UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 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 July 11, 1996 approximately 49,950,000 shares of Common Stock of the
registrant were outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
May 31, August 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $31,785 $44,749
Marketable equity securities 13,914 26,503
Accounts receivable - net 78,758 179,311
Inventories 19,045 16,015
Prepaid expenses 50,760 41,083
Other current assets 52,454 18,825
-------- --------
TOTAL CURRENT ASSETS 246,716 326,486
-------- --------
OTHER ASSETS
Fixed assets - net 38,828 33,970
Excess of cost over net assets acquired - net of accumulated
amortization of $11,837 and $9,091, respectively 56,154 59,837
Other assets 24,375 33,186
-------- --------
TOTAL ASSETS $366,073 $453,479
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $34,181 $49,072
Short-term borrowings 3,080 4,233
Accrued expenses 28,347 47,017
Income taxes payable 1,523 180
Current portion of long-term debt 6,641 25,196
Obligation under capital leases - current 265 333
-------- --------
TOTAL CURRENT LIABILITIES 74,037 126,031
-------- --------
LONG-TERM LIABILITIES
Long-term debt 20,693 --
Obligation under capital leases - noncurrent 511 408
Other long-term liabilities 783 53
-------- --------
TOTAL LIABILITIES 96,024 126,492
-------- --------
MINORITY INTEREST 1,120 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;
49,949 and 46,281 shares issued and
outstanding, respectively 1,003 926
Additional paid in capital 178,674 168,785
Retained earnings 91,582 153,141
Treasury stock (1,813) (807)
Foreign currency translation adjustment (2,074) 811
Unrealized gain on marketable equity securities 1,557 2,503
-------- --------
TOTAL STOCKHOLDERS' EQUITY 268,929 325,359
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $366,073 $453,479
-------- --------
See notes to consolidated financial statements.
2
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in 000s, except per share data)
Three Months Ended Nine Months Ended
May 31, May 31,
1996 1995 1996 1995
---- ---- ---- ----
NET REVENUES $62,639 $107,654 $243,846 $433,231
COST OF REVENUES 24,456 53,793 134,758 204,913
SPECIAL CARTRIDGE VIDEO CHARGE -- -- 51,168 --
------- -------- -------- --------
GROSS PROFIT 38,183 53,861 57,920 228,318
------- -------- -------- --------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses 39,296 35,817 135,173 154,317
Operating interest 2,150 1,055 5,255 2,967
Depreciation and amortization 3,671 2,796 10,867 6,409
------- -------- -------- --------
TOTAL OPERATING EXPENSES 45,117 39,668 151,295 163,693
------- -------- -------- --------
(LOSS) EARNINGS FROM OPERATIONS (6,934) 14,193 (93,375) 64,625
------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 958 542 2,935 1,374
Interest expense (593) (954) (1,711) (2,703)
Other income 565 1,281 4,239 2,665
------- -------- -------- --------
(LOSS) EARNINGS BEFORE INCOME TAXES (6,004) 15,062 (87,912) 65,961
------- -------- -------- --------
(BENEFIT) PROVISION FOR INCOME TAXES (1,800) 6,235 (28,260) 27,320
------- -------- -------- --------
NET (LOSS) EARNINGS BEFORE
MINORITY INTEREST (4,204) 8,827 (59,652) 38,641
MINORITY INTEREST (236) (28) (508) (28)
------- -------- -------- --------
NET (LOSS) EARNINGS $(3,968) $8,855 $(59,144) $38,669
------- -------- -------- --------
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $(0.08) $0.17 $(1.20) $0.78
------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 49,940 52,640 49,360 49,705
------- -------- -------- --------
See notes to consolidated financial statements.
