UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 1996
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 of (I.R.S. Employer
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 April 12, 1996 approximately 49,950,000 shares of Common Stock of the
registrant were outstanding.
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Quarterly Report on Form 10-Q for the fiscal
quarter ended February 29, 1996 as set forth in the pages attached hereto:
Item 1. Fiancial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 1. FINANCIAL STATEMENTS.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
February 29, August 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $32,072 $44,749
Marketable equity securities 14,822 26,503
Accounts receivable - net 91,773 179,311
Inventories 18,902 16,015
Prepaid expenses 41,912 41,083
Other current assets 49,611 18,825
------ ------
TOTAL CURRENT ASSETS 249,092 326,486
------- -------
OTHER ASSETS
Fixed assets - net 38,570 33,970
Excess of cost over net assets acquired - net of
accumulated amortization of $10,921 and $9,091,
respectively 58,007 59,837
Other assets 27,404 33,186
------ ------
TOTAL ASSETS $373,073 $453,479
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $36,362 $49,072
Short-term borrowings 2,217 4,233
Accrued expenses 35,103 47,017
Income taxes payable 2,217 180
Current portion of long-term debt 6,196 25,196
Obligation under capital leases - current 314 333
--- ---
TOTAL CURRENT LIABILITIES 82,409 126,031
------ -------
LONG-TERM LIABILITIES
Obligation under capital leases - noncurrent 505 408
Other long-term liabilities 16,349 53
--- --
TOTAL LIABILITIES 99,263 126,492
------ -------
MINORITY INTEREST 1,356 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 shares
authorized;
49,934 and 46,281 shares issued and
outstanding, respectively 1,003 926
Additional paid in capital 176,280 168,785
Retained earnings 95,550 153,141
Treasury stock (1,626) (807)
Foreign currency translation adjustment (842) 811
Unrealized gain on marketable equity securities 2,089 2,503
----- -----
TOTAL STOCKHOLDERS' EQUITY 272,454 325,359
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $373,073 $453,479
-------- --------
See notes to consolidated financial statements.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in 000s, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29 February 28,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $46,759 $161,273 $181,206 $325,577
COST OF REVENUES 34,438 73,456 110,302 151,121
SPECIAL CARTRIDGE VIDEO CHARGE 51,168 ----- 51,168 ------
------- ------ ------- -------
GROSS PROFIT (38,847) 87,817 19,736 174,456
------- ------ ------- -------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses 43,293 61,781 95,877 118,499
Operating interest 2,073 1,027 3,105 1,912
Depreciation and amortization 3,699 2,013 7,195 3,613
----- ----- ----- -----
TOTAL OPERATING EXPENSES 49,065 64,821 106,177 124,024
------- ------ ------- -------
(LOSS) EARNINGS FROM OPERATIONS (87,912) 22,996 (86,441) 50,432
-------- ------ -------- ------
OTHER INCOME (EXPENSE)
Interest income 1,147 398 1,978 832
Interest expense (525) (919) (1,117) (1,749)
Other (expense) income 4,511 1,158 3,677 1,383
------- ------ ------- -------
(LOSS) EARNINGS BEFORE INCOME TAXES (82,779) 23,633 (81,903) 50,898
(BENEFIT) PROVISION FOR INCOME TAXES (26,805) 9,780 (26,455) 21,085
------- ------ ------- -------
NET (LOSS) EARNINGS BEFORE
MINORITY INTEREST (55,974) 13,853 (55,448) 29,813
MINORITY INTEREST (203) ----- (272) -----
--------- ------- -------- -------
NET (LOSS) EARNINGS $(55,771) $13,853 $(55,176) $29,813
--------- ------- -------- -------
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $(1.12) $0.28 $(1.12) $0.61
--------- ------- -------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 49,915 48,742 49,070 48,742
--------- ------- -------- -------
</TABLE>
See notes to consolidated financial statements.
