<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ..................... TO .....................
COMMISSION FILE NUMBER 0-16986
ACCLAIM ENTERTAINMENT, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-2698904
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE ACCLAIM PLAZA
GLEN COVE, NEW YORK 11542
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(516) 656-5000
(REGISTRANT'S TELEPHONE NUMBER)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As at July 10, 1995, approximately 44,900,000 shares of Common Stock of
the registrant were outstanding.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000s, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1995 1994
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 22,750 $ 34,676
Marketable securities........................... 61,757 1,926
Accounts receivable--net........................ 120,017 164,794
Inventories..................................... 17,823 15,295
Prepaid expenses................................ 39,328 23,214
Other current assets............................ 14,212 10,796
-------- ----------
Total current assets.............................. 275,887 250,701
-------- ----------
Other Assets:
Fixed assets--net............................... 29,536 15,638
Excess of cost over net assets acquired--net of
accumulated amortization of $8,387 and
$5,951, respectively......................... 61,948 59,400
Other assets.................................... 31,652 10,139
-------- ----------
Total assets...................................... $399,023 $ 335,878
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.......................... $ 22,694 $ 69,376
Short-term borrowings........................... 4,897 1,757
Accrued expenses................................ 36,075 43,914
Income taxes payable............................ 3,598 2,031
Current portion of long-term debt............... 4,696 1,538
Obligation under capital leases--current........ 321 265
-------- ----------
Total current liabilities......................... 72,281 118,881
-------- ----------
Long-term liabilities:
Long-term debt.................................. 20,500 40,196
Obligation under capital leases--noncurrent..... 487 719
Other long-term liabilities..................... 1,083 839
-------- ----------
Total liabilities................................. 94,351 160,635
-------- ----------
Minority interest................................. 1,722 --
Commitments and Contingencies..................... -- --
Stockholders' Equity:
Preferred stock, $0.01 par value; 1,000 shares
authorized; None issued...................... -- --
Common stock, $0.02 par value; 100,000 (in 1995)
and 50,000 (in 1994) shares authorized;
44,834 and 39,348 shares issued and
outstanding, respectively.................... 897 787
Additional paid in capital........................ 155,117 69,246
Retained earnings................................. 144,840 106,571
Treasury stock.................................... (807) (807)
Foreign currency translation adjustment........... 2,708 (554)
Unrealized gain on marketable securities.......... 195 --
-------- ----------
Total stockholders' equity........................ 302,950 175,243
-------- ----------
Total liabilities and stockholders' equity........ $399,023 $ 335,878
-------- ----------
-------- ----------
</TABLE>
See note to consolidated financial statements.
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
(IN 000s, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------- --------------------
1995 1994 1995 1994
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net revenues.................... $104,955 $88,997 $423,332 $331,888
Cost of revenues................ 51,941 37,853 198,533 145,138
-------- ------- -------- --------
Gross profit.................... 53,014 51,144 224,799 186,750
-------- ------- -------- --------
OPERATING EXPENSES
Selling, advertising, general
and administrative expenses... 34,638 36,104 151,303 129,734
Operating interest.............. 1,055 537 2,967 1,609
Depreciation and amortization... 2,763 944 6,335 2,625
-------- ------- -------- --------
Total operating expenses........ 38,456 37,585 160,605 133,968
-------- ------- -------- --------
Earnings from operations........ 14,558 13,559 64,194 52,782
-------- ------- -------- --------
OTHER INCOME (EXPENSE)
Interest income................. 542 262 1,374 769
Interest expense................ (954) (83) (2,703) (299)
Other (expense) income.......... 1,170 (360) 2,376 (685)
-------- ------- -------- --------
Earnings before income taxes.... 15,316 13,378 65,241 52,567
Provision for income taxes...... 6,300 5,429 27,000 21,644
-------- ------- -------- --------
Earnings before minority
interest...................... 9,016 7,949 38,241 30,923
Minority interest............... (28) -- (28) --
-------- ------- -------- --------
Net earnings.................... $ 9,044 $ 7,949 $ 38,269 $ 30,923
-------- ------- -------- --------
Net earnings per common and
common equivalent share....... $ 0.18 $ 0.18 $ 0.79 $ 0.69
-------- ------- -------- --------
Weighted average number of
common and common equivalent
shares outstanding............ 51,490 44,950 48,555 44,950
-------- ------- -------- --------
</TABLE>
See note to consolidated financial statements.
