<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 NOVEMBER 30, 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 January 12, 1996, approximately 49,950,000 shares of the common
stock, par value $0.02 per share, 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>
NOVEMBER 30, AUGUST 31,
1995 1995
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 29,534 $ 44,749
Marketable securities........................... 26,869 26,503
Accounts receivable--net........................ 161,924 179,311
Inventories..................................... 34,086 16,015
Prepaid expenses................................ 42,523 41,083
Other current assets............................ 18,887 18,825
------------ ----------
Total current assets.............................. 313,823 326,486
------------ ----------
Other Assets:
Fixed assets--net............................... 38,551 33,970
Excess of cost over net assets acquired--net of
accumulated
amortization of $10,006 and $9,091,
respectively................................. 58,922 59,837
Other assets.................................... 24,878 33,186
------------ ----------
Total assets...................................... $436,174 $ 453,479
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.......................... $ 36,440 $ 49,072
Short-term borrowings........................... 2,559 4,233
Accrued expenses................................ 43,245 47,017
Income taxes payable............................ 864 180
Current portion of long-term debt............... 23,696 25,196
Obligation under capital leases--current........ 283 333
------------ ----------
Total current liabilities......................... 107,087 126,031
------------ ----------
Long-term liabilities:
Obligation under capital leases--noncurrent..... 555 408
Other long-term liabilities..................... 12 53
------------ ----------
Total liabilities................................. 107,654 126,492
------------ ----------
Minority interest................................. 1,560 1,628
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 and
50,000 shares authorized, respectively;
49,850 and 46,281 shares issued and
outstanding, respectively.................... 997 926
Additional paid in capital........................ 172,426 168,785
Retained earnings................................. 151,321 153,141
Treasury stock.................................... (807) (807)
Unrealized gain on available for sale
securities...................................... 2,716 2,503
Foreign currency translation adjustment........... 307 811
------------ ----------
Total stockholders' equity........................ 326,960 325,359
------------ ----------
Total liabilities and stockholders' equity........ $436,174 $ 453,479
------------ ----------
------------ ----------
</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
NOVEMBER 30,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Net revenues...................................... $134,447 $164,304
Cost of revenues.................................. 75,863 77,665
-------- --------
Gross profit...................................... 58,584 86,639
-------- --------
OPERATING EXPENSES
Selling, advertising, general and administrative
expenses........................................ 52,583 56,719
Operating interest................................ 1,032 885
Depreciation and amortization..................... 3,497 1,599
-------- --------
Total operating expenses.......................... 57,112 59,203
-------- --------
Earnings from operations.......................... 1,472 27,436
-------- --------
OTHER INCOME (EXPENSE)
Interest income................................... 831 434
Interest expense.................................. (592) (830)
Other (expense) income............................ (836) 226
-------- --------
Earnings before income taxes...................... 875 27,266
Provision for income taxes........................ 350 11,308
-------- --------
Net earnings before minority Interest............. 525 15,958
-------- --------
Minority Interest................................. (70) --
-------- --------
Net Earnings...................................... $ 595 $ 15,958
-------- --------
Net earnings per common and common equivalent
share........................................... $ 0.01 $ 0.34
-------- --------
Weighted average number of common and common
equivalent shares outstanding................... 56,640 47,497
-------- --------
</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
--------------- ---------------
ISSUED ISSUED ADDITIONAL
--------------- --------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
------ ------ ------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance August 31, 1993........................... -- -- 37,259 $745 $ 38,377 $ 61,516 $ (807)
------ ------ ------ ------ ---------- -------- --------
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)
------ ------ ------ ------ ---------- -------- --------
Net Earnings.................................... -- -- -- -- -- 44,770 --
Issuances....................................... -- -- 5,182 104 83,659 -- --
Exercise of Stock Options....................... -- -- 628 13 4,170 -- --
Pooling of Interests with Lazer-Tron............ -- -- 1,123 22 10,609 1,800 --
Tax Benefit from Exercise of Stock Options...... -- -- -- -- 1,101 -- --
Foreign Currency Translation Gain............... -- -- -- -- -- -- --
Unrealized Gain on Marketable Securities........ -- -- -- -- -- -- --
------ ------ ------ ------ ---------- -------- --------
Balance August 31, 1995........................... -- -- 46,281 926 168,785 153,141 (807)
------ ------ ------ ------ ---------- -------- --------
Net Earnings.................................... -- -- -- -- -- 595 --
