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 November 30, 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 January 10, 1997, approximately 49,700,000 shares of common stock of the
registrant were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 56,022 $ 18,814
Marketable equity securities 432 11,278
Accounts receivable - net 40,534 20,478
Inventories 8,171 8,052
Prepaid expenses 13,217 18,513
Income taxes receivable 1,324 54,334
--------- ---------
TOTAL CURRENT ASSETS 119,700 131,469
--------- ---------
OTHER ASSETS
Fixed assets - net 41,334 42,779
Excess of cost over net assets acquired - net of accumulated
amortization of $14,267 and $13,052, respectively 52,724 54,939
Other assets 10,468 10,464
--------- ---------
TOTAL ASSETS $ 224,226 $ 239,651
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 31,855 $ 29,749
Short-term borrowings 5,398 5,321
Accrued expenses 80,975 78,506
Income taxes payable 642 724
Current portion of long-term debt 23,916 25,527
Obligation under capital leases - current 1,923 1,681
--------- ---------
TOTAL CURRENT LIABILITIES 144,709 141,508
--------- ---------
LONG-TERM LIABILITIES
Obligation under capital leases - noncurrent 3,787 3,685
Other long-term liabilities 207 347
--------- ---------
TOTAL LIABILITIES 148,703 145,540
--------- ---------
MINORITY INTEREST 292 522
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 1,000 shares
authorized; None issued -- --
Common stock, $0.02 par value; 100,000 shares authorized;
50,045 and 50,041 shares issued, respectively 1,001 1,001
Additional paid-in capital 166,851 165,782
Accumulated deficit (89,642) (70,642)
Treasury stock, 348 shares (1,813) (1,813)
Foreign currency translation adjustment (1,009) (754)
Unrealized (loss) gain on marketable equity securities (157) 15
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 75,231 93,589
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 224,226 $ 239,651
--------- ---------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in 000s, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1996 1995
--------- ---------
<S> <C> <C>
NET REVENUES $ 53,338 $ 134,447
COST OF REVENUES 23,442 75,863
--------- ---------
GROSS PROFIT 29,896 58,584
--------- ---------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses 35,344 47,494
Research and development expenses 7,545 5,089
Operating interest 960 1,032
Depreciation and amortization 4,158 3,497
--------- ---------
TOTAL OPERATING EXPENSES 48,007 57,112
--------- ---------
(LOSS) EARNINGS FROM OPERATIONS (18,111) 1,472
--------- ---------
OTHER INCOME (EXPENSE)
Interest income 291 831
Interest expense (734) (592)
Other (expense) (676) (836)
--------- ---------
(LOSS) EARNINGS BEFORE INCOME TAXES (19,230) 875
PROVISION FOR INCOME TAXES -- 350
--------- ---------
NET (LOSS) EARNINGS BEFORE MINORITY INTEREST (19,230) 525
--------- ---------
MINORITY INTEREST (230) (70)
--------- ---------
NET (LOSS) EARNINGS $ (19,000) $ 595
--------- ---------
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ (0.38) $ 0.01
--------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 49,700 56,640
--------- ---------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(in 000s, except per share data)
<TABLE>
<CAPTION>
Preferred Stock (1) Common Stock
----------------------- -----------------------
Issued Issued Additional
Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance August 31, 1995 -- -- 46,281 $ 926 $ 168,785 $ (10,652)
--------- --------- --------- --------- --------- ---------
Net Loss -- -- -- -- --
Issuances of Common Stock
and Options -- -- 463 9 7,756 (7,765)
Deferred compensation expense -- -- -- -- -- 3,304
Exercise of Stock Options
and Warrants -- -- 552 11 3,711 --
Pooling of Interests with Sculptured
and Probe -- -- 2,745 55 (55) --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 698 --
Purchase of Treasury Stock -- -- -- -- --
Foreign Currency Translation Loss -- -- -- -- -- --
Unrealized Loss on
Marketable Equity Securities -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance August 31, 1996 -- -- 50,041 1,001 180,895 (15,113)
--------- --------- --------- --------- --------- ---------
Net Loss -- -- -- -- -- --
Deferred compensation expense -- -- -- -- -- 1,050
Exercise of Stock Options
and Warrants -- -- 4 -- 19 --
Foreign Currency Translation Loss -- -- -- -- -- --
Unrealized Loss on
Marketable Equity Securities -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance November 30, 1996 -- -- 50,045 $ 1,001 $ 180,914 $ (14,063)