2
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN 000s, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
(1) COMMON STOCK
--------------- --------------- COMMON
ISSUED ISSUED ADDITIONAL STOCK DUE
--------------- --------------- PAID-IN RETAINED TREASURY FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK MCA
------ ------ ------ ------ ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance August 31, 1992........................... -- -- 23,303 $466 $ 30,533 $ 33,579 -- $(807)
------ ------ ------ ------ ---------- -------- -------- ---------
Net Earnings.................................... -- -- -- -- -- 28,185 -- --
Exercise of Stock Options....................... -- -- 1,536 31 6,716 -- -- --
50% Stock Dividend.............................. -- -- 12,420 248 -- (248) -- --
Tax Benefit from Exercise of Stock Options...... -- -- -- -- 1,128 -- -- --
Shares Received from MCA........................ -- -- -- -- -- -- $ (807) 807
Foreign Currency Translation Loss............... -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- -------- -------- ---------
Balance August 31, 1993........................... -- -- 37,259 745 38,377 61,516 (807) 0
------ ------ ------ ------ ---------- -------- -------- ---------
Net Earnings.................................... -- -- -- -- -- 45,055 -- --
Issuances....................................... -- -- 971 19 14,981 -- -- --
Exercise of Stock Options....................... -- -- 1,118 23 7,435 -- -- --
Tax Benefit from Exercise of Stock Options...... -- -- -- -- 8,453 -- -- --
Foreign Currency Translation Gain............... -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- -------- -------- ---------
Balance August 31, 1994........................... -- -- 39,348 787 69,246 106,571 (807) 0
------ ------ ------ ------ ---------- -------- -------- ---------
Net Earnings.................................... -- -- -- -- -- 38,269 -- --
Issuances....................................... -- -- 5,182 104 83,659 -- -- --
Exercise of Stock Options....................... -- -- 304 6 1,287 -- -- --
Tax Benefit from Exercise of Stock Options...... -- -- -- -- 925 -- -- --
Foreign Currency Translation Gain............... -- -- -- -- -- -- -- --
Unrealized Gain on Marketable Securities........ -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- -------- -------- ---------
Balance May 31, 1995.............................. -- -- 44,834 $897 $ 155,117 $144,840 $ (807) $ 0
------ ------ ------ ------ ---------- -------- -------- ---------
<CAPTION>
FOREIGN UNREALIZED
CURRENCY GAIN/LOSS ON
TRANSLATION MARKETABLE
ADJUSTMENTS SECURITIES TOTAL
----------- ------------ --------
<S> <C> <C> <C>
Balance August 31, 1992........................... $ 935 -- $ 64,706
----------- ------ --------
Net Earnings.................................... -- -- 28,185
Exercise of Stock Options....................... -- -- 6,747
50% Stock Dividend.............................. -- -- --
Tax Benefit from Exercise of Stock Options...... -- -- 1,128
Shares Received from MCA........................ -- -- --
Foreign Currency Translation Loss............... (3,899) -- (3,899)
----------- ------ --------
Balance August 31, 1993........................... (2,964) -- 96,867
----------- ------ --------
Net Earnings.................................... -- -- 45,055
Issuances....................................... -- -- 15,000
Exercise of Stock Options....................... -- -- 7,458
Tax Benefit from Exercise of Stock Options...... -- -- 8,453
Foreign Currency Translation Gain............... 2,410 -- 2,410
----------- ------ --------
Balance August 31, 1994........................... (554) -- 175,243
----------- ------ --------
Net Earnings.................................... -- -- 38,269
Issuances....................................... -- -- 83,763
Exercise of Stock Options....................... -- -- 1,293
Tax Benefit from Exercise of Stock Options...... -- -- 925
Foreign Currency Translation Gain............... 3,262 -- 3,262
Unrealized Gain on Marketable Securities........ -- $195 195
----------- ------ --------
Balance May 31, 1995.............................. $ 2,708 $195 $302,950
----------- ------ --------
</TABLE>
- ------------------
(1) The Company is authorized to issue 1,000 shares of preferred stock at a par
value of $0.01 per share, none of which shares is presently issued and
outstanding.
See note to consolidated financial statements.
3
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN 000s, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating
activities:
Cash received from customers.................... $473,877 $383,052
Cash paid to suppliers and employees............ (434,360) (351,639)
Interest received............................... 1,374 769
Interest paid................................... (5,670) (1,908)
Income taxes (paid)............................. (20,060) (11,663)
-------- --------
Net cash provided by operating activities......... 15,161 18,611
Cash flows (used in) provided by investing
activities:
Acquisition of marketable securities............ -- (2,224)
Sale of marketable securities................... 13,141 --
Acquisition of Iguana Entertainment, Inc........ (5,513) --
Acquisition of fixed assets, excluding capital
leases....................................... (23,401) (5,992)
Disposal of fixed assets........................ 3 7
Acquisition of other assets..................... 2,658 (253)
-------- --------
Net cash (used in) investing activities........... (13,112) (8,462)
-------- --------
Cash flows provided by (used in) financing
activities:
Proceeds from short-term borrowings............. 9,337 13,542
Repayment of short-term borrowings.............. (22,002) (18,012)
Payment of mortgage............................. (1,342) (65)
Exercise of stock options....................... 1,293 1,266
Payment of obligation under capital leases...... (223) (222)
-------- --------
Net cash (used in) financing activities........... (12,937) (3,491)
-------- --------
Effect of exchange rate changes on cash........... (1,038) 1,426
-------- --------
Net (decrease) increase in cash................... (11,926) 8,084
Cash at beginning of period....................... 34,676 25,745
-------- --------
Cash at end of period............................. $ 22,750 $ 33,829
-------- --------
-------- --------
</TABLE>
See note to consolidated financial statements.