Exercise of Stock Options and Warrants.......... -- -- 359 7 3,196 -- --
Pooling of Interests with Sculptured and
Probe........................................ -- -- 3,210 64 (64) (2,415) --
Tax Benefit from Exercise of Stock Options...... -- -- -- -- 509 -- --
Foreign Currency Translation Loss............... -- -- -- -- -- -- --
Unrealized Gain on Marketable Securities........ -- -- -- -- -- -- --
------ ------ ------ ------ ---------- -------- --------
Balance November 30, 1995......................... -- -- 49,850 $997 $ 172,426 $151,321 $ (807)
------ ------ ------ ------ ---------- -------- --------
<CAPTION>
UNREALIZED FOREIGN
GAIN ON CURRENCY
MARKETABLE TRANSLATION
SECURITIES ADJUSTMENT TOTAL
---------- ---------- --------
<S> <C> <C> <C>
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.................................... -- -- 44,770
Issuances....................................... -- -- 83,763
Exercise of Stock Options....................... -- -- 4,183
Pooling of Interests with Lazer-Tron............ -- -- 12,431
Tax Benefit from Exercise of Stock Options...... -- -- 1,101
Foreign Currency Translation Gain............... -- 1,365 1,365
Unrealized Gain on Marketable Securities........ $2,503 -- 2,503
---------- ---------- --------
Balance August 31, 1995........................... 2,503 811 325,359
---------- ---------- --------
Net Earnings.................................... -- -- 595
Exercise of Stock Options and Warrants.......... -- -- 3,203
Pooling of Interests with Sculptured and
Probe........................................ -- -- (2,415)
Tax Benefit from Exercise of Stock Options...... -- -- 509
Foreign Currency Translation Loss............... -- (504) (504)
Unrealized Gain on Marketable Securities........ 213 -- 213
---------- ---------- --------
Balance November 30, 1995......................... $2,716 $ 307 $326,960
---------- ---------- --------
</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>
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating
activities:
Cash received from customers.................... $155,663 $180,165
Cash paid to suppliers and employees............ (178,742) (180,048)
Interest received............................... 831 434
Interest paid................................... (1,624) (1,715)
Income taxes (paid) refunded.................... 375 (2,166)
-------- --------
Net cash (used in) operating activities........... (23,497) (3,330)
-------- --------
Cash flows provided by (used in) investing
activities:
Acquisition of subsidiaries, net................ 7,161 7,255
Sale of marketable securities................... -- 305
Acquisition of fixed assets, excluding capital
leases....................................... (5,373) (4,215)
Disposal of fixed assets........................ 59 263
Acquisition of other assets..................... 7,131 (4,686)
-------- --------
Net cash provided by (used in) investing
activities...................................... 8,978 (1,078)
-------- --------
Cash flows provided by (used in) financing
activities:
Proceeds from short-term borrowings............. 128 3,749
Repayment of short-term borrowings.............. (2,153) (1,295)
Payment of mortgage............................. -- (22)
Exercise of stock options and warrants.......... 3,202 582
Payment of obligation under capital leases...... (53) (62)
Issuance of common stock........................ -- 871
Payment of long-term debt....................... (1,539) --
-------- --------
Net cash (used in) provided by financing
activities...................................... (415) 3,823
-------- --------
Effect of exchange rate changes on cash........... (281) 496
-------- --------
Net (decrease) in cash............................ (15,215) (89)
Cash at beginning of period....................... 44,749 34,676
-------- --------
Cash at end of period............................. $ 29,534 $ 34,587
-------- --------
-------- --------
</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>
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by (used in) operating activities:
Net Earnings.................................... $ 595 $ 15,958
-------- --------
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. 3,497 1,599
Increase (decrease) in allowance for
returns and discounts..................... 2,895 (1,507)
Deferred income taxes...................... (151) 783
Loss on investment in marketable
securities................................ -- 154
Minority interest in net earnings of
consolidated subsidiary................... (70) --
Other non-cash charges..................... 669 --
Change in assets and liabilities:
Decrease in accounts receivable............ 14,327 9,044
(Increase) in inventories.................. (18,104) (1,449)
(Increase) in prepaid expenses............. (3,237) (6,278)
(Increase) decrease in other current
assets.................................... (276) 859
(Increase) in advance payment to
suppliers................................. -- (160)
(Decrease) in trade accounts payable....... (13,420) (31,225)
(Decrease) increase in accrued expenses.... (10,948) 1,391
Increase in income taxes payable........... 726 7,501
-------- --------
Total adjustments.......................... (24,092) (19,288)
-------- --------
Net cash (used in) operating activities........... $(23,497) $ (3,330)
-------- --------
-------- --------
</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..................... $ 9,179
Cash paid for the capital stock................... (5,513)
-------
Liabilities assumed............................... $ 3,666
-------
</TABLE>
In fiscal 1995, the Company issued 4,349 shares of its common stock, valued
at $71,472, in exchange for 3,403 shares of Tele-Communications, Inc. Class A
common stock.