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
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance August 31, 1993 ---- ---- 37,259 $745 $38,377
------- ------- ------ ------ --------
Net Earnings ---- ---- ---- ---- ----
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
------- ------- ------ ------ --------
Net Earnings ---- ---- ---- ---- ----
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
Tax Benefit from Exercise of
Stock Options ---- ---- ---- ---- 1,101
Foreign Currency Translation Gain ---- ---- ---- ---- ----
Unrealized Gain on
Marketable Equity Securities ---- ---- ---- ---- ----
------- ------- ------ ------ --------
Balance August 31, 1995 ---- ---- 46,281 926 168,785
------- ------- ------ ------ --------
Net Loss ---- ---- ---- ---- ----
Issuances of Common Stock
and Options ---- ---- 193 4 2,634
Exercise of Stock Options
and Warrants ---- ---- 445 9 3,452
Pooling of Interests with
Sculptured and Probe ---- ---- 3,015 64 (64)
Tax Benefit from Exercise of
Stock Options ---- ---- ---- ---- 1,473
Purchase of Treasury Stock ---- ---- ---- ---- ----
Foreign Currency Translation Loss ---- ---- ---- ---- ----
Unrealized Gain on
Marketable Equity Securities ---- ---- ---- ---- ----
------- ------- ------ ------ --------
Balance February 29, 1996 ---- ---- 49,934 $1,003 $176,280
------- ------- ------ ------ --------
</TABLE>
<TABLE>
<CAPTION>
Unrealized Foreign
Gain On Currency
Retained Treasury Marketable Translation
Earnings Stock Equity Securities Adjustment Total
-------- ----- ----------------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance August 31, 1993 $61,516 $(807) ---- $(2,964) $96,867
------- ------- ------ ----- --------
Net Earnings 45,055 ---- ---- ---- 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 106,571 (807) ---- (554) 175,243
------- ------- ------ ----- --------
Net Earnings 44,770 ---- ---- ---- 44,770
Issuances ---- ---- ---- ---- 83,763
Exercise of Stock Options ---- ---- ---- ---- 4,183
Pooling of Interests with
Lazer-Tron 1,800 ---- ---- ---- 12,431
Tax Benefit from Exercise of
Stock Options ---- ---- ---- ---- 1,101
Foreign Currency Translation Gain ---- ---- ---- 1,365 1,365
Unrealized Gain on
Marketable Equity Securities ---- ---- $2,503 ---- 2,503
------- ------- ------ ----- --------
Balance August 31, 1995 153,141 (807) 2,503 811 325,359
------- ------- ------ ----- --------
Net Loss (55,176) ---- ---- ---- (55,176)
Issuances of Common Stock
and Options ---- ---- ---- ---- 2,638
Exercise of Stock Options
and Warrants ---- ---- ---- ---- 3,461
Pooling of Interests with
Sculptured and Probe (2,415) ---- ---- ---- (2,415)
Tax Benefit from Exercise of
Stock Options ---- ---- ---- ---- 1,473
Purchase of Treasury Stock ---- (819) ---- ---- (819)
Foreign Currency Translation Loss ---- ---- ---- (1,653) (1,653)
Unrealized Gain on
Marketable Equity Securities ---- ---- (414) ---- (414)
------- ------- ------ ----- --------
Balance February 29, 1996 $95,550 $(1,626) $2,089 $(842) $272,454
------- ------- ------ ----- --------
</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 notes to consolidated financial statements.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
February 29 February 28,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Cash received from customers $338,409 $359,733
Cash paid to suppliers and employees (357,189) (334,044)
Interest received 1,978 832
Interest paid (4,222) (3,661)
Income taxes (paid) (262) (14,630)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (21,286) 8,230
------- -------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Sale of marketable equity securities $14,643 12,694
Acquisition of subsidiaries, net 7,161 1,742
Acquisition of fixed assets, excluding capital leases (8,653) (18,860)
Acquisition of other assets (1,395) 2,431
Other investing activities 161 265
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 11,917 (1,728)
------- -------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 1,453 6,193
Repayment of short-term borrowings (3,798) (3,025)
Payment of mortgage --- (1,342)
Issuance of common stock 4 1,088
Exercise of stock options 3,461 1,002
Payment of obligation under capital leases (110) (153)
Payment of long-term debt (3,056) ---
Other financing activities 128 ---
Common stock purchased for treasury (819) ---
------- -------
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (2,737) 3,763
------- -------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (571) 1,258
------- -------
NET (DECREASE) INCREASE IN CASH (12,677) 11,523
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,749 34,676
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $32,072 $46,199
------- -------
</TABLE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
February 29, February 28,
1996 1995
---- ----
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net (Loss) Earnings $(55,176) $29,813
-------- -------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,195 3,613
Other non-cash charges 170 7
Gain on sale of marketable equity securities (3,690) (1,107)
Increase (Decrease) in provision for returns and discounts 106,166 (6,455)
Deferred income taxes (13,217) 2,117
Minority interest in net earnings of consolidated subsidiary (272) ---
Change in asses and liabilities:
(Increase) Decrease in accounts receivable (10,200) 33,275
(Increase) in inventories (2,441) (6,998)
Decrease (Increase) in prepaid expenses 241 (10,500)
(Increase) in other current assets (302) (88)
(Decrease) in trade accounts payable (12,793) (42,667)
(Decrease) Increase in accrued expenses (23,469) 2,883
(Decrease) Increase in income taxes payable (13,498) 4,337
-------- -------
Total adjustments 33,890 (21,583)
-------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $(21,286) $8,230
-------- -------
</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:
Fair value of assets acquired $5,525
Cash paid for the capital stock (5,515)
-------
Liabilities assumed $10
-------
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 notes to consolidated financial statements.