4
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES--(CONTINUED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN 000s, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by (used in) operating activities:
Net earnings.................................... $ 38,269 $ 30,923
-------- --------
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. 6,335 2,625
Loss on disposal of equipment.............. 18 16
Gain on sale of marketable securities...... (1,135) --
(Decrease) increase in allowance for
returns and discounts..................... (12,247) 3,405
Deferred income taxes...................... 3,817 (2,853)
Minority interest in net loss of
consolidated joint venture................ (28) --
Change in assets and liabilities:
Decrease in accounts receivable............ 53,496 11,623
(Increase) decrease in inventories......... (2,209) 6,304
(Increase) decrease in prepaid expenses.... (15,851) 3,075
Decrease in other current assets........... 286 179
(Increase) in advance payments to
suppliers................................. (1,150) --
(Decrease) in trade accounts payable....... (47,824) (34,544)
(Decrease) in accrued expenses............. (9,114) (8,994)
Increase in income taxes payable........... 2,498 6,852
-------- --------
Total adjustments.......................... (23,108) (12,312)
-------- --------
Net cash provided by operating activities......... $ 15,161 $ 18,611
-------- --------
-------- --------
</TABLE>
Supplemental schedule of noncash investing and financing activities:
In fiscal 1995, the Company purchased all of the capital stock of Iguana
Entertainment, Inc. for $5,513, net of cash received. In connection with the
acquisition, liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................................... $ 7,352
Cash paid for the capital stock................................. (5,515)
-------
Liabilities assumed............................................. $ 1,837
-------
</TABLE>
In fiscal 1994, the Company purchased all of the capital stock of Acclaim
Comics for $62,805, net of cash received. In connection with the acquisition,
liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 67,478
Cash paid for the capital stock................................ (50,588)
Fair market value of common stock issued....................... (15,000)
--------
Liabilities assumed............................................ $ 1,890
--------
</TABLE>
See note to consolidated financial statements.
5
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
INTERIM PERIOD REPORTING
The data contained in these financial statements are unaudited and are
subject to year-end adjustments; however, in the opinion of management, all
known adjustments (which consist only of normal recurring accruals) have been
made to present fairly the consolidated operating results for the unaudited
periods.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Acclaim Entertainment, Inc. ('Acclaim'), together with its subsidiaries
(Acclaim and its subsidiaries are collectively hereinafter referred to as the
'Company'), is an entertainment publisher which engages in or plans to engage in
(i) the publication of interactive entertainment software ('Software') for use
with interactive entertainment hardware platforms; (ii) the development and
publication of comic books, which commenced in July 1994 through the acquisition
of Acclaim Comics, Inc. ('Acclaim Comics'), formerly Voyager Communications
Inc.; (iii) the marketing of its motion capture technology and studio services,
which commenced in the first quarter of fiscal 1995; (iv) the distribution of
coin-operated arcade games, which is anticipated to commence in fiscal 1996
(and, with respect to redemption games, would commence upon the consummation of
the proposed acquisition by the Company of Lazer-Tron Corporation which,
pursuant to the terms of the agreement, is scheduled to occur in late July
1995); (v) the distribution of Software for affiliated labels, which commenced
in the first quarter of fiscal 1995; and (vi) the electronic distribution of
interactive entertainment through the partnership (the 'Joint Venture')
established in October 1994 between a subsidiary of Acclaim and a subsidiary of
Tele-Communications, Inc. ('TCI'). To date, the Company's principal business has
been as a leading publisher of Software for dedicated interactive entertainment
hardware platforms ('Entertainment Platforms').
The interactive entertainment industry is characterized by rapid
technological change, resulting in hardware platform and related Software
product cycles. No single hardware platform or system has achieved long-term
dominance. The Company's revenues have traditionally been derived from sales of
Software for the then dominant platforms. Accordingly, the Company's revenues
are subject to fluctuation during transition periods when new hardware platforms
have been introduced but none has achieved mass market acceptance or become
dominant.
From inception through fiscal 1991, substantially all of the Company's
revenues were derived from sales of Software for the 8-bit Nintendo
Entertainment System ('NES'). Although the Company commenced the publication of
Software for Game Boy, the portable system marketed by Nintendo Co., Ltd.