--------- --------- --------- --------- --------- ---------
<CAPTION>
Unrealized
(Accumulated Foreign Gain (Loss) On
Deficit) Currency Marketable
Retained Treasury Translation Equity
Earnings Stock Adjustment Securities Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance August 31, 1995 $ 153,141 $ (807) $ 811 $ 2,503 $ 314,707
--------- --------- --------- --------- ---------
Net Loss (221,368) -- -- -- (221,368)
Issuances of Common Stock
and Options -- -- -- -- --
Deferred compensation expense -- -- -- -- 3,304
Exercise of Stock Options
and Warrants -- -- -- -- 3,722
Pooling of Interests with Sculptured
and Probe (2,415) -- -- -- (2,415)
Tax Benefit from Exercise of
Stock Options -- -- -- -- 698
Purchase of Treasury Stock -- (1,006) -- -- (1,006)
Foreign Currency Translation Loss -- -- (1,565) -- (1,565)
Unrealized Loss on
Marketable Equity Securities -- -- -- (2,488) (2,488)
--------- --------- --------- --------- ---------
Balance August 31, 1996 (70,642) (1,813) (754) 15 93,589
--------- --------- --------- --------- ---------
Net Loss (19,000) -- -- -- (19,000)
Deferred compensation expense -- -- -- -- 1,050
Exercise of Stock Options
and Warrants -- -- -- -- 19
Foreign Currency Translation Loss -- -- (255) -- (255)
Unrealized Loss on
Marketable Equity Securities -- -- -- (172) (172)
--------- --------- --------- --------- ---------
Balance November 30, 1996 $ (89,642) $ (1,813) $ (1,009) $ (157) $ 75,231
--------- --------- --------- --------- ---------
</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
3
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Cash received from customers $ 54,969 $ 146,554
Cash paid to suppliers and employees (75,864) (161,828)
Interest received 291 831
Interest paid (1,694) (1,624)
Income taxes refunded 52,815 375
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 30,517 (15,692)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Acquisition of subsidiaries, net -- 7,161
Sale of marketable equity securities 8,782 --
Acquisition of fixed assets, excluding capital leases (983) (5,373)
Disposal of fixed assets 63 59
Acquisition of other assets (170) (674)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,692 1,173
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 4,322 128
Repayment of short-term borrowings (4,076) (2,192)
Payment of long-term debt (1,500) (1,500)
Payment of mortgage (111) --
Exercise of stock options and warrants 19 3,202
Payment of obligation under capital leases (311) (53)
Other financing activities 500 --
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (1,157) (415)
--------- ---------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 156 (281)
--------- ---------
NET INCREASE (DECREASE) IN CASH 37,208 (15,215)
CASH AT BEGINNING OF PERIOD 18,814 44,749
--------- ---------
CASH AT END OF PERIOD $ 56,022 $ 29,534
--------- ---------
</TABLE>
4
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
<TABLE>
<CAPTION>
Three Months Ended November 30,
1996 1995
-------- --------
<S> <C> <C>
RECONCILIATION OF NET (LOSS) EARNINGS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Net (Loss) Earnings $(19,000) $ 595
-------- --------
Adjustments to reconcile net (loss) earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,158 3,497
Loss on sale of marketable securities 902 --
Increase in allowance for returns and discounts 9,757 19,715
Deferred taxes (108) (151)
Minority interest in net earnings of consolidated
subsidiary (230) (70)
Deferred compensation expense 1,050 615
Non-cash royalty charges 3,425 --
Other non-cash charges 63 54
Change in assets and liabilities, net of effects of
acquisitions:
(Increase) Decrease in accounts receivable (28,055) 5,312
(Increase) in inventories (140) (18,104)
Decrease (Increase) in prepaid expenses 5,094 (3,237)
Decrease (Increase) in other current assets 58 (276)
Increase (Decrease) in trade accounts payable 1,825 (13,420)
(Decrease) in accrued expenses (1,130) (10,948)
Increase in income taxes payable 52,848 726
-------- --------
Total adjustments 49,517 (16,287)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 30,517 $(15,692)
-------- --------
Supplemental schedule of noncash investing and financing
activities:
1996 1995
-------- --------
Acquisition of equipment under capital leases $ 213 $ 153
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
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.
