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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999 Commission File No. 0-27338
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GT INTERACTIVE SOFTWARE CORP.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3689915
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
417 FIFTH AVENUE, NEW YORK, NY 10016
(Address of principal executive
offices) (Zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 par value
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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_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the registrant's Common Stock, held by
non-affiliates of the registrant, based on the closing sale price of the Common
Stock on June 18, 1999 as reported on the Nasdaq National Market, was
$109,189,723. As of June 18, 1999, there were 72,900,776 shares of the
registrant's Common Stock outstanding.
Portions of the registrant's definitive proxy statement ("Proxy Statement")
for the 1999 Annual Meeting of Stockholders are incorporated by reference into
Part III hereof.
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GT INTERACTIVE SOFTWARE CORP.
MARCH 31, 1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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Item 1. Business.................................................... 2
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II
Item 5. Market for the Registrant's Common Equity and Related 19
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations...................................
Item 8. Index to the Financial Statements and Supplementary Data.... 34
Item 9. Changes in and Disagreements with Accountants on Accounting 34
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and 35
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 36
8-K.........................................................
Signatures ............................................................ 40
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PART I
When used in this Annual Report on Form 10-K, the words "intends,"
"expects," "plans," "estimates," "projects," "believes," "anticipates," and
similar expressions are intended to identify forward-looking statements. Except
for historical information contained herein, the matters discussed and the
statements made herein concerning the Company's future prospects are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Although the Company
believes that its plans, intentions and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
plans, intentions or expectations will be achieved. There can be no assurance
that future results will be achieved, and actual results could differ materially
from the forecast and estimates. Important factors that could cause actual
results to differ materially include, but are not limited to, worldwide business
and industry conditions (including consumer buying and retailer ordering
patterns), adoption of new hardware systems, product delays, changes in research
and development spending, software development requirements and their impact on
product launches, Company customer relations (in particular, levels of sales to
Wal-Mart and other mass merchants), retail acceptance of the Company's published
and third-party titles, competitive conditions and other risks and factors,
including, but not limited to, those discussed in "Factors Affecting Future
Performance" below at pages 9 to 15.
ITEM 1. BUSINESS
GENERAL
GT Interactive Software Corp., a Delaware corporation (the "Company" or
"GTIS"), is a leading worldwide developer, publisher and distributor of
interactive entertainment software for use on various platforms, including PCs,
Sony PlayStation and Nintendo 64. During calendar year 1998, the Company had the
third highest U.S. market share in number of units sold in the PC software game
category. The Company is also a leader in certain sub-segments of the
entertainment software market, including the fast growing children's education
and leisure entertainment segments. According to PC Data, in 1998 the Company
held the number one U.S. market share in the value-priced/leisure segment, on
the basis of both dollar and unit volume. In addition, during the same period,
the Company's Humongous studio held the number three U.S. market share in the PC
education software segment, on the basis of units sold.
The Company derives revenue from both publishing and distribution
activities. The Company's publishing business consists of three divisions:
Children's, Leisure and Frontline. The Company's Children's Division develops
and publishes children's educational and entertainment software for the personal
computer. GTIS' Leisure Division develops and publishes lower-priced PC
entertainment, reference and productivity titles for mass market consumption.
The Company's Frontline Division develops, internally and through third party
developers, and publishes cutting edge new release entertainment software for
the gaming enthusiast for use on multiple hardware platforms.
GTIS distributes both its own and third-party published software through an
established distribution network. The Company believes that it is one of the few
software publishers that sells its products directly to substantially all of the
major retailers of computer software in the U.S. This division also compiles,
repackages and markets older titles to retailers, extending the economic life of
those products. GTIS believes it is the largest distributor of consumer software
to mass merchants in the United States. GTIS supplies consumer software
(including its own and third-party published software) to approximately 2,380
Wal-Mart stores, approximately 2,165 K-mart stores and approximately 860 Target
stores. The Company also distributes consumer software to other major retailers
including Office Depot, Best Buy, CompUSA, AAFES, Sam's Club and Babbage's.
RECENT DEVELOPMENTS
On June 29, 1999, the Company announced that it had hired Bear Stearns &
Co. to seek a recapitalization, merger or sale of the Company. The Company also
announced that it received "Commitments" from affiliates of General Atlantic
Partners, LLC (together with its affiliates, "General Atlantic") and certain
members of the Cayre family to provide $30 million of subordinated debt
financing which will be made
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available to the Company on or before July 30, 1999. Effective immediately, but
conditioned upon the Commitments, the Banks who are party to the Company's $125
million credit facility (the "New Credit Agreement") have agreed to make
available to the Company an additional $20 million under the Company's borrowing
base until March 31, 2000. The Company anticipates that under the New Credit
Agreement, as amended, substantially all of the $125 million credit line should
be available to the Company through March 31, 2000. The Company believes that
amounts available under the New Credit Agreement and the Commitments will be
sufficient to fund its operational requirements through June 30, 2000, when the
New Credit Agreement becomes due and payable. This financing will also permit
the Company and Bear Stearns to seek a recapitalization, merger or sale of the
Company in an orderly manner and consistent with the needs of the Company's
ongoing business.
The Company is seeking a recapitalization, merger or sale because
management believes that in a consolidating industry, the Company's existing
capital resources are not adequate to carry out management's long-term strategic
objectives. There is no assurance, however, that any such transaction will be
completed. If such a transaction is not the subject of a definitive agreement
before December 31, 1999, or a transaction is not completed which results in
repayment of the New Credit Agreement and the Commitments, or such loans are not
extended or refinanced prior to June 30, 2000, the Company's operations and
financial condition could be materially and adversely affected. There is no
assurance that any such refinancing, if required, can be completed on favorable
terms, or at all.
PUBLISHING
The Company's publishing business consists of three divisions: Children's,
Leisure and Frontline. The Company's Frontline and Children's Divisions publish
premium priced, higher production-value titles for use on multiple platforms
that are developed internally or through third-party developers and marketed
both domestically and internationally. GTIS' Leisure segment publishes
value-priced PC titles for mass market consumption.
Children's Publishing
Humongous Entertainment, Inc. ("Humongous") is a leading developer and
publisher of interactive children's edutainment software. Humongous was acquired
by the Company in July 1996 and has been the primary vehicle through which the
Company has penetrated the children's edutainment market. Through internally
generated hit titles such as Freddi Fish, Putt Putt and Pajama Sam, and through
licensed products like Nickelodeon's Blue's Clues, Humongous has risen to become
the third-largest participant in the educational software market category
capturing 12% of total unit sales in the U.S. for the month of March 1999.
According to PC Data, Humongous published the best-selling (Blue's Clues ABC
Time Activities) and fourth best-selling (Blue's Clues Birthday Adventure)
edutainment titles of 1998. Other titles recently released by Humongous include
Putt-Putt(R) Enters the Race(TM), Putt-Putt(R) Travels through Time(TM),
Backyard Soccer(TM), Backyard Baseball(TM), Freddi Fish 4: The Case of the
Hogfish Rustlers of Briny Gulch(TM) and Pajama Sam 2: Thunder and Lightning
Aren't So Frightening(TM).
Leisure Publishing
The Leisure Division was established in June 1996 with the acquisition of
WizardWorks Group, Inc. ("WizardWorks"). Since that time, the Company has become
the leader in publishing value-priced leisure and recreational software.
The Company's Leisure Division publishes and distributes titles through
three labels:
WIZARDWORKS. In the fall of 1997, the Leisure Division virtually created a
brand new market when it introduced Deer Hunter for PC, under the WizardWorks
label. In approximately four months, this interactive hunting simulation game
went to the top of the PC Data charts to become the best-selling PC game in the
United States for the first six months of 1998. The phenomenon confirmed a
growing consumer trend in which the interest of those who typically do not play
computer games is increasingly sparked by a combination of compelling software
themes, new sub-$1,000 PC hardware and value software's sub-$20 price point.
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WizardWorks has since expanded the interactive outdoor sporting market with a
number of titles, including Deer Hunter II, Deer Hunter II Extended Season, Deer
Hunter's Extended Season, Deer Hunter Companion, Sporting Clays, Rocky Mountain
Trophy Hunter, Rocky Mountain Trophy Hunter II, Pro Bass Fishing, Deep Sea
Trophy Fishing, Bird Hunter Waterfowl Edition, Grand Slam Turkey Hunt, Alaskan
Expedition, Bird Hunter Upland Edition and African Safari Trophy Hunter 3D.
The Company's hunting software games for PC, published under the
WizardWorks brand, comprise more than 50% of the market share in units and
dollars for all hunting software games. GTIS has shipped approximately one
million units of its hit title Deer Hunter and approximately 800,000 units of
the sequel, Deer Hunter II. With all of the Company's sportsmen's titles
combined, GTIS has shipped a total of approximately 3.2 million units in the
hunting and fishing genre.
In fiscal year 1999, GTIS also published other titles under the WizardWorks
brand such as Montezuma's Return, Real Pool, Rudolf the Red-Nosed Reindeer's
Magical Sleigh Ride, Baseball Mogul and Carnivores, along with a number of other
titles targeted for the casual computer user.
COMPUWORKS. Under the CompuWorks brand the Company offers productivity and
small office/home office (SOHO) software products. GTIS has published such
recent CompuWorks titles as Joy of Cooking, America's Greatest Chili Cookbook,
National Golf Course Directory, Feng Shui, Holiday Card Creator '98, Yes 2K and
Learn Office 2000.
MACSOFT. The Company believes the MacSoft label is the leading Macintosh
games software publisher in the United States. MacSoft publishes front-line PC
Games for the Macintosh market, including GTIS-developed games, as well as
third-party games under license to GTIS. Recent successful titles published by
MacSoft include: Unreal, Civilization II: Gold Edition, Falcon 4.0, America's
Greatest Solitaire Games, Deer Hunter, Real Pool, Civilization II, and Quake.
Other recent titles published by MacSoft include: Lode Runner 2, Rocky Mountain
Trophy Hunter, Dark Vengeance, Klingon Honor Guard and America's Greatest Arcade
Hits 3D. MacSoft also publishes productivity titles including MacPublisher and
Desktop Labels Pro.
Frontline Publishing
The Company's Frontline Division is responsible for the development and
publishing of cutting edge, new release entertainment for the gaming enthusiast.
This division, which is the source of some of the industry's most successful
titles including Duke Nukem, Oddworld and Total Annihilation, has been a major
factor in the Company's leadership in the PC-based entertainment software
market. Frontline releases are largely responsible for the Company's third place
market share position in the PC games category for calendar year 1998 according
to PC Data. The Company has successfully exploited Frontline's strengths in
cutting edge PC entertainment software to gain entry into the high growth
videogame console platform market. In fiscal year 1999, approximately 62% of the
division's revenues were generated from sales of PlayStation, Nintendo and other
console software.
The Frontline Division publishes entertainment software developed by a
variety of wholly-owned and third party studios. Approximately 32% of
Frontline's fiscal year 1999 revenues were generated from products developed by
the Company's internally owned studios.
The Company has initiated efforts to reduce the number of new releases
published annually by the Front-line Division. In support of this effort, the
Company is in the process of closing two internal studios and is currently
reducing the size of another. This more selective approach to new releases is
expected to result in lower research and development costs, increased
efficiency, greater focus and more control over production schedules. A summary
description of each of Frontline's continuing internal studios is set forth
below.
Internal Development Studios
CAVEDOG ENTERTAINMENT. Cavedog, which was launched in late 1996, enabled
the Company to enter the real-time strategy game market. Cavedog published its
first front-line entertainment software title, Total Annihilation, in the fall
1997. Total Annihilation debuted amidst high praise and favorable reviews from
the world's gaming press and ultimately went on to ship more than one million
units worldwide and win more than
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45 industry awards of excellence. Shortly after its release, the game's website,
www.totalannihilation.com, was one of the 36 most visited websites on the
Internet and the third most visited gaming website. Cavedog also produced Total
Annihilation: Kingdoms, which was shipped in June 1999.
SINGLETRAC. In October 1997, the Company acquired SingleTrac Entertainment
Technologies, Inc., ("SingleTrac") the developer of hit PlayStation titles
including JetMoto I and II, Twisted Metal I and II and WarHawk. Since it was
acquired by GTIS, SingleTrac has produced Rogue Trip and Streak.
REFLECTIONS. The Company acquired Newcastle, England-based Reflections
Interactive Limited ("Reflections") in December 1998. Reflections was the
developer of PlayStation mega-hits Destruction Derby and Destruction Derby II.
In June 1999, the Company shipped approximately one million units of Driver,
Reflections' newest title.
LEGEND ENTERTAINMENT. The Company acquired Legend Entertainment Company
("Legend") in December 1998. Legend is currently developing a number of titles
for GTIS, including Unreal 2, Unreal Mission Pack I and Wheel of Time, for the
Company.
ODDWORLD INHABITANTS. In November 1996, the Company invested in
convertible preferred stock of Oddworld Inhabitants, Inc. ("Oddworld"), which is
convertible into 50% of the common equity of Oddworld. The Company also entered
into an exclusive worldwide publishing agreement with Oddworld. Since that time,
Oddworld has developed and shipped the first two successful installments of its
Oddworld series: Abe's Oddysee and Abe's Exoddus. Each title has sold more than
one million units worldwide.
Although the Company's past growth was enhanced in part by acquisitions, it
does not expect to make any acquisitions in the forseeable future, and the
Company's Credit Agreement, as amended on June 29, 1999, prohibits acquisitions
without the consent of the Banks.
External Product Development
Since its inception, the Company has established publishing and
distribution relationships with various independent developers. For the fiscal
year ended March 31, 1999, approximately 68% of the Company's Frontline
publishing revenues were derived from products developed by independent,
third-party developers. For example, the Duke Nukem franchise created by 3D
Realms has generated for the Company gross unit sales, including add-ons and
sequels, to date in excess of three million units worldwide. From May 1998
through March 1999, the Company shipped more than 800,000 units of Unreal, an
action title created by Epic Games.
Acquired titles are marketed under the Company's name as well as the name
of the original developer. The agreements with third-party developers provide
the Company with exclusive publishing and distribution rights for a specific
period of time for specified platforms and territories. Those agreements may
grant to the Company the right to publish sequels, enhancements and add-ons to
the product originally being developed and produced by the developer. In
consideration for its services, the developer receives a royalty based on sales
of the product that it has developed. A portion of this royalty may be pre-paid,
with payments tied to the completion of detailed performance milestones.
The Company manages the production of external development projects by
appointing a producer to oversee the product's development and to work with the
third-party developer to design, develop and test the software. This producer
also helps ensure that performance milestones are met in a timely manner. The
Company generally has the right to cease making payments to an independent
developer if such developer fails to complete its performance milestones in a
timely fashion.
DISTRIBUTION
The Company's strength in distribution ensures access to valuable shelf
space for its published product. The Company believes that it is one of the few
software publishers that sells directly to substantially all of the major
retailers of computer software in the United States and that it is the largest
distributor of computer software to mass merchants in the United States. GTIS
supplies consumer software (including its own and
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third-party published software) to approximately 2,380 Wal-Mart stores,
approximately 2,165 K-mart stores and approximately 860 Target stores.
The Company also distributes consumer software (including its own and
third-party published software) to other major retailers including Office Depot,
Best Buy, CompUSA, AAFES, Sam's Club and Babbage's. The Company values its
distribution relationship with these major retailers because it also allows the
Company to more readily sell its own, higher margin software to them.
TECHNOLOGY. Utilizing its point-of-sale replenishment systems and
electronic data interchange ("EDI") links with its largest mass merchant
accounts, the Company is able to handle high sales volumes to those customers
efficiently, manage and replenish inventory on a store-by-store basis and
assemble for its customers regional and store-by-store data based on product
sell-through. The Company utilizes proprietary technology systems for order
processing, inventory management, purchasing and tracking of shipments thereby
increasing the efficiency and accuracy of order processing and payments and
shortening order turnaround time. These systems automatically track software
orders from order processing to point-of-sale, thereby enhancing customer
satisfaction through prompt delivery of the desired software titles.
FULFILLMENT. Historically, the Company's warehouse operations provided
fulfillment services within North America to the Company and third party
developers. Such services included physical receipt and storage of inventory and
its distribution to the mass market and other retailers. After evaluating the
costs associated with the fulfillment function, including, among other things,
the costs of projected future investments in plant and technology, the Company
has decided to outsource its warehouse operations to a third-party vendor
beginning in July 1999.
DISTRIBUTION OF THIRD PARTY PRODUCTS. Based on the strength of its current
consumer software distribution operation, the Company has successfully attracted
other publishers to utilize its mass merchant distribution capabilities for
their products. Such products are generally acquired by the Company and
distributed under the name of the publisher who is, in turn, responsible for the
publishing, packaging marketing and customer support of such products. The
Company's agreements with other publishers typically provide for certain retail
distribution rights in designated territories for a specific period of time,
after which those rights are subject to negotiated renewal.
VALUE/CLOSE-OUT. In June 1995, GTIS acquired Slash Corporation, a leading
publisher, merchandiser and distributor of value-priced software. The
value/close-out business purchases older titles, late in their product life
cycles, from other publishers and sells them as "value" titles to retailers.
This helps the publisher extend the life cycle of its products. The products are
intended for retail price points of $4.98 to $19.99 and may include boxed
products as well as product in jewel cases. The value/close-out business may
purchase finished goods or may license the rights to produce finished goods from
the publisher. The Company sells value programs to some retailers in which the
Company is responsible for stocking a four-foot or eight-foot section in the
retailers' stores.
AFFILIATE LABEL PROGRAM. During 1997, the Company launched its Affiliate
Label Program. Affiliates have included Empire Interactive, SegaSoft, Melbourne
House, Strategy First, HomeStyles Interactive and Project Two. Under this
program, the Company sells and distributes interactive software for, and
provides marketing consulting services to, a variety of publishers on a global
basis. The Affiliate Label Program is provided on a fee-for-service basis,
without the Company taking ownership of the inventory.
GEOGRAPHY
The Company is geographically diversified. In January 1995, the Company
established a publishing operation in London, England with responsibility for
European markets. In November 1996, the Company acquired the business of Warner
Interactive Europe, a European subsidiary of Warner Music Group. As a result of
its acquisitions, the Company now has international offices in the United
Kingdom, Germany, France, Benelux and Australia. Including the United States,
the Company currently publishes and distributes its titles in 39 countries
worldwide.
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The Company's international business has grown significantly in recent
years, from revenues of $53 million in fiscal year 1997 to $132 million in
fiscal year 1999. Sixty two percent of the Company's Frontline publishing
revenue for fiscal year 1999 was generated from international sales, versus 60%
in fiscal year 1998 and 42% in fiscal year 1997. The Company plans to continue
to pursue profitable opportunities to establish additional direct operations in
Europe, South America and the Far East.
Since 1997, the Company has established a physical presence for the Leisure
Division in each of Europe's major markets, including the United Kingdom
(through the acquisition of One Stop Direct Limited ("One Stop") in 1997),
Germany (through the acquisition of Prism Leisure Tontragervertriebs GmbH
("Prism") in 1998), France and the Benelux, as well as Australia. Because of the
increasing volume of leisure publishing performed by the Company in Europe, the
Company centralized its European leisure publishing function in fiscal year
1999. The Company intends to grow its international leisure operations (i) in
tandem with the growth of low price PCs around the world, (ii) through the
worldwide roll-out of its domestic leisure product line and (iii) through
acquisitions of local content developers.
The Company is also pursuing an international high growth strategy for its
Children's Division products. As third party licenses with local publishers
expire for Humongous products, the Company is selling these products directly in
its foreign territories, supported by localization efforts at Humongous. The
Company is also looking to international markets to expand its direct-to-retail
sales and distribution presence.
SALES AND MARKETING
The Company utilizes a wide range of sales and marketing techniques to
promote sales of its products including (i) in-store promotions utilizing
display towers and endcaps, (ii) advertising in computer and general consumer
publications, (iii) on-line marketing, (iv) direct mailings and (v) television
advertising. The Company monitors and measures the effectiveness of its
marketing strategies throughout the product lifecycle. Historically, the Company
has devoted a substantial amount of its marketing resources to its Frontline
published products and intends to do so in the future. The Company believes that
such marketing is essential for cultivating product successes and brand-name
loyalty.
The Company's marketing programs have expanded along with the Company's
publishing business, with an emphasis both on launching products and on raising
the public's awareness of new brands and franchises. The Company may begin to
develop an integrated marketing program for a product more than a year in
advance of its release. This integrated marketing approach may include extensive
press contacts, development of point-of-purchase displays, print and television
advertising, Internet promotion, press events and a global synchronized launch.
The Internet is an integral element of the Company's marketing efforts
used, in part, to generate awareness for titles months prior to their market
debut. The Company incorporates the Internet into its marketing programs through
the creation of product-dedicated mini-sites and on-line promotions. In
addition, the Company provides editorial material to on-line publications that
reach the core gaming audience.
To capitalize on the innovative nature of its products, the Company has
developed a public relations program that has resulted in coverage for the
Company by trade journals and also by well-recognized publications such as The
New York Times, Entertainment Weekly, Newsweek and USA Today. Among the
marketing strategies the Company utilizes is the creation of special press
events to coincide with the launch of a new product. The Company also uses
independent field sales representative organizations to assist in servicing its
mass merchant accounts.
In fiscal year 1999, the Company consolidated its three North American
sales organizations into a single sales organization in order to improve the
efficiency of its sales effort. The Company has 14 customer sales
representatives who serve as the primary GTIS contacts with the Company's
largest 25 customers. In addition the Company has five divisional sales
representatives who work with the Company's customer sales representatives and
their customers to help provide leadership and direction to the Company's
selling efforts.
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In Europe, the Company has a sales force in each of the countries in which
it has direct operations: England, France, Germany and the Benelux. All other
territories in Europe, Asia Pacific, Latin America and the Middle East are
serviced by an exclusive distributor network.
OPERATIONS
Beginning in July 1999, the Company will outsource its warehouse operations
in the United States to Arnold Logistics ("Arnold"). The warehouse operations
include the receipt and storage of inventory as well as the distribution of
inventory to mass market and other retailing customers. In connection with the
outsourcing agreement, the Company expects to discontinue the use of its Edison,
New Jersey facilities for warehouse operations, as well as terminate the
approximately 525 employees performing related services for the Company.
The Company decided to enter into the agreement with Arnold because (i) the
Company's business already exceeded the capacity of its Edison distribution
center, and the agreement with Arnold permitted the Company to avoid investing
significant capital in a new distribution center and warehouse management
system, (ii) Arnold could provide more efficient warehouse operations than the
Company, (iii) the cost of outsourcing its warehouse operations to Arnold is
expected to be less than the Company's cost to provide these services
internally, and (iv) Arnold charges the Company on a variable basis, based on
the Company's volume, while the Company's costs for its own warehouse operations
were of a fixed nature.
The Company's CD-ROM disk duplication is contracted out to a number of
third-party disk duplication companies. Printing of user manuals and of
packaging materials is performed to the Company's specifications by outside
sources. Disks, user manuals and sales brochures are, for the most part,
assembled for sale by the Company. To date, GTIS has not experienced any
material difficulties or delays in the manufacture and assembly of its products,
or material returns due to product defects. No concentration for the supply of
the Company's publishing needs currently exists and a number of vendors are
available.
Sony and Nintendo manufacture the Company's products that are compatible
with their respective video game consoles, as well as the manuals and packaging
for such products, and ship finished products to the Company for distribution.
PlayStation products consist of proprietary format CD-ROMs and are typically
delivered to the Company by Sony within a relatively short lead time.
Manufacturers of Nintendo and other video game cartridges typically deliver
software to the Company within 45 to 60 days after receipt of a purchase order.
EMPLOYEES
As of March 31, 1999, the Company had 1,693 employees worldwide.
Domestically, there were a total of 1,513 employees with 139 in administration
and finance, 94 in operations, 145 in sales and marketing, 471 in product
development and 664 in manufacturing and distribution. Included in the 664 for
manufacturing and distribution are 565 employees who are members of Local 734 of
the L.I.U. of N.A. of the AFL-CIO (the "Union"). The Union employees are all
located at the Edison, New Jersey distribution center and are subject to a
collective bargaining agreement between the Company and the Union which expires
on May 31, 2001. When the Company outsources its distribution to Arnold
beginning in August 1999, approximately 525 of the Company's employees will be
terminated, of whom approximately 465 belong to the Union.
Internationally, as of March 31, 1999, the Company had 180 employees with
52 in administration and finance, 11 in operations, 78 in sales and marketing,
37 in product development and two in distribution.
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FACTORS AFFECTING FUTURE PERFORMANCE
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO COMPLETE A RECAPITALIZATION,
MERGER OR SALE OF GTIS. In addition, the process of seeking a recapitalization,
merger or sale of GTIS may disrupt our ongoing business and distract our
management and workforce from the day-to-day operations of GTIS. If we fail to
sign a definitive agreement for a recapitalization, merger or sale of GTIS by
December 31, 1999, then the amounts outstanding under the New Credit Agreement
may be accelerated.
AS A RESULT OF THE NEW CREDIT AGREEMENT AND THE COMMITMENTS, WE HAVE
SUBSTANTIAL INDEBTEDNESS. After giving effect to the New Credit Agreement and
the Commitments, our total indebtedness could be as high as $155 million. The
level of our indebtedness could have negative consequences to us including the
following:
- our ability to obtain additional financing in the future for working
capital, capital expenditures, debt service requirements or other
purposes may be limited;
- a substantial portion of our cash flow from operations must be dedicated
to the payment of interest on our indebtedness and other obligations and
will not be available for use in our business; and
- our substantial indebtedness may make us more vulnerable to economic
downturns and may limit our ability to withstand competitive pressures.
WE MAY NEED ADDITIONAL FINANCING. Although we believe that financing from
the New Credit Agreement and the Commitments will provide sufficient amounts to
fund our anticipated operations through June 30, 2000 and to seek a
recapitalization, merger or sale of GTIS in an orderly manner, we cannot assure
you that we will not require additional financing before that time. If we do
need additional financing, or we must refinance the New Credit Agreement and the
Commitments on or before June 30, 2000, we cannot assure you that such financing
will be available on favorable terms, or at all.
THE NEW CREDIT AGREEMENT WILL RESULT IN THE DILUTION OF OUR COMMON
STOCK. We are required to issue warrants to purchase a total of 2,275,000
shares of our common stock, at an exercise price equal to par value, before July
30, 1999, in connection with the funding of the New Credit Agreement and the
Commitments. In addition, the terms of the New Credit Agreement and the
Commitments provide for the issuance of significant additional warrants to our
debtholders if we do not sign an agreement for a recapitalization, merger or
sale of GTIS which provides for the repayment of these debt facilities by
October 31, 1999 and complete the transaction by February 28, 2000. If we do not
sign an agreement for a recapitalization, merger or sale of GTIS by October 31,
1999, we will be required to issue warrants, at an exercise price equal to par
value, to purchase a total of an additional 2,750,000 shares of our common
stock. If we do not complete a recapitalization, merger or sale of GTIS by
February 28, 2000, we will be required to issue an additional 3,225,000
warrants, and if we do not repay the Commitments by June 30, 2000, we will be
required to issue 3,000,000 additional warrants each fiscal quarter until we
make repayment.
THE LOSS OF WAL-MART AS A KEY CUSTOMER COULD NEGATIVELY AFFECT OUR
BUSINESS. Our sales to Wal-Mart accounted for approximately 29% of net revenues
for the fiscal year ended March 31, 1999 and our accounts receivable from
Wal-Mart were approximately $49.1 million at March 31, 1999. Our business,
operating results and financial condition would be adversely affected if:
- we lost Wal-Mart as a customer,
- we began shipping fewer products to Wal-Mart,
- we were unable to collect receivables from Wal-Mart, or
- we experienced any other adverse change in our relationship with
Wal-Mart.
We do not have any written agreements or understandings with Wal-Mart.
Consequently, our relationship with Wal-Mart could end at any time. We cannot
assure you that Wal-Mart will continue to use us a major supplier of consumer
software, or at all. During the second half of 1997, Wal-Mart began purchasing
software directly from five publishers whose software was previously sold to
Wal-Mart through GTIS. During 1998 and
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1999, Wal-Mart has continued, and can be expected to continue, to buy software
directly from other publishers, rather than purchasing software through GTIS.
These direct purchases could significantly reduce our sales to Wal-Mart. For
example, Wal-Mart has recently announced that it expects to begin purchasing
products directly from Microsoft and Activision in fiscal year 2000. Our
combined net revenues from sales of those products to Wal-Mart totaled
approximately $47.3 million in the fiscal year ended March 31, 1999.
OUR REVENUES WILL DECLINE AND OUR COMPETITIVE POSITION WILL BE ADVERSELY
AFFECTED IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS. Our
continued success in the publishing business depends on the timely introduction
of successful new products, sequels or enhancements of existing products to
replace declining revenues from older products. A significant delay in
introducing new products, sequels or enhancements could materially and adversely
affect the ultimate success of our products and, in turn, our business,
operating results and financial condition, particularly in view of the
seasonality of our business. For example, we recently announced that the
introduction of five major titles was delayed from the fourth quarter of fiscal
year 1999 to the first half of fiscal year 2000, significantly contributing to
operating losses during the fourth quarter of fiscal year 1999. The process of
introducing new products, sequels or product enhancements is extremely difficult
and will only become more difficult as new platforms and technologies emerge.
Competitive factors in our industry demand that we create increasingly
sophisticated products, which in turn makes it difficult to produce and release
these products on a predictable schedule.