(Japan) (Nintendo along with its subsidiary, Nintendo of America, Inc., are
collectively hereinafter referred to as 'Nintendo'), in fiscal 1990, for the
Super Nintendo Entertainment System ('SNES') in fiscal 1991 and for Genesis and
Game Gear, the 16-bit dedicated and portable hardware systems, respectively,
marketed by Sega Enterprises Ltd. ('Sega') in fiscal 1992, the Company did not
derive significant revenues from the sale of portable or 16-bit Software until
fiscal 1992. The 16-bit systems are more sophisticated than the 8-bit systems,
producing faster and more complex images with more lifelike animation and better
sound effects and, by 1993, had replaced the 8-bit Entertainment Platform as the
dominant Entertainment Platform. In fiscal 1994, most of the Company's revenues
were derived from sales of Software for the 16-bit SNES and Genesis systems. The
Company anticipates that most of its revenues in fiscal 1995 will be derived
from sales of Software for the 16-bit Entertainment Platforms.
The interactive entertainment industry is currently undergoing, and
management anticipates that in both the short- and long-term future it will
continue to undergo, significant changes due, in large part, to the introduction
of the next generation of Entertainment Platforms incorporating 32- and 64-bit
processors, as well as the success of personal computer/compact disk/multimedia
hardware systems ('PC CD Systems'), the development of remote and electronic
delivery systems and the entry and participation of new companies in the
industry. The new hardware platforms may use read-only memory ('ROM')
cartridges, compact disk ('CD'), flash memory and/or other technologies as the
dominant software storage device. Additional CD platforms, including personal
computer systems for which Software products are published, are currently
marketed by Philips, Sega, Commodore, Apple, IBM, IBM-compatible manufacturers
and The 3DO Company. Atari launched Jaguar, its 64-bit cartridge-based system,
in November 1993 and Sega launched 32X, its 32-bit cartridge-based attachment
for its 16-bit Genesis system, in November 1994. Sega and Sony launched their
32-bit CD-based systems in Japan in November 1994 and Sega has shipped limited
quantities of its system in the U.S. commencing in May 1995. Sony Corporation
has announced plans to release its new 32-bit CD-based system in the U.S. in
September 1995 and Nintendo has announced plans to release a new 64-bit
ROM cartridge based system in the U.S. in 1996.
7
<PAGE>
The Company believes that sales of new 16-bit hardware systems peaked in
calendar 1993. Based on historical industry cycles, management believes that
16-bit Software sales peaked in calendar 1994 (the year following the peak year
for hardware sales). The Company as well as industry analysts anticipate, based
on Software sales information for calendar year 1994 and the continuing decline
in 16-bit hardware sales, that the market for 16-bit Software will decline in
calendar 1995 and thereafter.
Although the Company believes that hardware incorporating 32- and 64-bit
processors will become the dominant Entertainment Platforms in the interactive
entertainment industry over the next few years, the Company is unable to predict
which, if any, of the newly introduced or announced platforms will achieve
commercial success or the timing thereof or their impact on the industry. The
Company's strategy is to develop and/or publish Software for the hardware
platforms that currently dominate the market and to develop Software for the
hardware platforms that the Company perceives as having the potential to achieve
mass market acceptance, rather than to be the first Software publisher for an
emerging hardware platform; in order to promote its strategic relationships,
however, the Company may from time to time publish Software for a hardware
platform before it attains mass market appeal. No assurance can be given that
the Company will correctly identify the systems with such potential or be
successful in publishing Software for such platforms and systems. The
uncertainty associated with the transition from 16-bit cartridge-based
Entertainment Platforms to the next generation Entertainment Platforms decreases
the Company's ability to predict with any certainty its results of operations
and profitability during this transition phase.
Historically, management believed that the floppy and personal computer
market was characterized by (i) numerous hardware and software
incompatibilities; (ii) high price points for multimedia PC hardware; (iii) a
large number of software titles; and (iv) technological limitations of the
hardware systems for gaming as compared to the Entertainment Platforms.
Accordingly, the Company participated in this category through distribution
agreements which, in the opinion of management, provided the greatest return on
the investment of time and effort needed to service a fragmented market.
However, based on management's belief that this category now has sufficient mass
market penetration to warrant publishing Software directly, and due to
technological advancements incorporated in the newer PC CD Systems and the
higher gross margins realized by publishers of Software for this category, in
the second quarter of fiscal 1995, the Company commenced marketing Software for
PC CD Systems.
The Company commenced the development and sale of Software for the Sega CD
system in fiscal 1994 and for Sega's 32X in the second quarter of fiscal 1995.
The Company has announced that it is developing Software for Sega's Saturn
system, Nintendo's Ultra 64 system and Sony's CD-based Play Station. However,
management believes that the installed base of the new generation of
Entertainment Platforms will not rival the current installed base of 16-bit
Entertainment Platforms in the near-term. As a result, the sales growth of
Software for these new Entertainment Platforms and PC CD Systems may not offset
the decline in sales of Software for the 16-bit Entertainment Platforms in this
calendar year and, as a result, overall industry growth rates may decline in the
near-term.