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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.
Consolidated earnings for the three and six months ended February
28, 1995 were restated to reflect the acquisition of Lazer-Tron
Corporation on August 30, 1995, which was accounted for as a pooling
of interests. Such acquisition did not have a material effect upon
previously reported net income, revenues, assets, stockholders' equity
or earnings per share of the consolidated entities.
2. Special Cartridge Video Charge - The Company recorded a charge of
approximately $51.2 million for the quarter ended February 29, 1996
consisting of provisions of $28.9 million, $20.1 million and $2.2
million, respectively, to adjust accounts receivable, inventories and
prepaid royalties at February 29, 1996 to their estimated net
realizable values. The charge results from the accelerated decline in
the portable and 16-bit cartridge market and management's decision
not to continue to support its products in that market.
3. Acquisitions - On October 9, 1995, the Company acquired Sculptured
Software, Inc. ("Sculptured") and on October 16, 1995, the Company
acquired Probe Entertainment Limited ("Probe"). Sculptured and Probe
are developers of interactive video games. Both acquisitions were
accounted for as poolings of interests and were effected through the
exchange of 2,745 shares of common stock of the Company for all the
issued and outstanding shares of Sculptured and Probe. The Company's
financial statements for the six months ended February 29, 1996
include the results of Sculptured and Probe. Prior period financial
statements were not restated as these acquisitions did not have a
material effect upon the Company's previously reported net income,
revenues, assets, stockholders' equity or earnings per share.
4. Accounts Receivable - Accounts receivable are comprised of the
following:
<TABLE>
<CAPTION>
February 29, 1996 August 31, 1995
----------------- ---------------
<S> <C> <C>
Receivables assigned to factor $111,521 $155,782
Less advances from factor 41,034 37,082
------- --------
Due from factor 70,487 118,700
Unfactored accounts receivable 40,835 33,093
Accounts receivable - foreign 20,726 41,743
Other receivables 10,064 5,410
Allowances for returns and discounts (50,339) (19,635)
------- --------
$91,773 $179,311
------- --------
</TABLE>
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 is as a leading
publisher of interactive entertainment software ("Software") for use
with interactive entertainment hardware platforms ("Entertainment
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 third quarter 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 during
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 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.
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. 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.
In 1993, Sega introduced the Sega CD, a compact disk player which
consisted of an attachment for its 16-bit Genesis system. Additional
compact disk ("CD") platforms, including personal computer systems for
which Software products are published, are currently marketed by
Philips, Commodore, Apple, IBM, IBM-compatible manufacturers and The
3DO Company ("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. Although 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, it did not derive significant revenues therefrom.
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 system in the United States in September
1995. In fiscal 1995, the Company commenced the development and sale
of Software for Sega's Saturn and for Sony's PlayStation. Nintendo has
announced plans to release Ultra 64, its new 64-bit read-only memory
("ROM") cartridge-based system, in Japan in the summer of 1996 and
Matsushita has announced plans to release M2, the 64-bit CD-based
hardware system licensed by it from 3DO by the end of 1996.
The Company believes that sales of new 16-bit hardware systems
peaked in calendar 1993 and that 16-bit Software sales peaked in
calendar 1994 (the year following the peak year for hardware sales),
have decreased substantially since that time and will continue to do
so.
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 next generation hardware platforms are equipped with CD
and, to a lesser extent, ROM cartridges and/or other technologies as
the dominant software storage device.
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 has expanded and intends
to continue to expand the number of Software titles for Multimedia/PC
Systems marketed by it in fiscal 1996.
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 have both achieved commercial success in Japan and, based
on sales information, that the limited quantities of the PlayStation
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.
Retail sales of the Company's cartridge Software during the second
fiscal quarter generally fell short of the Company's expectations.
