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 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.
The registrant hereby amends the following items, financial
statements, exhibits or other portions of its Quarterly Report on
Form 10-Q for the fiscal year ended November 30, 1995 as set forth
in the pages attached hereto:
Item 1. Financial 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)
November 30, August 31,
1995 1995
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 29,534 $ 44,749
Marketable equity 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
-------- --------
See note to consolidated financial statements.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
(in 000s, except per share data)
Three Months Ended
November 30,
1995 1994
---- ----
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
-------- --------
See note 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 Securities --- --- --- --- ---
------ ------ ------ ------ -------
Balance August 31, 1995 --- --- 46,281 926 168,785
------ ------ ------ ------ -------
Net Earnings --- --- --- --- ---
Exercise of Stock Options and
Warrants --- --- 359 7 3,196
Pooling of Interests with Sculptured
and Probe --- --- 3,210 64 (64)
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
====== ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Unrealized Foreign
Gain On Currency
Retained Treasury Marketable Translation
Earnings Stock 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 Securities --- --- $2,503 --- 2,503
-------- ------ --------- --------- -------
Balance August 31, 1995 153,141 (807) 2,503 811 325,359
-------- ------ --------- --------- -------
Net Earnings 595 --- --- --- 595
Exercise of Stock Options and
Warrants --- --- --- --- 3,203
Pooling of Interests with Sculptured
and Probe (2,415) --- --- --- (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 $151,321 $(807) $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.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
Three Months Ended
November 30,
---------------------
1995 1994
---- ----
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Cash received from customers $163,468 $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 (15,692) (3,330)
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Acquisition of subsidiaries, net 7,161 7,255
Sale of marketable equity securities ---- 305
Acquisition of fixed assets, excluding
capital leases (5,373) (4,215)
Disposal of fixed assets 59 263
Acquisition of other assets (674) (4,686)
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,173 (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 AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 44,749 34,676
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,534 $ 34,587
-------- --------
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
Three Months Ended
November 30,
-------------------
1995 1994
-------- -------
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 equity
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 22,132 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 (16,287) (19,288)
-------- -------
NET CASH (USED IN) OPERATING ACTIVITIES $(15,692) $(3,330)
======== =======
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 $9,179
Cash paid for the capital stock (5,513)
------
Liabilities assumed $3,666
------
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.
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.
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.
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 slow-down 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 Company's reserves for such concessions and, if so exceeded,
the Company's 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 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.
Results of Operations
The following table sets forth certain statements of
consolidated earnings data as a percentage of net revenues for
the periods indicated:
Three Months Ended
November 30,
1995 1994
---- ----
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
===== =====
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:
Three Months Ended
November 30,
1995 1994
---- ----
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
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 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.
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 $15.7 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.
SIGNATURES
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: April 18, 1996 By /s/ Anthony R. Williams
-------------------------------
Name: Anthony R. Williams
Title: Executive Vice
President