Based on the decline of the 16-bit hardware market and the related slowdown
in retail sell-through of 16-bit Software on an industry-wide basis, management
believes that retailers, in order to reduce inventory levels, may reduce
purchases of the Company's 16-bit Software in the next several fiscal quarters
as compared to prior fiscal quarters. Any such reduction in retail purchasing,
to the extent not offset by growth in Software sales for the new Entertainment
Platforms and PC CD Systems, would decrease the Company's rate of growth as
discussed below. As retail sell-through of 16-bit Software continues to slow
down, this may result in a build up of retail inventory which, in turn, may
force the Company to liquidate excess inventory levels at retail by offering
price protection and other concessions to its customers in future periods. As
the transition to the next generation of Entertainment Platforms continues and
as new Entertainment Platforms achieve market acceptance, the risk of returns of
the Company's 16-bit Software titles has increased and will continue to
increase. Although management believes that it has adequate reserves for such
concessions and returns, no assurance can be given that future price protection,
returns and other similar concessions will not exceed such reserves. In
addition, the Company has incurred and expects to continue to incur higher
marketing expenses in connection with the sale of 16-bit Software, which higher
expenses may adversely affect the Company's profitability.
8
<PAGE>
Due to the decline of the market for Software for 16-bit Entertainment
Platforms in 1995 and the related transition to the next generation of
Entertainment Platforms, the Company believes that it will experience a lower
rate of growth in fiscal 1995 and fiscal 1996 as compared to fiscal 1994, and a
materially lower rate of growth, if any, in the fourth quarter of fiscal 1995 as
compared to the first three quarters of fiscal 1995.
The release of individual 'hit' Software products or families of products
can significantly affect revenues. Historically, 'hit' products or families of
products have accounted for significant portions of the Company's gross revenues
during particular periods. In prior periods, the Simpsons family of products and
the WWF family of products have accounted for significant portions of the
Company's gross revenues. Continuing this historic pattern, in the quarter ended
May 31, 1994, the NBA Jam family of products accounted for a significant portion
of the Company's gross revenues and in the nine months ended May 31, 1994, each
of the NBA Jam and Mortal Kombat family of products accounted for a significant
portion of the Company's gross revenues. In the nine months ended May 31, 1995,
each of the Mortal Kombat II and NBA Jam Tournament Edition family of products
accounted for a significant portion of the Company's gross revenues. In the
quarter ended May 31, 1995, although sales of the Judge Dredd and Justice League
families of products were material, no single family of products accounted for a
significant portion of the Company's gross revenues. However, management
believes that it will continue to derive significant revenues from 'hit'
products or families of products in future periods.
The timing of the release of Software products can cause quarterly revenue
and earnings fluctuations. A significant portion of the Company's revenues in
any quarter are generally derived from Software products or families of products
first shipped in that quarter. Product development schedules are difficult to
predict due, in large part, to the difficulty of scheduling accurately the
creative process and, with respect to Software for new hardware platforms, the
use of new development tools and the learning process associated with
development for new technologies, including the Company's own motion capture and
related technologies. As the industry trend toward more sophisticated
Entertainment Platforms continues, the related Software products frequently
include more original, creative content and are more complex to develop and,
accordingly, cause additional development and scheduling risk. As a result, the
Company's quarterly results of operations are difficult to predict and the
failure to meet product development schedules or even minor delays in product
deliveries could cause a shortfall in shipments in any given quarter, which
could cause the results of operations and net income for such quarter to fall
significantly below anticipated levels.