WE MAY BE UNABLE TO DEVELOP, MARKET AND PUBLISH NEW PRODUCTS IF WE ARE
UNABLE TO SECURE OR MAINTAIN RELATIONSHIPS WITH INDEPENDENT SOFTWARE
DEVELOPERS. Although we substantially increased our internal software
capabilities in 1996, 1997 and 1998, we are still dependent, to a meaningful
degree, upon independent software developers. For the fiscal year ended March
31, 1999, approximately 68% of our Frontline publishing revenues were derived
from products developed by independent developers. Consequently, our success
depends in part on our continued ability to obtain and/or renew product
development agreements with independent developers. However, we cannot assure
you that we will be able to obtain or renew these product development agreements
on favorable terms, or at all; nor can we assure you that we will be able to
obtain the rights to sequels of successful products which were originally
developed by independent developers for GTIS. In addition, many of our
competitors have greater access to capital than we do, which puts us at a
competitive disadvantage when bidding to attract independent developers to enter
into publishing agreements with us.
Our agreements with independent software developers are easily terminable,
often without notice, if either party declares bankruptcy, becomes insolvent,
ceases operations or materially breaches its agreement and fails to cure that
breach within a designated time frame. In addition, many independent software
developers have limited financial resources. Many are small companies with a few
key individuals without whom a project may be difficult or impossible to
complete. Consequently, we are exposed to the risk that these developers will go
out of business before completing a project, or simply cease work on a project,
for which we have hired them.
COMPETITION FOR INDEPENDENT SOFTWARE DEVELOPERS IS INTENSE AND MAY PREVENT
US FROM SECURING OR MAINTAINING RELATIONSHIPS WITH INDEPENDENT SOFTWARE
DEVELOPERS. We may be unable to secure or maintain relationships with
independent developers if our competitors can offer them better shelf access,
better marketing support, more development funding, higher royalty rates, or
other selling advantages. Even if these independent developers have developed
products for us in the past, we cannot assure you that they will continue to
develop products for us in the future. In fact, we have in the past worked with
independent developers who later entered into agreements with our competitors
because of our competitor's ability or willingness to pay higher royalty rates
and/or advances.
INDEPENDENT DEVELOPERS MAY PUBLISH THEIR OWN PRODUCTS INSTEAD OF USING GTIS
TO PUBLISH AND DISTRIBUTE THEIR PRODUCTS, OR MAY SIGN PUBLICATION AGREEMENTS
WITH OUR COMPETITORS, EITHER OF WHICH MAY ADVERSELY AFFECT OUR ABILITY TO
DEVELOP, MARKET AND PUBLISH NEW PRODUCTS. For example, in January 1998, a
consortium, in which certain independent developers purport to have ownership
interests, announced that it secured publishing rights with respect to software
titles to be produced by these developers. These developers include Apogee
Software (3D Realms), developer of Duke Nukem and Prey, and Epic Games,
developer of Unreal. Although the consortium also announced that these
developers will honor their existing obligations to other
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software publishers, we do not know if the competitive pressures exerted by the
consortium will inhibit us from establishing and maintaining relationships with
independent software developers in the future. For example, it was recently
announced that Apogee Software (3D Realms) has agreed to publish one of the
future sequel Duke Nukem titles through one of our competitors.
AS OUR PAYMENT OF ADVANCES AND GUARANTEED ROYALTIES TO INDEPENDENT
DEVELOPERS INCREASES, WE FACE THE RISK THAT OUR OPERATING RESULTS MAY SUFFER IF
WE ARE UNABLE TO RECOVER THESE PREPAID ROYALTIES. In connection with our
licensing agreements with independent developers and licensors, we had
approximately $9.2 million of royalty advances, associated with multi-year
output contracts, on our balance sheet as of March 31, 1999. We cannot assure
you that current or future royalty advances will be recouped. Our ability to
receive revenue and recoup these advances may be prevented or delayed if:
- we fail to release the products associated with royalty advances,
- we experience a delay in the release of these products, or
- sales of these products do not cover the advances made.
FLUCTUATIONS IN OUR QUARTERLY NET REVENUES AND OPERATING RESULTS MAY RESULT
IN REDUCED PROFITABILITY AND LEAD TO REDUCED PRICES FOR OUR STOCK. Our
quarterly net revenues and operating results have varied in the past and can be
expected to vary in the future. As a result, we cannot assure you that we will
be consistently profitable on a quarterly or annual basis. If our operating
results in any future quarter fall below the expectations of market analysts or
investors, the price of our common stock will likely decrease.
Our business has experienced, and is expected to continue to experience,
significant seasonality. Typically, our net sales are significantly higher
during the fourth calendar quarter because of increased consumer demand during
the year-end holiday season. In other calendar quarters, our net revenues may be
lower and vary significantly.
OUR REVENUE GROWTH AND COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED IF WE
ARE UNABLE TO ANTICIPATE AND ADAPT TO RAPIDLY CHANGING TECHNOLOGY. The consumer
software industry is characterized by rapidly changing technology. The
introduction of new technologies, including new technologies that support multi-
player games and new media formats such as on-line delivery and digital video
disks (DVDs), could render our previously released products obsolete or
unmarketable. We must continually anticipate the emergence of, and adapt our
products to, new technologies and systems. In addition, the development cycle
for products designed to operate on new systems can be significantly longer than
our current development cycles. When we choose to publish or develop a product
for a new system, we may need to make a substantial development investment one
or two years in advance of when we actually ship products for that system. If we
develop products for a new system that is ultimately unpopular, our expected
revenues from that product will suffer and we may not be able to recoup our
investment. Conversely, if we choose not to publish products for a new system
that is ultimately popular, our revenue growth and competitive position may be
adversely affected. While 32 and 64 bit game systems, such as Sony PlayStation
and Nintendo 64, continue to be popular and their installed base has reached
significant levels in the US and worldwide, new systems are being developed. For
example, Sony recently announced the development of its next-generation
PlayStation, a 128 bit system which, among other things, will incorporate DVD
technology. Sony plans to introduce its next generation PlayStation in Japan by
March 2000 and in its overseas markets by fall 2000. If successfully developed,
these new systems would require us to reassess our commitment to 32 and 64 bit
game systems and/or any new systems which are introduced.
BECAUSE SOME LICENSORS HAVE SIGNIFICANT CONTROL OVER OUR PRODUCTS, THE
COSTS OF DEVELOPING AND MANUFACTURING THOSE PRODUCTS MAY INCREASE. We are
required to obtain a license to develop and distribute software for each of the
video game systems for which we develop products. We currently have licenses
from Sony, to develop products for the Sony PlayStation, and Nintendo, to
develop products for Nintendo 64. Our contracts with Sony and Nintendo often
grant them significant control over the manufacturing of GTIS
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products. For example, we are obligated to submit new games to Sony or Nintendo
for approval prior to development and/or manufacture. In some circumstances,
this could adversely affect GTIS by:
- leaving GTIS unable to have its products manufactured and shipped to
customers,
- increasing manufacturing lead times and expense to us over the lead times
and costs we could achieve independently,
- delaying the manufacture and, in turn, the shipment of products, and
- requiring GTIS to take significant risks in prepaying for and holding its
inventory of products.
These factors could materially and adversely affect our business, operating
results and financial condition.
THE LOSS OF OUR SENIOR MANAGEMENT AND SKILLED PERSONNEL COULD NEGATIVELY
AFFECT OUR BUSINESS. In early 1999, we replaced our three most senior executive
officers. Our success will depend to a significant degree upon the performance
and contribution of our senior management team and upon our ability to attract,
motivate and retain highly qualified employees with technical, management,
marketing, sales, product development and other creative skills. In the computer
software industry, competition for highly skilled and creative employees is
intense and costly. We expect this competition to continue for the foreseeable
future, and we may experience increased costs in order to attract and retain
skilled employees.
We cannot assure you that we will be successful in attracting and retaining
skilled personnel. Although we have entered into employment agreements with
Thomas Heymann, as Chairman of the Board and Chief Executive Officer of the
Company, and John Baker, as President and Chief Operating Officer of the
Company, we cannot assure you that these individuals or other senior management
will not leave or compete against us. Our business, operating results and
financial condition could be materially and adversely affected if we lost the
services of these or other senior employees or if we fail to replace other
employees who leave or to attract additional qualified employees. Our recent
announcement that we will be seeking a recapitalization, merger or sale of GTIS
may make it more difficult to retain or attract qualified employees.
THE GENERAL ECONOMIC AND POLITICAL RISKS OF DOING BUSINESS ABROAD COULD
NEGATIVELY AFFECT OUR BUSINESS IN INTERNATIONAL MARKETS. In the past three
years, we have materially increased our international revenues. International
publishing revenues accounted for approximately 31%, 48%, 48% and 44%, of
publishing revenues for the years ended December 31, 1996 and 1997, the three
months ended March 31, 1998 and the twelve months ended March 31, 1999,
respectively. We expect that international revenues will account for a
significant portion of our net revenues in the future. However, in addition to
the possibility that our international business will not continue to grow at the
same rate as in the past, our international revenues are subject to the general
risks of doing business abroad, including:
- unexpected changes in regulatory requirements, tariffs and other
barriers,
- fluctuating exchange rates,
- potential political instability,
- difficulties installing and managing foreign operations,
- difficulties collecting accounts receivable,
- costs and difficulties of localizing products for use in foreign markets
and
- inability of foreign laws to protect our proprietary rights to the same
extent as U.S. law, particularly in some international markets such as
South America, the Middle East, the Pacific Rim and the Far East where
software piracy presents a particularly acute problem.
We cannot assure you that these or other factors will not have a material
adverse effect on our future international revenues and, consequently, on our
business, operating results and financial condition.
SIGNIFICANT COMPETITION IN OUR INDUSTRY COULD ADVERSELY AFFECT OUR
BUSINESS. The market for our products is highly competitive and relatively few
products achieve significant market acceptance. Currently,
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we compete primarily with other publishers of interactive entertainment software
for both personal computers and video game consoles. Our competitors include
Electronic Arts Inc., Mattel Inc., Hasbro Corporation, Havas SA, a French
company, and Activision. In addition, some large software companies, media
companies and film studios, such as Walt Disney Company, who are increasing
their focus on the interactive entertainment and edutainment software market,
may become significant competitors of GTIS. As compared to GTIS, many of our
current and future competitors may have significantly greater financial,
technical and marketing resources than we do. As a result, these current and
future competitors may be able to:
- respond more quickly to new or emerging technologies or changes in
customer preferences,
- carry larger inventories,
- undertake more extensive marketing campaigns,
- adopt more aggressive pricing policies and
- make higher offers or guarantees to software developers and licensors
than GTIS.
We may not have the resources required for us to respond effectively to
market or technological changes or to compete successfully with current and
future competitors. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, operating results or financial
condition. We cannot assure you that we will be able to successfully compete
against our current or future competitors or that competitive pressures will not
have a material adverse effect on our business, operating results and financial
condition.
REVENUES FROM OUR DISTRIBUTION BUSINESS MAY DECLINE AS COMPETITION
INCREASES AND INTERNET TECHNOLOGY IMPROVES. During the fiscal year ended March
31, 1999, revenues from our distribution business were approximately 48% of net
revenues. Recently, several of our competitors have sought to expand their
distribution capabilities and Wal-Mart has announced plans to purchase products
directly from Microsoft and Activision. New video game systems and electronic
delivery systems may be introduced into the software market and potential new
competitors may enter the software development and distribution market,
resulting in greater competition. In addition, revenues from our distribution
business may be adversely affected as Internet technology is improved to enable
consumers to purchase and download full-version software products or order
products directly from publishers or from unauthorized or illegal pirate sources
over the Internet.
REVENUES FROM OUR DISTRIBUTION BUSINESS MAY DECLINE IF THE THIRD-PARTY
PRODUCTS WHICH WE DISTRIBUTE FOR OTHER COMPANIES BECOME UNAVAILABLE TO US. As
part of our distribution program, we provide our mass merchant customers with a
wide variety of titles. To achieve this product mix, we must supplement the
distribution of our published products with third-party software products,
including products published by our competitors. We cannot assure you that these
competitors will continue to provide us with their products for distribution to
our mass merchant customers. Our inability to obtain software titles developed
or published by our competitors, coupled with our inability to obtain these
titles from other distributors, could have a material adverse effect on our
relationships with our mass merchant customers and our ability to obtain shelf
space for our own products. This, in turn, could have a material adverse effect
on our business, operating results and financial condition.
WE MAY FACE INCREASED COMPETITION AND DOWNWARD PRICE PRESSURE IF WE ARE
UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Our success is heavily
dependent upon our confidential and proprietary intellectual property. We sell a
significant portion of our published software under licenses from independent
developers and, in these cases, we do not acquire the copyrights for the
underlying work. We rely primarily on a combination of confidentiality and
non-disclosure agreements, patent, copyright, trademark and trade secret laws,
as well as other proprietary rights laws and legal methods, to protect our
proprietary rights and the rights of our developers. However, current U.S. and
international laws afford us only limited protection. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy our
products or obtain and use information that we regard as proprietary. Software
piracy is a persistent problem in the computer software industry. Policing
unauthorized use of our products is extremely difficult because consumer
software can be easily duplicated and disseminated. Furthermore, the laws of
some foreign countries may not protect our
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proprietary rights to as great an extent as U.S. law. Software piracy is a
particularly acute problem in some international markets such as South America,
the Middle East, the Pacific Rim and the Far East. Our business, operating
results and financial condition could be materially and adversely affected if a
significant amount of unauthorized copying of our products were to occur. We
cannot assure you that our attempts to protect our proprietary rights will be
adequate or that our competitors will not independently develop similar or
competitive products.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE COSTLY
TO RESOLVE. As the number of available software products increase, and their
functionality overlaps, software developers and publishers may increasingly
become subject to infringement claims. We are not aware that any of our products
infringe on the proprietary rights of third parties. However, we cannot assure
you that third parties will not assert infringement claims against GTIS in the
future with respect to current or future products. There has been substantial
litigation in the industry regarding copyright, trademark and other intellectual
property rights. We have also initiated litigation to assert our intellectual
property rights. Whether brought by or against GTIS, these claims can be
time-consuming, result in costly litigation and divert management's attention
from the day-to-day operations of GTIS, which can have a material adverse effect
on our business, operating results and financial condition.
WE MAY BE AT A COMPETITIVE DISADVANTAGE IF WE ARE UNABLE TO SUCCESSFULLY
IMPLEMENT OUR INTERNET STRATEGY. To take advantage of Internet opportunities,
we have, and will continue to:
- expand our World Wide Web sites and the development of our Internet
infrastructure and capabilities;
- expand our electronic distribution capabilities;
- incorporate on-line functionality into existing products; and
- develop and invest in new Internet-based businesses and products,
including multi-player entertainment products.
Implementing our Internet strategy has been costly. We have incurred, and
expect to incur, significant additional costs in connection with these efforts.
These costs include those associated with the acquisition and maintenance of
hardware and software necessary to permit on-line commerce and multi-player
games, as well as the related maintenance of our website and personnel. Although
we believe these platforms and technologies are an integral part of our
business, we cannot assure you that our Internet strategy will be successful or
that we will be able to recoup the cost of our investment.
WE ARE CURRENTLY IN LITIGATION WHICH COULD BE COSTLY IF WE LOSE. As
described under Item 3, "Legal Proceedings," GTIS is currently a defendant, or
subject to counterclaims, in a number of lawsuits. In all of these lawsuits, we
believe that the plaintiffs' complaints are without merit. Although we intend to
defend ourselves vigorously against these actions, doing so is costly and
time-consuming and may divert management's attention from our day-to-day
operations. In addition, we cannot assure you that these actions will be
ultimately resolved in our favor or that an adverse outcome will not have a
material adverse effect on our business, operating results and financial
condition.
IF ACTUAL RETURNS EXCEED OUR RETURN RESERVE, OUR BUSINESS MAY BE NEGATIVELY
AFFECTED. To cover returns, we establish a return reserve at the time we ship
our products. We estimate the potential for future returns based on historical
return rates, seasonality of sales, retailer inventories of GTIS products, and
other factors. Historically, we have experienced product returns at a rate of
approximately 30% of gross revenues. While we are able to recover the majority
of our costs when third-party products are returned, we bear the full financial
risk when our own products are returned. In addition, the license fees we pay
Sony and Nintendo are non-refundable and we cannot recover these fees when our
console products are returned. Although we believe we maintain adequate reserves
with respect to product returns, we cannot assure you that actual returns will
not exceed reserves, which could adversely affect our business, operating
results and financial condition.
OUR PRODUCTS, SYSTEMS AND SALES MAY BE SUBJECT TO YEAR 2000 PROBLEMS. We
have reviewed our critical information systems and other technology for Year
2000 compliance and we are correcting any deficiencies through normal upgrades
of our software or, when necessary, through replacement of existing software or
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affected systems with Year 2000 compliant applications or systems. However, if
our present efforts to address Year 2000 compliance issues are not successful,
our business, operating results and financial position could be materially and
adversely affected. For example, failure to achieve Year 2000 compliance for our
internal critical information systems could delay our ability to manufacture and
ship products, disrupt customer service and technical support facilities, or
interrupt customer access to online products and services. In addition, because
of the number of products sold by GTIS currently and in the past, we could face
litigation relating to Year 2000 compliance of products that we no longer sell
and/or support, although we believe that any such exposure should not be
material.
Furthermore, our business is heavily dependent upon third parties such as
vendors, suppliers, service providers and a large retail distribution channel.
We have asked vendors and other third parties with whom we have relevant
relationships to certify that they are Year 2000 compliant or, if they are not,
to provide us with a description of their plans to become so. However, if these
vendors or other third parties experience Year 2000 failures or malfunctions,
our ability to conduct ongoing operations could be materially and adversely
affected. For example, our ability to manufacture and ship products (including
our own and third-party published software) into the retail channel, to receive
retail sales information necessary to maintain proper inventory levels or to
complete online transactions dependent upon third party service providers could
be affected. In addition, should third-party published products distributed by
GTIS fail to be Year 2000 compliant, especially any utility software which, if
not Year 2000 compliant could corrupt a user's hardware system, our retail
customers might return these products or seek redress from us, which in turn
would require us to seek redress from the publisher of the product.
THE START-UP OF OUR OUTSOURCING CONTRACT FOR WAREHOUSE OPERATIONS COULD
CREATE OPERATING DIFFICULTIES. We recently entered into an agreement with an
outside vendor to have all of our physical inventory (including returns) handled
and shipped by that vendor from its plant in Pennsylvania. While we believe that
this outsourcing of our warehouse operations will result in more efficient and
cost effective operations for the Company, we cannot assure you that the process
of the changeover to the vendor's facility (scheduled for August 1999) will not
create unforeseen operating difficulties or adversely affect our warehouse
operations and our relationships with our retail customers.
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ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and development
facilities are located in approximately 90,000 square feet of space at 417 Fifth
Avenue in New York City under a lease expiring in 2007, which commenced in
December 1996. The Company sublets approximately 4,700 square feet of its office
space to Five Partners Asset Management LLC ("Five Partners"), a company
affiliated with Joseph J. Cayre, Chairman Emeritus of the Board of Directors.
The Company believes that the terms of this lease are no less favorable to the
Company than those it could obtain from independent third parties.
The Company maintains a 192,900 square foot distribution center and a
70,000 square foot return center in Edison, New Jersey under leases that expire
in December 1999 and May 2000, respectively.
Certain product development and marketing divisions are located in
approximately 7,600 square feet of office space in San Francisco, CA, under a
lease that expires in November 2003.
The Leisure Division has a lease for 240,000 square feet of office,
warehouse and distribution space in the Plymouth, Minnesota area that expires in
September 1999. The division has entered into a new lease for office space in
Plymouth, Minnesota for 23,400 square feet expiring in February 2003.
In Scottsdale, Arizona, the Company maintains two leases: a 25,000 square
foot office space under a lease expiring in March 2006 which has been sublet for
the remaining term, and a 2,900 square foot office space under a lease expiring
in May 2000.
The Company has leased approximately 83,000 square feet of office space
under two separate leases to house its Humongous subsidiary in Bothell,
Washington, under leases expiring in May 2008 and June 2004.
The Company has assumed leases for certain of its acquisitions and entered
into leases for certain of its internal development studios, totaling
approximately 87,000 square feet with lease expiration dates from August 1999
through September 2010. These properties are located in Utah, England, the
Netherlands, Germany and France.
The Company's One Zero Media subsidiary ("OZM") is located in approximately
22,000 square feet of space under three leases expiring in June 2000 and April,
2003.
The Company maintains several facilities in London, England totaling
approximately 16,000 square feet, from which it conducts a substantial portion
of its European operations, under leases that expire in the years 2000 and 2020.
Additional facilities for sales, marketing and operations are located in Paris
and Hamburg. One of the London facilities is owned by Marylebone 248 Realty LLC,
an affiliate of Joseph J. Cayre. The Company believes that the terms of this
lease are no less favorable to the Company than those it could obtain from
independent third parties.
The Company also maintains approximately 4,700 square feet of office space
in Australia under leases which expire in September 1999 and November 2000.
ITEM 3. LEGAL PROCEEDINGS
On September 18, 1997, Scavenger, Inc., 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.
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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 must be completed by July 30,
1999. Another compliance conference has been scheduled for June 30, 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. The
Company intends to vigorously defend this action and pursue its counterclaim.
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. The plaintiffs allege 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. Motions were made by certain groups of plaintiffs for their
appointment as lead plaintiffs in the actions. On October 7, 1998, the Court
appointed lead plaintiffs and lead counsel to the plaintiffs in the actions. The
plaintiffs' consolidated and amended complaint was filed and served in early
January 1999. 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 have each filed motions to dismiss the second consolidated and
amended complaint. The Company believes that these complaints are without merit
and intends to defend itself vigorously against these actions.
On January 25, 1999, the Company filed a complaint in the Supreme Court of
the State of New York, County of New York, against Midway Games, Inc. ("Midway
Games"), Midway Home Entertainment, Inc. ("Midway Home"), Midway Manufacturing
Company, WMS Industries, Inc. ("WMS"), Williams Electronics Games, Inc.,
Williams Entertainment Inc., Williams Interactive, Inc. and Atari Games
Corporation (collectively the "Midway Defendants") seeking injunctive relief and
tens of millions of dollars in damages arising out of the Midway Defendants'
breach of certain agreements that give the Company an exclusive option to
distribute, in territories throughout the world, entertainment software products
acquired or developed by the Midway Defendants for personal computers and video
console systems. On February 24, 1999, the Midway Defendants moved to dismiss
the action in its entirety. On May 21, 1999, the Court denied the motion as to
the Company's claims for breach of contract, breach of the implied covenant of
good faith and fair dealing and injunctive relief. The Court granted the motion
as to defendant Williams Interactive, Inc., and also dismissed the Company's
claims for tortious interference with prospective business relations,
anticipatory repudiation and defamation. On May 28, 1999, the Midway Defendants
answered the complaint and asserted counterclaims against the Company for breach
of contract and violations of the Illinois Consumer Fraud and Deceptive Business
Practices Act. The Company intends to vigorously defend these counterclaims.
On May 28, 1999, Midway Games also sent notice that it was terminating the
Company's rights under the GTIS Master Option and License Agreements but not the
individual Distribution and License Agreements now in effect. On June 1, 1999,
the Company moved for a preliminary injunction to enjoin the Midway Defendants
from terminating the Company's option rights. On June 8, 1999, the Court denied
the Company's request for a preliminary injunction. The Company will continue to
litigate this matter.
In June 1999, the Company received notice that Midway Home, a subsidiary of
Midway Games Inc., had filed an action against the Company in the District Court
of Navarro County, Texas. During 1994 and 1995,
17
<PAGE> 19
WMS received warrants to purchase 214,285 shares of the Company's common stock
at an exercise price equal to the price at which shares were to be sold in the
Company's initial public offering in December 1995. These warrants were issued
in connection with the license agreements that the Company and WMS (and certain
affiliates) entered into in 1994 and 1995 ("License Agreements"). According to
the petition, WMS assigned these warrants to Midway Home on October 23, 1996.
Plaintiff alleges that on that day, Midway Home exercised 71,428 of the warrants
for a total consideration of $1,000,000, promptly sold 46,675 of the shares at
the then market price of $21.425, and continues to hold 24,754 of the shares. As
in the federal securities class actions described above, Midway Home contends
that the Company failed to expense properly certain prepaid royalties for
software products, which misstatements purportedly had the effect overstating
the Company's net profits. It asserts claims under the Texas Securities Act and
the Texas Business and Commerce Code and for common law fraud, negligent
misrepresentation and breach of contract. Midway Home seeks damages, rescission
of its purchase of 24,754 shares of the Company's stock, reformation of the
warrants to include a strike price below $14.00 per share (the initial public
offering price of the Company's common stock in December 1995) and to increase
the number of warrants that should allegedly have been issued to WMS, as well as
exemplary damages, attorneys fees, interest and other costs. The Company intends
to vigorously defend itself against these claims.
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 10 other videogame
corporations have entered into a joint defense agreement, and have retained
counsel. The Court has stayed all discovery pending an initial case management
conference scheduled for July 19, 1999. The Company intends to vigorously defend
this action.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On January 8, 1999, stockholders holding 42,801,556 shares of Common Stock,
representing approximately 59% of the outstanding shares of the Company's Common
Stock, executed and delivered a Written Consent of the Stockholders in Lieu of a
Special Meeting (the "Written Consent") approving and adopting an amendment to
the Company's 1997 Stock Incentive Plan to increase, from 1,000,000 to
3,000,000, the total number of shares of Common Stock with respect to which
options may be granted to any one employee of the Company during any one-year
period. On March 1, 1999, the Company filed an Information Statement on Schedule
14C (the "Information Statement") pursuant to the requirements of Rule 14c-2
promulgated under Section 13 of the Securities Exchange Act of 1934, as amended,
to inform holders of Common Stock entitled to vote or give an authorization or
consent in regard to the action authorized by the Written Consent, of the action
so taken. The Information Statement is filed as an exhibit to this Annual Report
and the contents of the Information Statement are incorporated by reference into
this Annual Report.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market. The
high and low sale prices for the Common Stock as reported by the Nasdaq National
Market for the years ended December 31, 1996 and 1997, the three month
transition period ended March 31, 1998 and for the fiscal year ended March 31,
1999 are summarized below. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs, or commissions and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
First Quarter............................................... $15 $ 8 7/8
Second Quarter.............................................. $25 $10 5/8
Third Quarter............................................... $26 3/4 $16 3/4
Fourth Quarter.............................................. $26 3/4 $ 6 5/8
1997
First Quarter............................................... $ 9 1/4 $ 7 1/8
Second Quarter.............................................. $11 7/8 $ 5 7/8
Third Quarter............................................... $12 3/4 $ 9
Fourth Quarter.............................................. $12 3/8 $ 6 1/8
1998
Three Month Transition Period............................... $ 8 9/16 $ 5 5/16
FISCAL 1999
First Quarter............................................... $11 1/8 $ 7
Second Quarter.............................................. $ 9 $ 4 1/2
Third Quarter............................................... $ 7 7/16 $ 3 3/4
Fourth Quarter.............................................. $ 5 13/16 $ 3 7/8
</TABLE>
On June 18, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $3 7/8. As of June 18, 1999, there were approximately
256 registered holders of record of the Common Stock.
The Company currently anticipates that it will retain all of its future
earnings for use in the expansion and operation of its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. In addition, the payment of cash dividends is limited by the New Credit
Agreement and may be limited by financing agreements entered into by the Company
in the future.
RECENT SALES OF UNREGISTERED SECURITIES
On February 23, 1999, the Company issued to certain affiliates of General
Atlantic 600,000 shares of its Series A Convertible Preferred Stock, par value
$0.01 per share (the "Series A Preferred Stock"), for an aggregate purchase
price of $30 million. Each share of Series A Preferred Stock is convertible at
any time into ten shares of the Company's Common Stock, and will vote on an
as-converted basis with the Common Stock as a single class. The securities
issued in this transaction 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.