2. Liquidity - The accompanying consolidated financial statements have been
prepared assuming that Acclaim Entertainment, Inc. ("Acclaim"), together with
its subsidiaries (Acclaim and its subsidiaries are collectively hereinafter
referred to as the "Company"), will continue as a going concern. The Company's
significant loss from operations in fiscal 1996 and in the three months ended
November 30, 1996, the uncertainty as to whether the Company's products in
development will achieve commercial success, the Company's default of certain
financial covenants under its bank financings and uncertainty regarding the
resolution of litigation, including various class action lawsuits, raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
arise from the outcome of this uncertainty.
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 an aggregate of 2,745
shares of common stock of the Company for all the issued and outstanding shares
of Sculptured and Probe. The Company's consolidated financial statements for
fiscal 1996 include the results of Sculptured and Probe.
4. Accounts Receivable - Accounts receivable are comprised of the following:
November 30, 1996 August 31, 1996
----------------- ---------------
Receivables assigned to factor $37,657 $55,099
Less advances from factor 10,607 23,487
------- -------
Due from factor 27,050 31,612
Unfactored accounts receivable 9,510 12,031
Accounts receivable - foreign 30,818 20,229
Other receivables 3,961 5,472
Allowances for returns and discounts (30,805) (48,866)
------- -------
$40,534 $20,478
------- -------
Pursuant to a factoring agreement, the Company's principal bank acts as its
factor for the majority of its North American receivables, which are assigned
on a pre-approved basis. At November 30, 1996, the factoring charge amounted to
0.25% of the receivables assigned. The Company's obligations to the bank are
collateralized by all of the Company's and its North American subsidiaries'
accounts receivable, inventories and equipment. The advances for factored
receivables are pursuant to a revolving credit and security agreement, which
expires on January 31, 1999. Pursuant to the terms of the agreement, which can
be cancelled by either party upon 90 days notice prior to the end of the term,
the Company is required to maintain specified levels of working capital and
tangible net worth, among other financial covenants.
6
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in 000s, except per share data)
4. Accounts Receivable - (Continued)
The Company draws down working capital advances and opens letters of credit
(up to an aggregate maximum of $20 million) against the facility in amounts
determined on a formula based on factored receivables, inventory and cost of
imported goods under outstanding letters of credit. Effective November 8, 1996,
interest is charged at the bank's prime lending rate (8.25% at November 30,
1996) plus one percent per annum on such advances.
As of August 31, 1996, the Company was in default of certain financial
covenants under its revolving credit facility, which defaults have been waived
by the lender. The Company is also in default of the prohibitions on having a
"going concern" paragraph in the auditors' report on its financial statements
under the revolving credit facility. As of November 30, 1996, the Company was
also in default of certain financial and other covenants under its revolving
credit facility. The Company is currently seeking a waiver and new financial
covenants. The bank has continued to open collateralized letters of credit in
respect of the Company's products.
Sales credits and allowances for the three months ended November 30, 1996
and 1995 were $9,757 and $19,715, respectively.