The Company's ability to sustain its current results of operations and
profitability and to generate sales growth in the future will be dependent in
large part on (i) the Company's ability to identify, develop and publish 'hit'
Software titles for the hardware platforms that are established in the mass
market, (ii) the growth of the interactive entertainment Software market and
(iii) the Company's ability to develop and generate revenues from its other
entertainment operations. In addition, the Company has incurred and expects to
continue to incur increased research and development as well as general and
administrative expenses in connection with the start-up of its new business
operations (e.g., coin-operated games). If the Company is not successful in
generating revenues from these new businesses, its profitability will be
adversely affected.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statements of consolidated earnings
data as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, MAY 31,
-------------- --------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Domestic revenues....................... 78.3% 75.1% 76.5% 75.1%
Foreign revenues........................ 21.7 24.9 23.5 24.9
----- ----- ----- -----
Net revenues.......................... 100.0 100.0 100.0 100.0
Cost of revenues........................ 49.5 42.5 46.9 43.7
----- ----- ----- -----
Gross profit.......................... 50.5 57.5 53.1 56.3
Selling, advertising, general and
administrative expenses............... 33.0 40.6 35.7 39.1
Operating interest...................... 1.0 0.6 0.7 0.5
Depreciation and amortization........... 2.6 1.1 1.5 0.8
----- ----- ----- -----
Total operating expenses.............. 36.6 42.3 37.9 40.4
Earnings from operations................ 13.9 15.2 15.2 15.9
Earnings before income taxes............ 14.6 15.0 15.4 15.8
Net earnings............................ 8.6 8.9 9.0 9.3
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NET REVENUES
The increase in the Company's net revenues from $89.0 million for the
quarter ended May 31, 1994 to $105.0 million for the quarter ended May 31, 1995
and from $331.9 million for the nine months ended May 31, 1994 to $423.3 million
for the nine months ended May 31, 1995 was predominantly due to increased unit
sales of 16-bit Software and, to a lesser extent, sales of CD Software. The
dollar increase in the Company's foreign revenues in the three and nine months
ended May 31, 1995 as compared to the three and nine months ended May 31, 1994
was due to increased unit sales of 16-bit Software in the European market. The
Company believes that its foreign revenues will be greater in fiscal 1995 as
compared to fiscal 1994, both in dollars and as a percentage of the Company's
revenues. However, the Company does not anticipate that its foreign revenues in
fiscal 1995 will reach the percentage levels achieved in fiscal 1992 or 1993. To
date, the Company has not generated material revenues from any of its operations
other than Software publishing and no assurance can be given that the Company
will be able to generate such revenues in the future.
The Company is substantially dependent on Nintendo as the sole manufacturer
of Super NES and Game Boy hardware and Software for those platforms and as the
sole licensor of the proprietary information and the technology needed to
develop Software for those platforms; and on Sega as the sole manufacturer of
Genesis, Master System, Game Gear, 32X, Sega CD and Saturn hardware and a
portion of Software for those platforms and as the sole licensor of the
proprietary information and the technology needed to develop Software for those
platforms. For the quarters ended May 31, 1994 and 1995, the Company derived 44%
and 54% of its gross revenues, respectively, from sales of Nintendo-compatible
products and 56% and 37% of its gross revenues, respectively, from sales of
Sega-compatible products. The Company anticipates that the proportion of its
revenues derived from Nintendo-compatible products as compared to
Sega-compatible products will remain relatively constant during fiscal 1995
despite quarter to quarter fluctuations.
The majority of the Company's gross revenues were derived from the
following product categories:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, MAY 31,
-------------- --------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Portable Software............. 11.3% 10.7% 10.3% 13.7%
16-Bit Software............... 70.6 83.5 78.3 81.3
CD Software................... 8.5 4.8 6.4 1.9
</TABLE>
10
<PAGE>
GROSS PROFIT
Gross profit fluctuates as a result of four factors: (i) the level of
domestic manufacturing of Genesis and Sega CD Software; (ii) the percentage of
foreign sales; (iii) the percentage of foreign sales to third party
distributors; and (iv) the percentage of CD Software sales.
The Company arranges for the manufacture of its worldwide Genesis and Sega
CD Software under a license granted by Sega. The Company believes that it has
improved cash flows and better control over the flow of its inventory as a
result of the decreased lead time resulting from its ability to manufacture
Software. The cost of Software manufactured by the Company, together with the
royalties payable to Sega for such manufacturing, is lower than the cost of the
Company's Software products when manufactured by Sega. The royalty payable to
Sega for Software manufactured by the Company is included as an operating
expense, rather than as part of cost of revenues, and increased levels of
manufacturing by the Company result in higher gross profit as a percentage of
net revenues.
The Company's margins on foreign sales are typically lower than those on
domestic sales due to higher prices charged by hardware licensors for Software
distributed by the Company outside North America. The Company's margins on
foreign sales to third party distributors are approximately one-third lower than
those on sales that the Company makes directly to foreign retailers.
The Company's margins on sales of CD Software are higher than those on
cartridge Software as a result of significantly lower product costs. As the
percentage of sales of the Company's CD Software increases, the Company expects
that its gross margin will also increase.
Management anticipates that the Company's future gross profit will be
affected by (i) the percentage of Software sales for PC CD Systems and sales
related to the Company's new businesses and (ii) the percentage of returns,
price protection and other similar concessions in respect of the Company's
16-bit Software sales. The Company's gross margins on coin-operated arcade games
are anticipated to be lower than on its cartridge Software. Although gross
margins on sales of Software for PC CD Systems are and are anticipated to
continue to be higher than those on sales of cartridge Software, management
believes that it will be required to effect stock-balancing programs for such
products to allow for the historically higher rate of return of PC CD Software.
As the percentage of sales of PC CD Software increases, management anticipates
that its reserves for such returns will increase, thereby offsetting a portion
of the higher gross margins generated from PC CD Software sales. Additionally,
if returns and other similar concessions to retailers in respect of 16-bit
Software sales increase materially during the transition phase to the next
generation of Entertainment Platforms, the Company's gross margins would be
adversely affected.