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial information
of the Company which, for each of the years in the four year period ended
December 31, 1997, the three months ended March 31, 1998 and the year ended
March 31, 1999, is derived from the audited consolidated financial statements of
the Company. Consolidated financial information for the three months ended March
31, 1997 and the twelve months ended March 31, 1998 is unaudited. These tables
should be read in conjunction with the Company's Consolidated Financial
Statements, including the notes thereto, appearing elsewhere in this Annual
Report on Form 10-K. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
YEARS ENDED DECEMBER 31, ENDED MARCH 31, MARCH 31,
----------------------------------------- ------------------ -------------------
1994 1995 1996 1997 1997 1998 1998 1999
-------- -------- -------- -------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $101,826 $234,461 $365,490 $530,677 $93,381 $105,767 $543,063 $572,342
Cost of goods sold.................... 54,449 138,662 214,580 315,134 57,883 57,092 314,343 329,959
Selling and distribution expenses..... 16,104 41,733 72,517 98,689 16,538 24,467 106,618 147,499
General and administrative expenses... 10,539 19,491 31,157 45,561 8,623 10,655 47,593 66,616
Research and development.............. -- 1,717 5,633 13,824 2,397 10,866 22,293 76,870
Royalty advance write-off............. -- -- -- 73,821 -- -- 73,821 --
Restructuring charges................. -- -- -- -- -- -- -- 17,479
Purchased research and development.... -- -- -- 11,008 -- -- 11,008 5,000
SingleTrac retention bonus............ -- -- -- 2,400 -- -- 2,400 1,680
Merger and other costs................ -- -- 3,718 1,050 -- -- 1,050 --
Amortization of goodwill.............. -- 567 1,092 1,295 347 636 1,584 3,349
-------- -------- -------- -------- ------- -------- -------- --------
Operating income (loss)............... 20,734 32,291 36,793 (32,105) 7,593 2,051 (37,647) (76,110)
Interest and other income (expense),
net................................. 41 795 3,974 (2,075) 247 (1,389) (3,711) (5,315)
-------- -------- -------- -------- ------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes......... 20,775 33,086 40,767 (34,180) 7,840 662 (41,358) (81,425)
Provision for (benefit from) income
taxes:
Federal and state (historical)...... 2,427 14,002 15,628 (9,157) 3,386 304 (12,239) (29,628)
Benefit from change in tax
status(1)......................... -- (3,520) -- -- -- -- -- --
-------- -------- -------- -------- ------- -------- -------- --------
Total provision for (benefit
from) income taxes......... 2,427 10,482 15,628 (9,157) 3,386 304 (12,239) (29,628)
-------- -------- -------- -------- ------- -------- -------- --------
Net income (loss) from continuing
operations.......................... 18,348 22,604 25,139 (25,023) 4,454 358 (29,119) (51,797)
Discontinued operations:
Loss from operations of OZM......... -- -- -- -- -- -- -- (3,531)
Loss on disposal of OZM............. -- -- -- -- -- -- -- (15,510)
-------- -------- -------- -------- ------- -------- -------- --------
Loss from discontinued operations... -- -- -- -- -- -- -- (19,041)
-------- -------- -------- -------- ------- -------- -------- --------
Net income (loss) before dividends
on preferred stock................ 18,348 22,604 25,139 (25,023) 4,454 358 (29,119) (70,838)
Less dividends on preferred stock..... -- -- -- -- -- -- -- 226
-------- -------- -------- -------- ------- -------- -------- --------
Net income (loss) attributable to
common stockholders................. $ 18,348 $ 22,604 $ 25,139 $(25,023) $ 4,454 $ 358 $(29,119) $(71,064)
======== ======== ======== ======== ======= ======== ======== ========
Basic net income (loss) per share from
continuing operations............... $ 0.38 $ (0.37) $ 0.07 $ 0.01 $ (0.43) $ (0.75)
Basic net loss per share from
discontinued operations............. -- -- -- -- -- $ (0.27)
-------- -------- ------- -------- -------- --------
Basic net income (loss) per share..... $ 0.38 $ (0.37) $ 0.07 $ 0.01 $ (0.43) $ (1.02)
======== ======== ======= ======== ======== ========
Weighted average shares outstanding... 66,391 66,982 66,395 67,938 67,363 69,654
======== ======== ======= ======== ======== ========
Diluted net income (loss) per share
from continuing operations.......... $ 0.37 $ (0.37) $ 0.07 $ 0.01 $ (0.43) $ (0.75)
Diluted net loss per share from
discontinued operations............. -- -- -- -- -- $ (0.27)
-------- -------- ------- -------- -------- --------
Diluted net income (loss) per share... $ 0.37 $ (0.37) $ 0.07 $ 0.01 $ (0.43) $ (1.02)
======== ======== ======= ======== ======== ========
Weighted average shares outstanding... 68,313 66,982 67,358 68,384 67,363 69,654
======== ======== ======= ======== ======== ========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------- -------------------
1994 1995 1996 1997 1998 1999
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments..... $ 4,496 $ 93,694 $ 76,584 $ 39,713 $ 17,329 $ 13,512
Working capital (deficit)................................ (4,180) 105,748 113,652 77,965 69,994 131,770
Total assets............................................. 72,332 301,641 367,111 457,725 365,871 487,615
Total debt............................................... 413 868 1,415 54,619 28,017 98,750
Stockholders' equity (deficit)........................... (3,637) 126,040 152,138 134,241 138,889 127,133
</TABLE>
- ---------------
(1) The benefit from change in tax status occurred as a result of the transition
from an S corporation to a C corporation on March 1, 1995, which allowed the
Company to accrue certain tax benefits which would otherwise have flowed to
the stockholders of the S corporation. This benefit would not have arisen
for the year ended December 31, 1995 had the Company been a C corporation
beginning January 1, 1994.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, publishes, and distributes interactive entertainment
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 Front-line, 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 Company develops and publishes products for multiple platforms, and
this diversification continues to be a cornerstone of the Company's strategy.
Sales of the Company's PlayStation, N64, Sega Saturn and Gameboy titles
("Console Titles") increased from 10% of the Company's front-line revenue during
the year ended December 31, 1996 ("1996") to 58% in the year ended December 31,
1997 ("1997"), 62% in the three months ended March 31, 1998 ("1998") and 64% in
the twelve months ended March 31, 1999 ("fiscal 1999"). Since 1996, the Company
has released approximately 50 Console Titles. As evidenced by the strong sales
of these platforms, the Company believes that significant growth opportunities
exist across a variety of next generation hardware platforms, in particular
PlayStation, for which the Company continues to create software products.
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 development done by its own internal development studies and
that done by third-party developers.
Along with its industry competitors, the Company had historically
capitalized royalties advanced to third-party developers as a prepayment in
current assets and evaluated the realization of these royalty advances on a
quarterly basis. The market changes noted above have made it extremely difficult
to determine the likelihood of individual product acceptance and success. As a
result, in the quarter ended December 31, 1997, the Company expensed royalty
advances of $73.8 million on products that were in development or on sale. In
connection with this change in the dynamics of the marketplace, the Company
changed its accounting,
22
<PAGE> 24
beginning on January 1, 1998, for future royalty advances, treating such costs
as research and development expenses, which are expensed as incurred. Multi-year
output advances will continue to be capitalized as royalty advances and expensed
over the development periods, in accordance with generally accepted accounting
principles.
The distribution channels for interactive software have changed
significantly in recent years. Traditionally, consumer software was sold through
specialty stores. Today, consumer software is increasingly sold through mass
merchants such as Wal-Mart, Kmart and Target, as well as major retailers,
including Office Depot, Best Buy, CompUSA, AAFES, Sam's Club and Babbage's. The
Internet and on-line networks also present a new channel through which
publishers and distributors can distribute their products to end-users.
In 1996, the Company acquired WizardWorks, a publisher of value-priced
interactive entertainment, edutainment and productivity software, FormGen Inc.,
a publisher of interactive PC shareware and software and Humongous, a premier
developer and publisher of original interactive children's software.
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 1996, the Company acquired the business of Warner Interactive Europe, a
developer and publisher of interactive PC software. In 1997, the Company
acquired Premier Promotion Limited, the parent company of One Stop, a leading
European value software distributor and publisher and SingleTrac, a leading
developer of frontline software. In 1998, the Company acquired OZM, an Internet
entertainment company, Reflections and Legend, developers of entertainment
software, and Home Soft Benelux B.V. ("Homesoft"), a distributor of
entertainment software. 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 and it is the Company's present intention to sell OZM.
Except for OZM, these acquisitions did not have a material impact on the
financial condition or the results of operations of the Company in the year
acquired.
Sales are recorded net of expected future returns. Historically, the
Company has experienced returns at approximately 30% of gross sales.
Effective January 1, 1998, the Company changed its fiscal year from
December 31 to March 31. Accordingly, the discussion of financial results set
forth below compares the twelve months ended March 31, 1999 to the twelve months
ended March 31, 1998, the three months ended March 31, 1998 to the comparable
1997 period, and compares the Company's previous fiscal years ended December 31,
1997, 1996 and 1995.
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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for each of the years in the
three years ended December 31, 1997, the three months ended March 31, 1998 and
the twelve months ended March 31, 1999, that is derived from the audited
consolidated financial statements of the Company. The consolidated financial
information for the three months ended March 31,
23
<PAGE> 25
1997 and the twelve months ended March 31, 1998 is derived from the unaudited
financial statements of the Company.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, MARCH 31, MARCH 31,
-------------------------- -------------- --------------
1995 1996 1997 1997 1998 1998 1999
------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................... 59.1 58.7 59.4 62.0 54.0 57.9 57.7
Selling and distribution expenses........... 17.9 19.9 18.6 17.7 23.1 19.6 25.8
General and administrative expenses......... 8.3 8.5 8.6 9.2 10.1 8.8 11.6
Research and development.................... 0.7 1.5 2.6 2.6 10.3 4.1 13.4
Royalty advance write-off................... -- -- 13.9 -- -- 13.6 --
Restructuring charges....................... -- -- -- -- -- -- 3.1
Purchased research and development.......... -- -- 2.1 -- -- 2.0 0.9
SingleTrac retention bonus.................. -- -- 0.4 -- -- 0.4 0.3
Merger and other costs...................... -- 1.0 0.2 -- -- 0.2 --
Amortization of goodwill.................... 0.2 0.3 0.2 0.4 0.6 0.3 0.6
----- ----- ----- ----- ----- ----- -----
Operating income (loss)..................... 13.8 10.1 (6.0) 8.1 1.9 (6.9) (13.3)
Interest and other income (expense), net.... 0.3 1.1 (0.4) 0.3 (1.3) (0.7) (0.9)
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for (benefit
from) income taxes........................ 14.1 11.2 (6.4) 8.4 0.6 (7.6) (14.2)
Provision for (benefit from) income taxes... 4.5 4.3 (1.7) 3.6 0.3 (2.3) (5.2)
----- ----- ----- ----- ----- ----- -----
Net income (loss) from continuing
operations................................ 9.6 6.9 (4.7) 4.8 0.3 (5.4) (9.1)
Discontinued operations:
Loss from operations of OZM............... -- -- -- -- -- -- (0.6)
Loss on disposal of OZM................... -- -- -- -- -- -- (2.7)
----- ----- ----- ----- ----- ----- -----
Loss from discontinued operations......... -- -- -- -- -- -- (3.3)
----- ----- ----- ----- ----- ----- -----
Net income (loss) before dividends on
preferred stock......................... 9.6 6.9 (4.7) 4.8 0.3 (5.4) (12.4)
Less dividends on preferred stock........... -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss) attributable to common
stockholders.............................. 9.6% 6.9% (4.7)% 4.8% 0.3% (5.4)% (12.4)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31,
1998
Net revenues for fiscal 1999 increased approximately $29.3 million, or
5.4%, to $572.3 million from $543.1 million in fiscal 1998. This growth in net
revenues was attributable to increases in net revenues of Children's publishing,
Leisure publishing and Distribution of $23.2 million, or 108%, $12.5 million, or
39%, and $12.3 million, or 5%, respectively. The increase in Children's net
revenue is attributable to the release of Blue's Clues related titles during
fiscal 1999. The increase in Leisure's net revenue is attributable to the
increased and continuing success of Deer Hunter, Deer Hunter II and Rocky
Mountain Trophy Hunter. The increase in Distribution net revenues for fiscal
1999 is primarily due to an increase in the number of stores supplied and
serviced by the Company.
These increases are offset by a reduction in Frontline net revenue of 18.7
million, or 8%. The decrease is largely attributable to a $13.5 million, or 71%
decrease in royalty income.
Cost of goods sold for fiscal 1999 increased approximately $15.6 million,
or 5.0%, to $330.0 million from $314.3 million in fiscal 1998. Cost of goods
sold as a percentage of net revenues decreased to 57.7% in fiscal 1999 as
compared to 57.9% in fiscal 1998. Excluding increased charges for obsolete
inventory between the periods, the cost of goods percentage would have been
55.4% of net revenue in fiscal 1999. This decrease is primarily a result of
increased sales in the Children's and Leisure categories of publishing.
24
<PAGE> 26
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During fiscal 1999, these expenses increased
approximately $40.9 million, or 38.3%, to $147.5 million from $106.7 million in
fiscal 1998. Selling and distribution expenses as a percentage of net revenues
for fiscal 1999 increased to 25.8% as compared to 19.6% in fiscal 1998. The
increase, as a percentage of net revenues, was primarily attributable to the
increase of print advertising worldwide to support the new and existing releases
of the Company's published product and increased cooperative advertising.
Additionally, increased premium freight costs due to higher unit volume and the
expense of consolidating inventory of the Company's Plymouth, MN distribution
center into its Edison, NJ distribution center, as compared to fiscal 1998. The
overall increase was also attributable to increased sales volume.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in fiscal 1999 increased approximately $19.0 million, or 40%, to $66.6
million from $47.6 million in fiscal 1998. General and administrative expenses
as a percentage of net revenues increased to 11.6% in fiscal 1999 from 8.8% in
fiscal 1998. This increase was due primarily to increased depreciation
associated with the expansion of the Company's worldwide facilities and the
implementation of enterprise software to enhance the Company's management
information systems worldwide, the increase in bad debt expenses, additional
legal and accounting fees incurred as part of the discontinued private placement
of senior subordinated debt and the write-off of an equity investment.
Research and development primarily includes payment for 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 other
related costs. These expenses in fiscal 1999 increased approximately $54.6
million, or 244.8%, to $76.9 million from $22.3 million in fiscal 1998. Research
and development, as a percentage of net revenues, increased to 13.4% in fiscal
1999 from 4.1% in fiscal 1998. This increase is primarily due to the change in
accounting effective January 1, 1998, whereby royalty advances on products that
are currently in development are expensed as incurred, and the additional
headcount attributable to increased in-house development capacity. Research and
development of the Company's internal development studios, which, during the
relevant periods, primarily included SingleTrac, Cavedog Entertainment,
Humongous, Legend Entertainment, Reflections and Bootprint increased to $34.9
from $17.6 million in fiscal 1999 as compared to fiscal 1998. Excluding the
impact of the change in accounting, research and development expenses would have
increased $28.2 million from $48.7 million to $76.9 million or 58%.
Restructuring charges of approximately $17.5 million, recorded in the
fourth quarter of fiscal 1999, relate 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.
Approximately $9.8 million relates to the planned severance of 135 employees,
$7.1 million relates to impaired assets and $0.6 million relates to rent for the
transition period. This reorganization was announced on March 19, 1999, and
management expects to complete the reorganization by March 19, 2000.
The charge for royalty advance write-off of $73.8 million during fiscal
1998 represents a change in estimate and accounting whereby royalty advances on
products that were currently in development or on sale were expensed. In
connection with this change, the Company prospectively expensed royalty advances
in a manner comparable with internal software development costs, which are
expensed to research and development as incurred.
In connection with the acquisitions of SingleTrac in October 1997 and
Reflections in December 1998, the Company incurred charges of $11.0 million and
$5.0 million, respectively, for purchased research and development. In addition,
the Company incurred a charge of $2.4 million and $1.7 million in fiscal 1998
and fiscal 1999, respectively, for a retention bonus for the SingleTrac
employees, which was based on the achievement of certain performance goals.
Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
fiscal 1998.
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Amortization of goodwill increased approximately $1.8 million, or 111.4% in
fiscal 1999, to $3.3 million from $1.6 million in fiscal 1998. This increase is
attributable to the purchases of Reflections, Homesoft, Prism and Legend in
fiscal 1999.
Interest and other expenses increased approximately $1.6 million during
fiscal 1999 to $5.3 million from $3.7 million in fiscal 1998. This increase was
primarily attributable to the increase in interest costs associated with
borrowings under the Revolving Credit Agreement (the "Credit Agreement").
The Company's effective tax rate for fiscal 1999 was 36% compared to 30% in
fiscal 1998. The increased rate is attributable to the lower proportion of
nondeductible expenses, primarily purchased research and development and
goodwill, in the current period.
In February 1999, certain partnerships affiliated with General Atlantic
purchased from the Company 0.6 million shares of the Company's Series A
convertible preferred stock ("Preferred Stock") for an aggregate purchase price
of $30.0 million. These shares of Preferred Stock accumulate dividends at 8.0%
and are convertible into 6.0 million shares of the Company's common stock at a
conversion price of $5 per share.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the Consolidated Financial Statements of the Company
reflect the planned disposal of OZM as a discontinued operation. Accordingly,
the revenues, costs and expenses, assets and liabilities, and cash flows of this
business have been excluded from the respective captions in the Consolidated
Balance Sheets, Consolidated Statements of Operations, Consolidated Statements
of Comprehensive Income and Consolidated Statements of Cash Flows, and have been
reported through its planned date of disposition as "Loss from discontinued
operations." As of March 31, 1999, OZM is accounted for as a discontinued
operation and it is the Company's present intention to sell OZM, resulting in an
anticipated loss from discontinued operations of $19.0 million. The loss from
operations of OZM represents net expenses of $4.6 million on net revenues of
$1.1 million. The loss on disposal of OZM includes a provision of $5.0 million
for operating losses during the phase-out period, and is primarily attributable
to the write-off of goodwill of approximately $18.3 million. There is no tax
benefit recorded on the loss from discontinued operations as OZM has
historically generated net losses.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Net revenues for 1998 increased approximately $12.4 million, or 13.3%, to
$105.8 million from $93.4 million in the comparable 1997 period. This growth in
net revenues was primarily attributable to a 49% increase in publishing revenue
which includes front-line, children's and leisure. Frontline net revenue
increased $9.4 million, or 36% from $26.4 million to $35.9 million, as a result
of the sales of Duke Nukem titles for the Playstation, N64 and the PC, Hexen for
N64, OddWorld: Abe's Oddysee for the Playstation, Total Annihilation for the PC,
East Meets West, and Quake N64, internationally. Leisure publishing's net
revenue increased $4.1 million, or 103% as a result of continued strong sales of
Deer Hunter and Wild Turkey Hunt for the PC. Children's net revenue increased
$2.6 million or 120% as a result of newly released titles such as Freddi Fish 3:
The Case of the Stolen Conch Shell. The overall increase in net revenues was
partially offset by the decrease in distribution net revenues to $57.1 million,
or 54% of net revenues, in 1998 from $60.8 million, or 65% of net revenues, in
the comparable 1997 period, as a result of Wal-Mart purchasing software directly
from several publishers whose software was previously sold to Wal-Mart by the
Company.
Cost of goods sold primarily includes costs of purchased products. Cost of
goods sold for 1998 decreased approximately $0.8 million, or 1.4%, to $57.1
million from $57.9 million in the comparable 1997 period. Cost of goods sold as
a percentage of net revenues decreased to 54.0% in 1998 as compared to 62.0% in
the comparable 1997 period. The decrease, as a percentage of net revenues, was
primarily due to the Company's change in accounting with respect to royalty
advances, resulting in the expensing of such advances to research and
development as incurred, rather than recouping such advances based on sales.
Additionally, the Company's overall sales mix of its Published Product, which
generally have higher margins, increased to 46% of net revenues in 1998 compared
to 35% in the comparable 1997 period. This decrease was partially offset by
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the higher sales of console titles, which generally have higher costs than PC
titles. Console titles accounted for 45% of Published Product revenue in 1998
compared to 17% during the comparable 1997 period.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During 1998 these expenses increased
approximately $7.9 million, or 47.9%, to $24.5 million from $16.5 million in the
comparable 1997 period. Selling and distribution expenses as a percentage of net
revenues for 1998 increased to 23.1% as compared to 17.7% in the comparable 1997
period. The increase, as a percentage of net revenues, was primarily
attributable to the increase of print advertising worldwide to support the new
and existing releases of the Company's Published Product and increased
cooperative advertising associated with higher published front-line revenues as
compared to the comparable 1997 period. The overall increase was also
attributable to increased sales volume.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in 1998 increased approximately $2.0 million, or 23.6%, to $10.7
million from $8.6 million in the comparable 1997 period. General and
administrative expenses as a percentage of net revenues increased to 10.1% in
1998 from 9.2% in the comparable 1997 period. This increase was due primarily to
additional personnel required to support the expansion of the Company's
publishing operations and the related amortization associated with the expansion
of the Company's worldwide facilities and the implementation of enterprise
software to enhance the Company's management information systems worldwide.
Research and development expenses primarily include payment for 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 other related costs. These expenses in 1998 increased approximately $8.5
million, or 353.3%, to $10.9 million from $2.4 million in the comparable 1997
period. Research and development expenses as a percentage of net revenues
increased to 10.3% in 1998 from 2.6% in the comparable 1997 period. This
increase is primarily due to the change in accounting effective for the three
months ended March 31, 1998, whereby royalty advances on products that are
currently in development or on sale are expensed as incurred, and the additional
headcount attributable to increased in-house development capacity primarily the
result of the SingleTrac acquisition.
Interest and other income (expense), net, decreased approximately $1.6
million during 1998 to an expense of $1.4 million from income of $0.2 million in
the comparable 1997 period. This decrease was primarily attributable to the
decrease in short-term investments and the increase in interest costs associated
with borrowings under the Revolving Credit Agreement (the "Credit Agreement").
The Company's effective tax rate for 1998 was 46% compared to 43% in the
comparable 1997 period. The increase is attributable to the higher proportion of
nondeductible expenses, primarily goodwill, in the current period.
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996
Net revenues increased approximately $165.2 million, or 45.2%, to $530.7
million in 1997 from $365.5 million in 1996. Publishing's net revenues increased
by $113.3 million from $152.4 million to $265.7 million or 74%. This growth in
net revenues was primarily attributable to an increase in front-line net revenue
of $100.9 from $120.5 million to $221.4 million or 84%. The release of newly
published titles, both domestically and internationally, which included
OddWorld: Abe's Oddysee for the PlayStation, Duke Nukem 3D for N64 and the
PlayStation, Hexen for N64 and the PlayStation and Total Annihilation for the
PC. The international release of Doom II, Mortal Kombat Trilogy, San Francisco
Rush, NBA Hangtime and Mace for N64, the domestic release of Shadow Warrior for
the PC, Critical Depth for the PlayStation, Blood for the PC and Courier Crisis
for the PlayStation, as well as the continuing strong sales of Duke Nukem 3D and
Quake and an increase in royalty income (from licensing of certain of the
Company's products in selected international markets) also contributed to the
growth in net revenues. Children's net revenue increased $5.6 million from $11.1
million to $16.7 million or 50% primarily as a result of the release of Putt
Putt(R) Travels Through Time(TM). Leisure's net revenue increased $6.8 million,
from $20.8 million to $27.6 million or, 33% as a result of
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increased sales of Deer Hunter, Sportsmen's Paradise, and Duke 3D shareware.
Distribution's net revenue increased $53.0 million from $213 million to 265
million, or 25%, as a result of increases 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 growth in net revenues.
This increase was partially offset by the reduction in revenues resulting from
Wal-Mart's decision in the second half of 1997 to purchase products directly
from five publishers whose products had been previously distributed by the
Company.
Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold increased
approximately $100.6 million, or 46.9%, to $315.1 million in 1997 from $214.6
million in 1996. Cost of goods sold as a percentage of net revenues increased to
59.4% in 1997 as compared to 58.7% in 1996. The increase of 0.7% was primarily
due to the decline in the average wholesale price of the Company's value-priced
products and an increase in the sales of N64 titles, which have lower margins.
This increase was mostly offset by a shift in the Company's overall sales mix
toward its published products which increased to an aggregate of approximately
50% of net revenue in 1997 compared to approximately 42% during 1996 and a
change in product mix within the products distributed for third parties to
higher margin 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 $26.2
million, or 36.1%, to $98.7 million in 1997 from $72.5 million in 1996. The
increase is attributable to the overall increase in sales volume. Selling and
distribution expenses as a percentage of net revenues for 1997 decreased to
18.6% as compared to 19.9% for 1996. This decrease was primarily attributable to
the reduction of freight as a percentage of net revenues and 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 in 1997 increased approximately $14.4 million, or 46.2%, to $45.6
million in 1997 from $31.2 million in 1996. General and administrative expenses
as a percentage of net revenues increased to 8.6% in 1997 from 8.5% in 1996.
This increase was due primarily to additional personnel required to support the
expansion of the Company's research and development and publishing operations,
an increase in the reserve for bad debts and an increase in depreciation expense
due to the write-off of the leasehold improvements at the Company's former
headquarters.
Research and development expenses primarily include direct costs of
developing and producing a title such as salaries and other related costs. These
expenses in 1997 increased approximately $8.2 million, or 145.4% to $13.8
million from $5.6 million in 1996. Research and development expenses as a
percentage of net revenues increased to 2.6% in 1997 from 1.5% in 1996. This
increase is primarily due to the in-house development of Humongous titles.
The charge for royalty advance write-off of $73.8 million during 1997
represents a change in estimate and accounting whereby royalty advances on
products that are currently in development or on sale were expensed. In
connection with this change, the Company will prospectively expense royalty
advances in a manner comparable with internal software development costs, which
are expensed as incurred. Management anticipates that this will result in cost
of goods sold and research and development increasing; however, the amount of
such increase in research and development costs will depend upon the amount of
internal research and development expenditures as well as the amounts of royalty
advances paid to third parties.
In connection with the acquisition of SingleTrac, the Company incurred a
charge of $11.0 million for purchased research and development. In addition, the
Company incurred a charge of $2.4 million for a retention bonus for the
SingleTrac employees, which was based on the achievement of certain performance
goals. Pursuant to the SingleTrac purchase agreement, the Company has structured
a retention oriented bonus pool of up to approximately $10.0 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 during
calendar year 1998.
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Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
1997 and to complete the acquisitions of the Acquired Companies and for the
Company's canceled secondary stock offering during 1996.
Interest and other income (expense), net, decreased approximately $6.0
million during 1997. 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.
The Company's effective tax rate, as a percentage of pre-tax income (loss),
decreased in 1997 to 27% compared to 38% in 1996 due to the non-deductible one
time charge related to the acquisition of in-process research and development
during the year.
For 1997, the net loss was $25.0 million, or $0.37 per share, compared to
net income of $25.1 million, or $0.38 per share for 1996, with earnings per
share for both 1997 and 1996 calculated based on the basic method. Excluding one
time charges resulting from the charge for the royalty advance expense,
purchased research and development, the retention bonus for the SingleTrac
employees and the merger costs, the Company would have recognized net income of
$33.9 million or $0.51 per share. Exclusive of the one time charge for merger
costs, net income for 1996 would have been $27.3 million or $0.40 per share.
Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended December
31, 1995
Net revenues for 1996 increased approximately $131.0 million, or 55.9%, to
$365.5 million in 1996 from $234.5 million in the year ended December 31, 1995
("1995"). Publishing's net revenue increased $70.0 million from $82.4 million to
$152.4 million, or 85%. Frontline net revenue increased $61.5 million from $59.0
million to $120.5 million, or 104%. This growth in net revenues was primarily
attributable to the introduction of newly published titles such as Duke Nukem
3D, Quake, Area 51, Final Doom for the PlayStation, Heretic: Shadow of the
Serpent Rider, Bedlam, and "9" and, the continuing strong sales of Doom and
Doom-related products and increased royalty income. Children's net revenue
increased $3.0 million from $8.1 million to $11.1 million, or 37%. Leisure's net
revenue increased $5.5 million from $15.3 million to $20.8 million, or 36%.
Distribution's net revenue increased $60.4 million from $152.3 million to $212.7
million, or 40%. In the third quarter of 1995, Microsoft(R) Windows(R) 95 was
introduced and distributed to certain retailers by the Company. This one time
event added net revenues of approximately $15.2 million of distribution revenue.
Without these sales, net revenues would have increased $45.8 million.
Additionally, the expansion of the Company's value-priced line of software, an
increase in the shelf space available from its existing mass merchant customers,
an increase in the number of mass merchant stores supplied and serviced by the
Company and an increase in sales from its existing mass merchant shelf space
contributed to the growth in net revenues. 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 revenues.
Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold for 1996 increased
approximately $75.9 million, or 54.8%, to $214.6 million in 1996 from $138.7
million in 1995. Cost of goods sold as a percentage of net revenues decreased to
58.7% in 1996 compared to 59.1% in 1995. This decrease was primarily due to a
change in product mix toward the Company's higher margin published products,
which increased to approximately 42% of net revenues in 1996 as compared to
approximately 35% in 1995. Additionally, during the last half of 1995, the
Company's sales of Microsoft(R) Windows(R) 95 contributed to the increase in
cost of goods sold as a percentage of net revenues for that year as a result of
that product's lower gross margin.
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 $30.8
million, or 73.8%, to $72.5 million in 1996 from $41.7 million in 1995. The
increase was due in part to additional advertising costs of approximately $9.6
million to support the growth of the Company's published products and an
increase in shipping costs of approximately $4.8 million 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 $13.7 million to support the Company's
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growth. Selling and distribution expenses as a percentage of net revenues
increased to 19.9% for 1996 compared to 17.9% for 1995.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses increased approximately $11.7 million, or 59.9%, to $31.2 million in
1996 from $19.5 million in 1995. The increase was due primarily to the expansion
of the Company's operations. General and administrative expenses as a percentage
of net revenues increased to 8.5% from 8.3%.
Research and development expenses primarily include direct costs of
developing and producing a title such as salaries and other related costs. These
expenses in 1996 increased approximately $3.9 million, or 228.1%, to $5.6
million from $1.7 million in 1995. Research and development expenses as a
percentage of net revenues increased to 1.5% in 1996 from 0.7% in 1995. This
increase is primarily due to additional in-house development of Humongous
titles.
Merger costs consist of legal, accounting and other professional fees
incurred by the Company to complete the acquisitions of the Acquired Companies
and for the Company's canceled secondary stock offering.
Amortization of goodwill increased by approximately $.5 million, or 92.6%,
to $1.1 million in 1996 from $0.6 million in 1995. This increase is attributable
to the full year impact of the June 1995 acquisition of Slash.
Operating income for 1996 increased from $32.3 million to $36.8 million,
while operating margins decreased from 13.8% to 10.1%. Excluding merger costs,
operating income and operating margins would have been approximately $40.5
million and 11.1% for 1996.
Interest and other income, net, increased $3.2 million for 1996 as compared
to 1995. This is primarily attributable to greater short-term investments and
cash balances.