Additionally, sales of the Company's Software continued to be
adversely impacted during the quarter and six months ended February
29, 1996 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 front-line (full-priced)
titles during the period. The Company did not release as many "hit"
Software products during the quarter (and six months) ended February
29, 1996 as it had in comparable periods in the past. In addition, the
Company offered concessions (such as returns and allowances) to its
retailers at higher than anticipated levels in order to manage 16-bit
Software inventory levels. As a result of the foregoing, the Company's
revenues for the quarter ended February 29, 1996 were materially lower
than the comparable period in fiscal 1995 and the Company incurred a
net loss from operations (excluding the special cartridge video charge
discussed below) of $36.7 million, a net loss from operations
(including the special cartridge video charge) of $87.9 million and a
net loss (on an after-tax basis) of $55.8 million for the quarter
ended February 29, 1996. See "Cartridge Market Exit Charge".
In connection with its review of the Company's results of
operations for the quarter ended February 29, 1996, management noted,
among other things, that the 16-bit and portable Software markets not
only supported fewer front-line (full-priced) titles but that such
titles sold through a substantially lower number of units at retail
than in prior periods; that non-"hit" 16-bit titles were marketed at
mid- or budget prices by many of the Company's competitors during the
quarter; that retail sales of front-line 16-bit Software declined by
approximately 40% (in dollars and units) on an industry-wide basis in
the first two months of calendar 1996 and are anticipated to continue
to decline; that retail sales of budget-priced 16-bit Software titles
increased by approximately 25% (in dollars) and 20% (in units) on an
industry-wide basis in the first two months of calendar 1996 and are
anticipated to continue to increase; that budget prices for 16-bit and
portable Software titles are lower as compared to prior periods; that
sales of mid- and budget-priced 16-bit and portable cartridge Software
currently represent approximately 65% of the retail market on an
industry-wide basis; and that Software for Multimedia/PC Systems and
the next generation of Entertainment Platforms retails for $15 to $20
less than full priced 16-bit Software and management believes that
consumers perceive they are obtaining greater value for lower prices.
Management concluded that the life cycle of 16-bit Software product
has shortened and that the life-cycle of the 16-bit and portable
cartridge Entertainment Platforms is shortening and declining faster
than, for example, the 8-bit Entertainment Platform. Management also
noted that two front-line titles released by the Company in the second
quarter of fiscal 1996 (Revolution X and College Slam), which
management had anticipated to perform well at retail (based on the
Company's historical experience with comparable titles), did not
perform as anticipated. Management believes that the deterioration of
the 16-bit and portable hardware market will accelerate through the
remainder of calendar 1996, with the result that the saleable value of
Software product inventories for the 16-bit and portable Entertainment
Platforms will be eroded and the timely and full collection of
receivables relating thereto will be compromised as retailers monitor
inventory sell-through during the industry transition (which has
already impacted the Company's results for the first six months of
fiscal 1996). See "-- Results of Operations." As the market continues
to deteriorate, prices of 16-bit and portable Software titles continue
to fall and management believes that the cost of supporting that
market would continue to rise and the Company's net revenues and
income therefrom would continue to be materially adversely impacted.
Accordingly, management decided to discontinue support for the 16-bit
and portable cartridge markets and the Company recorded a special
charge of $51.2 million in the second quarter of fiscal 1996
consisting of write-offs and allowances to adjust accounts receivable,
inventories and prepaid royalties to their estimated net realizable
values. Once the Company had made its decision to exit the 16-bit and
portable cartridge category, the Company then had to estimate the
price at which it could liquidate its existing cartridge Software
inventory, which resulted in the inventory writeoffs for the quarter
ended February 29, 1996. The only available channel to liquidate the
Company's existing cartridge Software inventory was through its
existing customers who had purchased, and were marketing, the same
cartridge Software titles at prices higher than the Company's
estimated liquidation value for such Software. In light of the
foregoing and in order to preserve its retail relationships, the
Company recognized that it would be required to provide those
customers with allowances in respect of the cartridge Software
inventory at retail. The Company estimated the anticipated cost of
such allowances and recorded them as an adjustment to accounts
receivable in the quarter ended February 29, 1996. See "--Cartridge
Market Exit Charge."
Management believes that, by exiting the 16-bit and portable
cartridge markets and focusing the Company's resources on the next
generation Entertainment Platforms and Multimedia/PC Systems, the
Company's results of operations and profitability will be positively
impacted in the future. However, due to, among other things, the
industry transition and related factors, there can be no assurance of
the Company's results of operations and profitability in future
periods.