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 of the unaudited
periods.
Consolidated earnings for the three months ended November 30, 1994 were
restated to reflect the acquisition of Lazer-Tron Corporation on August 30,
1995, which was accounted for as a pooling of interests.
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 a mass market entertainment company whose principal business to
date has been as a leading publisher of interactive entertainment software
('Software') for use with interactive entertainment hardware platforms. The
Company also engages in (i) 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., (ii) the distribution
of Software for affiliated labels, which commenced in the first quarter of
fiscal 1995, (iii) the marketing of its motion capture technology and studio
services, which commenced in the first quarter of fiscal 1995 and (iv) the
distribution of coin-operated, location-based ticket redemption games, which
commenced in August 1995 through the acquisition of Lazer-Tron Corporation
('Lazer-Tron'). The Company plans to engage in the distribution of coin-operated
video arcade games, commencing in the spring of 1996, and the electronic
distribution of Software through the partnership (the 'Joint Venture')
established in October 1994 between a subsidiary of Acclaim and a subsidiary of
Tele-Communications, Inc. ('TCI'), commencing not earlier than fiscal 1997.
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 and have been and, in the future, could be materially
adversely affected 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 and 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 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 (i) the
introduction of the next generation of Entertainment Platforms incorporating 32-
and 64-bit processors, (ii) the success of personal computer/compact
disk/multimedia hardware systems ('Multimedia/PC Systems'), (iii) the
development of remote and electronic delivery systems and (iv) the entry and
participation of new companies in the industry. The new hardware platforms are
equipped with read-only memory ('ROM') cartridges, compact disk ('CD') and/or
other technologies as the dominant software storage device.
Sega and Sony Corporation ('Sony') launched 32-bit CD-based systems in
Japan in November 1994. Sega shipped limited quantities of its Saturn system in
the United States commencing in May 1995 and Sony released its
PlayStation(Trademark) system in the United States in September 1995. In fiscal
1995, the Company commenced the development and sale of Software for Sega's
Saturn system and for Sony's PlayStation(Trademark). Nintendo has announced
plans to release Ultra 64, its new 64-bit ROM cartridge-based system, in Japan
in the spring of 1996 and Matsushita has announced plans to release M2, the
64-bit CD-based hardware system licensed by it from The 3DO Company ('3DO') by
the end of 1996. In 1993, Sega introduced the Sega CD, a CD player which
consists of an attachment for its 16-bit Genesis system. Additional CD
platforms, including personal computer systems for which Software products are
published, are currently marketed by Philips, Commodore, Apple, IBM,
IBM-compatible manufacturers and 3DO. 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. The
Company developed and sold Software for Sega's CD system during fiscal 1994 and
1995 and for Sega's 32X system during fiscal 1995.
7
<PAGE>
The Company believes that sales of new 16-bit hardware systems peaked in
calendar 1993, have decreased substantially since that time and will continue to
do so, and that 16-bit Software sales peaked in calendar 1994 (the year
following the peak year for hardware sales).
The Company believes that hardware incorporating 32- and 64-bit processors,
including Multimedia/PC Systems, will become the dominant hardware platforms in
the interactive entertainment industry over the next few years. The Company
believes that Sega's Saturn and Sony's PlayStation(Trademark) have both achieved
commercial success in Japan and, based on preliminary sales information, that
the limited quantities of the PlayStation(Trademark) shipped to date have
achieved high retail sell-through in the United States. However, there can be no
assurance that either of these platforms or any of the other newly introduced or
announced platforms will achieve commercial success similar to that of the SNES
or Genesis systems or the timing and impact of such success, if achieved, 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. However, in order to promote its strategic
relationships, 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 mass market potential or be
successful in publishing Software for such platforms and systems.