3
<TABLE>
<CAPTION>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(in 000s, except per share data)
Preferred
Stock (1) Common Stock Unrealized
-------------- -------------- Gain On Foreign
Issued Issued Additional Marketable Currency
------ ------ Paid-In Retained Treasury Equity Translation
Shares Amount Shares Amount Capital Earnings Stock Securities Adjustment Total
------ ------ ------ ------ ------- -------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance August 31, 1993 -- -- 37,259 $745 $38,377 $61,516 $(807) -- $(2,964) $96,867
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
Net Earnings -- -- -- -- -- 45,055 -- -- -- 45,055
Issuances -- -- 971 19 14,981 -- -- -- -- 15,000
Exercise of Stock
Options -- -- 1,118 23 7,435 -- -- -- -- 7,458
Tax Benefit from
Exercise of Stock
Options -- -- -- -- 8,453 -- -- -- -- 8,453
Foreign Currency
Translation Gain -- -- -- -- -- -- -- -- 2,410 2,410
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
Balance August 31, 1994 -- -- 39,348 787 69,246 106,571 (807) -- (554) 175,243
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
Net Earnings -- -- -- -- -- 44,770 -- -- -- 44,770
Issuances -- -- 5,182 104 83,659 -- -- -- -- 83,763
Exercise of Stock
Options -- -- 628 13 4,170 -- -- -- -- 4,183
Pooling of Interests
with Lazer-Tron -- -- 1,123 22 10,609 1,800 -- -- -- 12,431
Tax Benefit from
Exercise of Stock
Options -- -- -- -- 1,101 -- -- -- -- 1,101
Foreign Currency
Translation Gain -- -- -- -- -- -- -- -- 1,365 1,365
Unrealized Gain on
Marketable Equity
Securities -- -- -- -- -- -- -- $2,503 -- 2,503
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
Balance August 31, 1995 -- -- 46,281 926 168,785 153,141 (807) 2,503 811 325,359
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
Net Loss -- -- -- -- -- (59,144) -- -- -- (59,144)
Issuances of Common
Stock and Options -- -- 193 4 4,988 -- -- -- -- 4,992
Exercise of Stock
Options and Warrants -- -- 460 9 3,492 -- -- -- -- 3,501
Pooling of Interests
with Sculptured and
Probe -- -- 3,015 64 (64) (2,415) -- -- -- (2,415)
Tax Benefit from
Exercise of Stock
Options -- -- -- -- 1,473 -- -- -- -- 1,473
Purchase of Treasury
Stock -- -- -- -- -- -- (1,006) -- -- (1,006)
Foreign Currency
Translation Loss -- -- -- -- -- -- -- -- (2,885) (2,885)
Unrealized Loss on
Marketable Equity
Securities -- -- -- -- -- -- -- (946) -- (946)
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
Balance May 31, 1996 -- -- 49,949 $1,003 $178,674 $91,582 $(1,813) $1,557 $(2,074) $268,929
---- ---- ------ ------ -------- ------- ------- ------ ------- --------
</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.
4
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
Nine Months Ended
May 31,
1996 1995
---- ----
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Cash received from customers $422,156 $484,636
Cash paid to suppliers and employees (440,985) (444,918)
Interest received 2,935 1,374
Interest paid (6,966) (5,670)
Income taxes (paid) (2,394) (20,515)
-------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (25,254) 14,907
-------- -------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Sale of marketable equity securities 14,643 13,141
Acquisition of subsidiaries, net 7,912 1,742
Acquisition of fixed assets, excluding capital leases (11,204) (23,638)
Acquisition of other assets (2,068) 2,644
Other investing activities 212 --
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,495 (6,111)
-------- -------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 12,947 9,337
Repayment of short-term borrowings (14,286) (22,002)
Proceeds from mortgage 6,676 --
Payment of mortgage (111) (1,342)
Issuance of common stock 4 1,146
Exercise of stock options 3,502 1,293
Payment of obligation under capital leases (166) (223)
Payment of long-term debt (4,613) --
Other financing activities 127 --
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,080 (11,791)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,285) (1,038)
-------- -------
NET (DECREASE) INCREASE IN CASH (12,964) (4,033)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,749 34,676
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $31,785 $30,643
-------- -------
5
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
Nine Months Ended
May 31,
1996 1995
---- ----
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net (Loss) Earnings $(59,144) $38,669
-------- -------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,867 6,409
Loss on disposal of equipment 18
Other non-cash charges 173
Gain on sale of marketable equity securities (3,684) (1,135)
Increase (Decrease) in provision for returns and
discounts 109,837 (12,247)
Deferred income taxes (7,022) 3,817
Minority interest in net earnings of consolidated
subsidiary (508) (28)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (2,374) 54,065
(Increase) in inventories (3,127) (2,468)
(Increase) in prepaid expenses (3,836) (15,926)
(Increase) in advance payment to suppliers -- (1,150)
Decrease in other current assets 1,288 313
(Decrease) in trade accounts payable (14,280) (48,711)
(Decrease) in accrued expenses (29,805) (9,082)
(Decrease) Increase in income taxes payable (23,639) 2,363
-------- -------
Total adjustments 33,890 (23,762)
-------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $(25,254) $14,907
-------- -------
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.