Adjustments in the fourth quarter of fiscal 1996, on a pre-tax basis,
aggregated $138,300, a portion of which related to prior quarters. Accordingly,
for comparative quarterly purposes, during fiscal 1997, the 1996 quarterly
operating results may not necessarily be indicative of the results of
operations for such quarterly periods if these year-end adjustments could be
allocated to the respective quarters.
5. Long Term Debt - Long-term debt consists of the following:
November 30, August 31,
1996 1996
------ ------
(A) Term loan $17,500 $19,000
(B) Mortgage note 6,416 6,527
------ ------
23,916 25,527
Less: current portion 23,916 25,527
------ ------
$ -- $ --
------ ------
(A) In conjunction with the acquisition of Acclaim Comics, Inc., in July
1994, Acclaim Comics entered into a term loan guaranteed by the Company and
collateralized by all the assets of Acclaim Comics. The loan is payable in
quarterly installments of $1,500 through July 1998 and $1,750 through July
1999, and bears interest at a rate of LIBOR (5.59375% at November 30, 1996)
plus 2.5%. The loan contains covenants which require the maintenance of certain
financial ratios, restrict encumbrance of assets and limit the payment of
dividends by the Company and Acclaim Comics. Interest and principal payments
continue to be made on a timely basis.
(B) The mortgage note bears interest at the bank's prime lending rate
(8.25% at November 30, 1996), and is payable in quarterly installments that
commenced March 1, 1996. The principal amount is payable in quarterly
installments that commenced on May 1, 1996. On March 27, 2003, the unpaid
principal sum of $3,559, together with all accrued and unpaid interest, will be
due and payable. The mortgage note is collateralized by a building (Corporate
Headquarters) with a carrying value of approximately $17,170. Interest and
principal payments continue to be made on a timely basis.
7
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in 000s, except per share data)
5. Long Term Debt - (Continued)
As of November 30, 1996, the Company has been advised by the lenders of the
aforementioned long term debt that events of default have occurred and are
continuing under clauses of the respective lending agreements regarding certain
financial ratio requirements and prohibitions on cross defaults with other
facilities. Although interest and principal payments continue to be made on a
timely basis, the lenders have advised the Company that they reserve the right
to take any and all actions including the option of accelerating and/or
demanding immediate repayment of the obligations. Accordingly, both debts have
been classified as current. The Company is in preliminary negotiations with
respect to paying off the term loan. With respect to the mortgage note, the
Company is discussing a waiver of the defaults with the Lender, including an
immediate paydown of a portion of the loan and accelerated payment terms for
the balance.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is intended to update the information contained in the
Company's Form 10-K for the year ended August 31, 1996 and presumes that
readers have access to, and will have read, the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
Form 10-K.
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this report,
the words "believe," "anticipate," "think," "intend," "plan," "will be" and
similar expressions identify such forward-looking statements. Such statements
regarding future events and/or the future financial performance of the Company
are subject to certain risks and uncertainties, including those discussed in
"Factors Affecting Future Performance" below at pages 15 to 19, which could
cause actual events or the actual future results of the Company to differ
materially from any forward-looking statement. In light of the significant
risks and uncertainties inherent in the forward-looking statements included
herein, the inclusion of such statements should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
Overview
The Company is a mass market entertainment company whose principal business
to date has been as a publisher of interactive entertainment software
("Software") for use with interactive entertainment hardware platforms. Acclaim
also (i) develops and publishes comic books through its subsidiary, Acclaim
Comics, Inc.; (ii) distributes Software titles developed by other Software
publishers ("Affiliated Labels"); (iii) markets its motion capture technology
and studio services; and (iv) distributes coin-operated, video arcade games.