In the late 1980's and early 1990's 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 Systems; (iii) a
large number of software titles; and (iv) consumer demographics that were
different from those of the Company's core customers. 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, by 1995, this category had sufficient mass market penetration to
warrant publishing Software directly and due to technological advancements
incorporated in the newer Multimedia/PC Systems and the higher gross margins
realized by publishers of Software for this category, the Company commenced
marketing Software for Multimedia/PC Systems in fiscal 1995 and intends to
expand the number of Software titles for Multimedia/PC Systems marketed by it in
fiscal 1996.
Based on the decline of the 16-bit hardware market and the related slowdown
in retail sell-through of 16-bit Software published by the Company as well as on
an industry-wide basis, management believes that, in order to reduce inventory
levels, certain retailers have reduced purchases of the Company's 16-bit
Software as compared to prior fiscal quarters and that these and other retailers
will continue to reduce purchases of the Company's 16-bit Software over the next
several fiscal quarters. Management believes that such reduction in retail
purchasing has resulted in a decline in the Company's revenues as discussed
below. The slow down in retail sell-through of 16-bit Software has caused and
could continue to cause increased retail inventories which, in turn, caused and
could continue to cause 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 and Multimedia/PC Systems
achieve market acceptance, management believes that the risk of returns of the
Company's 16-bit Software titles has increased and will continue to increase. No
assurance can be given that future price protection, returns and other similar
concessions will not exceed the Companys reserves for such concessions and, if
so exceeded, the Companys results of operations and financial condition will be
materially adversely affected. In addition, the Company has incurred and
expects to continue to incur higher marketing expenses, which higher expenses
are anticipated to affect adversely the Company's profitability.
As a result of the Company's acquisitions of three software development
companies in 1995 (two of which acquisitions were completed in the fiscal
quarter ended November 30, 1995), the Company's fixed costs relating to the
development of Software were higher in the first quarter of fiscal 1996 and will
continue to be higher in fiscal 1996 as compared to prior periods. However, this
increase in research and development expenses will be offset in part by reduced
royalties payable to developers, a variable cost which was included in selling,
advertising, general and administrative expenses in prior periods. In addition,
to the extent the Company incurs
8
<PAGE>
development costs related to a particular Software title in any period in which
that Software title is not shipped, the Company's general and administrative
expenses in such period will be materially higher as compared to its historical
rate and the Company's profitability will be materially adversely affected. The
Company has also 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 coin-operated video arcade operations. If the Company
is not successful in generating revenues from these new businesses, its
profitability will be adversely affected.
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 the quarter ended November 30, 1994, the Mortal
Kombat II family of titles accounted for a significant portion of gross revenues
and each of the WWF Raw and Maximum Carnage families of titles accounted for a
material portion of the Company's revenues. In the quarter ended November 30,
1995, WWF Arcade and Quarterback Club '96 accounted for a material portion of
the Company's gross revenues.
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 and Multimedia/PC Systems 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 (such as, for example, the 32-bit software versions of
Quarterback Club '96 which, management had anticipated shipping, but which were
not actually shipped, in the first quarter of fiscal 1996), which could cause
the results of operations and net income for such quarter to fall significantly
below anticipated levels.
Retail sales for pre-Christmas and Christmas 1995 generally fell short of
the Company's expectations. Additionally, sales of the Company's Software
continued to be adversely impacted during the quarter ended November 30, 1995
due to the continuing decline of the market for Software for 16-bit
Entertainment Platforms and the related transition to Multimedia/PC Systems and
the next generation of Entertainment Platforms. Management believes that the
market for Software for 16-bit Entertainment Platforms supported fewer 'hit' and
higher-priced titles during the period. The Company did not release as many
'hit' Software products during the quarter ended November 30, 1995 as it had in
comparable periods in the past. In addition, the Company was forced to offer
concessions (such as returns and allowances) to its retailers in order to manage
inventory levels. As a result of the foregoing, the Company's revenues in the
first quarter of fiscal 1996 were materially lower than the comparable quarter
in fiscal 1995 which, in turn, adversely affected the Company's profitability.
Management anticipates that its revenues and profitability during the second
quarter of fiscal 1996 will be materially lower than the comparable period in
fiscal 1995 and that the Company's results of operations and profitability
during fiscal 1996 will be lower than in fiscal 1995.
