GT Interactive Software

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GT Interactive Software

417 Fifth Avenue
New York, New York 10016
U.S.A.
Telephone: (212) 726-6500
Fax: (212) 679-3424
Web site: http://www.gtinteractive.com

Public Company
Incorporated: 1993
Employees: 1,693
Sales: $572.3 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: GTIS
NAIC: 42143 Computer and Computer Peripheral Equipment and Software Wholesalers; 511210 Software Publishers; 514191 On-Line Information Services

GT Interactive Software is a major publisher and distributor of entertainment software for PC and Macintosh computers, including CD-ROM, and for game system consoles manufactured by Nintendo and Sony. The company provides software for entertainment and “edutainment,” including value-priced offerings, to mass merchants such as Kmart, Wai-mart, and Target, and to more than 20,000 specialty retail stores. GT Interactive publishes and distributes worldwide software from its seven in-house development studios, as well as for associated development companies. The company also distributes to mass merchants in the United States software developed and published by other companies.

Company Origins

GT Interactive Software (GTIS) began as a division of GoodTimes Entertainment, a private company owned by three brothers, Joseph, Stanley, and Kenneth Cayre. The business success of the Cayre brothers has been attributed to their ability to identify opportunities early. In the 1970s they started a record company that produced and distributed Latin music before the major record labels recognized the potential of that market. In the 1980s, when movie videos were retail priced at $40 to $90 each, the Cayre brothers found obscure movies that did not require royalty payments and reproduced them for retail sale at $9.99. GoodTimes Entertainment offered the videos to Wal-Mart for $7.00 each wholesale, including shipping costs as well as return shipping costs for unsold merchandise, and arranged with Wal-Mart to lease shelf space for the videos near the front of their stores. GoodTimes’ revenue reached $3 million the first year. When the movie studios realized that they could achieve high volume sales by pricing new movie releases at $19.95, the Cayre brothers began looking for new business opportunities.

GTIS was born in 1993 when Ronald Chaimowitz, a former competitor in the Latin music business as well as a former employee at GoodTimes, happened to call the Cayres to propose that they publish and distribute computer game software. Chaimowitz suggested replication of the same sales concept used in the music and video business: obtain prime retail shelf space to attract software developers. GoodTimes owned a rack-jobbing company that monitored video inventory by a satellite-linked computer system and stocked videos with a staff of 500 field personnel. Chaimowitz proposed that this rack-jobbing system could be applied to interactive computer games as well.

The Cayre brothers hired Chaimowitz as CEO and President. In his first major action, Chaimowitz attained the rights to publish “Wolfenstein 3D,” developed by id Software. The sales of the wartime adventure game had waned, but GTIS sold more than 100,000 units by using the jobber system to distribute the computer games. GTIS achieved a sizable presence in the computer game software market in 1994 after Wal-Mart approached the company to supply and manage its software displays. First-year revenues at GTIS reached $10.3 million.

The successful sale of “Wolfenstein 3D” led id Software to give GTIS the publishing rights to its “Doom” series of computer games. Prior to the October 10, 1994 release of “Doom II: Hell on Earth,” GTIS had obtained preorders for more than 250,000 units. Available on PC floppy disc or CD-ROM, “Doom IF’ was the sequel to a free, online shareware computer game, and an eager audience awaited the greater firepower and higher resolution graphics that the new software offered. The action of these games was “first-person,” viewed by the player from the perspective of the action hero. In “Doom II” the action was viewed through a marine who has returned to Earth to find it captive to demons, monsters, and mutants from Hell. GTIS rated “Doom II” for mature audiences as it contained animation of violence, blood, and gore. A record breaker, more than 500,000 copies of the game sold in the first four months of distribution.

With its reputation as an effective software distributor established, GTIS sought to publish and distribute worldwide a variety of software for computers and game consoles. In an exclusive partnership with Williams Entertainment, GTIS would develop and distribute computer software games such as, “Troy Aikman Football,” an interactive guide to the NFL, and “Fun and Games,” multimedia activities for kids. Their first joint production was a high speed go-kart race game, “Super Karts.” Players chose from 16 race tracks worldwide, each with its particular hazards, such as ice on the track in Russia. As with many computer games, a second player could compete on the same computer or through a network connection.

GTIS ventured into children’s “edutainment” software in February 1995 through a contract with Big Tuna New Media. Mercer Mayer, award-winning author of children’s stories, approached GTIS to publish and distribute his stories in both computer and game system platforms. The first release, “Just Me and My Dad,” followed the characters through a camping experience, with fishing, ghost stories, and a starry nighttime sky. Designed for three- to eight-year-old children, the story could be watched like a movie, be read by Little Critter and other characters, or be approached interactively by using a mouse to click on certain pictures for sound and movement. The storyline included lessons for children, such as respect for others and prevention of forest fires.