6
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 nine months ended May 31, 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 in North
America.
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 3,015 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 nine months ended May 31, 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 of the consolidated entities.
4. Accounts Receivable - Accounts receivable are comprised of the following:
May 31, 1996 August 31, 1995
------------ ---------------
Receivables assigned to factor $76,500 $155,782
Less advances from factor 39,515 37,082
------- --------
Due from factor 36,985 118,700
Unfactored accounts receivable 47,573 33,093
Accounts receivable - foreign 21,057 41,743
Other receivables 6,173 5,410
Allowances for returns and discounts (33,030) (19,635)
------- --------
$78,758 $179,311
------- --------
7
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") and the distribution of coin-operated video arcade games, which
commenced in the third quarter of fiscal 1996. The Company plans to engage in
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 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
8
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 released Nintendo 64, its new 64-bit read-only memory
("ROM") cartridge-based system, in Japan in June 1996 and has announced its plan
to introduce this system in North America in September 1996. Matsushita has
announced plans to release M2, the 64-bit CD-based hardware system licensed by
it from 3DO, by the end of 1996 in Japan.
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), and 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 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 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
9
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.
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 in North America.
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 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 or as
contractually obligated 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 above) 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.
As part of its 16-bit and portable cartridge market exit strategy, the
Company may release additional 16-bit Software titles in Europe. The Company
intends to continue to sell its existing 16-
10
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 has had and in the future is expected to continue
to have an adverse effect on the Company's gross margin percentages in future
periods as the only gross margin realized is that sufficient to cover expenses
associated with the sale of cartridge product such as royalties, sales
commissions and freight as the Company's cartridge inventory has been recorded
at estimated net realizable value. 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.
Management believes that the previously reported industry trends and
factors which contributed to its decision in the second quarter of fiscal 1996
to exit the 16-bit portable and cartridge market (such as fewer front line
titles, front line titles selling at lower unit volume levels and constituting a
smaller percentage of industry wide sales, increasing sales of non-hit titles at
budget prices and such budget priced titles constituting a larger percentage of
industry wide sales, and the general deterioration of the 16-bit market)
generally continued in the third quarter of fiscal 1996. 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 eventually be positively impacted in the future. In fact, the Company's
decision to focus on CD Software resulted in the gross margin increasing to 61%
for the quarter ended May 31, 1996 from 50% for the quarter ended May 31, 1995;
however, since CD Software sales have not generated revenues at levels
comparable to those achieved from cartridge sales, the improved margin did not
result in profitability in the 1996 quarter. 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 three quarters of fiscal
1996 and will continue to be higher in fiscal 1996 as compared to prior periods.
However, commencing during fiscal 1997, these costs may offset, in part, by
reduced royalties payable to developers, a variable cost which is included in
selling, advertising, general and administrative expenses. 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. Such expenses in the aggregate have
had an adverse impact on the Company's profitability during the first three
quarters of fiscal 1996. If the Company is not successful in generating revenues
from these new businesses, its profitability will continue to 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 products) have accounted for
significant portions of the Company's gross revenues during particular periods.