The Company's provision for income taxes for 1996 includes the reversal of
a valuation allowance relating to a net operating loss carry-forward of one of
the Acquired Companies. Additionally, had the Company been a C corporation for
the entire year ended December 31, 1995, the Company's provision for income
taxes would have been $15.1 million and 6.4% of net revenues for the period.
Net income for 1996 increased $2.5 million, or 11%, from $22.6 million to
$25.1 million. Excluding merger costs, net income and net income as a percentage
of net sales would have been $27.3 million and 7.5% for 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's working capital was $144.4 million
compared to $70.0 million at March 31, 1998. Cash and cash equivalents were
$13.4 million at March 31, 1999 compared to $17.2 million at March 31, 1998.
The primary source of cash during the twelve months ended March 31, 1999
was cash provided by financing activities of $101.1 million. These externally
generated funds and the existing cash balance at March 31, 1998 of $17.2 million
were primarily used to fund receivables of $49.8 million, inventories of $33.8
million, income taxes receivable of $8.7 million and the purchase of property
and equipment of $22.6 million. The increase in the receivable balance at March
31, 1999 reflects overall higher sales volume during the three months ended
March 31, 1999 and a larger proportion of those sales occurring late in the
quarter as compared to the three months ended March 31, 1998. The increase in
the inventory balance as of March 31, 1999, as compared to March 31, 1998, is
primarily attributable to the mix of higher cost products including Windows '98
Upgrade and Flight Simulator and a greater proportion of PlayStation product,
which also carries a higher cost. The increase in income taxes receivable is due
to a net loss for the twelve months ended March 31, 1999, as a result of the
loss on disposal of OZM of $19.0 million and from restructuring charges of $17.5
million related to a reorganization of the Company's front-line publishing
business, planned relocation of corporate headquarters to California and
outsourcing of the Company's distribution function. The increase in accounts
payable is attributable to the increase of inventory. The increase in accrued
liabilities is due to restructuring
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charges scheduled to be paid out beginning in the quarter ended September 30,
1999 . The increase in property and equipment is primarily due to additional
investments in computer hardware and software to support the Company's growth.
The Company does not currently have any material commitments with respect
to any capital expenditures.
On January 21, 1997, the Company entered, with certain banks, into a
revolving Credit Agreement (as amended, the "Old Credit Agreement") 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. Under the
New Credit Agreement, the Company can borrow up to $125 million (the "Line"). At
March 31, 1999, the Company had outstanding debt of approximately $98.8 million,
representing borrowings under the New Credit Agreement, and letters of credit
amounting to approximately $2.8 million.
On June 29, 1999, the Company and the Banks amended the New Credit
Agreement to increase the Company's borrowing base by an additional $20 million
until March 31, 2000 and to remove certain financial covenants under the New
Credit Agreement. 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. Under the New Credit Agreement, as amended, the
borrowings bear interest at either the bank's reference rate (which is generally
equivalent to the published prime rate) plus 2.5% or the LIBOR rate plus 4% and
the Company pays, on the unused portion of the Line, a commitment fee that is
based on certain ratios, which is currently 0.50%. The amended New Credit
Agreement also requires maintenance of certain EBITDA levels and limits on
capital expenditure amounts. To induce the Banks to amend the New Credit
Agreement, the Company is paying the Banks an amendment fee of 1.75% on the
existing Line, as well as certain arrangement fees and annual agent fees. As an
additional inducement, the Company agreed to issue the Banks warrants to
purchase, at an exercise price of $0.01 per share, an aggregate of 750,000
shares of the Company's Common Stock with varying vesting schedules for
exercisability. Of these, warrants to purchase 275,000 shares of Common Stock
are immediately exercisable and warrants to purchase the remaining 475,000
shares of Common Stock will become exercisable only upon the occurrence of
certain events.
At June 28, 1999, the Company had outstanding debt of approximately $106.5
million, representing borrowings under the New Credit Agreement, and letters of
credit amounting to approximately $4.8 million.
On February 24, 1999, certain partnerships affiliated with General Atlantic
purchased from the Company 0.6 million shares of the Company's Series A
Convertible Preferred Stock (the "Preferred Stock") for an aggregate purchase
price of $30.0 million. These shares of Preferred Stock are convertible into 6.0
million shares of the Company's common stock at a conversion price of $5 per
share.
As a further condition to the Banks' agreement to amend the New Credit
Agreement, on June 29, 1999, the Company received Commitments from General
Atlantic and certain members of the Cayre family (together with General
Atlantic, the "Junior Debtholders") to loan to the Company an aggregate of $30.0
million (the "Junior Debt"). Certain members of the Cayre family and affiliates
of General Atlantic own, in the aggregate, a significant percentage of the
Company's Common Stock. The Junior Debt will be made available to the Company on
or before July 30, 1999. Of the $30.0 million which the Junior Debtholders are
obligated to loan the Company, $20.0 million will be funded by General Atlantic
and $10.0 million will be funded by the Cayre family. The Junior Debt will be
evidenced by promissory notes (the "Notes") from the Company to the Junior
Debtholders. The Company will use the borrowings under the Notes to prepay a
portion of the Line, which may be reborrowed.
To induce General Atlantic to enter into the Commitments, the Company will
also amend the terms of the Certificate of Designation designating its Series A
Convertible Preferred Stock to provide that in the event of a change of control,
the holders of the Preferred Stock will receive, before any payment or
distribution is made on any other equity securities of the Company, an amount
equal to the liquidation preference set forth in the Certificate of Designation
plus all accrued and unpaid dividends thereon to the date fixed for such change
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of control. Further, the Company will issue to General Atlantic warrants (the
"Commitment Warrants") to purchase, at an exercise price equal to $0.01 per
share, an aggregate of 500,000 shares (subject to anti-dilution adjustments) of
the Company's Common Stock. The Cayre family has granted to General Atlantic an
option to purchase a total of 1,500,000 shares of Common Stock owned by them.
One-third of the Commitment Warrants will be credited against this option.
Concurrently with the issuance of the Commitment Warrants, the Company will
amend the Registration Rights Agreement, dated February 23, 1999 (the
"Registration Rights Agreement"), between the Company and General Atlantic, to
extend those registration rights to the shares of Common Stock issuable upon
exercise of the Commitment Warrants and any additional warrants issued to
General Atlantic, as described below.
The Notes will mature on July 30, 2000 (the "Maturity Date") and will bear
cumulative interest, compounding quarterly, at the rate of 9% per year until
January 1, 2000, on which date the rate will increase to 12% per year. All
accrued and unpaid interest will be due and payable in cash on the earlier of
(i) the Maturity Date and (ii) the first business day after the Line has been
repaid in full. In the event of a change in control of the Company, the Company
is required to prepay the aggregate unpaid principal amount of the Notes plus
all accrued and unpaid interest thereon. After the Line has been repaid in full,
the Company may prepay the Notes in whole or in part. The Notes, including all
unpaid principal of and interest thereunder, will be subordinate and junior in
right of payment to all amounts owed under the New Credit Agreement, as amended.
If the Company borrows any amounts under the Commitments, then concurrently
with the issuance of the Notes, the Company will issue to the General Atlantic
warrants to purchase, at an exercise price of $0.01 per share, an aggregate of
1,500,000 shares of the Company's Common Stock. In addition, under certain
circumstances, the Company may be obligated to issue additional warrants to the
Junior Debtholders.
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 businesses and corporate plan of reorganization.
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 New Credit Agreement and the Commitments, will be
sufficient to fund the Company's anticipated operations until June 30, 2000.
YEAR 2000 COMPLIANCE
Many currently installed operating systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
need additional digits to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.
Failure to correct systems to become "Year 2000 Compliant," may result in
systems failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Year 2000
issue also may affect the Company's products.
The Company's review of its Year 2000 compliance issues encompasses three
principal areas: critical information systems (including information technology)
("IT"), such as financial and order entry systems, and non-information
technology ("Non-IT") systems, such as facilities); third party customers,
vendors and others with whom the Company does business; and the Company's
products.
The Company has conducted a comprehensive review of its critical
information systems, created a plan for reviewing its products for Year 2000
compliance and begun implementing that plan. A plan has also been developed, and
is now being implemented, to remedy any deficiencies in the Company's critical
information systems. The Company is resolving Year 2000 compliance issues
primarily through normal upgrades of its software or, when necessary, through
replacement of existing software or affected non-IT systems with Year 2000
compliant applications or systems. Presently, the Company is in the process of
testing the enhancements to its critical information systems and is developing
and implementing a plan to identify time sensitive
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components in its products currently under development. In addition, the Company
is in the process of asking vendors and other third parties with whom the
Company has relevant relationships to certify that they are Year 2000 compliant
or, if they are not yet so compliant, to provide a description of their plans to
become so. The Company expects to complete its programs for Year 2000 compliance
with respect to critical information systems and vendor and other third parties
by September 30, 1999 and intends to complete such process with respect to its
products in advance of January 1, 2000.
There can be no assurance that such upgrades and replacements can be
completed on schedule or within estimated costs or can successfully address the
Year 2000 compliance issues. If the Company's present efforts to address the
Year 2000 compliance issues are not successful, or if vendors and other third
parties with which the Company conducts business do not successfully address
such issues, the Company's business, operating results and financial position
could be materially and adversely affected. For example, failure to achieve Year
2000 compliance for the Company's internal critical information systems could
delay its ability to manufacture and ship products, disrupt customer service and
technical support facilities, or interrupt customer access to online products
and services. The Company also relies heavily on third parties such as vendors,
suppliers, service providers and a large retail distribution channel. If these
or other third parties experience Year 2000 failures or malfunctions, there
could be a material adverse impact on the Company's ability to conduct ongoing
operations. For example, the ability to manufacture and ship products (both the
Company's and third parties' for which the Company acts as distributor) into the
retail channel, to receive retail sales information necessary to maintain proper
inventory levels, or to complete online transactions dependent upon third party
service providers could be affected. Moreover, should third party products
distributed by the Company fail to be Year 2000 compliant, retail customers of
the Company might return such products or seek redress from the Company, which
in turn would require the Company to seek redress from the publisher of the
product. In addition, because of the number of products sold by the Company
currently and in the past, the Company could face litigation relating to Year
2000 compliance of products that the Company no longer sells and/or supports,
although the Company believes that any such exposure should not be material.
The Company has budgeted $0.8 million for the cost of upgrading, replacing,
testing and implementing its Year 2000 compliance, and has currently spent
approximately $0.45 million to date. Additionally, the Company has not yet
established a contingency plan and will continue to evaluate whether one is
necessary, depending upon its progress in implementing its Year 2000 compliance
measures as set forth above.
The above discussion regarding costs, risks and estimated completion dates
for the Year 2000 is based on the Company's best estimates given information
that is currently available, and is subject to change. Actual results may differ
materially from these estimates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it has any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this Item.
33
<PAGE> 35
ITEM 8. INDEX TO THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, and notes thereto, and the Financial
Statement Schedule of the Company, are presented on pages F-1 through F-28
hereof as set forth below:
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-1
Consolidated Balance Sheets as of March 31, 1998 and
1999................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1997, the Three Months Ended
March 31, 1998 and the Year Ended March 31, 1999....... F-3
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1996 and 1997, the Three
Months Ended March 31, 1998 and the Year Ended March
31, 1999............................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997, the Three Months Ended
March 31, 1998 and the Year Ended March 31, 1999....... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996 and 1997, the Three
Months Ended March 31, 1998 and the Year Ended March
31, 1999............................................... F-6
Notes to the Consolidated Financial Statements............ F-7 to F-27
FINANCIAL STATEMENT SCHEDULE
For the Years Ended December 31, 1996 and 1997, the Three
Months Ended March 31, 1998 and the Year Ended March
31, 1999
Schedule II -- Valuation and Qualifying Accounts.......... F-28
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's fiscal year ended March 31, 1999, the three month
transition period ended March 31, 1998 and the previous two fiscal years, there
have been no changes in the independent accountants nor disagreements with such
accountants as to accounting and financial disclosures of the type required to
be disclosed in this Item 9.
34
<PAGE> 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item 10 is incorporated herein by
reference to the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the Company's Proxy Statement.
35
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
See Item 8 hereof.
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
2.1 (1) Agreement and Plan of Reorganization by and among the
Company, GT Acquisition Sub, Inc., WizardWorks Group, Inc.
and the Stockholders of WizardWorks Group, Inc., dated June
24, 1996.
2.2 (1) Escrow Agreement by and among the Company, Paul D. Rinde, as
the Stockholder Representative of WizardWorks Group, Inc.,
and Republic National Bank of New York, as Escrow Agent,
dated June 24, 1996.
3.1 (10) Amended and Restated Certificate of Incorporation, as
amended.
3.2 (10) Amended and Restated By-laws, as amended.
4.1 (4) Specimen form of stock certificate for Common Stock.
4.2 (12) Certificate of the Powers, Designations, Preferences and
Rights of the Series A Convertible Preferred Stock.
10.1 (3) The 1995 Stock Incentive Plan (as amended on October 31,
1996).
10.2 (4) Services Agreement between the Company and GoodTimes Home
Video Corp., dated as of January 1, 1995.
10.3 (4) 4.5% Subordinated Secured Promissory Note, due February 28,
1996.
10.4 (4) Employment Agreement, dated December 10, 1995, between the
Company and Ronald Chaimowitz.
10.5 (4) Employment Agreement, dated June 22, 1995, between the
Company and Charles F. Bond.
10.6 (4) Non-Competition Agreement, dated June 22, 1995, between the
Company and Charles F. Bond.
10.7 (4) Employment Agreement, dated January 1, 1995, between the
Company and Harry M. Rubin.
10.8 (4) Employment Agreement, dated December 30, 1994, between the
Company and Harry Steck.
10.9 (4) Employment Agreement, dated July 1, 1995, between the
Company and Chris Garske.
10.10 (4) GTIS Master Option and License Agreement between the Company
and the Midway Entertainment Group, dated December 28, 1994,
and the Amendment to such agreement, dated March 31, 1995.
10.11 (4) GTIS Master Option and License Agreement (Home Video Games)
between the Company and the Midway Entertainment Group,
dated March 31, 1995.
10.12 (4) Agreement between the Company and SOFTBANK Corporation,
dated October 9, 1995.
10.13 (4) Agreement between the Company and Roadshow PTY LTD, dated
October 3, 1995.
10.14 (4) Agreement and Plan of Reorganization by and between Charles
F. Bond, Slash Corporation and the Company, dated June 22,
1995.
10.15 (4) Lease Agreements between the Company and 16 East 40th
Associates.
10.16 (4) Sub-lease Agreement between the Company and Michael Stevens
Ltd., dated February 22, 1995.
10.17 (4) Lease Agreement between GT Interactive Software (Europe)
Limited and Marylebone 248 Realty LLC, dated May 2, 1995.
10.18 (4) Stockholders' Agreement by and among Joseph J. Cayre,
Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts
listed on Schedule I attached thereto and the Company.
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
10.19 (4) Registration Rights Agreement by and among Joseph J. Cayre,
Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts
listed on Schedule I attached thereto and the Company.
10.20 (4) Agreement by and between the Company and REPS.
10.21 (5) Second Amendment to GTIS Master Option and License Agreement
between the Company and Midway Entertainment Group, dated
March 27, 1996.
10.22 (5) Amendment to GTIS Master Option and License Agreement (Home
Video Games) between the Company and Midway Entertainment
Group, dated March 27, 1996.
10.23 (5) Master Option and License Agreement for Atari PC Games
between the Company and WMS Industries Inc., dated March 27,
1996.
10.24 (5) Master Option and License Agreement for Atari Home Video
Games between the Company and WMS Industries Inc., dated
March 27, 1996.
10.25 (5) Employment Agreement, dated April 19, 1996, between the
Company and Andrew Gregor.
10.26 (3) 6.15% Promissory Note, due August 31, 1998, of Andrew
Gregor.
10.27 (3) 6.15% Promissory Note, due August 31, 1998, of Chris Garske.
10.28 (6) Lease Agreement between the Company and Plymouth 2200, LLP,
dated September 6, 1996.
10.29 (7) Agreement of Lease, dated as of December 12, 1996, by and
between the Company and F.S. Realty Corp.
10.30 (7) Amendment to Stockholders Agreement, dated as of December
18, 1995, by and among Joseph J. Cayre, Kenneth Cayre,
Stanley Cayre, Jack J. Cayre, the trusts parties thereto and
the Company.
10.31 (7) Credit Agreement, dated as of January 21, 1997, by and among
the Company, the banks parties thereto and Republic National
Bank of New York, as Agent.
10.32 (8) Amendment, dated as of June 30, 1997, to the Credit
Agreement, dated as of January 21, 1997 by and among the
Company, the banks parties thereto and Republic National
Bank of New York, as Agent.
10.33 (8) Employment Agreement, dated May 15, 1997, between the
Company and David I. Chemerow.
10.34 (8) The 1997 Stock Incentive Plan.
10.35 (9) Employment Agreement, dated October 15, 1997, between the
Company and Michael A. Ryder.
10.36 (9) Amended and Restated 6.15% Promissory Note, due August 31,
2000, of Andrew Gregor.
10.37 (10) Amendment, dated as of July 9, 1998, to the Credit
Agreement, dated as of January 21, 1997, by and among the
Company, the banks parties thereto and Republic National
Bank of New York, as Agent.
10.38 (10) Employment Agreement, dated April 28, 1998, between the
Company and David I. Chemerow.
10.39 (10) Employment Agreement, dated April 28, 1998, between the
Company and Harry M. Rubin.
10.40 (10) Employment Agreement, dated April 28, 1998, between the
Company and Ronald Chaimowitz.
10.41 (10) The 1997 Stock Incentive Plan (as amended on June 17, 1998).
10.42 (10) The 1998 Employee Stock Purchase Plan.
10.43 (11) Employment Agreement, dated July 1, 1998, between the
Company and Charles F. Bond.
10.44 (11) Employment Agreement, dated August 18, 1998, between the
Company and Jack J. Cayre.
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
10.45 (11) Credit Agreement, dated as of September 11, 1998, by and
among the Company, the Lenders thereto, NationsBanc
Montgomery Securities, LLC, as Syndication Agent, Fleet
Bank, N.A., as Documentation Agent, and First Union National
Bank, as Administrative Agent.
10.46 (11) Security Agreement, dated as of September 11, 998, by and
between the Company and First Union National Bank, as
Administrative Agent.
10.47 (11) Pledge Agreement, dated as of September 11, 1998, by the
Company in favor of First Union National Bank, as
Administrative Agent.
10.48 (13) Stock Purchase Agreement, dated February 8, 1999, among the
Company, General Atlantic Partners 54, L.P. and GAP
Coinvestment Partners II, L.P.
10.49 (13) Employment Agreement between the Company and Thomas Heymann.
10.50 Warehouse Services Contract, dated March 2, 1999, by and
between the Company and Arnold Transportation Services, Inc.
t/d/b/a Arnold Logistics.
10.51 Letter Agreement, dated March 12, 1999, between the Company
and Andrew Gregor.
10.52 Agreement, dated February 19, 1999, between the Company and
Ronald Chaimowitz.
10.53 Employment Agreement, dated April 2, 1999, between the
Company and John T. Baker IV.
10.54 Amendment, dated May 5, 1999, to the Employment Agreement,
dated May 15, 1997, as previously amended April 28, 1999,
between the Company and David Chemerow.
21.1 The Company's Subsidiaries.
22.1 (12) Information Statement on Schedule 14C with respect to
stockholder action taken on January 8, 1999.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended March 31, 1999.
</TABLE>
- ---------------
(1) 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
July 9, 1996.
(2) 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
year ended December 31, 1995.
(3) 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 October 18, 1996, and all amendments thereto (Registration No.
333-14441).
(4) 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 October 20, 1995, and all amendments thereto (Registration No.
33-98448).
(5) Incorporated herein by reference to an exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
(6) Incorporated herein by reference to an exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(7) Incorporated herein by reference to an exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(8) Incorporated herein by reference to an exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
(9) Incorporated herein by reference to an exhibit filed as part of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended.
(10) 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.
(11) Incorporated herein by reference to an exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
38
<PAGE> 40
(12) Incorporated herein by reference to the Company's Information Statement on
Schedule 14C filed on March 1, 1999.
(13) Incorporated herein by reference to an exhibit filed as part of the
Company's Current Report on 8-K filed on March 2, 1999.
(c) Reports on Form 8-K
During the fourth quarter ended March 31, 1999, the Company filed a Current
Report on Form 8-K, dated February 23, 1999, to announce the Company's issuance
to certain affiliates of General Atlantic Partners, LLC, a Delaware limited
liability company, of 600,000 shares of its Series A Convertible Preferred
Stock, par value $0.01 per share, for an aggregate purchase price of $30
million.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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/ THOMAS A. HEYMANN
------------------------------------
Name: Thomas A. Heymann
Title: Chairman of the Board of
Directors and Chief
Executive Officer
Date: June 29, 1999
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ JOSEPH J. CAYRE Chairman Emeritus of the Board of June 29, 1999
- --------------------------------------------------- Directors
Joseph J. Cayre
/s/ WALTER PARKS Senior Vice President, Finance and June 29, 1999
- --------------------------------------------------- Administration, and Chief Financial
Walter Parks Officer (Principal Financial and
Accounting Officer)
/s/ THOMAS A. HEYMANN Chairman of the Board of Directors June 29, 1999
- --------------------------------------------------- and Chief Executive Officer
Thomas A. Heymann
/s/ JACK J. CAYRE Executive Vice President, Director June 29, 1999
- ---------------------------------------------------
Jack J. Cayre
/s/ STANLEY CAYRE Director June 29, 1999
- ---------------------------------------------------
Stanley Cayre
/s/ STEVEN A. DENNING Director June 29, 1999
- ---------------------------------------------------
Steven A. Denning
/s/ WILLIAM E. FORD Director June 29, 1999
- ---------------------------------------------------
William E. Ford
/s/ JORDAN A. LEVY Director June 29, 1999
- ---------------------------------------------------
Jordan A. Levy
/s/ ALVIN N. TELLER Director June 29, 1999
- ---------------------------------------------------
Alvin N. Teller
/s/ PHILLIP J. RIESE Director June 29, 1999
- ---------------------------------------------------
Phillip J. Riese
</TABLE>
40
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
GT Interactive Software Corp. and subsidiaries:
We have audited the accompanying consolidated balance sheets of GT
Interactive Software Corp. (a Delaware corporation) and subsidiaries as of March
31, 1998 and 1999 and the related consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1997, for the three months ended March
31, 1998 and for the year ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GT Interactive Software
Corp. and subsidiaries as of March 31, 1998 and 1999 and the results of their
operations and cash flows for each of the two years in the period ended December
31, 1997, for the three months ended March 31, 1998 and for the year ending
March 31, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements and supplementary data is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
NEW YORK, NEW YORK
JUNE 29, 1999
F-1
<PAGE> 43
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,224 $ 13,407
Short-term investments.................................... 105 105
Receivables, net.......................................... 134,815 185,042
Inventories, net.......................................... 98,469 131,889
Royalty advances.......................................... 10,009 9,195
Deferred income taxes..................................... 16,140 36,142
Income taxes receivable................................... 10,684 1,973
Prepaid expenses and other current assets................. 7,954 12,947
-------- --------
Total current assets................................... 295,400 390,700
Property and equipment, net................................. 29,049 36,808
Investments, at cost........................................ 10,089 7,412
Goodwill, net of accumulated amortization of $3,591 and
$5,078, respectively...................................... 28,043 34,194
Deferred income taxes....................................... -- 12,664
Other assets................................................ 3,290 5,837
-------- --------
Total assets...................................... $365,871 $487,615
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $103,062 $152,556
Accrued liabilities....................................... 49,414 84,205
Revolving credit facility................................. 28,000 --
Royalties payable......................................... 40,395 18,515
Deferred income........................................... 156 173
Income taxes payable...................................... 3,449 2,569
Current portion of long-term liabilities.................. 5 4
Due to related party...................................... 925 908
-------- --------
Total current liabilities.............................. 225,406 258,930
Long-term debt.............................................. -- 98,750
Other long-term liabilities................................. 1,576 2,802
-------- --------
Total liabilities................................. 226,982 360,482
-------- --------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $0.01 par, 5,000,000
shares authorized, 600,000 shares issued and outstanding,
stated at liquidation preference of $50.00 per share...... -- 30,000
Common stock, $0.01 par, 150,000,000 shares authorized,
67,991,926 and 72,775,868 shares issued and outstanding,
respectively.............................................. 680 727
Additional paid-in capital.................................. 131,382 161,073
Retained earnings (deficit)................................. 7,577 (63,250)
Cumulative translation adjustment........................... (750) (1,417)
-------- --------
Total stockholders' equity........................ 138,889 127,133
-------- --------
Total liabilities and stockholders' equity........ $365,871 $487,615
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 44
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS YEAR ENDED
------------------------ ENDED MARCH 31,
1996 1997 MARCH 31, 1998 1999
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Net revenues................................ $365,490 $530,677 $105,767 $572,342
Cost of goods sold.......................... 214,580 315,134 57,092 329,959
Selling and distribution expenses ($3,407,
$5,194, $1,434 and $4,233 to a related
party for the periods presented,
respectively)............................. 72,517 98,689 24,467 147,499
General and administrative expenses ($1,060,
$987, $106 and $947 to a related party for
the periods presented, respectively)...... 31,157 45,561 10,655 66,616
Research and development.................... 5,633 13,824 10,866 76,870
Royalty advance write-off................... -- 73,821 -- --
Restructuring charges....................... -- -- -- 17,479
Purchased research and development.......... -- 11,008 -- 5,000
SingleTrac retention bonus.................. -- 2,400 -- 1,680
Merger and other costs...................... 3,718 1,050 -- --
Amortization of goodwill.................... 1,092 1,295 636 3,349
-------- -------- -------- --------
Operating income (loss)................... 36,793 (32,105) 2,051 (76,110)
Interest and other income (expense), net.... 3,974 (2,075) (1,389) (5,315)
-------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes............ 40,767 (34,180) 662 (81,425)
Provision for (benefit from) income taxes... 15,628 (9,157) 304 (29,628)
-------- -------- -------- --------
Net income (loss) from continuing
operations............................. 25,139 (25,023) 358 (51,797)
Discontinued operations:
Loss from operations of OZM............... -- -- -- (3,531)
Loss on disposal of OZM................... -- -- -- (15,510)
-------- -------- -------- --------
Loss from discontinued operations......... -- -- -- (19,041)
-------- -------- -------- --------
Net income (loss) before dividends on
preferred stock...................... 25,139 (25,023) 358 (70,838)
-------- -------- -------- --------
Less dividends on preferred stock........... -- -- -- 226
-------- -------- -------- --------
Net income (loss) attributable to
common stockholders.................. $ 25,139 $(25,023) $ 358 $(71,064)
======== ======== ======== ========
Basic net income (loss) per share from
continuing operations..................... $ 0.38 $ (0.37) $ 0.01 $ (0.75)
Basic net loss per share from discontinued
operations................................ -- -- -- (0.27)
-------- -------- -------- --------
Basic net income (loss) per share........... $ 0.38 $ (0.37) $ 0.01 $ (1.02)
======== ======== ======== ========
Weighted average shares outstanding....... 66,391 66,982 67,938 69,654
======== ======== ======== ========
Diluted net income (loss) per share from
continuing operations..................... $ 0.37 $ (0.37) $ 0.01 $ (0.75)
Diluted net loss per share from discontinued
operations................................ -- -- -- (0.27)
-------- -------- -------- --------
Diluted net income (loss) per share......... $ 0.37 $ (0.37) $ 0.01 $ (1.02)
======== ======== ======== ========
Weighted average shares outstanding....... 68,313 66,982 68,384 69,654
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 45
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
-------------------- ENDED MARCH 31,
1996 1997 MARCH 31, 1998 1999
-------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Net income (loss) before dividends on preferred
stock........................................... $ 25,139 $ (25,023) $ 358 $(70,838)
Other comprehensive income (loss):
Foreign currency translation adjustments........ 841 (2,732) 1,169 (667)
Unrealized holding gain (loss) on securities.... (186) (199) -- 11
-------- --------- ------ --------
Comprehensive income (loss)....................... $ 25,794 $ (27,954) $1,527 $(71,494)
======== ========= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 46
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
------------------- ENDED MARCH 31,
1996 1997 MARCH 31, 1998 1999
-------- -------- -------------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 25,139 $(25,023) $ 358 $(70,838)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 3,202 7,434 2,511 14,606
Write-off of investment.......................... -- -- -- 2,676
Purchased research and development............... -- 11,008 -- 5,000
Royalty advance write-off........................ -- 73,821 -- --
Deferred income taxes............................ (1,269) (1,010) 1,010 (32,666)
Deferred income.................................. (3,754) (1,690) 187 21
Write-off of assets in connection with
restructuring charges......................... -- -- -- 7,362
Loss from discontinued operations................ -- -- -- 19,041
Changes in operating assets and liabilities:
Receivables, net................................. (8,880) (118,508) 81,091 (49,785)
Inventories, net................................. (10,481) (32,084) (5,418) (33,772)
Royalty advances................................. (33,293) (20,505) 5,870 814
Due to related party, net........................ (354) (349) 581 (17)
Prepaid expenses and other current assets........ (1,316) 2,206 (3,409) (5,884)
Accounts payable................................. 16,480 38,607 (45,240) 46,254
Accrued liabilities.............................. 7,507 9,108 (17,472) 31,440
Royalties payable................................ 6,720 14,054 (7,037) (21,907)
Income taxes payable............................. 6,382 (3,804) (2,423) (1,133)
Income taxes receivable.......................... -- (15,171) 4,487 8,711
Long-term liabilities............................ 901 (8,186) (666) 1,220
Other............................................ (1,907) 522 (2,043) (2,226)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities............................... 5,077 (69,570) 12,387 (81,083)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments......................... (9,829) (259) -- --
Purchases of property and equipment.............. (5,703) (18,269) (7,641) (22,607)
Purchases of short-term investments, net......... 4,908 4,613 -- --
Acquisitions, net of cash acquired of
approximately $7, $135, $0 and $1,678,
respectively.................................. (6,297) (5,833) -- (2,701)
-------- -------- -------- --------
Net cash used in investing activities....... (16,921) (19,748) (7,641) (25,308)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit
facility, net................................. -- 54,600 (26,600) 70,750
Repurchase of warrants........................... (1,935) -- -- --
Proceeds from exercise of warrants............... -- 2,102 -- --
Proceeds from exercise of stock options.......... 636 786 114 376
Issuance of common stock......................... 100 -- -- --
Issuance of preferred stock...................... -- -- -- 30,000
-------- -------- -------- --------
Net cash provided by (used in) financing
activities............................... (1,199) 57,488 (26,486) 101,126
Effect of exchange rates on cash and cash
equivalents...................................... 841 (429) (644) 1,448
-------- -------- -------- --------
Net decrease in cash and cash equivalents.......... (12,202) (32,259) (22,384) (3,817)
Cash and cash equivalents -- beginning of fiscal
year............................................. 84,069 71,867 39,608 17,224
-------- -------- -------- --------
Cash and cash equivalents -- end of fiscal year.... $ 71,867 $ 39,608 $ 17,224 $ 13,407
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 47
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE ADDITIONAL RETAINED CUMULATIVE
PREFERRED COMMON PAID-IN EARNINGS TRANSLATION
STOCK STOCK CAPITAL (DEFICIT) ADJUSTMENT TOTAL
----------- ------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......... $ -- $661 $117,919 $ 7,488 $ (28) $126,040
Exercise of stock options.......... -- 2 634 -- -- 636
Tax benefit relating to exercise of
stock options.................... -- -- 1,503 -- -- 1,503
Issuance of stock.................. -- 1 99 -- -- 100
Repurchase of warrants............. -- -- (1,935) -- -- (1,935)
Net income......................... -- -- -- 25,139 -- 25,139
Currency translation adjustment.... -- -- -- -- 841 841
Unrealized loss on securities...... -- -- -- (186) -- (186)
------- ---- -------- -------- ------- --------
Balance, December 31, 1996......... -- 664 118,220 32,441 813 152,138
Issuance of stock in connection
with the acquisition of
SingleTrac....................... -- 7 7,162 -- -- 7,169
Exercise of warrants............... -- 5 2,097 -- -- 2,102
Exercise of stock options.......... -- 3 783 -- -- 786
Net loss........................... -- -- -- (25,023) -- (25,023)
Currency translation adjustment.... -- -- -- -- (2,732) (2,732)
Unrealized loss on securities...... -- -- -- (199) -- (199)
------- ---- -------- -------- ------- --------
Balance, December 31, 1997......... -- 679 128,262 7,219 (1,919) 134,241
Issuance of stock options in
connection with the acquisition
of SingleTrac.................... -- -- 3,007 -- -- 3,007
Exercise of stock options.......... -- 1 113 -- -- 114
Net income......................... -- -- -- 358 -- 358
Currency translation adjustment.... -- -- -- -- 1,169 1,169
------- ---- -------- -------- ------- --------
Balance, March 31, 1998............ -- 680 131,382 7,577 (750) 138,889
Issuance of preferred stock........ 30,000 -- -- -- -- 30,000
Issuance of stock options in
connection with acquisitions..... -- -- 1,356 -- -- 1,356
Issuance of stock in connection
with acquisitions................ -- 46 27,961 -- -- 28,007
Exercise of stock options.......... -- 1 374 -- -- 375
Net loss........................... -- -- -- (70,838) -- (70,838)
Currency translation adjustment.... -- -- -- -- (667) (667)
Unrealized gain on securities...... -- -- -- 11 -- 11
------- ---- -------- -------- ------- --------
Balance, March 31, 1999............ $30,000 $727 $161,073 $(63,250) $(1,417) $127,133
======= ==== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 48
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
GT Interactive Software Corp., a Delaware corporation (the "Company" or
"GTIS"), is a leading worldwide developer, publisher and distributor of
interactive entertainment software for use on various platforms, including PCs,
Sony PlayStation and Nintendo 64. The Company derives its revenues primarily
from the sale of its created, published, licensed and purchased products to mass
merchants, specialty software stores, computer superstores and distributors
located throughout North America and also in various international locations.