GTIS approached expansion through various means, beginning with the acquisition of Slash Corporation in June 1995. GTIS entered into a joint venture with Softbank, Japan’s largest distributor of software and related products, and Roadshow Entertainment PTY of Australia, which allowed GTIS to market software titles in those countries. Distribution in Japan began with the Playstation console version of the “Doom” series. In Australia the “HEXEN” series of action-adventure games was distributed for Windows 95 compatibility. At the end of 1995, GoodTimes took GTIS public as a separate company and raised $150 million, which it planned to use to grow through acquisitions of game software companies.

GTIS on Its Own in 1996

GTIS began 1996 improving its marketing techniques. GTIS placed 20 electronic kiosks in Wal-Mart stores as a new avenue to promote more than 2,000 PC and CD-ROM game titles. The interactive kiosks allowed customers to preview new software and to order software through an electronic connection to GTIS headquarters in New York City. In addition, GTIS developed a display of low-cost software, value-priced at less than $20. These displays were set up at 700 Wal-Mart stores and 600 Kmart stores.

GTIS expanded its base of distribution through numerous agreements with software development companies and mass merchandisers. In February GTIS signed an agreement to supply its line of computer games to 600 Target stores. GTIS agreed to administer point-of-sale replenishment, electronic data invoicing, and a purchase ordering system. In March 1996, GTIS signed an agreement with Graphix Zone and Star Press (which were in the process of merging under Graphix Zone) to distribute their line of entertainment CD-ROMs and software to Wal-Mart, Kmart, Sam’s Club, and Target. Star Press produced travel and health software, while Graphix Zone produced such music titles as “Bob Dylan: Highway 61 Interactive” on CD-ROM. GTIS purchased 800,000 shares of Graphix Zone common stock.

GTIS maintained its business alliance with id Software. The two companies signed an agreement for GTIS to publish and distribute worldwide “Quake,” a new 3D action game and “Beyond Heretic,” the second part of a complex fantasy game trilogy. In this game the player chose a character—either a fighter, a cleric, or a mage—which determined how challenges were handled as he traveled through swamps, ice castles, and other scenes.

New distribution agreements with game developers followed in April 1996. GTIS expanded in the global market in an agreement with Scavenger, Inc., which published a variety of PC video games, including “Into the Shadow,” a fantasy adventure, and “Scorcher,” a futuristic race. CyberSites gave GTIS the rights to publish “SPQR,” an Internet mystery game set in Ancient Rome. The intriguing story line and high quality graphics attracted GTIS to this product.

Six months after becoming a public company, GTIS began to expand with acquisitions and investments. GTIS’s investment in Mirage, an entertainment software development company in England, involved an agreement to publish multiple titles. Investment in software developer Off World Entertainment included the option to convert preferred stock to 50 percent common stock equity. Acquisition of the WizardWorks Group added low-cost entertainment software to GTIS’s publication stock.

The acquisition of Humongous Entertainment, Inc. expanded the company’s publication of children’s software. In exchange for four million shares of stock, a $76 million value, GTIS acquired all of the stock for Humongous Entertainment, Inc. Humongous published software for children with hand-animated characters, such as Putt-Putt, a friendly purple car, Freddi Fish, and Buzzy the Knowledge Bug. Humongous had received positive reviews and had a loyal customer base, but had not adequately reached its potential market.

Company Perspectives:

GT Interactive is a high performance corporation for a high performance world.

The acquisition of Candel Inc., parent company of FormGen Inc., brought a best-selling interactive computer game to GTIS’s distribution list, “Duke Nukem 3D,” released in July 1996. With 28 playing levels, the game featured a media editor that allowed players to create additional levels of play and to share them with others. Other features included detailed 3D graphics that provided realistic animation, ten new weapons, such as the laser trip mine, and a working subway system. PC Magazine (July 1996) described this adults only title as, “the most technically impressive first-person action game on the market.” The software offered parents the option of a password lock that eliminated scenes with nudity, adult language, and profanity.

When GTIS acquired Warner Interactive Entertainment, the European subsidiary of Warner Music Group, the company gained access to software markets in France, Germany, and Australia, as well as a staff of software developers. Based in Manchester, England, the staff included artists, graphic designers, and programmers.