In the nine months ended May 31, 1995, each of the Mortal Kombat II and NBA Jam
Tournament Edition family of products accounted for a significant portion of the
Company's gross revenues. In the quarter ended May 31, 1995, although sales of
the Judge Dredd and Justice League families of products were material to the
Company's gross revenues, no single family of products 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 nine months ended May 31, 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
11
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:
Three Months Nine Months
Ended Ended
May 31, May 31,
1996 1995 1996 1995
---- ---- ---- ----
Domestic revenues 55.0% 78.0% 64.0% 76.3%
Foreign revenues 45.0 22.0 36.0 23.7
----- ----- ----- -----
Net revenues 100.0 100.0 100.0 100.0
Cost of revenues 39.0 50.0 55.3 47.3
Special cartridge video charge -- -- 21.0 --
----- ----- ----- -----
Gross profit 61.0 50.0 23.7 52.7
Selling, advertising, general and
administrative expenses 62.7 33.3 55.4 35.6
Operating interest 3.4 1.0 2.1 0.7
Depreciation and amortization 5.9 2.6 4.5 1.5
----- ----- ----- -----
Total operating expenses 72.0 36.9 62.0 37.8
(Loss) earnings from operations (11.1) 13.2 (38.3) 14.9
(Loss) earnings before income taxes (9.6) 14.0 (36.1) 15.2
Net (loss) earnings (6.3) 8.2 (24.3) 9.0
12
Net Revenues
The decrease in the Company's net revenues from $107.7 million for the
quarter ended May 31, 1995 to $62.6 million for the quarter ended May 31, 1996
and from $433.2 million for the nine months ended May 31, 1995 to $243.8 million
for the nine months ended May 31, 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
offset by increased unit sales of Software for Multimedia/PC Systems. 16-bit
Software revenues are expected to continue to decrease and no assurance can be
given that the sales of Software for the Multimedia/PC System will increase.
In addition, 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. See
"Overview".
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
May 31, 1995 and 1996, the Company derived 54% and 11% of its gross revenues,
respectively, from sales of Nintendo-compatible Software and 39% and 33% of its
gross revenues, respectively, from sales of Sega-compatible Software. In
addition, during the quarter ended May 31, 1996, the Company derived 30% 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:
Three Months Nine Months
Ended Ended
May 31, May 31,
------- -------
1996 1995 1996 1995
---- ---- ---- ----
Portable Software 5.5% 11.3% 8.0% 10.3%
16-Bit Software 15.9 70.6 48.7 78.3
Multimedia/PC and 32-bit Software 70.8 15.4 39.4 7.8
Other 7.8 2.7 3.9 3.6
Gross Profit
Gross profit decreased from $53.9 million (50% of net revenues) for the
quarter ended May 31, 1995 to $38.2 million (61% of net revenues) for the
quarter ended May 31, 1996 and from $228.3 million (53% of net revenues) for the
nine months ended May 31, 1995 to $57.9 million (24% of net revenues) for the
nine months ended May 31, 1996. The dollar 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. The percentage increase for the
quarter ended May 31, 1996 as
13
compared to the same period for the prior year is primarily attributable to the
increased level of Multimedia/PC and 32-bit CD Software sales. The percentage
decrease for the nine months ended May 31, 1996 as compared to the nine months
ended May 31, 1995 is primarily attributable to the special cartridge video
charge. See "Overview".
Excluding the impact of the special cartridge video charge, gross profit
fluctuates as a result of six factors: (i) the level of returns and allowances;
(ii) the percentage of CD Software sales; (iii) the average unit price obtained
for sales of Software; (iv) the level of manufacture by the
Company of its Software; (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'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 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. In contrast, Software for the Sony Playstation is manufactured by
Sony. Royalties are payable to Sony at the time of manufacture and such costs
are included in the Company's cost of revenues sold which results in lower gross
profit as a percentage of net revenues when compared to gross profit on sales
of Sega Saturn Software.