The Company was incorporated in September 1992 and commenced operations in
February 1993.
Principles of Consolidation
The consolidated financial statements include the accounts of GT
Interactive Software Corp. and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items. The net reserve is included in
accrued liabilities.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and highly liquid,
short-term investments with original maturities of three months or less at the
date acquired.
Inventories
Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established (and reassessed
quarterly) to reduce the recorded cost of obsolete inventory and slow moving
inventory to its net realizable value.
Royalty Advances
During the fourth quarter of 1997, the convergence of marketplace forces
led the Company to reconsider its royalty advance evaluation process. Rapid
technological innovation, shelf-space competition, shorter product life cycles
and buyer selectivity had made it extremely difficult to determine the
likelihood of individual product acceptance and success. As a result, the
Company expensed royalty advances of $73,821 on products that were in
development or on sale as of December 31, 1997. The Company has, effective
January 1, 1998, changed its accounting for future royalty advances, treating
such costs as research and development expenses, which are expensed as incurred.
These changes created symmetry in accounting for both internally and externally
developed products. Multi-year output advances are expensed over the development
periods, in accordance with generally accepted accounting principles.
Goodwill
Goodwill is amortized using the straight-line method over periods not
exceeding 20 years. Management reassesses quarterly the appropriateness of both
the carrying value and remaining life of goodwill, principally based on
forecasts of future undiscounted cash flows of businesses acquired.
F-7
<PAGE> 49
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the related assets.
Income Taxes
The Company recognizes income taxes in accordance with the liability
method. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Fair Values of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximates fair
value due to the short-term nature of such items.
Valuation of Long-Lived Assets
Long-lived assets such as investments, property, plant and equipment and
goodwill are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the total of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and
carrying value of the asset.
Research and Development Costs
Research and development costs related to the designing, developing and
testing of new software products are charged to expense as incurred. Effective
January 1, 1998, research and development costs also include payments for
royalty advances to third party developers on products that are currently in
development.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1996 and 1997, for the three months ended March 31,
1998 and the year ended March 31, 1999 amounted to $23,987, $32,034, $7,889 and
$49,107, respectively.
Foreign Currency Translation
The Company's foreign subsidiaries maintain their accounting records in
their local currency. The currencies are then converted to United States dollars
and the effect of the foreign currency translation is reflected as a component
of stockholders' equity.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to classifications used in the current period.
F-8
<PAGE> 50
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Net Income (Loss) Per Share
Basic earnings per share ("EPS") is computed as net earnings after
preferred dividends 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. The Series A Convertible preferred
stock and all shares issuable under stock based compensation plans would be
anti-dilutive and therefore have not been considered in the diluted EPS
calculation in fiscal 1999.
Discontinued Operations
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the consolidated financial statements of the Company
reflect the planned disposal of OZM as a discontinued operation. Accordingly,
the revenues, costs and expenses, assets and liabilities, and cash flows of this
business have been excluded from the respective captions in the Consolidated
Balance Sheets, Consolidated Statements of Operations, Consolidated Statements
of Comprehensive Income and Consolidated Statements of Cash Flows, and have been
reported through the planned date of disposition as "Loss from discontinued
operations."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
Effective January 1, 1998, the Company has changed its fiscal year end from
December 31 to March 31. Accordingly, the fiscal year ended March 31, 1998
represents three months of operations.
NOTE 2 -- ACQUISITIONS
In 1996, the Company acquired all of the outstanding common stock of
WizardWorks Group, Inc. ("WizardWorks"), all of the outstanding common stock of
Candel Inc., the parent company of FormGen, Inc. ("FormGen"), and all of the
outstanding common stock of Humongous Entertainment, Inc. ("Humongous").
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 all periods presented.
In November 1996, the Company purchased 100% of the business of Warner
Interactive Entertainment Europe, which consisted of Warner Interactive
Entertainment Limited, Brambleworld Computers Limited, Warner Interactive France
S.A. and Warner Interactive Entertainment Germany GmbH, for approximately $6,300
in cash. Immediately subsequent to the acquisition, the Company renamed three of
the four companies to: Renegade Interactive Entertainment Limited, GT
Interactive Software France S.A. and GT Interactive Entertainment Germany GmbH.
This acquisition has been accounted for as a purchase and accordingly, the
operating results of the acquired companies have been included in the Company's
Consolidated Financial Statements as of the date of the acquisition.
F-9
<PAGE> 51
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- ACQUISITIONS -- (CONTINUED)
In January 1997, the Company acquired all of the outstanding capital stock
of Premier Promotion Limited, the parent company of One Stop Direct Limited, for
approximately $400 in cash. This transaction was accounted for as a purchase.
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 $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, $11,008 of
acquisition cost was expensed in the fourth quarter of 1997.
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
within the next six months and therefore OZM is accounted for as a discontinued
operation. This resulted in an anticipated loss from discontinued operations of
$19.0 million which includes a provision of $5.0 million for operating losses
during the phase-out period. OZM is valued at anticipated sales proceeds less
losses to be incurred through the date of sale. The net assets of OZM of $1.0
million are included in prepaid expenses and other current assets.
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.
F-10
<PAGE> 52
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- RECEIVABLES, NET
Receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Trade accounts receivable.............................. $137,978 $195,738
Royalties receivable................................... 89 17
-------- --------
138,067 195,755
Less: allowance for doubtful accounts.................. 3,252 10,713
-------- --------
$134,815 $185,042
======== ========
</TABLE>
NOTE 4 -- INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Finished goods.......................................... $94,220 $127,695
Raw materials........................................... 4,249 4,194
------- --------
$98,469 $131,889
======= ========
</TABLE>
NOTE 5 -- INVESTMENTS
In 1996, the Company purchased for approximately $2,676 in cash a 9.9%
investment in, and entered into a multi-titled publishing agreement with Mirage,
a U.K. developer of entertainment software. Since the total of the expected
future cash flows is less than the carrying amount of the investment, the
Company recognized a loss of $2,676 on its investment during fiscal 1999.
In 1996, the Company invested approximately $7,122 in convertible preferred
stock of OddWorld Entertainment, Inc., a developer of entertainment software,
which is convertible into 50% of the common equity.
In 1997, the Company purchased for $225 in cash a 9.9% investment in
GameWizards, Inc., a developer of electronic and print based strategy guides on
behalf of developers and publishers of software products.
F-11
<PAGE> 53
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 -- PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Computer equipment....................................... $12,789 $17,172
Machinery and equipment.................................. 7,059 6,622
Capitalized computer software............................ 8,369 17,918
Furniture and fixtures................................... 5,814 7,059
Leasehold improvements................................... 5,635 7,733
------- -------
39,666 56,504
Less: accumulated depreciation........................... 10,617 19,696
------- -------
$29,049 $36,808
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1996 and 1997, the
three months ended March 31, 1998 and the year ended March 31, 1999 amounted to
approximately $2,110, $6,139, $1,929 and $11,256, respectively.
NOTE 7 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Sales return reserve................................... $23,003 $32,789
Restructuring reserve.................................. -- 8,992
Advertising............................................ 10,516 19,462
Other.................................................. 15,895 22,962
------- -------
$49,414 $84,205
======= =======
</TABLE>
See Note 19 for information concerning the restructuring reserve.
F-12
<PAGE> 54
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 -- INCOME TAXES
The components of the provision for (benefit from) income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
------------------- ENDED MARCH 31, MARCH 31,
1996 1997 1998 1999
------- -------- --------------- ----------
<S> <C> <C> <C> <C>
Federal:
Current................................ $20,474 $(10,308) $(407) --
Deferred............................... (9,286) (1,265) 836 $(23,563)
------- -------- ----- --------
11,188 (11,573) 429 (23,563)
------- -------- ----- --------
State and local:
Current................................ 4,376 185 36 --
Deferred............................... (1,737) (1,726) 33 (4,202)
------- -------- ----- --------
2,639 (1,541) 69 (4,202)
------- -------- ----- --------
Foreign:
Current................................ 1,801 3,957 (194) 1,186
Deferred............................... -- -- -- (3,049)
------- -------- ----- --------
1,801 3,957 (194) (1,863)
------- -------- ----- --------
Provision for (benefit from) income
taxes.................................. $15,628 $ (9,157) $ 304 $(29,628)
======= ======== ===== ========
</TABLE>
The reconciliation of the income tax provision (benefit) computed at the
Federal statutory rate to the reported provision for (benefit from) income taxes
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
------------------- ENDED MARCH 31, MARCH 31,
1996 1997 1998 1999
------- -------- --------------- ----------
<S> <C> <C> <C> <C>
Provision for (benefit from) income taxes
computed at Federal statutory rate........ $14,268 $(11,963) $232 $(28,499)
Increase (decrease) in provision for
(benefit from) income taxes resulting
from:
State and local taxes, net of Federal tax
benefit................................... 2,683 (1,541) 36 (3,324)
Reversal of deferred tax asset valuation
allowance................................. (1,306) -- -- --
Non-deductible merger costs................. 1,158 -- -- --
Foreign taxes in excess of Federal statutory
rate...................................... (36) 9 (175) (512)
Purchased research and development.......... -- 4,293 -- --
Other, net.................................. (1,139) 45 211 2,707
------- -------- ---- --------
Provision for (benefit from) income taxes... $15,628 $ (9,157) $304 $(29,628)
======= ======== ==== ========
Effective income tax rate................... 38% 27% 46% 36%
======= ======== ==== ========
</TABLE>
F-13
<PAGE> 55
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 -- INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
------------------ ENDED MARCH 31, MARCH 31,
1996 1997 1998 1999
------- ------- --------------- ----------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Inventory valuation........................ $ 6,154 $ 6,727 $ 6,640 $ 7,825
Deferred income............................ 3,851 318 (504) 118
Sales return reserve....................... 2,196 5,147 4,305 (302)
Tax loss carryforwards..................... 1,255 3,166 3,166 26,729
Restructuring reserve...................... -- -- -- 5,822
Allowance for doubtful accounts............ 511 1,078 917 4,087
Other...................................... 1,423 255 2,156 3,841
------- ------- ------- -------
15,390 16,691 16,680 48,120
------- ------- ------- -------
DEFERRED TAX LIABILITIES:
Depreciation............................... (107) (399) (540) 686
------- ------- ------- -------
(107) (399) (540) 686
------- ------- ------- -------
Net deferred tax asset..................... 15,283 16,292 16,140 48,806
------- ------- ------- -------
Deferred income taxes (long term).......... -- -- -- 12,664
======= ======= ======= =======
Deferred income taxes (current)............ $15,283 $16,292 $16,140 $36,142
======= ======= ======= =======
</TABLE>
As of March 31, 1999, the Company and three of its subsidiaries had a
combined net operating loss carryforward of approximately $65,200 for tax
purposes expiring in the years 2011 through 2018.
The Company has recognized a benefit from U.S. income taxes in fiscal 1999
since, in the opinion of management, it is more likely than not that such
benefit will be realized through future operations. There is no tax benefit
recorded on the loss from discontinued operations as OZM has historically
generated net losses.
NOTE 9 -- STOCKHOLDERS' EQUITY
The Company has authorized 5 million shares of preferred stock, $0.01 par
value. On February 24, 1999, certain partnerships affiliated with General
Atlantic Partners purchased from the Company 0.6 million shares of the Company's
Series A Convertible Preferred Stock ("Preferred Stock") for an aggregate
purchase price of $30 million. These shares of Preferred Stock are convertible
into 6.0 million shares of the Company's common stock at a conversion price of
$5 per share and are entitled to cumulative annual dividends of 8%.
As of December 31, 1996 and 1997, and March 31, 1998 and 1999, the Company
had outstanding warrants to purchase an aggregate of approximately 956, 1,256,
1,256, and 1,232 shares of the Company's common stock, respectively, to
content-providers at exercise prices (ranging from $8.50 to $14.00) not less
than the fair market value at the date of issue. None of the outstanding
warrants vested prior to May 1996; vesting subsequent to such date is dependent
upon the achievement of sales levels of certain products, the rights to which
were granted to the Company. On July 19, 1996, the Company repurchased
approximately 211 of these warrants amounting to $1,936.
F-14
<PAGE> 56
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- STOCK OPTIONS
The Company has two stock option plans which began in 1995 and in 1997,
(the "Plans"). The Company accounts for these Plans under Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized.
Generally, under the Plans, options are granted to purchase shares of the
Company's common stock at no less than the fair market value at the date of the
grant, vest over a period of four or five years and are exercisable for a period
of ten years from the grant date.
A summary of the status of the Company's Plans at December 31, 1996 and
1997 and March 31, 1998 and 1999 and changes during the years ended December 31,
1996 and 1997, three months ended March 31, 1998 and the year ended March 31,
1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year............. 4,960 $ 0.04 - 14.00 $10.12
Granted...................................... 1,122 0.35 - 23.50 12.53
Exercised.................................... (218) 0.04 - 9.38 2.92
Forfeited.................................... (104) 12.38 - 20.00 14.08
Expired...................................... -- - --
-----
Outstanding at end of year................... 5,760 0.04 - 23.50 10.79
=====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year............. 5,760 $0.04 - 23.50 $10.79
Granted...................................... 4,404 0.36 - 14.00 8.63
Exercised.................................... (268) 0.04 - 9.38 2.89
Forfeited.................................... (1,341) 0.35 - 23.50 15.36
Expired...................................... (272) 7.94 - 17.75 11.26
------
Outstanding at end of year................... 8,283 0.04 - 14.50 9.13
======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of fiscal year....... 8,283 $0.04 - 14.50 $9.13
Granted....................................... 1,547 6.31 - 7.94 6.83
Exercised..................................... (33) 0.18 - 2.08 1.10
Forfeited..................................... -- - --
Expired....................................... (5) 0.35 - 14.00 7.00
-----
Outstanding at end of fiscal year............. 9,792 0.04 - 14.50 8.79
=====
</TABLE>
F-15
<PAGE> 57
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- STOCK OPTIONS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of fiscal year...... 9,792 $0.04 - 14.50 $8.79
Granted...................................... 5,694 0.00 - 20.00 6.57
Exercised.................................... (198) 0.00 - 7.94 1.48
Forfeited.................................... (497) 0.18 - 14.00 9.24
Expired...................................... (236) 0.35 - 14.00 9.21
------
Outstanding at end of fiscal year............ 14,555 0.00 - 20.00 8.02
======
</TABLE>
As of March 31, 1999, there were 14,555 options outstanding at prices
ranging from $0.002 to $20.00, of which 5,066 options were exercisable at prices
ranging from $0.002 to $14.50.
Had compensation cost for these plans been determined consistent with
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), the Company's net income (loss) before dividends on
preferred stock and earnings per share would have been reduced to the following
pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
------------------- ENDED MARCH 31,
1996 1997 MARCH 31, 1998 1999
------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)
before dividends on
preferred stock...... As reported $25,139 $(25,023) $ 358 $(70,838)
Pro forma 21,872 (32,140) (259) (77,566)
Basic net income (loss)
per share............ As reported $ 0.38 $ (0.37) $0.01 $ (1.02)
Pro forma $ 0.33 $ (0.48) $0.00 $ (1.11)
Diluted net income
(loss) per share..... As reported $ 0.37 $ (0.37) $0.01 $ (1.02)
Pro forma $ 0.32 $ (0.48) $0.00 $ (1.11)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ended December 31, 1996 and 1997, the
three months ended March 31, 1998 and the year ended March 31, 1999: no
dividends will be paid for the entire term of the option, expected volatility of
57.9% for 1996, 67.5% for 1997, the three months ended March 31, 1998 and the
year ended March 31, 1999, risk-free interest rates averaging 5.15% for 1996,
6.22% for 1997, 5.45% for the three months ended March 31, 1998 and 4.74% for
the year ended March 31, 1999 and expected lives of four years in 1996, 1997,
the three months ended March 31, 1998 and the year ended March 31, 1999.
NOTE 11 -- RELATED PARTY TRANSACTIONS
Transactions with GoodTimes Home Video Corp. (GTHV). The Company enters
into arms length manufacturing transactions with GTHV, a company owned by two
directors of the Company, on an as needed basis. The total amount charged to
operations for manufacturing services for the years ended December 31, 1996 and
1997 amounted to $7,516 and $2,498, respectively. The Company made cash payments
totaling $330 and $1,148 to GTHV during the three months ended March 31, 1998
and the year ended March 31, 1999, respectively. During 1996, the Company sold
approximately $3,488 of software to GTHV at fair market value.
F-16
<PAGE> 58
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
Transactions with Five Partners Asset Management LLC ("Five
Partners"). The Company sublets approximately 4,700 square feet of its office
space to Five Partners, a company affiliated with Joseph J. Cayre, Chairman
Emeritus of the Board of Directors. During the year ended March 31, 1999, the
Company recognized $69 in rent income from Five Partners.
REPS Agreement. In servicing its mass merchant accounts, the Company uses
field representatives supplied by REPS, a company owned by two directors of the
Company. REPS provides such services to the Company as well as to third parties.
The Company had an agreement with REPS pursuant to which REPS supplied such
services, at its cost, through December 31, 1997. The Company is currently
operating on a month to month basis under the terms of the old agreement. Prior
to entering into the REPS Agreement, REPS' services were provided to the Company
as part of the services agreement with GTHV. The total amount charged to
operations for these services amounted to approximately $3,025, $4,817, $1,434
and $4,089 for the years ended December 31, 1996 and 1997, the three months
ended March 31, 1998 and the year ended March 31, 1999.
Travel Services. The Company occasionally hires JT Aviation Corp.
("JTAC"), a company owned by Joseph J. Cayre, Chairman Emeritus of the Board of
Directors, and Excel Aire Service, Inc. ("Excel") to provide business travel
services for its officers and employees. Excel leases its planes from JTAC.
Excel is not owned in whole or in part by any member of the Cayre family. JTAC
and Excel provide air travel to the Company at an hourly rate and on an as
needed as available basis. During the years ended December 31, 1996 and 1997,
the three months ended March 31, 1998 and the year ended March 31, 1999, the
Company's aggregate air travel fees paid to JTAC were approximately $445, $370,
$40 and $217, respectively. During the year ended March 31, 1999, the Company
paid approximately $311 to Excel.
The Company occasionally hired JC Aviation Corp ("JCAC"), a company owned
by Jack J. Cayre, Executive Vice President and Director of the Company, to
provide business transportation services for its officers. During the year ended
December 31, 1997, the Company paid approximately $26 to JCAC. There were no
payments made during the three months ended March 31, 1998 or the year ended
March 31, 1999 to JCAC.
Transactions with ClientLogic Corporation ("ClientLogic"). The Company has
entered into agreements with ClientLogic (formerly doing business as SOFTBANK
Services Group) pursuant to which ClientLogic (i) provides toll-free customer
support for some of the Company's published products and (ii) takes direct
customer orders and provides fulfillment services for the Company, in each case
on a per service basis. Both agreements provide for automatic renewal on a month
to month basis upon expiration unless terminated by either party. During the
years ended December 31, 1996 and 1997, the three months ended March 31, 1998
and the year ended March 31, 1999, the Company had charged to operations
approximately $164, $230, $41 and $251, respectively, in fees to ClientLogic.
Jordan A. Levy, a Director of the Company, is Vice-Chairman of ClientLogic.
Purchases of Computer Equipment. From time to time, the Company purchases
computer equipment from and sells computer software to RCS Computer Experience,
LLC ("RCS"). In June 1998, Rockwell Computer Services, LLC, a company controlled
by Joseph J. Cayre, purchased approximately a 70% interest in RCS. During the
year ended March 31, 1999, the Company paid approximately $24 to RCS and
generated approximately $54 in net revenues from RCS.
Leasing Transactions. The Company has entered into agreements with an
unaffiliated leasing company for computer equipment. This leasing company
purchases computer equipment from various vendors including RCS. During the year
ended March 31, 1999, the leasing company paid approximately $231 to RCS for
equipment leased by the Company.
The Company believes that the amounts charged by related parties materially
approximate those amounts which would have been incurred from non-affiliates.
F-17
<PAGE> 59
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
Loans. On August 31, 1996, the Company extended a loan to Andrew Gregor,
Chief Financial Officer of the Company, in the principal amount of $250. The
loan, including interest, amounted to $290 and was forgiven as part of Mr.
Gregor's severance package and charged to restructuring charges in the fourth
quarter of fiscal 1999. See Note 19 for information concerning other
restructuring charges.
The Company has extended loans to the former stockholders of FormGen in the
aggregate amount of $1,098. $181 of such loans have been repaid as of March 31,
1999.
The Company has extended non-interest bearing loans to three employees of
the Company who were former stockholders of SingleTrac in the aggregate amount
of $300. Such loans become due and payable at the earlier of the sale of their
stock of the Company or November 1999. Each of the three borrowers has pledged
20 thousand shares of the Company's common stock owned by the borrowers, as
collateral security for the payment of the loan.
The Company extended a demand promissory note (the "Note") to the President
of Humongous. The Note bears interest at a rate of 8.75% per annum and is
secured by a residential first mortgage. The balance outstanding at March 31,
1999 is approximately $1,795.
The Company extended a loan to an employee of OZM in the principal amount
of $150. Such loan bears interest at 7 1/2% per annum and is due in three equal
annual installments commencing December 7, 1998.
See Note 12 for information concerning other related party transactions.
F-18
<PAGE> 60
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- LEASES
The Company accounts for its leases as operating leases, with expiration
dates ranging from 1999 through 2020. Future minimum annual rental payments
under the leases are as follows for the fiscal years then ended:
<TABLE>
<S> <C>
2000....................................................... $ 7,692
2001....................................................... 6,185
2002....................................................... 5,633
2003....................................................... 4,998
2004....................................................... 4,431
Thereafter................................................. 14,888
-------
$43,827
=======
</TABLE>
Total rent expense charged to operations for the years ended December 31,
1996 and 1997, the three months ended March 31, 1998 and the year ended March
31, 1999 amounted to approximately $3,207, $4,894, $1,233 and $7,344,
respectively. Through March 31, 1999, the Company leased a portion of its
international offices from a related party. Through December 31, 1997, the
Company leased its executive and administrative offices from a related party. Of
the total rent expense charged to operations, approximately $997, $967, $67 and
$268, was paid to the Company's related party during the years ended December
31, 1996 and 1997, the three months ended March 31, 1998 and the year ended
March 31, 1999, respectively.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
On January 21, 1997, the Company entered, with certain banks, into a
revolving credit agreement (as amended, the "Old Credit Agreement") 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.
Under the New Credit Agreement, the Company can borrow up to $125 million (the
"Line"). These borrowings have been used to refinance indebtedness under the Old
Credit Agreement and will be used for ongoing working capital requirements,
letters of credit and other general corporate purposes, including permitted
acquisitions. Borrowing is limited to a percentage of domestic accounts
receivable and inventory, and is secured by these and certain other assets. The
borrowings under the New Credit Agreement bear interest at either the banks'
reference rate (which is generally equivalent to the published prime rate) or
the LIBOR rate, plus a spread that is based on certain ratios, which is
currently 1.375%. The Company pays, on the unused portion of the Line, a
commitment fee that is based on certain ratios, which is currently 0.30%. The
New Credit Agreement requires maintenance of certain financial ratios and net
income levels. As of March 31, 1999, certain of these financial ratios have not
been met and the Company has received a waiver.
At March 31, 1999, the Company had outstanding debt of approximately $98.8
million, representing borrowings under the New Credit Agreement, and letters of
credit amounting to approximately $2.8 million. Interest expense for the year
ended December 31, 1997, the three months ended March 31, 1998 and the year
ended March 31, 1999 amounted to $1,948, $636 and $5,748, respectively.
On September 18, 1997, Scavenger, Inc., 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
F-19
<PAGE> 61
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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 must be completed by July 30, 1999. Another compliance
conference has been scheduled for June 30, 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. The Company intends to
vigorously defend this action and pursue its counterclaim.
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. The plaintiffs allege 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. Motions were made by certain groups of plaintiffs for their
appointment as lead plaintiffs in the actions. On October 7, 1998, the Court
appointed lead plaintiffs and lead counsel to the plaintiffs in the actions. The
plaintiffs' consolidated and amended complaint was filed and served in early
January 1999. 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 have each filed motions to dismiss the second consolidated and
amended complaint. The Company believes that these complaints are without merit
and intends to defend itself vigorously against these actions.