The Company's ability to generate sales growth and increase profitability
in the long-term 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.
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 ENDED
NOVEMBER 30,
----------------------------------------
1995 1994
------------------ ------------------
<S> <C> <C>
Domestic revenues....................... 69.3% 70.0%
Foreign revenues........................ 30.7 30.0
------ ------
Net revenues.......................... 100.0 100.0
Cost of revenues........................ 56.4 47.3
------ ------
Gross profit.......................... 43.6 52.7
Selling, advertising, general and
administrative expenses............... 39.1% 34.5%
Operating interest...................... 0.8 0.5
Depreciation and amortization........... 2.6 1.0
------ ------
Total operating expenses.............. 42.5 36.0
Earnings from operations................ 1.1 16.7
Earnings before income taxes............ 0.7 16.6
Net earnings............................ 0.4 9.7
------ ------
------ ------
</TABLE>
NET REVENUES
The decrease in the Company's net revenues from $164.3 million for the
quarter ended November 30, 1994 to $134.4 million for the quarter ended November
30, 1995 was predominantly due to reduced unit sales of 16-bit Software and also
increased returns and allowances attributable to lower than anticipated retail
sales during the pre-Christmas season.
The Company is substantially dependent on Sony, Sega and Nintendo as the
sole manufacturers of the hardware platforms marketed by them and as the sole
licensors of the proprietary information and technology needed to develop
Software for those platforms. See 'Other Information.' For the quarters ended
November 30, 1994 and 1995, the Company derived 51% and 43% of its gross
revenues, respectively, from sales of Nintendo-compatible Software and 47% and
37% of its gross revenues, respectively, from sales of Sega-compatible Software.
In addition, during the quarter ended November 30, 1995, the Company derived
9.5% of its gross revenues from sales of Software for the Sony
PlayStation(Trademark).
The Company's gross revenues were derived from the following product
categories:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
----------------------------------------
1995 1994
------------------ ------------------
<S> <C> <C>
Portable Software....................... 10.0% 12.0%
16-Bit Software......................... 64.0 81.0
CD console and PC Software.............. 23.0 3.0
Other................................... 3.0 4.0
</TABLE>
GROSS PROFIT
Gross profit fluctuates as a result of five factors: (i) the level of
returns and allowances; (ii) the level of manufacture by the Company of its Sega
Software; (iii) the percentage of CD Software sales; (iv) the percentage of
foreign sales; and (v) the percentage of foreign sales to third party
distributors.
The Company's gross profit is adversely impacted by increases in returns
and allowances to retailers.
The Company arranges for the manufacture of its Sega Software under a
license granted by Sega. See 'Other Information.' 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
10
<PAGE>
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 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 margins will also increase (subject to the other variables listed
above).
The Company's margins on foreign sales are typically lower than those on
domestic sales due to the 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.
Management anticipates that the Company's future gross profit will be
affected by (i) the Company's product mix (i.e., the percentage of CD Software
and cartridge Software sales 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 Software sales. The Company's gross
margins on coin-operated video arcade games are anticipated to be substantially
lower than on its cartridge and CD Software. Although gross margins on sales
of CD Software 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 its personal computer CD Software products
to allow for their historically higher rate of return. As the percentage of
sales of personal computer CD Software products increases, management
anticipates that its reserves for such returns will increase, thereby offsetting
a portion of the higher gross margins generated from CD Software sales.
Additionally, returns and other similar concessions to retailers in respect of
16-bit Software sales in fiscal 1996 are expected to have a material adverse
effect on the Company's gross margins in future periods.
Gross profit decreased from $86.6 million (53% of net revenues) for the
quarter ended November 30, 1994 to $58.6 million (44% of net revenues) for the
quarter ended November 30, 1995. The dollar decrease is primarily attributable
to lower sales volume and higher returns and discounts. The percentage decrease
is primarily attributable to increased returns and allowances relating to the
Company's Software offset, in part, by higher gross profit from sales of the
Company's Software for Multimedia/PC Systems.
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
$56.7 million (35% of net revenues) for the quarter ended November 30, 1994 to
$52.6 million (39% of net revenues) for the quarter ended November 30, 1995. The
dollar decrease is attributable to lower variable costs incurred by the Company
(due to lower net revenues), which were offset, in part, by increased product
development expenses attributable to the acquisition of two software development
companies during the quarter ended November 30, 1995. The percentage increase is
primarily attributable to reduced sales volume and the increased returns and
allowances discussed above.