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
14
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 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 stock-balancing programs
for its personal computer CD Software products will result in 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 increased from
$35.8 million (33% of net revenues) for the quarter ended May 31, 1995 to $39.3
million (63% of net revenues) for the quarter ended May 31, 1996 and decreased
from $154.3 million (36% of net revenues) for the nine months ended May 31, 1995
to $135.2 million (55% of net revenues) for the nine months ended May 31, 1996.
The dollar decrease for the nine months of fiscal 1996 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 increase for the third quarter of fiscal 1996
is primarily attributable to the impact of the acquisition of two Software
development companies in the first quarter of fiscal 1996. See "Overview".
Operating interest expense increased from $1.0 million (1% of net
revenues) for the quarter ended May 31, 1995 to $2.2 million (3% of net
revenues) for the quarter ended May 31, 1996 and from $3.0 million (0.7% of net
revenues) for the nine months ended May 31, 1995 to $5.3 million (2% of net
revenues) for the nine months ended May 31, 1996. The increase is primarily
attributable to higher outstanding balances under the Company's principal credit
facility during the quarter and nine months ended May 31, 1996.
Depreciation and amortization increased from $3.0 million (3% of net
revenues) for the quarter ended May 31, 1995 to $3.7 million (6% of net
revenues) for the quarter ended May 31, 1996 and from $6.4 million (2% of net
revenues) for the nine months ended May 31, 1995 to $10.9 million (5% of net
revenues) for the nine months ended May 31, 1996. The increase is primarily
15
attributable to increased depreciation relating to the acquisition of the
Company's new corporate headquarters and for the nine months ended May 31, 1996
is also attributable in part to the 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). See "Overview". The Company has also incurred and expects
to continue to incur increased research and development, and general and
administrative expenses in connection with the start-up of its coin-operated
video arcade operations. See "Overview".
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 nine
months ended May 31, 1995 and 1996 was cash flows from operations and, to a
lesser extent, from the sale during the nine months ended May 31, 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 May 31, 1995 and 1996, amounts outstanding under letters of
credit were approximately $4.0 million and $0.6 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, 1998. The Company draws down working capital advances and opens
letters of credit against the facility in amounts determined on a formula based
on factored receivables and inventory, which advances are secured by the
Company's assets. This bank also acts as the Company's factor for the majority
of its North American receivables, which are assigned on a nonrecourse,
pre-approved basis. The factoring charge is 0.25% of the receivables assigned
and the interest on advances is at the bank's prime rate minus one half percent.
At May 31, 1996, the
16
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, although there can be no assurance, 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 a consolidated class action litigation relating to
its press release announcing revised earnings and income for fiscal 1995, and to
a federal litigation and two State actions relating to the merger with
Lazer-Tron which includes allegations regarding the press release. 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 intends to defend such actions vigorously. No assurances can be given
that the resolution of such actions and/or future actions will not have a
material adverse effect on the Company's results of operations, liquidity or
financial condition for the quarter in which any such resolution occurs. 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.
17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Securities and Exchange Commission has issued orders directing a
private investigation relating to, among other things, the Company's earnings
estimate for fiscal 1995 and its decision in the second quarter of fiscal 1996
to exit the 16-bit portable and cartridge markets. The Company intends fully to
cooperate with the Commission in its investigation. There have been no other
material developments in the Company's legal proceedings during the quarter
ended May 31, 1996. For information with respect to the Company's legal
proceedings see the Company's Form 10-Q for the periods ended November 30, 1995
and February 29, 1996.
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.
18
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.
By: Robert Holmes July 16, 1996
-------------------
Robert Holmes,
President and
Chief Operating Officer
By: Anthony Williams July 16, 1996
--------------------
Anthony Williams,
Executive Vice President and
Chief Financial and Accounting Officer
19
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