Gross profit increased from $51.1 million (58% of net revenues) for the
quarter ended May 31, 1994 to $53.0 million (51% of net revenues) for the
quarter ended May 31, 1995 and from $186.8 million (56% of net revenues) for the
nine months ended May 31, 1994 to $224.8 million (53% of net revenues) for the
nine months ended May 31, 1995, predominantly due to increased sales volume. The
percentage decrease is predominantly due to a higher level of SNES Software (not
manufactured by the Company) as compared to Genesis Software (manufactured by
the Company) sold in the quarter and nine months ended May 31, 1995. The
Company's gross profit is higher on sales of Genesis Software compared to SNES
Software, particularly Genesis Software manufactured by the Company.
The Company purchases substantially all of its products at prices payable
in United States dollars. Appreciation of the yen could result in increased
prices charged by either Nintendo or Sega to the Company (although, to date,
neither Nintendo nor Sega has effected such a price increase), which the Company
may not be able to pass on to its customers and which could adversely affect its
results of operations.
OPERATING EXPENSES
Selling, advertising, general and administrative expenses decreased from
$36.1 million (41% of net revenues) for the quarter ended May 31, 1994 to $34.6
million (33% of net revenues) for the quarter ended May 31, 1995 and increased
from $129.7 million (39% of net revenues) for the nine months ended May 31, 1994
to $151.3 million (36% of net revenues) for the nine months ended May 31, 1995.
The decrease in the quarter ended May 31, 1995 is predominantly attributable to
decreased royalties payable to Sega as a result of a lower
11
<PAGE>
proportion of sales of Genesis Software manufactured by the Company in the
quarter ended May 31, 1995. The dollar increase in the nine months ended May 31,
1995 is predominantly attributable to increased sales volume, increased
advertising expense and increased general and administrative expenses.
Operating interest expense was $0.5 million (0.6% of net revenues) for the
quarter ended May 31, 1994 and $1.0 million (1.0% of net revenues) for the
quarter ended May 31, 1995 and $1.6 million (0.5% of net revenues) for the nine
months ended May 31, 1994 and $3.0 million (0.7% of net revenues) for the nine
months ended May 31, 1995. The increase is primarily attributable to the
increase in the prime rate and increased levels of advances against receivables.
Depreciation and amortization increased from $0.9 million (1.1% of net
revenues) for the quarter ended May 31, 1994 to $2.8 million (2.6% of net
revenues) for the quarter ended May 31, 1995 and from $2.6 million (0.8% of net
revenues) for the nine months ended May 31, 1994 to $6.3 million (1.5% of net
revenues) for the nine months ended May 31, 1995. The increase is primarily
attributable to increased amortization of the excess of costs over net assets
acquired arising from the acquisition of Acclaim Comics and increased
depreciation relating to the acquisition of the Company's new corporate
headquarters.
SEASONALITY
The Company's business is seasonal, with higher revenues and operating
income typically occurring during its first, second and fourth fiscal quarters
(which correspond to the Christmas and post-Christmas selling season). With the
maturation of the market for 16-bit Software and the related shift in the buying
patterns of certain of the Company's consumers (i.e. the bulk of purchases being
made before the Christmas season), management believes the Company's 16-bit
Software business has become increasingly seasonal. The timing of the delivery
of Software titles and the releases of new products cause significant
fluctuations in the Company's quarterly revenues and earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during the quarter and nine
months ended May 31, 1994 and 1995 was cash flows from operations and, to a
lesser extent, from the sale during the quarter and nine months ended May 31,
1995 of a portion of the shares of TCI's Class A common stock received in
exchange for shares of the Company's common stock.
The Company generally purchases inventory, other than inventory
manufactured domestically, by opening letters of credit when placing the
purchase order. At May 31, 1994 and 1995, amounts outstanding under letters of
credit were approximately $4 million and $4 million, respectively.
The Company has a revolving credit and security agreement with its
principal domestic bank in the amount of $70 million, which agreement expires on
January 31, 1996. The Company draws down working capital advances and opens
letters of credit against the facility in amounts determined on a formula based
on factored receivables and inventory, which advances are secured by the
Company's assets. This bank also acts as the Company's factor for the majority
of its North American receivables, which are assigned on a nonrecourse, pre-
approved basis. The factoring charge is 0.25% of the receivables assigned and
the interest on advances is at the bank's prime rate minus one half percent. At
May 31, 1995, the Company had approximately $32 million available under such
facility.
The Company currently has a $25 million trade finance facility with another
bank. The Company's Asian and European subsidiaries currently have independent
facilities totalling approximately $20 million and $25 million, respectively,
with various banks.