Operating interest expense increased from $0.9 million (0.5% of net
revenues) for the quarter ended November 30, 1994 to $1.0 million (0.8% of net
revenues) for the quarter ended November 30, 1995. The increase is primarily
attributable to higher outstanding balances under the Company's principal credit
facility.
Depreciation and amortization increased from $1.6 million (1% of net
revenues) for the quarter ended November 30, 1994 to $3.5 million (3% of net
revenues) for the quarter ended November 30, 1995. The increase in the quarter
ended November 30, 1995 is primarily attributable to increased depreciation
relating to the acquisition of the Company's new corporate headquarters and
increased amortization of the excess of costs over net assets acquired relating
to the acquisition of Iguana Entertainment, Inc.
11
<PAGE>
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). 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 quarters ended
November 30, 1994 and 1995 was cash flows from operations. The Company used net
cash from operations of approximately $3.3 million in the quarter ended November
30, 1994 and used net cash from operations of approximately $23.5 million during
the quarter ended November 30, 1995. The decrease in net cash from operations
for the quarter ended November 30, 1995 is primarily attributable to lower cash
received from customers due, in large part, to the increased returns and
allowances discussed above.
The Company generally purchases its inventory of Nintendo and Sega (to the
extent not manufactured by the Company) Software by opening letters of credit
when placing the purchase order. At November 30, 1994 and 1995, amounts
outstanding under letters of credit were approximately $23 million and $7
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 credit agreement will be automatically renewed for another
year by its terms, unless terminated upon 90 days' prior notice by either party.
The Company has not given nor has it received any such notice of termination.
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 of one percent. At November
30, 1995, the facility was fully utilized.
The Company currently has a $30 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. 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 is being amortized over a
four and one-half year period terminating in July 1999. The Loan, which is a
direct obligation of Acclaim Comics, bears interest, at the borrower's option,
at either (i) the higher of the federal funds rate plus one-half of one percent
and the lender's prime rate, in each case, plus 125 basis points, or (ii) the
London interbank offered rate plus 250 basis points, and is secured by a first
priority lien on substantially all of the assets of Acclaim Comics. The Loan is
also guaranteed by Acclaim and certain of its subsidiaries and is secured by a
first priority lien on all of the issued and outstanding shares of Acclaim
Comics and by a third priority lien on substantially all of the assets of the
Company. The credit agreement and related documents establishing and securing
the Loan, as well as the guarantees delivered by Acclaim and its subsidiaries,
contain customary financial, affirmative and negative covenants, including
mandatory prepayments from excess cash flow of Acclaim Comics and from the
proceeds of asset sales or sales of equity by the Company and restrictions on
the declaration or payment of dividends by Acclaim Comics and the Company.
The Company received a waiver, until April 15, 1996, with respect to its
failure to meet, at November 30, 1995, two financial covenants made in
connection with the Loan, which are required to be met on a quarterly basis.
The lender has advised the Company that it intends to amend the financial
covenants so that the Company will be in compliance in future periods. However,
since the covenants have not yet been amended, the Company has reclassified the
outstanding balance of the Loan as a current liability. If the covenants are not
amended on or prior to April 14, 1996 (the date on which the Company is
required to certify to the lender its compliance with the financial covenants as
of February 29, 1996), the Company fails to meet the current covenants as of
February 29, 1996 and the lender does not otherwise waive compliance by the
Company with such covenants, the Company would be required to repay the Loan in
full on April 14, 1996.
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 class action litigations relating to its press
release announcing revised earnings and income for fiscal 1995 (see 'Legal
Proceedings') and to the nonrenewal of the Company's license agreement with WMS
Industries Inc. The Company is also party to various litigations arising in the
course of its business, the resolution of none of which, the Company believes,
will have a material adverse effect on the Company's liquidity or financial
position.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In December 1995, the Company was sued in actions (the 'Actions') entitled
(i) Mohammed Ali Kahn v. Gregory E. Fischbach, James Scoroposki, Robert Holmes
and Acclaim Entertainment, Inc. (CV 95 4983), (ii) Richard J. Wenski,
individually and on behalf of all other persons similarly situated, v. Acclaim
Entertainment, Inc., Gregory Fischbach, Robert Holmes and Anthony Williams (CV
95 4996), (iii) Yosef Stern v. Acclaim Entertainment, Inc.; Gregory E.