In April 1997, Wal-Mart decided that it would purchase some entertainment software directly from the publishers rather than GTIS. These publishers were CUC International, Electronic Arts, Inc., and LucasArts Entertainment Company. GTIS would continue to handle 85 percent of Wal-Mart’s software merchandise. The loss amounted to less than five percent of revenue; in terms of 1996 sales of $365.5 million that loss would mean $20 million in lost revenue. With constricted profit margins the move was not unexpected. The strength of GTIS laid in its ability to sell direct to mass merchandisers such as Wal-Mart and Kmart and direct sales of its own published products to Toys ‘R’ Us and other retail chains. To compensate for the loss at Wal-Mart, GTIS expanded the software assortment distributed to Kmart stores and, in other areas, GTIS reduced the assortment from 40 to 50 titles down to 30 to 35 of the better selling titles.

GTIS also planned to expand in the publishing aspect of the business. In June 1997 it purchased SingleTrac Entertainment Technologies, which would become the company’s first in-house developer of entertainment software for computer and game system platforms. An agreement with MTV gave GTIS the rights to publish software games that feature Beavis and Butt-head, as well as Aeon Flux, animations owned by MTV.

Business Ventures Fruitful in 1997

Previous business activities began to bear fruit for GTIS by mid-1997. “Abe’s Oddysee” by OddWorld Inhabitants introduced a new genre in game software with A.L.I.V.E., Aware Life forms in Virtual Entertainment. Released for the PlayStation game system and Windows 95, the game featured realistic character portrayals, including displays of emotion such as fear, happiness, and frustration. The choices characters make when facing ethical dilemmas affect the outcome of the game, while GameSpeak allows a character to learn the Odd-World languages. A breakthrough in video graphics, the motion picture-like animation did not have the normal disruption in the graphics sequence between player and computer playback. GTIS and OddWorld launched a $10 million campaign that included television and print advertising, an Internet preview, in-store promotions, and joint promotions with Sony and MTV. Upon release 500,000 units were shipped worldwide, available in English, Spanish, French, Italian, and German.

A year after its acquisition, sales of children’s software at Humongous doubled to $20 million, and Humongous entered the top five in children’s software development. Humongous used their signature characters to create a line of children’s products, stuffed animals, puzzles, bedspreads, and clothing, with the hope that these characters would endure for years to come. An animated television show was put into development as well. New game products included the division’s first educational software, “Big Thinkers,” and the “Spy Fox” game.

Humongous added a new adult entertainment division, Cave Dog Entertainment. The company issued the real-time strategy game, “Total Annihilation,” in December 1997, its first software publication. In the final conflict of a 4,000-year struggle, the storyline setting encompassed a wide variety of terrains in fine detail, such as ice planets, desert valleys, and mechanical worlds.

Other 1997 releases included Fantasy Football Smarts by WizardWorks. The game encompassed all aspects of football, such as coaching and management of football teams, with an infinite number of leagues, divisions, and teams possible. The “Youngblood” game was based on the best-selling comic books by Rob Liefeld. In addition, in 1997, Los Angeles Dodgers 1997 All-Star player Mike Piazza signed on as the headline pitcher in the arcade style baseball video game, “StrikeZone.” The “Deer Hunter” computer game secured a place at the top of the value-priced entertainment software market for several months.

Continued Expansion in 1998

In December 1997 GTIS launched the Affiliate Label program, which offered exclusive sales and distribution to more than 40,000 retailers worldwide as well as marketing consultation. Highlights of distribution through GTIS included electronic data invoicing and same-day replenishment. Empire Interactive was the first company to affiliate. Palladium Interactive joined the program in April 1998, adding children’s entertainment and genealogy software to GTIS stock. Australia-based Beam International Ltd. joined in June 1998. SmartCode Interactive, maker of a variety of hand-held electronic organizers, some with Internet and e-mail capacity, affiliated with GTIS in July 1998. Sega PC and Segasoft joined in December 1998.

Key Dates:

1994:: Release of software game “Doom II: Hell on Earth” establishes company presence.
1995:: Public offering of stock raises $150 million.
1996:: Best-seller Duke Nukem 3D released.
1998:: Acquisition of OneZero Media, Inc.
1999:: Thomas Heyman of Walt Disney Store named CEO.

GTIS ventured into different aspects of the entertainment media in 1998. In February GTIS entered into an agreement with Threshold Entertainment and 3D Realms to transform the Duke Nukem game series into motion picture, television, and home video media. An agreement with Mercury Records provided a soundtrack for the “Rogue Trip” game featuring platinum sellers The Mighty Mighty Bosstones and other artists.