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 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 at such time as the Company's Software for such
platform is to be released. This generally requires the Company to estimate the
probable success of future hardware platforms as much as 12 to 24 months prior
to their introduction in order to allow sufficient lead time to develop
Software that will be available for such new platforms at or near the time of
their release. If the Company does not accurately predict the success of
existing or future hardware platforms due to, among other things, the long
Software development lead times involved, it could be in the position, as it
was in fiscal 1996 and in the first quarter of fiscal 1997, of marketing
Software (i) for new hardware platforms that have not achieved significant
market penetration and/or (ii) for hardware platforms that have become or are
becoming obsolete due to the introduction or success of new hardware platforms.
See "Factors Affecting Future Performance" and " -- Results of Operations." No
assurance can be given that the Company will, in the future, correctly identify
the platforms with mass market potential or be successful in publishing
Software for the platforms that achieve significant installed bases.
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 hardware platforms incorporating more advanced processors and
operating systems, (ii) the impact of technological changes embodied in
personal computer/compact disk/multimedia systems ("PC CD Systems") and
software therefor, (iii) the development of electronic and wireless delivery
systems and (iv) the entry and participation of new companies in the industry.
There can be no assurance that any of the newly introduced or announced
platforms will achieve market penetration similar to that achieved by the Super
Nintendo Entertainment System ("SNES") or Sega Genesis ("Genesis") 16-bit
platforms.
9
<PAGE>
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, in fiscal 1996 and the first quarter of fiscal
1997 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 a significant installed base.
The Company is currently developing Software for the Sony PlayStation, the
Sega Saturn, the Nintendo N64 and various PC CD Systems. The 32- and 64-bit
platforms have not achieved market penetration similar to that of the SNES or
Genesis; accordingly, the number of units of each Software title sold for those
platforms is significantly less than the number of units of a title generally
sold during 1993, 1994 and 1995 for the 16-bit platforms because of the smaller
installed base of the 32- and 64-bit platforms.
Net revenues from sales of the Company's Software during the first quarter
of fiscal 1997 were significantly lower than such revenues for the comparable
period in fiscal 1996. Sales of the Company's 32-bit and PC CD Software during
the first quarter of fiscal 1997 were, and management anticipates that such
sales during the remainder of fiscal 1997 will be, materially short of levels
necessary to offset the decline in 16-bit Software sales. Accordingly, the
Company's revenues and operating results from the sale of 32-bit and PC CD
Software in the first quarter of fiscal 1997 were, and management anticipates
that such revenues and operating results during the remainder of fiscal 1997
will be, materially less than the Company's revenues and operating profits in
fiscal 1994 and 1995. Management anticipates that the Company will continue to
incur material losses for the second quarter of fiscal 1997 and losses for
fiscal 1997. No assurance can be given of the Company's results of operations
and profitability in future periods. See "Factors Affecting Future
Performance."
As a result of the Company's acquisitions of three software development
studios in 1995 (two of which were completed in the first quarter of fiscal
1996), the Company's fixed costs relating to the development of Software and
its general and administrative expenses were substantially higher in fiscal
1996 and during the three months ended November 30, 1996 as compared to prior
periods and had a material adverse impact on the Company's profitability in
fiscal 1996 and during the three months ended November 30, 1996. Management
plans to maintain or reduce the dollar level of research and development
expenses during the remainder of fiscal 1997 which expenses management
anticipates will be offset, in part, by revenues derived from sales of Software
developed by the studios.
The release of "hit" titles for hardware platforms with significant
installed bases can significantly affect revenues. Historically, such "hit"
titles have accounted for significant portions of the Company's revenues during
particular periods.
The timing of the release of Software can cause material quarterly revenue
and earnings fluctuations. A significant portion of the Company's revenues in
any quarter are generally derived from Software first shipped in that quarter
or in the immediately preceding 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. Software for the new hardware platforms
requires more development time and, accordingly, causes 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 in the past have caused, and in the future could
cause, the Company's results of operations for such quarter to fall
significantly below anticipated levels. See "Factors Affecting Future
Performance."