Fischbach; James Scoroposki; Robert Holmes and Anthony Williams (CV 95 4990),
(iv) Marc Jaffe, on behalf of himself and all others similarly situated, v.
Acclaim Entertainment, Inc., Gregory E. Fischbach, James Scoroposki, Robert
Holmes, and Anthony Williams (CV 95 4989), (v) Robert Bloom v. Acclaim
Entertainment, Inc. and Robert Holmes (CV 95 4993), (vi) James Bencivenga, on
behalf of himself and all others similarly situated, v. Gregory E. Fischbach,
James Scoroposki, Robert Holmes, Anthony Williams and Acclaim Entertainment,
Inc. (CV 95 4985), (vii) Henry Vredeveld, on behalf of himself and all others
similarly situated, v. Anthony Williams, Acclaim Entertainment, Inc. (CV 95
4979), (viii) Michael Leitzes, individually and on behalf of all others
similarly situated, v. Acclaim Entertainment, Inc., Robert Holmes and George
Fischbach (CV 95 5004), (ix) Alan Yakuboff, on behalf of himself and all others
similarly situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach, James
Scoroposki and Anthony Williams (CV 95 5017), (x) Robert K. Williams III,
individually and on behalf of all others similarly situated, v. Acclaim
Entertainment, Inc.; Gregory E. Fischbach; James Scoroposki; Robert Holmes and
Anthony Williams (CV 95 5107), (xi) Perkins Partnership Ltd. v. Acclaim
Entertainment, Inc., Gregory E. Fischbach, Robert Holmes and Anthony Williams
(CV 95 4998), (xii) Robert Bernard v. Acclaim Entertainment Inc., Gregory E.
Fischbach, Robert Holmes, and Anthony Williams (CV 95 5022), (xiii) Anne B.
Caveliere and Sharon L. Robbins, on behalf of themselves and all others
similarly situated, v. Acclaim Entertainment, Inc., Gregory Fischbach, and James
Scoroposki (CV 95 5023), (xiv) Joan J. Gordon, on behalf of herself and all
other persons similarly situated, v. Acclaim Entertainment, Inc., Gregory E.
Fischback, James Scoroposki, Robert Holmes and Anthony Williams (CV 95 5047),
(xv) George H. Gray, individually and on behalf of all others similarly situated
v. Acclaim Entertainment, Inc. Robert Holmes and Anthony Williams (CV 95 5039)
and (xvi) Chad Chuang, Powen Su, Jason Hedeen, Eugene Breault, William McClurkin
and William C. McClurkin, on behalf of themselves and all others similarly
situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach, Robert Holmes
and Anthony Williams (CV 95 5263), all in the United States District Court in
the Eastern District of New York. The individual named defendants are directors
and/or officers of the Company.
The Company was also sued in an action (the 'Campbell Action') entitled
Adrienne Campbell, individually and on behalf of all others similarly situated,
v. Acclaim Entertainment, Inc.; Anthony R. Williams; James Scoroposki; and
Robert Holmes (C 95-04395) filed in December 1995 in the United States District
Court in the Northern District of California. The individual named defendants in
this action are directors and/or executive officers of the Company. The
plaintiffs in the Actions and in the Campbell Action, on behalf of a class of
the Company's stockholders, claim unspecified damages arising from alleged
violations of the anti-fraud provisions of the federal securities laws relating
to, among other things, (i) the Company's October 17, 1995 announcement of its
results of operations for the fiscal year ended August 31, 1995, which was
subsequently revised by the Company's December 4, 1995 announcement reflecting a
decision to defer $18 million of revenues and $10.5 million of net income
previously reported for the fiscal year ended August 31, 1995 and (ii) the
alleged misleading nature of prior public disclosures and announcements made by
the Company. In addition, in the Campbell Action, the plaintiffs also allege
certain common law causes of action. Additional actions may be brought against
the Company and its officers and directors arising from the matters described
above. The Company has directors' and officers' liability insurance which may
cover a portion of the liability asserted in the Actions and in the Campbell
Action. The Company intends to defend the Actions and the Campbell Action
vigorously. No assurance can be given that the resolution of the Actions and the
Campbell Action and/or future actions will not have a material adverse effect on
the Company's results of operations for the quarter in which any such resolution
occurs.