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 during the first two quarters of fiscal 1996 and will continue
to be higher in fiscal 1996 as compared to prior periods. However,
these costs 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. 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 (such as The Simpsons and WWF
families of titles) have accounted for significant portions of the
Company's gross revenues during particular periods. In the quarter
ended February 28, 1995, the NBA Jam Tournament Edition family of
titles accounted for a significant portion of the Company's gross
revenues and in the six months ended February 28, 1995, each of the
Mortal Kombat II and NBA Jam Tournament Edition family of titles
accounted for a significant portion of the Company's gross revenues.
No single family of titles accounted for a significant portion of the
Company's gross revenues during the quarter and six months ended
February 29, 1996.
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. Software products for the more
sophisticated Entertainment Platforms and Multimedia/PC Systems
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 Company's results of operations and net income for such quarter to
fall significantly below anticipated levels.
The Company's ability to generate sales growth and 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 for the next generation Entertainment Platforms and
Multimedia/PC Systems and (iii) the Company's ability to develop and
generate revenues from its other entertainment operations.
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 Six Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic revenues 60.6% 81.5% 67.0% 75.7%
Foreign revenues 39.4 18.5 33.0 24.3
---- ---- ---- ----
Net revenues 100.0 100.0 100.0 100.0
Cost of revenues 73.6 45.5 60.9 46.4
Special cartridge video charge 109.4 --- 28.2 ---
---- ---- ---- ----
Gross profit (83.1) 54.5 10.9 53.6
Selling, advertising, general and
administrative expenses 92.6 38.3 52.9 36.4
Operating interest 4.4 0.6 1.7 0.6
Depreciation and amortization 7.9 1.3 4.0 1.1
--- --- --- ---
Total operating expenses 104.9 40.2 58.6 38.1
(Loss) earnings from operations (188.0) 14.3 (47.7) 15.5
(Loss) earnings before income taxes (177.0) 14.7 (45.2) 15.6
Net (loss) earnings (119.3) 8.6 (30.4) 9.2
</TABLE>
Net Revenues
The decrease in the Company's net revenues from $161.3 million for
the quarter ended February 28, 1995 to $46.8 million for the quarter
ended February 29, 1996 and from $325.6 million for the six months
ended February 28, 1995 to $181.2 million for the six months ended
February 29, 1996 was predominantly due to reduced unit sales of
16-bit Software, increased returns and allowances relating primarily
to 16-bit Software and a reduction in average prices for sales of
16-bit Software. 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 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 February 28, 1995 and February
29, 1996, the Company derived 47% and 25% of its gross revenues,
respectively, from sales of Nintendo-compatible Software and 46% and
41% of its gross revenues, respectively, from sales of Sega-compatible
Software. In addition, during the quarter ended February 29, 1996, the
Company derived 18% of its gross revenues from sales of Software for
the Sony PlayStation. The Company anticipates that the proportion of
its revenues derived from Nintendo-compatible Software will continue
to decline during the remainder of fiscal 1996.
The Company's gross revenues were derived from the following
product categories:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Portable Software 7.0% 8.0% 9.0% 10.0%
16-Bit Software 45.0 81.0 56.0 81.0
Multimedia/PC and next generation Software 46.0 7.0 32.0 6.0
Other 2.0 4.0 3.0 3.0
</TABLE>
Cartridge Market Exit Charge
A special cartridge video charge of $51.2 million was recorded for
the quarter ended February 29, 1996, consisting of provisions of $28.9
million, $20.1 million and $2.2 million, respectively, to adjust
accounts receivable, inventories and prepaid royalties at February 29,
1996 to their estimated net realizable values in conjunction with
management's decision to exit the portable and 16-bit cartridge
market. See " -- Overview." As part of its 16-bit and portable
cartridge market exit strategy, the Company may release up to three
new 16-bit Software titles currently in development and one additional
16-bit Software title in Europe. The Company intends to continue to
sell its existing 16-bit and portable cartridge Software inventory and
may, if requested by a retailer, produce additional units of the
particular title(s) so requested on a special order basis. As the
Company implements its exit strategy, the sale of 16-bit and portable
Software may have an adverse effect on the Company's gross margin
percentages in future periods. There can be no assurance that the
Company will not record additional charges in future periods relating
to its exit from the portable and 16-bit cartridge market.