The Company's ability to generate sales growth and profitability will be
materially dependent on (i) the growth of the Software market for 32- and
64-bit hardware platforms and PC CD Systems, (ii) the Company's ability to
identify, develop and publish "hit" Software for hardware platforms with
significant installed bases, (iii) the development of, and the generation of
revenues from, its other entertainment operations and (iv) the success of the
Company's cost reduction efforts.
10
<PAGE>
Results of Operations
The following table sets forth certain statements of consolidated
operations data as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1996 1995
------ ------
<S> <C> <C>
Domestic revenues 47.0% 69.3%
Foreign revenues 53.0 30.7
------ ------
Net revenues 100.0 100.0
Cost of revenues 44.0 56.4
------ ------
Gross profit 56.0 43.6
Selling, advertising, general and administrative expenses 66.3 35.3
Research and development expenses 14.1 3.8
Operating interest 1.8 0.8
Depreciation and amortization 7.8 2.6
------ ------
Total operating expenses 90.0 42.5
------ ------
(Loss) earnings from operations (34.0) 1.1
Other income (expense), net (2.0) (0.4)
(Loss) earnings before income taxes (36.0) 0.7
Net (loss) earnings (36.0) 0.4
</TABLE>
Net Revenues
The Company's gross revenues, which exclude sales credits and allowances
which are material to the Company's results of operations, were derived from
the following product categories:
Three Months Ended
November 30,
1996 1995
------ ------
Portable Software 2.0% 10.0%
16-Bit Software 15.0% 64.0%
32-bit Software 63.0% 13.0%
PC CD Software 17.0% 10.0%
Other 3.0% 3.0%
The decrease in the Company's net revenues from $134.4 million for the
three months ended November 30, 1995 to $53.3 million for the three months
ended November 30, 1996 was predominantly due to reduced unit sales of 16-bit
Software and to a lesser extent a reduction in average unit selling prices for
16-bit Software, which were not offset by sales of 32-bit and PC CD Software.
See " -- Overview," "Factors Affecting Future Performance -- Inventory
Management; Risk of Returns" and Note 4 of Notes to Consolidated Financial
Statements. Management anticipates that sales of the Company's 32-bit, 64-bit
and PC CD Software in fiscal 1997 will be materially short of levels necessary
to offset the reduction in revenues from sales of 16-bit Software and no
assurance can be given with respect to the Company's revenues in future
periods. 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.
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A significant portion of the Company's revenues in any quarter are
generally derived from Software first shipped in that quarter or in the
immediately preceding quarter. In the quarter ended November 30, 1995, WWF
Arcade and Quarterback Club `96 accounted for 21% and 10% of the Company's
gross revenues, respectively, and, in the quarter ended November 30, 1996,
Alien Trilogy and NBA Jam Extreme accounted for 11% and 10% of the Company's
gross revenues, respectively.
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. For the three months ended November 30, 1995 and
1996, the Company derived 43% and 13% of its gross revenues, respectively, from
sales of Nintendo-compatible Software and for the three months ended November
30, 1995 and 1996, the Company derived 37% and 19% of its gross revenues,
respectively, from sales of Sega-compatible Software. In addition, for the
three months ended November 30, 1995 and 1996, the Company derived 9% and 48%
of its gross revenues from sales of Software for the Sony PlayStation.
Gross Profit
Gross profit fluctuates as a result of six factors: (i) the level of
returns and allowances; (ii) the number of "hit" products and average unit
selling prices; (iii) the percentage of sales of CD 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 the level
of returns and allowances to retailers, which reduces the average unit price
obtained for its Software sales. Similarly, lack of "hit" titles or a low
number of "hit" titles, resulting in lower average unit sales prices, adversely
impacts the Company's gross profits.
The Company's margins on sales of CD Software are higher than those on
cartridge Software as a result of significantly lower CD software product
costs.