On January 25, 1999, the Company filed a complaint in the Supreme Court of
the State of New York, County of New York, against Midway Games, Inc. ("Midway
Games"), Midway Home Entertainment, Inc. ("Midway Home"), Midway Manufacturing
Company, WMS Industries, Inc. ("WMS"), Williams Electronics Games, Inc.,
Williams Entertainment Inc., Williams Interactive, Inc. and Atari Games
Corporation (collectively the "Midway Defendants") seeking injunctive relief and
tens of millions of dollars in damages arising out of the Midway Defendants'
breach of certain agreements that give the Company an exclusive option to
distribute, in territories throughout the world, entertainment software products
acquired or developed by the Midway Defendants for personal computers and video
console systems. On February 24, 1999, the Midway Defendants moved to dismiss
the action in its entirety. On May 21, 1999, the Court denied the motion as to
the Company's claims for breach of contract, breach of the implied covenant of
good faith
F-20
<PAGE> 62
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
and fair dealing and injunctive relief. The Court granted the motion as to
defendant Williams Interactive, Inc., and also dismissed the Company's claims
for tortious interference with prospective business relations, anticipatory
repudiation and defamation. On May 28, 1999, the Midway Defendants answered the
complaint and asserted counterclaims against the Company for breach of contract
and violations of the Illinois Consumer Fraud and Deceptive Business Practices
Act. The Company intends to vigorously defend these counterclaims.
On May 28, 1999, Midway Games also sent notice that it was terminating the
Company's rights under the GTIS Master Option and License Agreements but not the
individual Distribution and License Agreements now in effect. On June 1, 1999,
the Company moved for a preliminary injunction to enjoin the Midway Defendants
from terminating the Company's option rights. On June 8, 1999, the Court denied
the Company's request for a preliminary injunction. The Company will continue to
litigate this matter.
In June 1999, the Company received notice that Midway Home, a subsidiary of
Midway Games Inc., had filed an action against the Company in the District Court
of Navarro County, Texas. During 1994 and 1995, WMS received warrants to
purchase 214,285 shares of the Company's common stock at an exercise price equal
to the price at which shares were to be sold in the Company's initial public
offering in December 1995. These warrants were issued in connection with the
license agreements that the Company and WMS (and certain affiliates) entered
into in 1994 and 1995 ("License Agreements"). According to the petition, WMS
assigned these warrants to Midway Home on October 23, 1996. Plaintiff alleges
that on that day, Midway Home exercised 71,428 of the warrants for a total
consideration of $1,000,000, promptly sold 46,675 of the shares at the then
market price of $21.425, and continues to hold 24,754 of the shares. As in the
federal securities class actions described above, Midway Home contends that the
Company failed to expense properly certain prepaid royalties for software
products, which misstatements purportedly had the effect overstating the
Company's net profits. It asserts claims under the Texas Securities Act and the
Texas Business and Commerce Code and for common law fraud, negligent
misrepresentation and breach of contract. Midway Home seeks damages, rescission
of its purchase of 24,754 shares of the Company's stock, reformation of the
warrants to include a strike price below $14.00 per share (the initial public
offering price of the Company's common stock in December 1995) and to increase
the number of warrants that should allegedly have been issued to WMS, as well as
exemplary damages, attorneys fees, interest and other costs. The Company intends
to vigorously defend itself against these claims.
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 10 other videogame
corporations have entered into a joint defense agreement, and have retained
counsel. The Court has stayed all discovery pending an initial case management
conference scheduled for July 19, 1999. The Company intends to vigorously defend
this action.
Additionally, the Company is involved in various claims and legal actions
arising in the ordinary course of business, the ultimate resolution of which
management believes will not be material to the Company's results of operations
or financial condition.
F-21
<PAGE> 63
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- ROYALTY ADVANCES
The Company has committed to pay advance royalty payments under certain
royalty agreements. These obligations are not guaranteed and are dependent, in
part, on the delivery of the contracted services by the licensor. Future advance
royalty payments due under these royalty agreements are as follows for the
fiscal years then ended:
<TABLE>
<S> <C>
2000....................................................... $32,720
2001....................................................... 14,284
2002....................................................... 850
2003....................................................... 50
Thereafter................................................. --
-------
$47,904
=======
</TABLE>
NOTE 15 -- CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which results in a
concentration of credit risk. This concentration of credit risk may be affected
by changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential losses are maintained.
The Company had sales constituting 45%, 36%, 37% and 29% of net revenue to
a single customer in the years ended December 31, 1996 and 1997, the three
months ended March 31, 1998 and the year ended March 31, 1999, respectively.
Accounts receivable due from two significant customers aggregated 46% and
40% of accounts receivable at March 31, 1998 and 1999, respectively.
The Company continually monitors its positions with, and the credit quality
of, the financial institutions with which the Company conducts business.
NOTE 16 -- OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS
The Company has two reportable segments: publishing and distribution.
Publishing is comprised of front-line, leisure and children's publishing.
Distribution constitutes the sale of other publishers' titles to various mass
merchants and other retailers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income of these segments.
The Company's reportable segments are strategic business units with
different associated costs and profit margins. They are managed separately
because each business unit requires different planning, merchandising and
marketing strategies.
F-22
<PAGE> 64
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS -- (CONTINUED)
The following unaudited summary represents the consolidated net revenues
and operating income (loss) by reportable segment for the years ended December
31, 1996 and 1997, the three months ended March 31, 1998 and the year ended
March 31, 1999:
<TABLE>
<CAPTION>
PUBLISHING DISTRIBUTION CORPORATE TOTAL
---------- ------------ --------- --------
<S> <C> <C> <C> <C>
1996:
Net revenues................................ $152,400 $213,090 -- $365,490
Operating income (loss)..................... 28,231 53,776 $ (40,404) 41,603
1997:
Net revenues................................ $265,700 $264,977 -- $530,677
Operating income (loss)..................... 61,717 61,123 $ (65,371) 57,469
Three months ended March 31, 1998:
Net revenues................................ $ 48,700 $ 57,067 -- $105,767
Operating income (loss)..................... 5,424 8,743 $ (11,480) 2,687
Year ended March 31, 1999:
Net revenues................................ $299,400 $272,942 -- $572,342
Operating income (loss)..................... 15,733 39,672 $(104,007) (48,602)
</TABLE>
The following represents the reconciliation of operating income (loss) as
reported for reportable segments to consolidated totals for the years ended
December 31, 1996 and 1997, the three months ended March 31, 1998 and the year
ended March 31, 1999:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS
------------------- ENDED YEAR ENDED
1996 1997 MARCH 31, 1998 MARCH 31, 1999
------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Operating income (loss) as reported for
reportable segments..................... $41,603 $ 57,469 $2,687 $(48,602)
Amortization of goodwill.................. 1,092 1,295 636 3,349
Other non-recurring charges............... 3,718 88,279 -- 24,159
------- -------- ------ --------
Operating income (loss)................... $36,793 $(32,105) $2,051 $(76,110)
======= ======== ====== ========
</TABLE>
F-23
<PAGE> 65
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS -- (CONTINUED)
Information about the Company's operations in the United States and other
geographic locations for the years ended December 31, 1996 and 1997, the three
months ended March 31, 1998 and year ended March 31, 1999 are presented below.
<TABLE>
<CAPTION>
OTHER
UNITED GEOGRAPHIC
STATES LOCATIONS TOTAL
-------- ---------- --------
<S> <C> <C> <C>
1996:
Net revenues............................................. $331,592 $ 33,898 $365,490
Operating income......................................... 30,424 6,369 36,793
Total assets............................................. 321,347 45,764 367,111
1997:
Net revenues............................................. $423,197 $107,480 $530,677
Operating income (loss).................................. (44,332) 12,227 (32,105)
Total assets............................................. 389,610 68,115 457,725
Three months ended March 31, 1998:
Net revenues............................................. $ 87,538 $ 18,229 $105,767
Operating income......................................... 1,270 781 2,051
Total assets............................................. 313,550 52,321 365,871
Year ended March 31, 1999:
Net revenues............................................. $469,670 $102,672 $572,342
Operating loss........................................... (68,947) (7,163) (76,110)
Total assets............................................. 418,735 68,880 487,615
</TABLE>
NOTE 17 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------------- MARCH 31, MARCH 31,
1996 1997 1998 1999
------ ------- ------------ ----------
<S> <C> <C> <C> <C>
Issuance of common stock in connection with the
acquisition of SingleTrac..................... $ -- $ 7,169 -- --
Issuance of stock options in connection with the
acquisition of SingleTrac..................... -- -- $3,007 --
Issuance of common stock in connection with the
acquisition of OZM............................ -- -- -- $15,473
Issuance of stock options in connection with the
acquisition of OZM............................ -- -- -- 1,347
Issuance of common stock in connection with the
acquisition of Reflections.................... -- -- -- 12,279
Issuance of common stock in connection with the
acquisition of Legend......................... -- -- -- 255
Issuance of stock options in connection with the
acquisition of Legend......................... -- -- -- 9
Accrual for purchase price adjustment for One
Stop.......................................... -- -- 3,095 --
Cash paid for income taxes...................... 9,783 10,243 2 11,118
Cash paid for interest.......................... 685 1,802 727 5,826
</TABLE>
F-24
<PAGE> 66
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has entered into a barter agreement effective March 30, 1998
with a three year term, in which the Company exchanged $3,246 of excess
inventory of published titles for a combination of barter credits and cash
contingent upon the sale of the product by the barter company. At March 31,
1999, the Company had barter credits available amounting to approximately
$2,928.
NOTE 18 -- TERMINATED MERGER AGREEMENT WITH MICROPROSE, INC.
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. On December 5, 1997, the companies' respective boards
of directors mutually agreed to terminate the merger agreement. The Company
charged $1,050 to operations in connection with the aborted acquisition of
MicroProse.
NOTE 19 -- RESTRUCTURING CHARGES
Restructuring charges of approximately $17,479, recorded in the fourth
quarter of fiscal 1999, relate to a reorganization of the Company's front-line
publishing business, planned relocation of corporate headquarters to California
and outsourcing of the Company's distribution function. Management expects to
complete the reorganization by March 31, 2000.
Total restructuring charges of $17,479 includes $7,041 of asset impairment
charges, $635 of additional rent for the transition period, and $9,803 of
severance for 135 employees, including executive officers, to be paid out
principally through the end of 1999. The restructuring reserve of $8,992
represents severance due of $8,357 and transition rent due of $635. In
connection with the reorganization of the Company's front-line business,
specifically due to the new strategic direction that the Company is now
pursuing, the Company wrote-off approximately $3,278 of goodwill relating to
SingleTrac. The remaining $600 of goodwill relating to SingleTrac relates to
future use of SingleTrac's label. The majority of the remaining asset impairment
charges of $3,763 relate to the write-off of assets located at the Company's
distribution center.
NOTE 20 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the year ended December 31, 1996
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues................................... $70,757 $ 73,526 $ 86,192 $135,015
Operating income............................... 7,211 5,999 12,187 11,396
Net income before dividends on preferred
stock........................................ 4,392 3,502 8,730 8,515
Basic net income per share..................... $ 0.07 $ 0.05 $ 0.13 $ 0.13
Weighted average shares outstanding.......... 66,145 66,145 69,217 66,391
Diluted net income per share................... $ 0.06 $ 0.05 $ 0.13 $ 0.13
Weighted average shares outstanding.......... 67,686 68,571 69,217 67,896
</TABLE>
F-25
<PAGE> 67
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 20 -- QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)
Summarized quarterly financial data for the year ended December 31, 1997
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues................................... $93,381 $102,737 $120,990 $213,569
Operating income (loss)........................ 7,593 8,761 14,650 (63,109)
Net income before dividends on preferred
stock........................................ 4,454 4,469 8,526 (42,472)
Basic net income (loss) per share.............. $ 0.07 $ 0.07 $ 0.13 $ (0.63)
Weighted average shares outstanding.......... 66,395 66,779 67,032 67,717
Diluted net income (loss) per share............ $ 0.07 $ 0.07 $ 0.12 $ (0.63)
Weighted average shares outstanding.......... 67,358 67,230 68,683 67,717
</TABLE>
Summarized financial data for the three months ended March 31, 1998
(audited) are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Net revenues................................... $105,767
Operating income............................... 2,051
Net income before dividends on preferred
stock........................................ 358
Basic net income per share..................... $ 0.01
Weighted average shares outstanding.......... 67,938
Diluted net income per share................... $ 0.01
Weighted average shares outstanding.......... 68,384
</TABLE>
Summarized quarterly financial data for the fiscal year ended March 31,
1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Net revenues.................................. $116,391 $116,151 $246,303 $ 93,497
Operating income (loss)....................... 4,112 3,034 33,706 (116,962)
Net income (loss) from continuing
operations.................................. 1,803 1,369 17,332 (72,301)
Loss from discontinued operations............. -- -- (560) (18,481)
Net income (loss) before dividends on
preferred stock............................. 1,803 1,369 16,772 (90,782)
Basic net income (loss) per share from
continuing operations....................... $ 0.03 $ 0.02 $ 0.25 $ (1.00)
Basic net loss per share from discontinued
operations.................................. $ -- $ -- $ (0.01) $ (0.25)
-------- -------- -------- ---------
Basic net income (loss) per share............. $ 0.03 $ 0.02 $ 0.24 $ (1.25)
======== ======== ======== =========
Weighted average shares outstanding........... 68,056 68,088 69,742 72,773
======== ======== ======== =========
Diluted net income (loss) per share from
continuing operations....................... $ 0.03 $ 0.02 $ 0.25 $ (1.00)
Diluted net loss per share from discontinued
operations.................................. $ -- $ -- $ (0.01) $ (0.25)
-------- -------- -------- ---------
Diluted net income (loss) per share........... $ 0.03 $ 0.02 $ 0.24 $ (1.25)
======== ======== ======== =========
Weighted average shares outstanding........... 68,988 68,567 70,097 72,773
======== ======== ======== =========
</TABLE>
F-26
<PAGE> 68
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 21 -- RECENT DEVELOPMENTS
On June 29, 1999 the Company announced that it had hired Bear Stearns & Co.
to assist it in seeking a recapitalization, merger or sale of the Company. The
Company also announced that it has received "Commitments" from affiliates of
General Atlantic Partners, LLC (together with its affiliates, "General
Atlantic") and certain members of the Cayre family, to provide $30 million of
subordinated debt financing which will be made available to the Company on or
before July 30, 1999. Effective immediately, but conditioned upon the
Commitments, the Banks who are party to the Company's $125 million credit
facility (the "New Credit Agreement"), have agreed to make available to the
Company an additional $20 million under the Company's borrowing base until March
31, 2000. The Company anticipates that under the New Credit Agreement, as
amended, substantially all of the $125 million credit line should be available
to the Company through March 31, 2000. The Company believes that amounts
available under the New Credit Agreement and the Commitments will be sufficient
to fund its operational requirements through June 30, 2000, when the New Credit
Agreement becomes due and payable. This financing will also permit the Company
and Bear Stearns to seek a recapitalization, merger or sale of the Company in an
orderly manner and consistent with the needs of the Company's ongoing business.
The Company is seeking a recapitalization, merger or sale of the Company
because management believes that in a consolidating industry, the Company's
existing capital resources are not adequate to carry out management's long-term
strategic objectives. There is no assurance, however, that any such transaction
will be completed. If a transaction is not the subject of a definitive agreement
before December 31, 1999, or a transaction is not completed which results in
repayment of the New Credit Agreement and the Commitments, or such loans are not
extended or refinanced prior to June 30, 2000, the Company's operations and
financial condition could be materially and adversely affected. There is no
assurance that any such refinancing, if required, can be completed on favorable
terms, or at all.
F-27
<PAGE> 69
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE -- CHARGED TO
BEGINNING COSTS AND BALANCE -- END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended March 31, 1999................. $3,252 $11,428 $(3,968) $10,712
====== ======= ======= =======
Three months ended March 31, 1998......... $4,379 $ 411 $(1,538) $ 3,252
====== ======= ======= =======
Years ended:
December 31, 1997......................... $4,069 $ 4,106 $(3,796) $ 4,379
====== ======= ======= =======
December 31, 1996......................... $1,844 $ 2,225 $ -- $ 4,069
====== ======= ======= =======
RESERVE FOR OBSOLESCENCE:
Year ended March 31, 1999................. $9,855 $ 5,437 $ -- $15,292
====== ======= ======= =======
Three months ended March 31, 1998......... $9,188 $ 968 $ (301) $ 9,855
====== ======= ======= =======
Years ended:
December 31, 1997......................... $6,081 $ 3,107 $ -- $ 9,188
====== ======= ======= =======
December 31, 1996......................... $7,066 $ -- $ (985) $ 6,081
====== ======= ======= =======
RESTRUCTURING RESERVE:
Year ended March 31, 1999................. $ -- $17,479 $(8,487) $ 8,992
====== ======= ======= =======
</TABLE>
F-28
<PAGE> 1
EXHIBIT 10.50
WAREHOUSING SERVICES CONTRACT
THIS AGREEMENT (the "Agreement"), made and entered into this
2nd day of March, 1999, by and between GT INTERACTIVE SOFTWARE CORP.
(hereinafter "GT Interactive" or "Depositor"), a Delaware corporation, with a
place of business at 417 5TH AVENUE, NEW YORK, NY 10016, and ARNOLD
TRANSPORTATION SERVICES, INC.,t/d/b/a ARNOLD LOGISTICS (hereafter
"Warehouseman"), a Pennsylvania corporation with a place of business at 4410
INDUSTRIAL PARK ROAD, CAMP HILL, PA 17011.
WITNESSETH:
WHEREAS, Warehouseman operates a commercial warehousing operation at its above
stated place of business and at the facilities (hereinafter, the "Facilities")
described on APPENDIX A hereto (which APPENDIX A, together with APPENDIX B and
the Exhibits hereto, is incorporated by reference in and shall for all purposes
be deemed a part of this Agreement); and
WHEREAS, the Facilities are located on two parcels of land (individually a
"Parcel", and collectively the "Parcels"), title to each of which is in the name
of Warehouseman; and
WHEREAS, the parties hereto desire that Depositor shall store certain goods and
materials at the Facilities and that Warehouseman shall perform certain services
for Depositor in connection therewith; and
WHEREAS, the parties hereto desire to enter into an agreement covering all such
goods and materials placed in storage at the Facilities and all such services to
be performed by Warehouseman.
NOW, THEREFORE, the parties hereto agree as follows:
GENERAL
1. Warehouseman is and shall be at all times an independent contractor and
shall have exclusive control and direction of Warehouseman's employees
engaged in performing services for Depositor. Neither Warehouseman nor
its employees, agents and/or representatives will be treated as an
employee of Depositor for any purpose whatsoever. Warehouseman assumes
full responsibility for the payment of local, state and federal payroll
taxes or contributions or taxes for unemployment insurance, old age
pensions, worker's compensation, or other social security and related
protection, and any other expenses whatsoever that might arise with
respect to Warehouseman's employees, independent contractors or agents
engaged in the performance of such services and agrees to comply with
applicable rules and regulations promulgated under such laws.
<PAGE> 2
Warehouseman shall, at its sole cost and expense, comply with all laws,
regulations and ordinances, and all agreements by which it is bound,
applicable to its performance of services hereunder and shall procure
and maintain all such consents, licenses and permits as may be required
by local, state or federal authorities or other third parties with
respect to such performance.
In performing its obligations under this Agreement Warehouseman shall
employ a standard of care commensurate with the highest standards for
the industry.
Warehouseman shall have no authority to enter into any agreement or
make any representation, commitment or warranty binding upon Depositor
or to incur any liability or obligation on behalf of Depositor.
At Depositor's request Warehouseman shall allow a representative or
representatives of Depositor access to the Facilities to monitor the
performance of the services to be provided hereunder.
Warehouseman shall promptly notify Depositor of any material
development, including, without limitation, the commencement of any
suit, action, investigation or other proceeding which in Warehouseman's
reasonable judgment could have a material adverse effect on
Warehouseman's ability to perform its obligations hereunder.
Depositor shall tender for storage only goods and materials that are of
the nature and type contemplated by the parties upon execution of this
Agreement, including, without limitation: computer software, books and
manuals and other goods and materials currently used or sold by
Depositor in the ordinary course of its computer software business.
None of the goods and materials tendered shall be of a toxic or
hazardous nature unless Depositor has given Warehouseman ninety (90)
days advance written notice of the toxic or hazardous nature of the
materials and Depositor has agreed in writing to accept the materials,
provided, however, that additional charges may be assessed by
Warehouseman for storage of such materials. None of the goods and
materials tendered for storage shall constitute illegal contraband or
paraphernalia, the possession and/or storage of which is prohibited
under state or Federal law. Depositor warrants that all goods and
materials will be in compliance with all state and Federal copyright
and trademark laws and will not be subject to seizure for violation of
any such laws.
EQUAL OPPORTUNITY
2. Warehouseman's implementation of this agreement will be carried out in
compliance with all federal and state laws regulating discrimination in
employment. Specifically, Warehouseman agrees that it will not
discriminate by reason of race, color, creed, religion, national
origin, age or gender.
<PAGE> 3
SETTING UP OF SYSTEM
2A Warehouseman shall purchase and cause to be installed in the Facilities
a Dorner Manufacturing Corp. Sortation System as specified in Dorner's
proposal number 2137, a copy of which has been delivered to Depositor,
(the "Sortation System"). Warehouseman covenants that the Sortation
System will be capable of performing Warehouseman's obligations under
this Agreement. Warehouseman agrees that if such Sortation System has
not been installed and is not fully operational by July 15, 1999,
Depositor shall have the right, in its sole discretion, to terminate
this Agreement without payment of any Termination Premium, any Asset
Payment or any other payment of any kind.
The parties agree that they will cooperate fully in establishing the
electronic interfaces necessary to communicate such order, inventory
and other information as may be necessary to implement the procedures
described in and otherwise effect the purposes of this Agreement. The
parties understand that the electronic communication system must allow
Depositor to access Warehouseman's computer system directly from
Depositor's computer system, to the extent, but only to the extent,
necessary for Depositor to verify the completeness and accuracy of
Warehouseman's records in connection with the performance of its
obligations hereunder.
Depositor shall install a frame relay circuit running from Depositor's
principal place of business in New York City to Warehouseman's computer
center in Lebanon, Pennsylvania. Depositor shall further provide an NT
Server and hub for facilitating electronic communications between the
parties, with the server to be installed at Warehouseman's computer
center in Lebanon, Pennsylvania, on the public side of Warehouseman's
computer security "firewall." Warehouseman's internal communications
network shall connect the NT server and hub to Warehouseman's IBM AS400
on the private side of Warehouseman's computer security "firewall." The
conduit from the public side of the security firewall to the private
side of the security firewall shall remain open as required to permit
full performance of the parties' obligations under this agreement.
STORAGE AND HANDLING
3. In consideration of the storage and handling charges herein provided,
Warehouseman agrees to receive, handle, store and distribute goods and
materials of Depositor at and from Warehouseman's Facilities.
Warehouseman shall provide sufficient and suitable personnel, equipment
and other accessories necessary or incidental to the efficient and safe
performance of such receiving, handling, storage and distribution
services in accordance with the terms hereof. Except as otherwise
expressly agreed to by Depositor in this Agreement, Warehouseman shall
be responsible for all expenses it incurs directly or indirectly, in
the performance of this Agreement, and shall not incur any expense for
Depositor's account. Warehouseman shall promptly unload inbound
carriers and load carriers for outbound shipments.
<PAGE> 4
SPACE AVAILABLE
4. Warehouseman guarantees that the quantity of space set forth on
APPENDIX A shall be available for Depositor's goods and materials and
that such amount represents the entire amount of space available at the
Facilities. It is understood, however, that there may be times when
Depositor's goods and materials will not occupy the entire space
available at the Facilities. In the event that space is available in
the Facilities, Warehouseman shall have the right to use the available
space for the storage and handling of goods and material of persons
other than Depositor (an "Alternative Use"); provided, however, that no
such Alternative Use shall be allowed without Depositor's advance
written consent, which shall not be unreasonably withheld. It is
further understood that reasonable causes for Depositor's refusal to
allow an Alternative Use shall include, but not be limited to, the
following: (i) Depositor's expectation that it will use the space
itself during the time of the proposed Alternative Use, or at any time
after the Alternative Use where Depositor's expected use would be
adversely affected by such Alternative Use; and (ii) Depositor's belief
that the proposed Alternative Use would create a hazard or otherwise
increase the likelihood of damage to Depositor's goods and materials.
As of the date hereof, Warehouseman has good and valid title to the
Facilities, including the real property on which they are located, free
and clear of any lien, pledge, mortgage, security interest, charge,
restriction, adverse claim or other encumbrance of any kind or nature
whatsoever ("Encumbrances"), other than those Encumbrances set forth on
Schedule 4 to this Agreement.
Warehouseman agrees that it will not sell, or otherwise transfer either
Parcel, or pledge, mortgage, hypothecate or otherwise subject either
Parcel to any Encumbrance, unless (i) the other Parcel is
simultaneously sold, otherwise transferred, pledged, mortgaged,
hypothecated or otherwise subjected to an Encumbrance to the same party
on the same terms and (ii) such party agrees in writing to be bound by
the terms of this Agreement.
Notwithstanding any other provisions of this Agreement to the contrary,
Warehouseman may not assign its obligations to provide the services
described in this Agreement without the prior written consent of
Depositor.
Immediately upon the execution of this Agreement Warehouseman shall
file, or caused to be filed, in the Office of the Recorder of Deeds,
Lancaster County Courthouse, 50 North Duke Street, Lancaster, PA 17603,
a Memorandum of Agreement, pursuant to Title 21, Section 405 of the
Pennsylvania Statutes (21 P.S. Section 405), in substantially the form
of Exhibit A hereto.
(SEE APPENDIX A FOR OUTLINE OF STORAGE CHARGES)
<PAGE> 5
RATES AND SERVICES
5. Warehouseman will submit weekly statements for services performed for
Depositor for the period covered by each statement. Payment is due 30
days after invoice date, subject to a 1% per month late charge after an
additional 30 days.
Failure to pay within 60 days of invoice date shall at Warehouseman's
option be cause for termination, except where the Depositor is
contesting such invoice in good faith. Termination Premium and Asset
Payment (SEE APPENDIX A) will apply in the event of termination by
Warehouseman for such failure to pay, which shall constitute a
termination by Warehouseman with Cause hereunder, and Warehouseman
shall be relieved of any obligation it may have to perform services
hereunder.
Depositor will arrange to provide for the benefit of Warehouseman a
$500,000 Letter of Credit in substantially the form of Exhibit B
hereto. Warehouseman covenants that it will provide whatever
documentation may be required to waive any liens it may have on any of
Depositor's goods and materials to actual or potential lenders to
Depositor.
Rates are firm for years 1 & 2 of contract. At the beginning of each of
years 3, 4 and 5 rates may be increased by the lesser of (i) any
increase in the Consumer Price Index for All Urban Consumers for the
U.S. City Average for All Items, 1982-84=100 (the "CPI"), and (ii) 5%.
(SEE APPENDIX A FOR OUTLINE OF RATES AND SERVICES)
ROUTING OF SHIPMENTS
6. Shipments of goods and materials are to be consigned to Depositor in
care of Warehouseman. The bill of lading and manifest of contents are
to be received by Warehouseman before arrival of the shipment.
LIENS
7. All goods and materials of depositor that are stored at Warehouseman's
Facilities or otherwise in Warehouseman's possession shall at all times
remain the property of Depositor for all purposes, and neither
Warehouseman nor any creditor of Warehouseman shall have a lien on such
goods and materials, and Warehouseman hereby waives any and all liens
or other interests in such goods and materials it may have as a matter
of law or otherwise. Warehouseman shall return to Depositor any and all
goods and materials requested by Depositor as soon as reasonably
practicable after such request. Warehouseman shall not sell, assign,
loan, lease, borrow against, pledge or mortgage such goods and
materials to any other person or entity. All Depositor's goods and
materials shall be clearly and prominently labelled as Depositor's
property and shall be maintained by Warehouseman in a designated area,
segregated from other materials or products. Warehouseman shall not
represent to
<PAGE> 6
any person that such goods and materials are Warehouseman's own
property or the property of a third party.
DELIVERY REQUIREMENTS
8. No goods or materials shall be delivered or transferred except upon
receipt by the Warehouseman of complete instructions from the
Depositor. When no negotiable receipt is outstanding, goods and
materials may be delivered upon instructions by telephone or electronic
mail as set forth on APPENDIX A hereto. When a negotiable receipt has
been issued, no goods or materials covered by that receipt shall be
delivered, or transferred on the books of the Warehouseman, unless the
receipt, properly endorsed, is surrendered for cancellation, or for
endorsement of partial delivery thereon.
When goods and materials are ordered out, Warehouseman shall carry out
instructions as described in APPENDIX A, and, if he is unable because
of acts of God, or any reason beyond the Warehouseman's reasonable
control, or because of loss or destruction of the goods and materials
for which Warehouseman is not liable (SEE APPENDIX A FOR DETAILS), the
Warehouseman shall not be liable for failure to carry out such
instructions, but the goods and materials remaining in storage contrary
to such instructions will be held at no cost to the Depositor.
Warehouseman will not be responsible for misdeliveries made in good
faith in reliance on orders given by ostensible or alleged agents,
representatives or employees of Depositor when such orders are given in
the manner prescribed in this Agreement.
Warehouseman will not be responsible for loss or damage occasioned by
any misunderstanding of orders or instructions received or taken by
telephone in the manner prescribed in this Agreement.
ACCEPTANCE
9. In the event that goods and materials other than computer software,
books and manuals and other goods and materials used or sold by
Depositor in the ordinary course of its business are tendered for
storage, Warehouseman may refuse to accept such goods and materials for
storage if in its reasonable judgment storage of such goods and
materials would be dangerous or prejudicial to other goods in storage
in the Facilities owned by someone other than Depositor. If
Warehouseman accepts such goods and materials for storage, Depositor
agrees to the rates and charges set forth in APPENDIX A and the billing
and other terms of this Agreement.
TENDER FOR STORAGE
10. All goods and materials for storage at the Facilities shall be
delivered at the Facilities properly marked and packaged for handling.