Gross Profit
Gross profit decreased from $87.8 million (55% of net revenues) for
the quarter ended February 28, 1995 to a gross loss of $38.8 million
((83%) of net revenues) for the quarter ended February 29, 1996 and
from $174.5 million (54% of net revenues) for the six months ended
February 28, 1995 to $19.7 million (11% of net revenues) for the six
months ended February 29, 1996. The decrease is primarily attributable
to lower sales volume, lower average prices of 16-bit Software and
higher returns and discounts offset, in part, by higher gross profit
from sales of the Company's Software for Multimedia/PC Systems and the
special cartridge video charge described above. The percentage
decreases for the three and six months ended February 29, 1996 as
compared to the same periods ended February 29, 1995 were primarily
attributable to the special cartridge video charge. See "Cartridge
Market Exit Charge". Excluding the impact of the cartridge market exit
charge, gross profit would have been $12.3 million for the three
months ended February 29, 1996 and $70.9 million for the six months
ended February 29, 1996.
Excluding the impact of the cartridge market exit charge, gross
profit fluctuates as a result of six factors: (i) the level of
returns and allowances; (ii) the average unit price obtained for sales
of the Company's 16-bit Software; (iii) the level of manufacture by
the Company of its Software; (iv) the percentage of CD Software sales;
(v) the percentage of foreign sales and (vi) 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 and reduced average unit prices
obtained for sales of its 16-bit Software.
The Company contracts for the manufacture of its Sega Software
under an arrangement 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
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 margin will also
increase (subject to the other variables listed above).
The Company's margins on foreign cartridge Software 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 cartridge
Software 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 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 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 rates of returns. 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.
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 Sony, Sega or Nintendo to the Company
(although, to date, none of them 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 $61.8 million (38% of net revenues) for the quarter ended
February 28, 1995 to $43.3 million (93% of net revenues) for the
quarter ended February 29, 1996 and from $118.5 million (36% of net
revenues) for the six months ended February 28, 1995 to $95.9 million
(53% of net revenues) for the six months ended February 29, 1996. The
dollar decrease is primarily 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 in the first quarter
of fiscal 1996. The percentage increase is primarily attributable to
the increased returns and allowances discussed above.
Operating interest expense increased from $1.0 million (0.6% of net
revenues) for the quarter ended February 28, 1995 to $2.1 million (4%
of net revenues) for the quarter ended February 29, 1996 and from $1.9
million (0.6% of net revenues) for the six months ended February 28,
1995 to $3.1 million (2% of net revenues) for the six months ended
February 29, 1996. The increase is primarily attributable to higher
outstanding balances under the Company's principal credit facility
during the quarter and six months ended February 29, 1996.
Depreciation and amortization increased from $2.0 million (1% of
net revenues) for the quarter ended February 28, 1995 to $3.7 million
(8% of net revenues) for the quarter ended February 29, 1996 and from
$3.6 million (1% of net revenues) for the six months ended February
29, 1995 to $7.2 million (4% of net revenues) for the six months ended
February 29, 1996. The increase 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.
The Company's ability to control its fixed operating expenses will
have a direct impact on the Company's earnings during the near-term
future (until the transition to the next generation Entertainment
Platforms and Multimedia/PC Systems is completed).
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 quarter and
six months ended February 28, 1995 and February 29, 1996 was cash
flows from operations and, to a lesser extent, from the sale during
the quarters ended February 28, 1995 and February 29, 1996 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 February 28, 1995 and February 29, 1996,
amounts outstanding under letters of credit were approximately $14.6
million and $2.8 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, 1997. 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. The Company received a waiver with respect to its failure
to meet, at February 29, 1996, two financial covenants made under the
agreement. At February 29, 1996, the Company had approximately $30
million available under such facility.
The Company currently has a $30 million trade finance facility with
another bank. The Company's Asian and European subsidiaries currently
have independent facilities totaling 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.
In April 1996, the Company completed a mortgage financing related
to its corporate headquarters with Natwest Bank USA in the principal
amount of approximately $7 million.
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." The Company is also party to a class action
litigation relating to the nonrenewal of the Company's license
agreement with WMS Industries, Inc. The Company is 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 results of operations, liquidity or financial
condition.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment on Form
10-Q/A to its Quarterly Report on Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCLAIM ENTERTAINMENT, INC.
Date: July 18, 1996 BY /s/ Anthony R. Williams
Name: Anthony R. Williams
Title: Executive Vice President