In a derivative action entitled Eugene Block v. Gregory E. Fischbach, James
Scoroposki, Robert Holmes, Bernard J. Fischbach, Michael Tannen, Robert H.
Groman and James Scibelli and Acclaim Entertainment, Inc.
13
<PAGE>
(CV 95-036316) brought on behalf of the Company in December 1995 in the Supreme
Court of the State of New York, County of Nassau, the plaintiff alleges that the
individual named defendants, who are directors of the Company, caused the
Company, among other things, to make false and misleading statements in its
October 17, 1995 announcement discussed above, thereby subjecting the Company to
shareholder lawsuits and thereby wasting Company assets and, accordingly, claims
unspecified damages based on allegations of breaches of the duty of candor,
waste of Company assets and mismanagement. The directors intend to defend this
action vigorously.
In December 1995, the former directors and/or officers of Lazer-Tron were
sued in an action entitled Adrienne Campbell and Donna Sizemore, individually
and on behalf of all others similarly situated v. Norman B. Petermeier; Matthew
F. Kelly, Bryan M. Kelly; Morton Grosser; Bob K. Pryt; Roger V. Smith; and DOES
1 through 50, inclusive (Civil No. 760717-4), in the Superior Court of the State
of California, County of Alameda. The plaintiffs, on behalf of a class of
Lazer-Tron's stockholders, claim unspecified damages based on allegations that,
as a result of the lack of due diligence by the named defendants in fully
investigating the proposed acquisition by the Company of Lazer-Tron, the
defendants breached their fiduciary duties to Lazer-Tron's shareholders. In
connection with the acquisition of Lazer-Tron, Acclaim agreed to cause
Lazer-Tron to honor, for at least six years, all rights of indemnification in
favor of the former directors and officers contained in the articles of
incorporation and by-laws of Lazer-Tron and in indemnification agreements
between Lazer-Tron and such persons. Acclaim also agreed to cause Lazer-Tron to
use its best efforts to maintain in effect directors' and officers' liability
insurance covering the former directors and officers and, if Lazer-Tron is
unable to maintain such insurance, has agreed to indemnify each of Lazer-Tron's
former directors and officers for any and all losses which each may suffer on
the same or similar terms and dollar limitations (not to exceed $1,000,000 in
the aggregate) as the insurance in place prior to the acquisition by the Company
of Lazer-Tron. At the present time, Lazer-Tron has directors' and officers'
liability insurance which may cover a portion of the liability asserted in this
action.
ITEM 5. OTHER INFORMATION
In April 1992, the Company entered into an agreement with Sega (the 'Sega
Agreement') and has certain other arrangements with Sega, pursuant to which the
Company received the nonexclusive right to utilize the 'Sega' name and its
proprietary information and technology in order to develop and distribute
Software titles for use with various Sega platforms. The Sega Agreement, as
amended, expired on December 31, 1995. The Company is currently negotiating a
new agreement with Sega. In the interim, the Company and Sega are continuing to
operate in the ordinary course under the terms of the expired Sega Agreement and
such arrangements. The Company believes that the terms of any such new agreement
will not impose materially greater obligations on the Company than the Sega
Agreement although there can be no assurance of that result. No assurance can be
given that the Company will be successful in negotiating a new agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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: /s/ Robert Holmes President and Chief January 15, 1996
-------------------------------- Operating Officer
Robert Holmes
By: /s/ Anthony Williams Executive Vice January 15, 1996
-------------------------------- President and Chief
Anthony Williams Financial and
Accounting Officer
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 29,534
<SECURITIES> 26,869
<RECEIVABLES> 161,924
<ALLOWANCES> 0
<INVENTORY> 34,086
<CURRENT-ASSETS> 313,823
<PP&E> 50,122
<DEPRECIATION> 11,571
<TOTAL-ASSETS> 436,174
<CURRENT-LIABILITIES> 107,087
<BONDS> 0
0
0
<COMMON> 997
<OTHER-SE> 325,963
<TOTAL-LIABILITY-AND-EQUITY> 436,174
<SALES> 134,447
<TOTAL-REVENUES> 134,447
<CGS> 75,863
<TOTAL-COSTS> 57,112
<OTHER-EXPENSES> 597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592
<INCOME-PRETAX> 875
<INCOME-TAX> 350
<INCOME-CONTINUING> 595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 595
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