In connection with its acquisition by the Company, Acclaim Comics entered
into a credit agreement with Midland Bank plc ('Midland') for a loan (the
'Loan') of $40 million, which is guaranteed by Acclaim and certain of its
subsidiaries. In connection with the establishment of the Joint Venture and the
related stock swap with TCI, the Company reached an agreement with Midland
pursuant to which it repaid $15 million of the Loan and the remaining $25
million principal amount of the Loan will be amortized over a four and one-half
year period.
12
<PAGE>
The Company completed the purchase of a 70,000 square foot building and an
adjoining parcel of land in April 1994. The Company incurred capital
expenditures of approximately $2 million for improvements to the property for
the quarter ended May 31, 1995 and $9.3 million for the nine months ended May
31, 1995, which were financed with cash flows from operations.
Management believes that cash flow from operations and the Company's
borrowing facilities will be adequate to provide for the Company's liquidity and
capital needs for the foreseeable future.
The Company is party to various litigations arising in the course of its
business. The Company believes that the resolution of these litigations will not
have a material adverse effect on the Company's liquidity or financial
condition. The Company is also party to a class action litigation relating to
the nonrenewal of the Company's license agreement with WMS Industries, Inc.
Discovery in the class action litigation is in the early stages. The Company
believes that the action is without merit and lacks any basis in fact and
intends to defend the action vigorously.
RECENT DEVELOPMENTS
On March 22, 1995, Acclaim entered into an Agreement and Plan of Merger
(the 'Agreement') with Lazer-Tron Corporation ('Lazer-Tron') pursuant to which
Acclaim agreed to acquire Lazer-Tron through the merger (the 'Merger') of
Acclaim Arcade Holdings, Inc., a wholly-owned subsidiary of Acclaim, with and
into Lazer-Tron. Lazer-Tron designs, develops, manufactures and markets coin-
and token-operated redemption games for use in family entertainment centers and
other entertainment venues. If the proposed Merger is consummated, Lazer-Tron
will be the surviving corporation and will become a wholly-owned subsidiary of
Acclaim. Acclaim is continuing its due diligence examination of Lazer-Tron,
including analysis of the closing date balance sheet of Lazer-Tron delivered
under the Agreement. Under the terms of the Agreement, the Merger is currently
scheduled to be consummated in late July, subject to the satisfaction of various
conditions including receipt of certain third party consents, the approval of
Lazer-Tron's shareholders and satisfactory completion by Acclaim of its due
diligence. There can be no assurance that the Merger will be consummated.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Current Reports on Form 8-K:
A report on Form 8-K dated March 22, 1995 was filed with respect to the
Company's Agreement and Plan of Merger with Lazer-Tron pursuant to which the
Company agreed to acquire Lazer-Tron through the merger of Acclaim Arcade
Holdings, Inc., a wholly-owned subsidiary of the Company, with and into
Lazer-Tron.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------
<S> <C>
11 -- Computation of per share earnings.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCLAIM ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------- -------------
<S> <C> <C>
By: ROBERT HOLMES President and Chief July 12, 1995
----------------------------------- Operating Officer
Robert Holmes
By: ANTHONY WILLIAMS Executive Vice July 12, 1995
----------------------------------- President and Chief
Anthony Williams Financial and
Accounting Officer
</TABLE>
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------
<S> <C>
11 -- Computation of per share earnings.
</TABLE>
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(IN 000s, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MAY 31, ENDED MAY 31,
-------------- ----------------
1995 1994 1995 1994
------ ------ ------- -------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding:
Average Common Stock Outstanding...... 44,815 37,710 44,815 37,710
Average Common Stock Equivalents...... 6,675 7,240 3,740 7,240
------ ------ ------- -------
Total Weighted Average Shares
Outstanding........................... 51,490 44,950 48,555 44,950
------ ------ ------- -------
Net Earnings............................ $9,044 $7,949 $38,269 $30,923
------ ------ ------- -------
Net Earnings Per Common and Common
Equivalent Share...................... $0.18 $0.18 $0.79 $0.69
------ ------ ------- -------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> MAY-31-1995
<CASH> 22,750
<SECURITIES> 61,757
<RECEIVABLES> 120,017
<ALLOWANCES> 0
<INVENTORY> 17,823
<CURRENT-ASSETS> 275,887
<PP&E> 36,520
<DEPRECIATION> 6,984
<TOTAL-ASSETS> 399,023
<CURRENT-LIABILITIES> 72,281
<BONDS> 0
<COMMON> 897
0
0
<OTHER-SE> 302,053
<TOTAL-LIABILITY-AND-EQUITY> 399,023
<SALES> 423,332
<TOTAL-REVENUES> 423,332
<CGS> 198,533
<TOTAL-COSTS> 198,533
<OTHER-EXPENSES> (1,047)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,703
<INCOME-PRETAX> 65,241
<INCOME-TAX> 27,000
<INCOME-CONTINUING> 38,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,269
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