Humongous captured a five-year, exclusive partnership to produce and distribute CD-ROMs based on Nickelodeon’s “Blue’s Clues,” the highly acclaimed television show for preschool children. “Blue’s ABC Time Activities” and “Blue’s Birthday Adventure” were released in 1998.

GTIS obtained publishing rights to Scholastic Entertainment’s Animorphs, based on storylines from more than 15 million books and a television show on Nickelodeon. Animorphs is the story of five teenagers who must use ingenuity rather than brawn in their mission to save the earth from aliens. The global agreement gave GTIS exclusive, multi-title publishing rights to PC and game console software as well as new add-on and playing level packs.

GTIS bolstered in-house publishing with the launch of Bootprint Entertainment in November 1998. Bootprint’s first project was to develop a proprietary engine for an action/strategy PC game expected to be released in 2000. In December GTIS acquired England-based Reflections Interactive, bringing in-house software development staff to more than 230 programmers, graphic designers, and artists.

In November 1998 GTIS announced the acquisition of One-Zero Media, Inc. (OZM) for $15 million in stock. GTIS would benefit from the Internet “portal” market provided by OZM, which has had exclusive rights to operate the entertainment zone of Alta Vista, an Internet search engine. The company produced the Wild Wild Web Internet site, which provided information on entertainment—music, movies, and television. The Wild Wild Web television show, which discussed Internet topics, was renewed for its third season in January 1999 in 148 syndicates. OZM has generated advertising revenue from e-bay, Compaq, Web TV, and CD Now. GTIS hoped OZM would provide new opportunities for on-line sales, as the company’s own web site, www.gtinteractive.com, has generated only one percent of direct sales.

New Leadership Challenges in 1999

The ever widening scope of GTIS business and continual losses required new leadership. Thomas Heyman became the new chairman and CEO in February 1999, bringing with him experience at the Walt Disney Store, which he turned from a million dollar operation into a billion dollar worldwide operation. John Baker IV, from competitor Activision, was named president and COO. The two confronted a number of financial challenges at GTIS. An ambitious software development schedule resulted in the late shipment of new games. Although revenue for the fiscal year ending March 31, 1999 was $57.3 million, the company experienced a net loss of $71 million. Another setback came in May 1999 when Wal-Mart opted to purchase software titles directly from Microsoft and Activision. The change was estimated to result in a loss of $50 million in revenue for GTIS.

Heyman and Baker took a number of steps to realign the company’s finances. GTIS decided to lay off 35 percent of its staff, primarily at its distribution center in New Jersey. The 192,000-square-foot center was closed in April 1999, and an independent contractor was hired to handle distribution, Arnold Logistics in Lancaster, Pennsylvania. GTIS hired the Bear Stearns Company to examine options such as a sale or recapitalization to bring the company’s finances into alignment. In addition, the company planned a relocation from New York City to Los Angeles.

The good news in 1999 involved several awards for GTIS published software. At the World Animation Celebration, “Abe’s Oddysee” won Best Director for CD-ROM Games and took second place for Best Animation for CD-ROM Games. “Unreal,” by Epic MegaGames and Digital Extremes, listed among the top ten best-selling games in 1998 and won more than 20 industry awards, including the 1999 Codie Award for Best New Arcade/Action Software Game, given by the Software and Information Industry Association. With a new level of power in computer graphics engines, “Unreal” players traversed an alien world environment with a variety of exotic scenery and outdoor panoramas while trying to free the native people from a race of reptilian monsters. Another publishing agreement followed for “Unreal Tournament” and a sequel to “Unreal.”

Business as usual continued at GTIS in 1999, beginning with the acquisition of Legend Entertainment, adding to in-house software development. GTIS entered into a global agreement with IMS Properties to publish and distribute interactive software. All teams and drivers for the Indianapolis 500, the Indy Racing League, Indianapolis Motor Speedway as well as sequels, add-on, and level packs were included in the deal. Significant game releases in 1999 included “Duke Nukem: Zero Hour” for the Nintendo 64 game console. Humongous Entertainment released two “Blue’s Clues” video games, “Blue’s 123 Activities” and “Blue’s Treasure Hunt” for CD-ROM.

Principal Subsidiaries

Bootprint Entertainment; Candel, Inc.; Cave Dog Entertainment; FormGen, Inc.; G.T. Interactive Software France S.A.; G.T. Interactive Entertainment Company Germany GmbH; G.T. Interactive Entertainment (Europe) Limited; Humongous Entertainment, Inc.; Legend Entertainment, Inc.; Premier European Promotional Limited; OneZero Media, me,; SingleTrac Entertainment Technologies; WizardWorks Group, Inc.; Wiz-ardworks (UK) Limited.