The Depositor shall furnish at or prior to such delivery by electronic
means or otherwise a manifest showing marks, brands,
<PAGE> 7
or sizes to be kept accounted for separately and the class of storage
and other services desired, if any and otherwise complying with the
provisions of APPENDIX A.
TRANSFER, TERMINATION OF STORAGE, REMOVAL OF GOODS
11. Instructions to transfer goods or materials on the books of the
Warehouseman are not effective until delivered to and accepted by
Warehouseman, and all charges up to the time of receipt of instructions
to transfer are chargeable to the Depositor. If transfer involves
rehandling the goods and materials such will be subject to the charges
described on APPENDIX A.
All Depositor's goods and materials shall be stored in the space as
described in Section 4 hereof. Notwithstanding the immediately
preceding sentence, with the prior approval of Depositor, Warehouseman
may move the goods and materials herein described between Depositor
exclusive storage rooms within the Facilities or remove said goods and
materials to any other warehouse operated by it. If in Warehouseman's
reasonable judgment at any time during the bailment the continued
storage of Depositor's goods and materials shall pose a material risk
to the Facilities or to Warehouseman's Employees, Warehouseman may
terminate the bailment by notifying Depositor of such termination, and
requiring the removal of such goods and materials. Depositor agrees
that within one hundred-eighty (180) days after receipt of such notices
it will provide transportation for the removal of said goods and
materials. Any such termination shall be considered a termination by
Warehouseman with Cause.
TRANSITION PROVISIONS
11.A The parties agree that notwithstanding the expiration or any
termination of this Agreement (other than a termination by Warehouseman
with Cause pursuant to Section 5 hereof), during the time before (i)
the final removal of Depositor's goods and materials from the
Facilities, or (ii) the full assumption of Warehouseman's duties
hereunder by Depositor or its designee, as the case may be, the parties
will perform their obligations under this Agreement in good faith, so
that there will be no disruption in the ordinary course of Depositor's
business.
The parties further agree that, in the event that Warehouseman shall
cease to perform its duties hereunder, Warehouseman shall nonetheless,
upon the request of Depositor, cooperate fully in providing such
liaison and assistance as may be reasonably necessary to enable
Depositor or its designee to provide the services provided by
Warehouseman pursuant to this Agreement and to effect an orderly and
efficient transition of such services. Depositor will pay Warehouseman
the then current rates under this Agreement for any services
Warehouseman continues to provide hereunder at Depositor's request
after termination or expiration of this Agreement.
Warehouseman understands that in the event it requires Depositor to
remove Depositor's goods and materials from the Facilities Depositor's
business will be
<PAGE> 8
significantly disrupted, and Warehouseman therefore agrees that in the
event it shall terminate this Agreement without Cause it shall pay
Depositor the sum of $1,000,000.
Unless this Agreement specifies otherwise (as for example, with respect
to a termination by Warehouseman with Cause pursuant to Section 5
hereof), any termination of this Agreement by Warehouseman shall be
considered a termination without Cause.
SPECIAL SERVICES
12. Warehouseman will not be responsible for any special service not
expressly undertaken by him in writing.
VALUE OF MERCHANDISE
13. The rates charged have been fixed on the basis that for the purpose of
fixing the maximum limit of the amount of any liability the
Warehouseman may incur as a result of loss or damage to goods, the
value of the commodities stored is agreed not to exceed an amount equal
to FIVE DOLLARS PER POUND or the actual value of the commodities,
whichever is the smaller amount. Total liability of Warehouseman is
limited to FIFTY MILLION DOLLARS ($50,000,000.00) PER WAREHOUSE, OR ONE
HUNDRED MILLION DOLLARS ($100,000,000.00) IN TOTAL. Depositor may
declare in writing a higher value, but for the purpose of fixing the
maximum limit of the Warehouseman's liability for loss or damage, the
value of the goods shall in no event be deemed to exceed their actual
value.
INSURANCE
14. Rates do not include fire or other insurance covering the goods. Other
than with respect to the insurance listed on the Certificate of
Insurance, Warehouseman will not arrange for insurance unless
instructed to do so in writing and all premiums incurred with respect
to such insurance shall be borne by Depositor. Warehouseman agrees to
provide and maintain type and amounts set forth on the Certificate of
Insurance attached hereto as Exhibit C.
RESPONSIBILITY FOR LOSS
15. Warehouseman is not responsible for loss or damage caused by fires,
riots, strikes, insurrections, or from inherent or perishable
quantities of the merchandise, or other causes beyond his control
unless such loss or damage be caused by the failure of the Warehouseman
to exercise the ordinary care and diligence required of it by law.
Warehouseman shall maintain and preserve Depositor's goods and
materials stored on its premises in as good condition as that they were
in when received and shall take all reasonable actions as may be
necessary to protect such goods and materials from damage or loss, and
shall at all times meet the levels of inventory accuracy, shrinkage,
damage and other Measurements set forth on APPENDIX A.
<PAGE> 9
Upon request of Depositor and after reasonable notice to Warehouseman,
Depositor shall be allowed to make, at Depositor's expense, on site
audits of Depositor's goods and materials stored at Warehouseman's
Facilities, and Warehouseman shall allow Depositor and its agents,
attorneys and accountants access to the Facilities for such purpose;
provided that such audits and inspections are conducted by Depositor's
personnel or authorized representatives in a manner and at a time
reasonably convenient to both parties.
CLAIMS
16. As a condition precedent to recovery, claims for loss or damage must be
made in writing within ninety (90) days after the merchandise is
delivered from the Facilities or, in the case of failure to make
delivery, then within ninety (90) days after delivery of the last
package of the lot in Warehouseman's apparent possession.
Claims for loss, damage or delay (when applicable) shall be paid or
denied by Warehouseman within sixty (60) days of filing by Depositor.
CONVERSIONS
17. As a condition of storage, the failure of Warehouseman to deliver goods
to any person entitled thereto shall not constitute a conversion of
goods nor subject Warehouseman to any liability whatsoever when such
non-delivery results from causes arising from strikes, lockouts, work
stoppages, or restraints of labor from whatever cause. In cases of
non-delivery or suspension of services for such causes, Warehouseman
shall use its best efforts to restore service as soon as practicable,
provided, however, that if such suspension continues for five (5)
consecutive days, or for ten (10) days in any twenty (20) day period,
Depositor may terminate this Agreement without any liability upon
written notice to Warehouseman. Depositor agrees that within two
hundred and seventy (270) days after the giving of this termination
notice it will provide transportation for the removal of its goods and
materials stored at the Facilities. Depositor will be responsible for
paying Warehouseman all charges and costs incurred by Warehouseman,
that are otherwise payable to Warehouseman pursuant to the terms of
this Agreement, to the date the last of Depositor's goods and materials
are removed from the Facility (the "Removal Date"). The parties agree
that, notwithstanding the giving of the termination notice, they shall
perform their obligations under this Agreement in good faith, so that
there will be no disruption of the ordinary course of Depositor's
business, until the Removal Date.
NOTICES
18. All notices required to be given under the terms of this Agreement or
which either party hereto may desire to give to the other, unless
pursuant to the terms of this Agreement such notice may be given by
electronic means, shall be in writing signed by or on behalf of the
party giving the same and sent by certified mail to the
<PAGE> 10
addresses set forth below or at such other address as either party may
furnish to the other in writing.
If to Depositor, to:
GT Interactive Software Corp.
417 5th Avenue
New York, NY 10016
Attn: Alan Behr, Esq.
Peter White
with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Attn: David P. Levin, Esq.
If to Warehouseman, to:
Arnold Logistics
4410 Industrial Park Road
Camp Hill, PA 17011
Attn: Douglas Enck, VP/General Manager
with a copy to:
Keefer Wood Allen & Rahal, LLP
210 Walnut Street
Harrisburg, PA 17101
Attn: Eugene E. Pepinsky, Esq.
Gary E. French, Esq.
BINDING EFFECT
19. The provisions of this Agreement, and the attached schedules, shall
apply to and bind Depositor and Warehouseman, their heirs, personal
representatives, successors and permitted assigns. This Agreement may
not be assigned by Warehouseman, whether by operation of law and
otherwise, without the prior written consent of Depositor.
CONFIDENTIALITY
20. Warehouseman understands and agrees that the terms and conditions of
this Agreement, all documents referenced herein, communications between
the parties regarding this Agreement or the services to be provided
hereunder, all plans, designs, drawings, trade secrets, customers,
suppliers, and the terms of any agreements with
<PAGE> 11
customers or suppliers, business and other proprietary information of
Depositor which is disclosed in connection with this Agreement (all
such information, collectively, "Confidential Information"), shall at
all times, except as provided herein, be held in strict confidence and
be protected from disclosure to any third party, provided, however that
Warehouseman may disclose such Confidential Information to those of its
employees, agents and advisors who are required to use such
Confidential Information in connection with the activities contemplated
by this Agreement and who are advised of this Agreement and agree to be
bound by the confidentiality provisions hereof. Warehouseman agrees
that it shall, and it shall cause its directors, officers, employees,
independent contractors and other agents who may receive Confidential
Information to, (i) use the Confidential Information only for the
purposes set forth in this Agreement, (ii) refrain from reproducing
such Confidential Information in any form or from orally communicating
such Confidential Information except as required to perform
Warehouseman's obligations under this Agreement. All Confidential
Information shall remain the property of the Depositor. For purposes of
this Agreement "Confidential Information" shall not include information
that has been or is (i) was generally known or generally available to
the public prior to its disclosure to Warehouseman, (ii) becomes
generally known or generally available to the public subsequent to its
disclosure to Warehouseman through no wrongful act of any person, or
(iii) which Warehouseman is required to disclose by rules, statutes and
regulations (provided that Warehouseman provides Depositor with prior
notice of the contemplated disclosure and reasonably cooperates with
Depositor at Depositor's expense in seeking a protective order or other
appropriate protection of such information). Warehouseman further
agrees that it shall return such Confidential Information and any
copies thereof to Depositor upon Depositor's written request or, in any
event upon termination of this Agreement.
The parties agree that neither party will issue any public statement
announcing the existence of this Agreement without the prior consent of
the other party, which shall not be unreasonably withheld, except as
such party believes in good faith (upon advice of counsel) is required
by law and following notice to the other party.
SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF
21. Each of the parties hereto acknowledges and agrees that the other party
would be damaged irreparably in the event any of the covenants
contained in this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the
parties hereto agrees that the other party shall be entitled (without
posting any bond or proving that monetary damages would not be
adequate) to an injunction or injunctions to prevent breaches of the
covenants contained in this Agreement and to enforce specifically this
Agreement and the covenants herein, in addition to any other remedy to
which such other party may be entitled at law or in equity.
<PAGE> 12
YEAR 2000 COMPLIANCE
22. Warehouseman covenants and agrees that software products or services
owned, provided or otherwise developed by Warehouseman, or used in the
fulfillment of Warehouseman's obligations hereunder, which incorporate
any date-related information or otherwise process any date-related
information, will, on or before August 1, 1999, and at all times
thereafter until the termination of this Agreement, provide, among
other things, the following functionality: (i) accurate processing of
date-related information before, during and after January 1, 2000,
including accepting the date input, providing the date output, and
performing calculations on dates or portions of dates; (ii) accurate
functioning without interruption before, during and after January 1,
2000 without any change in operation associated with the advent of the
new century; (iii) ability to respond to two-digit input in a way that
resolves any ambiguity as to century in a disclosed, defined and
predetermined manner; and (iv) the ability to store and provide output
date information in ways that are unambiguous as to the century.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
23. Each party hereby represents and warrants (with respect to itself) to
the other party that:
i. It has full power and authority to enter into and perform its
obligations under this Agreement;
ii. This Agreement has been duly and validly authorized, executed
and delivered on behalf of such party and is a legal, valid
and binding agreement of such party enforceable in accordance
with its terms;
iii. The execution and delivery of this Agreement, the incurrence
of the obligations set forth in this Agreement and the
performance of such obligations will not violate, or
constitute a breach of or default under, the governing
documents of such party or any material agreement or
instrument by which it or any of its property is bound, or to
the best of such party's knowledge, any law, rule, regulation,
order, license, permit, consent, authorization or approval
applicable to such party of any local, state or federal
governmental authority or administrative agency or
self-regulatory authority having jurisdiction over such party
or its property.
iv. There is not pending, nor, to the best of such party's
knowledge, threatened, any action, suit or proceeding before
or by any court or other local, state or federal governmental
authority or administrative agency or self-regulatory agency
which might reasonably be expected to have a material adverse
effect on such party's ability to perform its obligations
under this Agreement.
<PAGE> 13
v. No consent, approval, authorization or order of any local,
state or federal governmental authority or administrative
agency, or any third party is required on the part of such
party for the execution, delivery and performance of this
Agreement by such party.
INDEMNIFICATION
23A. Warehouseman shall indemnify and hold harmless Depositor and its
officers, directors, employees and affiliates from and against any
liability, damage, loss, cost or expense including, without limitation,
reasonable attorney's fees and expenses arising out of or resulting
from Warehouseman's negligence, willful misconduct or breach of any of
its representations, warranties or obligations under this Agreement.
Depositor shall indemnify and hold harmless Warehouseman and its
officers, directors, employees and affiliates from and against any
liability, damage, loss, cost or expense including, without limitation,
reasonable attorney's fees and expenses arising out of or resulting
from Depositor's negligence, willful misconduct or breach of any of its
representations, warranties or obligations under this Agreement.
INVALIDITY OF PROVISIONS
24. Should any part of this agreement for any reason be declared by any
court of competent jurisdiction to be invalid, such decision shall not
affect the validity of any remaining portion, which remaining portion
shall continue in full force and effect as if this agreement had been
executed with the invalid portion hereof eliminated, it being the
intention of the parties that they would have executed the remaining
portion of this agreement without including any such part, parts or
portions which may for any reason be hereafter declared invalid.
DISPUTE RESOLUTION
25. Any controversy or claim that may arise between the Depositor and
Warehouseman relating to the services provided hereunder, including
performance or lack thereof, by either party in which the claimed
amount is fifty thousand dollars ($50,000) or less shall be settled by
arbitration administered by the American Arbitration Association before
a sole arbitrator in accordance with its Commercial Rules and judgment
upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. In the event of any dispute or claim
having a value greater than fifty thousand dollars ($50,000), either
party may initiate litigation.
WAIVER AND DISCHARGE
26. This agreement may not be released, discharged, abandoned, changed or
modified in any manner except by an instrument in writing signed on
behalf of each of the parties hereto by their duly authorized
representatives. The failure of any party hereto to
<PAGE> 14
enforce at any time any of the provisions of this agreement shall in no
way be construed as a waiver of any such provision, or in any way to
affect the validity of this agreement or any part thereof or the right
of any party thereafter to enforce each and every provision. No waiver
of any breach of this agreement shall be held to be a waiver of any
other or subsequent breach
TERM
27. The Term of this Agreement shall commence on the date hereof and,
unless sooner terminated pursuant to the terms hereof shall continue in
effect until August 1, 2004 (the "Initial Period"), and thereafter
shall be extended for two successive 12-month periods (each an
"Extended Period") unless either party gives the other written notice
at least six months prior to the end of such period that the term shall
not be extended. Unless otherwise agreed by the parties in writing the
rates and charges payable pursuant hereto during any Extended Period
shall be equal to the rates and charges for the immediately preceding
12-month period.
SURVIVAL
28. The expiration or termination of this Agreement shall not release the
parties from liabilities and obligations accrued as to the date
thereof. In the event of such expiration or termination the
indemnification and confidentiality obligations of the parties and any
other obligations of the parties which by their terms are to be
performed or complied with subsequent to the expiration or termination
of this Agreement shall survive and continue in effect.
NO THIRD PARTY RIGHTS
29. The provisions of this Agreement are for the exclusive benefit of the
parties to this Agreement, and no other person (including without
limitation any creditor of any party to this Agreement) shall have any
right or claim against any party to this Agreement by reason of those
provisions or be entitled to enforce any of those provisions against
any party to this Agreement.
RELATIONSHIP OF THE PARTIES
30. This Agreement shall not constitute or be construed as creating a
partnership or joint venture between the parties and neither party
shall be liable for any debts or obligations of the other party.
Neither party shall be in any way considered as being an agent or
representative of the other party in any dealings with any third party,
and neither party may act for, or bind, the other party in any such
dealings.
TIME OF THE ESSENCE
31. Time is of the essence in the performance of this Agreement.
<PAGE> 15
FURTHER ASSURANCES
32. Each party agrees to execute and deliver any and all such other and
additional instruments and documents and do any and all such other acts
and things as may be necessary or expedient to effectuate more fully
this Agreement and to carry out the business contemplated by this
Agreement.
ENTIRE AGREEMENT
33. This Agreement, including the Schedules and Appendices attached hereto,
contains every obligation and understanding between the parties
relating to the subject hereof and merges all prior discussions,
negotiations and agreements, if any, between the parties, and neither
party shall be bound by any conditions, definitions, understandings,
warranties or representations other than as expressly provided or
referred to herein.
GOVERNING LAW
34. This Agreement shall be governed by the laws of the State of New York,
without regard to the conflict of laws provisions thereof.
COUNTERPARTS
35. This Agreement may be executed in two counterparts which when taken
together shall constitute one and the same agreement. Signatures may be
by facsimile.
<PAGE> 16
DEPOSITOR AND WAREHOUSEMAN HAVE HERE UNTO SET THEIR HANDS AND SEALS THE DATE AND
YEAR ABOVE WRITTEN, AND HEREBY ACKNOWLEDGE HAVING READ THIS AGREEMENT,
UNDERSTANDING ITS LANGUAGE AND AGREEING TO ITS CONDITIONS.
GT INTERACTIVE SOFTWARE CORP.
By: /s/ DAVID CHEMEROW
----------------------------------------
David Chemerow
President and Chief Operation Officer
ARNOLD TRANSPORTATION SERVICES, INC.,
t/d/b/a AS ARNOLD LOGISTICS
By: /s/ DOUGLAS B. ENCK
-----------------------------------------
Douglas B. Enck
Vice President/ General Manager
<PAGE> 1
EXHIBIT 10.51
ANDREW GREGOR
11 LIGHTHOUSE LANE
OLD GREENWICH, CT 06870
(203) 637-4474
March 12, 1999
Mr. Thomas Heymann
Chairman and Chief Executive Officer
GT Interactive Software Corp.
417 Fifth Avenue
New York, NY 10016
Dear Tom:
Reference is made to the following agreements with respect to my employment with
GT Interactive Software Corp. ("GT"):
1. Severance Pay Agreement dated 21 July 1998 ("Severance
Agreement").
2. Amendment to Stock Option Agreements dated 13 February 1998
("Option Amendment").
3. Amendment to Severance Agreement dated 27 October 1998
("Severance Amendment").
This letter will confirm our agreement with respect to my employment by GT and
the modification of each of the agreements referenced above (the "Agreements").
In consideration for my continued employment with GT through 3 September 1999,
we agree that the Agreements are hereby amended as follows:
1. Section 2(d) of the Severance Agreement is hereby modified and
replaced in its entirety to read: "(d) Termination by Company
for Any Other Reason. In the event that the Executive's
employment is terminated by the Company during the Agreement
Term for any reason other than for Cause or for Disability,
then the Company shall pay to Executive, within thirty days of
the date of such termination, Executive's Base Salary through
such date of termination and, in lieu of any further
compensation and benefits, severance pay equal to the Base
Salary and benefits (other than bonuses and stock options)
that Executive would have otherwise received if his employment
had continued during the
<PAGE> 2
eighteen month period from the effective date of such
termination, commencing with such termination date at the
times and in the amounts such base salary and benefits would
have been paid and provided." This paragraph shall not affect
my rights to existing stock options as provided in paragraph 3
below.
2. Section 1 of the Severance Amendment is hereby amended by
inserting "18 months" to replace "12 months."
3. The Option Amendment is hereby amended in its second paragraph
to define the Revised Expiration Date "as the later of March
3, 2002, and the first anniversary of such termination."
4. On September 3, 1999, GT will terminate my employment, in
accordance with Section 2(d) of the Severance Agreement, as
amended.
5. Other than for "Cause" (as defined in the Severance
Agreement), GT will not terminate me before September 3, 1999.
Please indicate your agreement with the preceding terms and amendments by
signing the copy attached, and returning it to me.
Sincerely, Accepted and agreed to:
/s/ANDREW GREGOR /S/ THOMAS A. HEYMANN
- ------------------------ ----------------------------------------
Andrew Gregor Title: Chairman of the Board and Chief
Executive Officer
<PAGE> 1
EXHIBIT 10.52
AGREEMENT
AGREEMENT, dated as of February 19, 1999, between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation (the "Company"), and RONALD
CHAIMOWITZ, the undersigned individual ("Executive").
WHEREAS, effective February 8, 1999, the Company employed Mr.
Thomas Heymann as Chairman and Chief Executive Officer of the Company, and such
employment would entitle the Executive to exercise his rights under Sections
5(d)(i)(B) and 5(d)(ii)(C) of the Employment Agreement, dated April 28, 1998,
between Executive and the Company (the "Employment Agreement").
NOW THEREFORE, IN CONSIDERATION of the mutual covenants and
agreements hereinafter set forth, the Company and Executive agree as follows:
1. CEO of OZM. Executive agrees to remain employed by the
Company, subject to Section 3 hereof, as the Chairman and Chief Executive
Officer of the Company's One Zero Media internet subsidiary ("OZM") and in that
capacity to produce a business plan for OZM (the "Business Plan"), which
Business Plan shall include a strategic plan, as well as business strategies,
projected income, expense, capital expenditure and cash flow through the period
March 31, 2000, which will be delivered to the Board of Directors of the Company
not later than March 17, 1999 and prior thereto discussed with Mr. Heymann.
2. Amount in Lieu of Bonus. The Company shall pay to Executive
the amount of One Million Four Hundred Thousand Dollars ($1,400,000) in cash on
or before March 31, 1999, as full payment of all amounts referred to as "60% of
such Base Salary in lieu of bonus," pursuant to Section 5(d)(i) of the
Employment Agreement.
3. Termination. If on or before March 31, 1999, the Company
and the Executive do not execute the Amended Employment Agreement in the form
attached hereto as Exhibit A, then either the Company or the Executive may
notify the other that it is not prepared to proceed with the Business Plan, and
in such case, Executive shall promptly terminate his employment with the Company
and OZM and the terms of the Employment Agreement shall govern (except for
amounts referred to as "60% of such Base Salary in lieu of bonus" under Section
5(d)(i) of the Employment Agreement, which amounts will be discharged by the
Company by complying with Section 2 above) and Executive shall be deemed to have
resigned for Good Reason (as defined in Section 5(b) of the Employment
Agreement).
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed on its behalf by an officer thereunto duly authorized and
Executive has duly executed this Agreement, all as of the date and year first
written above.
GT INTERACTIVE SOFTWARE CORP.: EXECUTIVE:
By: /s/ JOSEPH CAYRE /S/ RONALD CHAIMOWITZ
-------------------------- -----------------------------------
Name: Joseph Cayre Ronald Chaimowitz
Title: Chairman Emeritus
<PAGE> 1
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
THIS AGREEMENT (together with all exhibits hereto, the
"Agreement"), made in New York, New York as of the 2nd day of April, 1999,
between GT INTERACTIVE SOFTWARE CORP., a Delaware corporation having its
executive offices and principal place of business in New York, New York (the
"Company"), and JOHN T. BAKER IV, the undersigned individual ("Executive").
IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, the Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the four-year
period commencing on May 3, 1999 (the date on which Executive will commence his
employment, subject to Section 2(d) hereof, at the Company's offices in Los
Angeles, California, referred to as the "Commencement Date") and ending on May
2, 2003 (as extended from time to time pursuant to Section 8(n) hereof, the
"Agreement Term").
2. Employment.
(a) Employment by the Company. Executive agrees to be
employed by the Company for the Agreement Term upon the terms and subject to the
conditions set forth in this Agreement. Executive shall serve as the President
and Chief Operating Officer of the Company. Executive shall serve as an
Executive Officer of the Company and shall have such duties as may be reasonably
prescribed by the Chairman of the Board of Directors and Chief Executive Officer
of the Company (the "CEO").
(b) Board of Directors. The CEO has agreed to
nominate Executive to the Board of Directors of the Company and to use his best
reasonable efforts to cause Executive's election to fill the current vacancy
thereon.
(c) Performance of Duties. Throughout the Agreement
Term, Executive shall faithfully and diligently perform Executive's duties in
conformity with the directions of the Board of Directors of the Company,
commensurate with Executive's titles, and serve the Company to the best of
Executive's ability. Executive shall devote Executive's entire working time,
attention and energies to the business and affairs of the Company, subject to
four weeks' vacation per year, sick leave in accordance with Company policy and
except as otherwise set forth in Section 4(a) hereof. Executive shall have the
titles of President and Chief Operating Officer, and shall report to the CEO.
Subject to the discretion
<PAGE> 2
of the CEO, Executive shall perform the duties and shall have the
responsibilities set forth on Exhibit A hereto.
(d) Place of Performance. During the Agreement Term,
Executive shall be based within thirty miles of Los Angeles County, California
and, in this regard, Executive shall maintain Executive's personal residence
within such area or such other location within reasonable access to Executive's
office. Notwithstanding the foregoing, Executive will make such arrangements for
reasonable travel to the Company's offices in New York, New York and elsewhere
as reasonably requested by the CEO, provided that the Company shall bear the
reasonable costs and expenses related to such travel.
3. Compensation and Benefits.
(a) Base Salary. The Company agrees to pay to
Executive for employment hereunder a base salary ("Base Salary") at the annual
rate of $350,000 for the first year of the Agreement Term, $375,000 for the
second year of the Agreement Term, $400,000 for the third year of the Agreement
Term and $450,000 for the fourth year of the Agreement Term, payable in
installments consistent with the Company's payroll practices.
(b) Benefits and Perquisites.
(i) Benefits Generally. Executive shall be
entitled to participate in, to the extent Executive is otherwise eligible under
the terms thereof, the benefit plans and programs, and receive the benefits and
perquisites, generally provided to senior level executive officers of the
Company. Except as otherwise provided in this Agreement, Executive may receive
bonuses and be entitled to receive stock options at the sole discretion of the
Board of Directors, provided that (A) Executive shall participate in the
Company's senior executive bonus plan with a target bonus of 60% of Base Salary,
and (B) for the Company's fiscal year ending March 31, 2000, Executive shall
receive a minimum guaranteed bonus of no less than $150,000. The company shall
provide, at no cost to Executive, health insurance coverage for Executive and
his wife and children.
(c) Travel and Business Expenses. Upon submission of
itemized expense statements in the manner specified by the Company, Executive
shall be entitled to reimbursement for reasonable travel and other reasonable
business expenses duly incurred by Executive in the performance of Executive's
duties under this Agreement in accordance with the policies and procedures
established by the Company from time to time for its senior executives.
(d) Options. The Board of Directors or the stock
option subcommittee of the Compensation Committee of the Board of Directors has
approved, and the Company will grant to Executive on the Commencement Date the
stock options at the prices and on the other terms and conditions set forth on
Exhibit B hereto.
<PAGE> 3
(e) Commencement Bonus. On or within one day of the
Commencement Date, the Company shall pay to Executive a one-time cash payment of
$200,000.
(f) No Other Compensation or Benefits; Payment. The
compensation and benefits specified in Sections 3 and 5 of this Agreement shall
be in lieu of any and all other compensation and benefits. Payment of all
compensation and benefits to Executive hereunder shall be made in accordance
with the relevant Company policies in effect from time to time, including normal
payroll practices, and shall be subject to all applicable employment and
withholding taxes.
(g) Cessation of Employment. In the event Executive
shall cease to be employed by the Company for any reason, then Executive's
compensation and benefits shall cease on the date of such event, except as
otherwise provided herein or in any applicable employee benefit plan or program.
(h) Company Rules, Regulations and Policies.
Executive agrees to observe all reasonable rules, regulations and policies
adopted by the Company in connection with the operation of its business,
including but not limited to the standards and policies set forth in the
Company's policy manual. In particular, Executive acknowledges and agrees to
abide by the Company's policy that prohibits executive officers who may be
deemed affiliates under SEC policy interpretations, from selling any shares of
the Company's Common Stock at a time when such officer is advised by the Chief
Financial Officer (based upon advice from the Company's independent certified
public accountants) that such sale could adversely affect pooling of interests
accounting treatment of any acquisition or other business combination engaged in
or to be engaged in by the Company. If requested, Executive will execute an
"affiliate" agreement confirming such agreement in connection with any such
acquisition or business combination.
4. Exclusive Employment; Noncompetition.
(a) No Conflict; No Other Employment. During the
period of Executive's employment with the Company, Executive shall not: (i)
wilfully engage in any activity which conflicts or interferes with or materially
and unreasonably derogates from the performance of Executive's duties hereunder
nor shall Executive engage in any other business activity, whether or not such
business activity is pursued for gain or profit, except as approved in advance
in writing by the Board of Directors of the Company; provided, that Executive
shall be entitled to manage his personal investments and otherwise attend to
personal affairs, including charitable activities and directorships in
noncompetitive activities, in a manner that does not unreasonably interfere with
his responsibilities hereunder, or (ii) accept any other full-time or
substantially full-time employment, whether as an executive or consultant or in
any other capacity, and whether or not compensated therefor.
(b) No Competition. Without limiting the generality
of the provisions of Sections 2(b) or 4(a) hereof, during the Agreement Term,
Executive shall not,
<PAGE> 4
directly or indirectly, own, manage, operate, join, control, participate in,
invest in or otherwise be connected or associated with, in any manner, including
as an officer, director, employee, partner, consultant, advisor, agent,
proprietor, trustee or investor, any Competing Business; provided, however, that
if Executive's employment hereunder is terminated by the Company under Sections
5(c) or 5(d) hereof or Executive voluntarily resigns for Good Reason as provided
in Section 5(d), then the provisions of this Section 4(b) shall terminate at the
time of such event. For purposes of this Section 4(b), the term "Competing
Business" shall mean (A) any business or venture which develops, manufactures,
publishes, licenses, sells, distributes or supplies entertainment, educational
or "edutainment" computer software or video games for commercial use, whether
for retail distribution, by direct marketing, electronically, by license to
others or otherwise; (B) any Internet-related business which is substantially
similar to the whole or any significant part of the business conducted by the
Company's One Zero Media subsidiary; or (C) any other business which is
substantially similar to the whole or any significant part of the business
conducted by the Company (any such activities described in the foregoing clauses
(A), (B) or (C) shall for purposes of this section be hereinafter referred to as
"Prohibited Activities"); provided that ownership of 2% or less of the stock or
other securities of a corporation, the stock of which is listed on a national
securities exchange or is quoted on The NASDAQ Stock Market, shall not
constitute a breach of this Section 4, so long as Executive does not in fact
have the power to control, or direct the management of, or is not otherwise
associated with, such corporation. Notwithstanding anything to the contrary
contained herein, Executive may be employed by a business or venture which
engages in Prohibited Activities only so long as (x) Executive does not engage
directly or indirectly in any Prohibited Activities, (y) such business or
venture derives only immaterial revenues and profits from Prohibited Activities
in relation to its overall business and (z) Executive's ownership of such
business or venture is less than 2% of the stock or other securities thereof and
Executive does not have the power to control or direct the management thereof.
(c) No Solicitation of Employment. During the
Agreement Term and for a period of two years thereafter, Executive shall not
solicit or encourage any other employee to leave the Company for any reason.
(d) Company Customers. Executive shall not, during
the period which is coincident with the Executive's obligation not to compete
under Section 4(b) hereof, directly or indirectly, contact, solicit or do
business with (i) Wal-mart Corporation, Target Stores, Caldor, Phar-mor, Comp
U.S.A., Best Buy, Office Depot, Kmart or any of their respective affiliated
operations, for the purpose of selling entertainment, educational or
"edutainment" computer software, video games or any other product (which is an
integral product in a material product line of the Company) then sold by the
Company to such customers at the time of termination of Executive's employment
hereunder; (ii) any "customers" (as defined below) of the Company for the
purpose of selling computer software, video games or any other product then sold
by the Company to such customers at the time of termination of Executive's
employment hereunder; or (iii) any supplier, licensor or licensee of the Company
with respect to licensing computer software, video games or other intellectual
property (which is related to computer software, video games or any other
material product line of the Company), from such person.
<PAGE> 5
For the purposes of the provisions of this Section 4(d), "customer" shall
include any entity that purchased computer software, video games or any other
product from the Company within eight months of the termination of Executive's
employment hereunder, without regard to the reason for such termination. The
term "customer" also includes any former customer or potential customer of the
Company which the Company has solicited within eight months of such termination,
for the purpose of selling computer software or any other product then sold by
the Company.
5. Termination of Employment.
(a) Termination. The Company may terminate
Executive's employment for Cause (as defined below), in which case the
provisions of Section 5(b) shall apply. The Company may also terminate
Executive's employment in the event of Executive's Disability (as defined
below), in which case the provisions of Section 5(c) shall apply. The Company
may also terminate the Executive's employment for any other reason by written
notice to Executive, in which case the provisions of Section 5(d) shall apply.
If Executive's employment is terminated by reason of Executive's death,
retirement or voluntary resignation, the provisions of Section 5(b) shall apply.
(b) Termination for Cause; Termination by Reason of
Death or Retirement or Voluntary Resignation. In the event that Executive's
employment hereunder is terminated during the Agreement Term (x) by the Company
for Cause (as defined below), (y) by reason of Executive's death or retirement
or (z) by reason of Executive's voluntary resignation (other than voluntary
resignation with Good Reason (as hereinafter defined) or following a Change of
Control as permitted by Section 5(d)(iii)), then the Company shall pay to
Executive, within fifteen (15) days of the date of such termination, only the
Base Salary and any bonus previously approved by the Board of Directors and
provide benefits to Executive through such date of termination. For purposes of
this Agreement, "Cause" shall mean (i) conviction of any crime (whether or not
involving the Company) constituting a felony in the jurisdiction involved; (ii)
engaging in any substantiated act involving moral turpitude adversely affecting
the Company's business and not involving a de minimis amount of money; (iii)
willful and continued gross neglect or willful misconduct in the performance of
Executive's material duties hereunder; and (iv) willful and repeated failure or
refusal to perform such duties as may be delegated to Executive by the Chief
Executive Officer commensurate with Executive's position as Chief Operating
Officer of the Company and consistent with the responsibilities of a Chief
Operating Officer; provided, however, that (a) with respect to clauses (iii) and
(iv), Executive shall have received written notice from the Company setting
forth the alleged act or failure to act constituting "Cause" hereunder, and
Executive shall not have cured such act or refusal to act (other than fraud or
embezzlement, which may not be cured) within 15 business days of his actual
receipt of such notice; and (b) for purposes of this Section, no act or failure
to act by Executive shall be considered "willful" unless done, or omitted to be
done, by Executive in bad faith and without a reasonable belief that his actions
or omission were in the best interest of the Company. For purposes hereof, the
term "Good Reason" shall mean (i) the assignment to Executive of a position or
title other than, President and Chief Operating Officer, or (ii) any requirement
<PAGE> 6
that the Executive report to any person other than the CEO, or (iii) any
requirement that Executive perform services in an office of the Company located
more than 30 miles from Los Angeles County, California (except for reasonably
required travel), or (iv) the production or distribution by the Company of any
entertainment software or other product which is pornographic, or (v) the
failure by the Company to pay compensation or provide benefits or perquisites to
Executive as and when required by the terms of this Agreement.
(c) Disability. If, as a result of Executive's
incapacity due to physical or mental illness, Executive shall have been absent
from Executive's duties hereunder on a full time basis for either (i) two
hundred ten (210) days within any three hundred sixty-five (365) day period, or
(ii) one hundred eighty (180) consecutive days, and within thirty (30) days
after written notice of termination is given shall not have returned to the
performance of Executive's duties hereunder on a full time basis, the Company
may terminate Executive's employment hereunder for "Disability". In that event,
the Company shall pay to Executive, within fifteen (15) days of the date of such
termination, only the Base Salary and an appropriately pro-rated bonus and
provide benefits to Executive through such date of termination. During any
period that Executive fails to perform Executive's duties hereunder as a result
of incapacity due to physical or mental illness (a "Disability Period"),
Executive shall continue to receive the compensation and benefits provided by
Section 3 hereof until Executive's employment hereunder is terminated; provided,
however, that the amount of compensation and benefits received by Executive
during the Disability Period shall be reduced by the aggregate amounts, if any,
payable to Executive under disability benefit plans and programs of the Company
or under the Social Security disability insurance program covering the same
period of time. Following such termination, for one year the Company shall
provide continued medical coverage and other insurance benefits as previously
provided to Executive, as well as COBRA benefits and other insurance benefits
required by law.
(d) Termination By Company For Any Other Reason;
Voluntary Resignation for Good Reason; Change of Control.
(i) In the event that (A) Executive's
employment hereunder is terminated by the Company during the Agreement Term for
any reason other than as provided in Sections 5(b) or 5(c) hereof, or (B) the
Executive voluntarily resigns for Good Reason, as defined in Section 5(b), then
the Company shall pay to Executive, within fifteen (15) days of the date of such
termination, the Base Salary and an appropriately pro-rated bonus and provide
benefits through such date of termination or resignation and, in lieu of any
further compensation, benefits and perquisites for the balance of the Agreement
Term, severance pay of Fifty Thousand Dollars ($50,000) per annum during a
period which shall end on the later to occur of (X) the end of the Agreement
Term or (Y) that date which is two-years from the date of such termination or
resignation (as applicable, the "Severance Period"), commencing with such date
of termination or resignation and payable at the times that Executive's Base
Salary would have been so paid. In addition, under such circumstances, the
Company and Executive will enter into a consulting agreement (as attached hereto
as Exhibit C) for a term equal to the length of the Severance Period.
<PAGE> 7
(ii) Upon the happening of a Change of
Control, as hereinafter defined, then all options previously granted to
Executive pursuant to the Company's 1997 Stock Incentive Plan, 1999 Stock
Incentive Plan, or otherwise shall immediately vest and be exercisable by
Executive in full, and Executive shall thereafter be entitled to exercise such
options for one year from the occurrence of such Change of Control. In addition,
if, following a Change of Control, (1) there occurs Good Reason, as defined in
Section 5(b), or (2) Executive is not the President and Chief Operating Officer
of the Company or its successor and ultimate parent company, if any, or (3)
Executive's employment is terminated by the Company or its successor or parent
company, if any, for any reason other than as provided in Sections 5(b) or (c),
then in any such case, at any time within ninety (90) days of any event
specified in clauses (1) or (2), Executive may voluntarily resign from
employment with the Company or its successor and parent company, and thereupon
(and following the happening of the event specified in clause (3)), the Company
and its successor and parent company shall be obligated to make severance
payments and enter into the consulting agreement as provided in Section 5(d)(i)
hereof with the same effect as if the Company terminated the employment of
Executive as contemplated by the provisions of Section 5(d)(i) or the Executive
voluntarily resigned for Good Reason.
For purposes hereof, Change of Control shall mean any of the
following occurrences:
(1) any "person" as such term is used in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934 ("Exchange Act") or
"group" as contemplated by, or required to comply with the
provisions of Rule 13d-1(b)(1)(ii)(H) promulgated under the
Exchange Act (other than (A) the Company or any trustee or
other fiduciary holding securities under an employee benefit
plan of the Company, (B) Joseph Cayre, Stanley Cayre, Kenneth
Cayre and their respective spouses or children or trusts for
such children, (C) General Atlantic Partners or any entity
managed or controlled by General Atlantic Partners ((A), (B)
and (C) together or individually, a "Current Owner"), or (D)
any entity more than 50% of whose voting and equity interests
are owned beneficially by a Current Owner), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power
of the Company's then outstanding securities (other than as a
result of a merger or consolidation covered by clause (3)(i)
below in connection with a merger involving the Company which
would result in voting securities of the Company outstanding
immediately prior thereto continuing to represent more than
50% of the combined voting power of the voting securities of
the Company or the surviving entity (or its parent)
outstanding immediately after such merger or consolidation);
(2) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors
of the Company, and any new director (other than a director
designated by a person who has entered into an agreement with
the Company to effect a transaction described in clause (1),
(3)
<PAGE> 8
or (4) of this definition) whose election by the Board or
nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at
the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason
to constitute at least a majority thereof;
(3) the stockholders of the Company approve a merger or
consolidation of the Company with any other entity, other than
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such
surviving entity (or its parent) outstanding immediately after
such merger or consolidation or (ii) a merger or consolidation
effected to implement a recapitalization of the Company (or
similar transaction) in which no "person" or "group" (as
hereinabove defined) acquires more than 50% of the combined
voting power of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
(e) No Further Liability; Release. Full payment made
and complete performance by the Company in accordance with this Section 5 shall
operate to fully discharge and release the Company and its directors, officers,
employees, subsidiaries, affiliates, stockholders, successors, agents and
representatives from any further obligation or liability with respect to
Executive's employment and termination of employment. Other than paying
Executive's Base Salary through the date of termination of Executive's
employment and making any severance payment and continuing benefits and
perquisites pursuant to and in accordance with this Section 5 (as applicable),
the Company and its directors, officers, employees, subsidiaries, affiliates,
stockholders, successors, agents and representatives shall have no further
obligation or liability to Executive or any other person under this Agreement.
The Company shall have the right to condition the payment of any severance or
other amounts pursuant to Sections 5(c) or 5(d) hereof upon the delivery by
Executive to the Company of a release in form and substance satisfactory to the
Company of any and all claims Executive may have against the Company and its
directors, officers, employees, subsidiaries, affiliates, stockholders,
successors, assigns, agents and representatives arising out of or related to
Executive's employment by the Company and termination of such employment, other
than any failure by the Company to pay amounts otherwise required by this
Agreement.
<PAGE> 9
6. Confidential Information.
(a) Existence of Confidential Information. The
Company owns and has developed and compiled, and will develop and compile,
certain proprietary techniques and confidential information which have great
value to its business (referred to in this Agreement, collectively, as
"Confidential Information"). Confidential Information includes not only
information disclosed by the Company to Executive, but also information
developed or learned by Executive during the course of or as a result of
employment with the Company, which information shall be the property of the
Company. Confidential Information includes all information that has or could
have commercial value or other utility in the business in which the Company is
engaged or contemplates engaging, and all information of which the unauthorized
disclosure could be detrimental to the interests of the Company, whether or not
such information is specifically labelled as Confidential Information by the
Company. By way of example and without limitation, Confidential Information
includes any and all information developed, obtained, licensed by or to or owned
by the Company concerning trade secrets, techniques, know-how (including
designs, plans, procedures, merchandising, marketing, distribution and
warehousing know-how, processes, and research records), software, computer
programs, and any other intellectual property created, used or sold (through a
license or otherwise) by the Company, Electronic Data Information know-how and
processes, innovations, discoveries, improvements, research, development, test
results, reports, specifications, data, formats, marketing data and plans,
business plans, strategies, forecasts, unpublished financial information,
orders, agreements and other forms of documents, price and cost information,
merchandising opportunities, expansion plans, store plans, budgets, projections,
customer, supplier, licensee, licensor and subcontractor identities,
characteristics, agreements and operating procedures, and salary, staffing and
employment information.
(b) Protection of Confidential Information. Executive
acknowledges and agrees that in the performance of duties hereunder the Company
discloses to and entrusts Executive with Confidential Information which is the
exclusive property of the Company and which Executive may possess or use only in
the performance of duties for the Company. Executive also acknowledges that
Executive is aware that the unauthorized disclosure of Confidential Information,
among other things, may be prejudicial to the Company's interests, an invasion
of privacy and an improper disclosure of trade secrets. Executive shall not,
directly of indirectly, use, make available, sell, disclose or otherwise
communicate to any corporation, partnership, individual or other third party,
other than in the course of Executive's assigned duties and for the benefit of
the Company, any Confidential Information, either during the Agreement Term or
thereafter. Notwithstanding the foregoing, Confidential Information shall not
include that information which (i) is or comes into the public domain, unless
such information comes into the public domain as a result of a breach of this
Agreement or violation of a confidentiality obligation to the Company, or (ii)
is required to be disclosed pursuant to law or under a court order.
(c) Delivery of Records, Etc. In the event
Executive's employment with the Company ceases for any reason, Executive will
not remove from the Company's premises without its prior written consent any
records, files, drawings, documents,
<PAGE> 10
equipment, materials and writings received from, created for or belonging to the
Company, including those which relate to or contain Confidential Information, or
any copies thereof, except that Executive shall be permitted to remove his
personal files, records and belongings (including copies of his correspondence,
which may include Confidential Information). Upon request or when employment
with the Company terminates, Executive will immediately deliver the same to the
Company.
7. Assignment and Transfer.
(a) Company. Subject to Executive's rights under
Section 5(d)(ii) hereof, this Agreement shall inure to the benefit of and be
enforceable by, and may be assigned by the Company to, any purchaser of all or
substantially all of the Company's business or assets, any successor to the
Company or any assignee thereof (whether direct or indirect, by purchase,
merger, consolidation or otherwise). The Company will require any such
purchaser, successor or assignee to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such purchase, succession or assignment had taken
place. For purposes of this Agreement, the term Company shall include any
successor to the Company, and any parent company of such successor (or of the
Company), pursuant to or resulting from a merger or consolidation involving the
Company which does not constitute a "Change of Control" pursuant to Section 5(d)
of this Agreement.
(b) Executive. Executive's rights and obligations
under this Agreement shall not be transferable by Executive by assignment or
otherwise, and any purported assignment, transfer or delegation thereof shall be
void; provided, however, that if Executive shall die, all amounts then payable
to Executive hereunder shall be paid in accordance with the terms of this
Agreement to Executive's devisee, legatee or other designee or, if there be no
such designee, to Executive's estate.
8. Miscellaneous.
(a) Nondisclosure; Other Employers. Executive will
not disclose to the Company, or use, or induce the Company to use, any
proprietary information, trade secrets or confidential business information of
others. Executive represents and warrants that Executive has returned all
property, proprietary information, trade secrets and confidential business
information belonging to all prior employers.
(b) Cooperation. Following termination of employment
with the Company, Executive shall cooperate with the Company, as requested by
the Company, to affect a transition of Executive's responsibilities and to
ensure that the Company is aware of all matters being handled by Executive.
(c) No Duty to Mitigate. Executive shall be under no
duty to mitigate with respect to any severance or other amounts payable pursuant
to this Agreement
<PAGE> 11
and such payments shall be made without regard to sums earned by Executive from
any other source, except as provided in Section 5(d) hereof.
(d) Protection of Reputation. During the Agreement
Term and thereafter, Executive agrees that he will take no action which is
intended, or would reasonably be expected, to harm the Company or its reputation
or which would reasonably be expected to lead to unwanted or unfavorable
publicity to the Company.
(e) Governing Law. This Agreement, including the
validity, interpretation, construction and performance of this Agreement, shall
be governed by and construed in accordance with the laws of the State of
California applicable to agreements made and to be performed in such state
without regard to such state's conflicts of law principles. All actions and
proceedings relating directly or indirectly to this Agreement shall be litigated
in any state court or federal court located in Los Angeles, California. The
parties hereto expressly consent to the jurisdiction of any such court and to
venue therein.
(f) Entire Agreement. This Agreement contains the
entire agreement and understanding between the parties hereto in respect of the
subject matter hereof and supersedes, cancels and annuls any prior or
contemporaneous written or oral agreements, understandings, commitments and
practices between them respecting the subject matter hereof, including all prior
employment agreements, if any, and any amendments or supplements thereto between
the Company and Executive, which agreement(s) hereby are terminated and shall be
of no further force or effect.
(g) Amendment. This Agreement may be amended only by
a writing which makes express reference to this Agreement as the subject of such
amendment and which is signed by Executive and, on behalf of the Company, by its
duly authorized officer.
(h) Severability. If any term, provision, covenant or
condition of this Agreement or part thereof, or the application thereof to any
person, place or circumstance, shall be held to be invalid, unenforceable or
void, the remainder of this Agreement and such term, provision, covenant or
condition shall remain in full force and effect, and any such invalid,
unenforceable or void term, provision, covenant or condition shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same and the remainder of this
Agreement valid, enforceable and lawful. In this regard, Executive acknowledges
that the provisions of Sections 4 and 6 are reasonable and necessary for the
protection of the Company.
(i) Construction. The headings and captions of this
Agreement are provided for convenience only and are intended to have no effect
in construing or interpreting this Agreement. The language in all parts of this
Agreement shall be in all cases construed according to its fair meaning and not
strictly for or against the Company or Executive. The use herein of the word
"including," when following any general provision, sentence, clause, statement,
term or matter, shall be deemed to mean "including, without limitation". As used
herein, "Company" shall mean the Company and its subsidiaries and any purchaser
of, successor to or assignee (whether direct or indirect, by purchase, merger,
consolidation or
<PAGE> 12
otherwise) of all or substantially all of the Company's business or assets which
is obligated to perform this Agreement by operation of law, agreement pursuant
to Section 7 hereof or otherwise. As used herein, the words "day" or "days"
shall mean a calendar day or days.
(j) Nonwaiver. Neither any course of dealing nor any
failure or neglect of either party hereto in any instance to exercise any right,
power or privilege hereunder or under law shall constitute a waiver of any other
right, power or privilege or of the same right, power or privilege in any other
instance. All waivers by either party hereto must be contained in a written
instrument signed by the party to be charged and, in the case of the Company, by
its duly authorized officer.
(k) Remedies for Breach. The parties hereto agree
that Executive is obligated under this Agreement to render personal services
during the Agreement Term of a special, unique, unusual, extraordinary and
intellectual character, thereby giving this Agreement peculiar value, and, in
the event of a breach or threatened breach of any covenant of Executive herein,
the injury or imminent injury to the value and the goodwill of the Company's
business could not be reasonably or adequately compensated in damages in an
action at law. Accordingly, Executive expressly acknowledges that the Company
shall be entitled to specific performance, injunctive relief or any other
equitable remedy against Executive, without the posting of a bond, in the event
of any breach or threatened breach of Sections 4 and 6 hereof. Without limiting
the generality of the foregoing, if Executive breaches Sections 4 or 6 hereof,
such breach will entitle the Company to enjoin Executive from disclosing any
Confidential Information to any Competing Business, to enjoin such Competing
Business from receiving from Executive or using any such Confidential
Information and/or to enjoin Executive from rendering personal services to or in
connection with such Competing Business. The rights and remedies of the parties
hereto are cumulative and shall not be exclusive, and each such party shall be
entitled to pursue all legal and equitable rights and remedies and to secure
performance of the obligations and duties of the other under this Agreement, and
the enforcement of one or more of such rights and remedies by a party shall in
no way preclude such party from pursuing, at the same time or subsequently, any
and all other rights and remedies available to it.
(l) Notices. Any notice, request, consent or approval
required or permitted to be given under this Agreement or pursuant to law shall
be sufficient if in writing, and if and when sent by certified or registered
mail, return receipt requested, with postage prepaid, or by hand delivery or by
reputable overnight delivery service (such as Federal Express) to Executive's
residence (as reflected in the Company's records or as otherwise designated by
Executive on thirty (30) days' prior written notice to the Company with a copy
to Michael K. Lindsey, Esq., Paul, Hastings, Janofsky & Walker LLP, 555 South
Flower Street, 23rd Floor, Los Angeles, California 90071) or to the Company's
principal executive office, attention: General Counsel (with a copy to David P.
Levin, Esq., Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York,
New York 10022), as the case may be. All such notices, requests, consents and
approvals shall be effective upon receipt. However, the time period in which a
response thereto must be given shall commence to run from the date of receipt on
the return receipt of the notice, request, consent or approval by the addressee
thereof. Rejection or other refusal to accept, or the inability to
<PAGE> 13
deliver because of changed address of which no notice was given as provided
herein, shall be deemed to be receipt of the notice, request, consent or
approval sent.
(m) Assistance in Proceedings, Etc. Executive shall,
without additional compensation, during and after expiration of the Agreement
Term, upon reasonable notice, furnish such information and proper assistance to
the Company as may reasonably be required by the Company in connection with any
legal or quasi-legal proceeding, including any external or internal
investigation, involving the Company or any of its affiliates or in which any of
them is, or may become, a party. The Company shall, in connection therewith, pay
Executive's reasonable attorney's fees and expenses incurred in connection with
this Section 8.
(n) Automatic Extension of Agreement Term. This
Agreement shall be automatically extended for a period of one year at the end of
the Agreement Term (or any extension thereof) upon economic terms and conditions
to be agreed upon (which shall be no less favorable than those contained herein)
unless, not later than six months prior to the end of the Agreement Term (or
extension thereof) (the "Notice Date"), the Company or the Executive shall have
notified the other in writing of its or his intention not to so renew this
Agreement. Any such extension shall be effective and binding as of the
applicable Notice Date.
(o) Survival. This Agreement and the respective
obligations, rights and benefits of the Company and the Executive as set forth
herein shall survive the cessation or termination of Executive's employment with
the Company and the termination of the Agreement Term in accordance with the
terms set forth herein.
[The remainder of this page has intentionally been left blank.]
<PAGE> 14
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed on its behalf by an officer thereunto duly authorized and
Executive has duly executed this Agreement, all as of the date and year first
written above.
GT Interactive Software Corp. EXECUTIVE:
By: /s/ THOMAS A. HEYMANN /s/ JOHN T. BAKER IV
------------------------------- -----------------------------------
Name: Thomas A. Heymann John T. Baker IV
Title: Chairman of the Board and
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.54
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT, dated as of May 5, 1999 (the "Amendment"), to the
EMPLOYMENT AGREEMENT, dated as of May 15, 1997, as previously amended on April
28, 1998 (the "Agreement"), between GT Interactive Software Corp. (the
"Company") and David Chemerow ("Executive").
WHEREAS, the Company and Executive wish to make certain
amendments to the Agreement;
NOW, THEREFORE, for good and valuable consideration, the
adequacy of which is hereby acknowledged, the undersigned hereby amend the
Agreement as follows:
1. Section 2(c) of the Agreement is hereby amended to read as follows:
2(c) Place of Performance. During the Agreement Term,
Executive shall be based at the Company's principal executive offices,
which shall be located in New York City. Executive shall not be
required to perform his primary duties at any office other than the
Company's principal executive offices nor in any location other than
New York City. For purposes hereof, the Company's "principal executive
offices" shall be the offices of the Company from which the Chief
Executive Officer of the Company conducts his primary duties. Any
breach by the Company of the requirements of this paragraph shall
constitute a deemed termination of Executive for purposes of Section
5(d)(i) hereof.
2. Section 5(d) of the Agreement is hereby amended to add a new paragraph
(iv) at the end thereof:
The Company has notified Executive that he will no longer
serve as its President effective upon the assumption by John Baker of
such position. The Company has also notified Executive that, effective
September 3, 1999, the Company's principal executive offices will be
relocated to Los Angeles, California. The Company acknowledges that
each such action constitutes a deemed termination by the Company of
Executive's employment for purposes of Section 5(d)(i) hereof. Without
limitation of Executive's rights under this Agreement, Executive has
agreed that he will remain employed by the Company in its New York
offices with the title of consultant until September 3, 1999. During
such time, Executive's status will be that of an employee for purposes
of all compensation, stock option and employee benefit plans of the
Company, and the Company will continue to honor the compensation and
benefits obligations under Section 3 of this Agreement. Notwithstanding
the foregoing and without requirement of any notice or other action by
Executive, effective September 3, 1999, the Company will honor and
provide Executive with all of the termination rights and benefits set
forth in Section 5(d)(i) and 5(d)(ii) hereof, without
<PAGE> 2
limitation of Executive's rights upon the happening of a Change of
Control pursuant to Section 5(d)(iii) hereof.
In all other respects, the terms of the Agreement remain
unchanged.
All capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Agreement.
This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers or trustees as of the date
hereof.
GT Interactive Software Corp. Executive:
By: /s/ THOMAS HEYMANN /S/ DAVID CHEMEROW
------------------------------- -----------------------------------
Name: Thomas Heymann David Chemerow
Title: Chairman of the Board and
Chief Executive Officer
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
OF
GT INTERACTIVE SOFTWARE CORP.
<TABLE>
<CAPTION>
JURISDICTION
OF
ENTITY ORGANIZATION
- ------ ------------
<S> <C>
GT Interactive Software Corp.: Delaware
DOMESTIC SUBSIDIARIES
WizardWorks Group, Inc.: Minnesota
Humongous Entertainment, Inc.: Washington
Candel Inc.: Delaware
FormGen, Inc.: Arizona
Gold Medallion Software, Inc.: Nevada (inactive)
Mediatechnics Ltd. Illinois (inactive)
SingleTrac Entertainment Technologies, Inc.: Delaware
Swan Acquisition Corp. Delaware (inactive)
One Zero Media, Inc. Massachusetts
Legend Entertainment Company LLC Delaware
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C>
G.T. Interactive Software (Europe) Limited: United Kingdom
Renegade Interactive Entertainment Limited: United Kingdom
Bramblewold Computers Limited: United Kingdom
Premier European Promotions Limited: United Kingdom
One Stop Direct Limited: United Kingdom
Software Sourcerers International Limited: United Kingdom
WizardWorks (UK) Limited: United Kingdom United Kingdom
G.T. Distribution Limited: United Kingdom
GT Interactive Software GmbH: Germany
GT Value GmbH Germany
G.T. Interactive Software France SARL: France
Renegade Interactive France S.A.: France
GT Interactive Software Australia PTY Limited: Australia
Reflections Interactive Ltd. United Kingdom
GT Interactive European Holdings BV Netherlands
Home Software Benelux BV Netherlands
Candel, Inc. [Delaware]
1051236 Ontario, Inc.: Ontario
FormGen Corp: Ontario
</TABLE>
-2-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (Registration Nos.
333-00428, 333-33353, 333-39353, 333-61197 and 333-62271).
ARTHUR ANDERSEN LLP
New York, New York
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 13,407
<SECURITIES> 105
<RECEIVABLES> 195,755
<ALLOWANCES> 10,713
<INVENTORY> 131,889
<CURRENT-ASSETS> 390,700
<PP&E> 56,504
<DEPRECIATION> 19,697
<TOTAL-ASSETS> 487,615
<CURRENT-LIABILITIES> 258,930
<BONDS> 0
0
0
<COMMON> 727
<OTHER-SE> 126,406
<TOTAL-LIABILITY-AND-EQUITY> 487,615
<SALES> 572,342
<TOTAL-REVENUES> 572,342
<CGS> 329,959
<TOTAL-COSTS> 329,959
<OTHER-EXPENSES> 251,877
<LOSS-PROVISION> 11,428
<INTEREST-EXPENSE> 5,315
<INCOME-PRETAX> (81,425)
<INCOME-TAX> (29,628)
<INCOME-CONTINUING> (51,797)
<DISCONTINUED> (19,041)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,838)
<EPS-BASIC> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