The Company arranges for the manufacture by subcontractors of its Sega
Software under its agreement with Sega. 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 sales of Software manufactured by the Company results
in higher gross profit as a percentage of net revenues. Software for the Sony
and Nintendo platforms is manufactured by Sony and Nintendo, respectively.
Royalties are payable to Sony and Nintendo as part of the product cost 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 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.
Gross profit decreased from $58.6 million (44% of net revenues) for the
three months ended November 30, 1995 to $29.9 million (56% of net revenues) for
the three months ended November 30, 1996. The percentage increase in gross
profit is primarily attributable to higher levels of sales of CD Software (PC
CD and 32-bit Software) as margins on CD Software are higher than those on
cartridge Software as a result of significantly lower CD product costs. The
dollar decrease is predominantly due to lower sales volumes.
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Management anticipates that the Company's future gross profit will
principally be affected by (i) the percentage of returns, price protection and
other similar concessions in respect of the Company's Software sales and (ii)
the Company's product mix (i.e., the percentage of CD Software and sales
related to the Company's new businesses). 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 PC CD Software products will result in higher rates of returns of such
product as compared to the historical rate of return of cartridge Software. As
the percentage of sales of PC 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
$47.5 million (35% of net revenues) for the three months ended November 30,
1995 to $35.3 million (66% of net revenues) for the three months ended November
30, 1996. The dollar decrease is primarily attributable to reduced selling
expenses resulting from decreased sales volume and decreased advertising
expenses. The percentage increase is attributable to reduced sales volume.
Research and development expenses increased from $5.1 million (4% of net
revenues) for the three months ended November 30, 1995 to $7.5 million (14% of
net revenues) for the three months ended November 30, 1996 due to increased
internal Software development resulting from the acquisition of two Software
studios in the first quarter of fiscal 1996.
Operating interest expense was $1.0 million (0.8% of net revenues) for the
three months ended November 30, 1995 and $1.0 million (2% of net revenues) for
the three months ended November 30, 1996. The dollar decrease was primarily
attributable to decreased sales volume and to lower outstanding balances under
the Company's principal credit facility. The percentage increase is
attributable to lower net revenues in the first quarter of fiscal 1997.
Depreciation and amortization increased from $3.5 million (3% of net
revenue) for the three months ended November 30, 1995 to $4.2 million (8% of
net revenues) for the three months ended November 30, 1996. The increase is
primarily attributable to depreciation relating to fixed assets held by the
studios and to the reduction, in the fourth quarter of fiscal 1996, of the
estimated remaining life of goodwill relating to Acclaim Comics from forty to
twenty years.
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 material fluctuations in the Company's quarterly revenues and earnings.
Liquidity and Capital Resources
The Company derived net cash from operating activities of approxiamtely
$30.5 million during the three months ended November 30, 1996 and used net cash
from operating activities of approximately $15.7 million during the three
months ended November 30, 1995.
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The increase in net cash from operations during the three months ended
November 30, 1996 as compared to the three months ended November 30, 1995 was
primarily attributable to an income tax refund of approximately $53 million
related to the carryback of the Company's loss for fiscal 1996. The decrease in
cash received from customers is primarily attributable to lower sales resulting
from the maturation of the 16-bit market and the related transition to 32-bit
and 64-bit platforms. See " -- Overview."
The Company derived net cash from investing activities of approximately
$7.7 million and $1.2 million during the three months ended November 30, 1996
and 1995, respectively.
The increase in net cash from investing activities in the three months
ended November 30, 1996 as compared to the three months ended November 30, 1995
is primarily attributable to proceeds derived from the sale of TCI capital
stock offset by cash associated with the acquisition of certain subsidiaries in
the 1996 fiscal quarter, which reflects cash held by subsidiaries at the
respective dates of acquisition. In addition, lower cash amounts were expended
on the acquisition of fixed assets in the three months ended November 30, 1996
as compared to the three months ended November 30, 1995.
The Company used net cash in financing activities of approximately $1.2
million and $0.4 million during the three months ended November 30, 1996 and
November 30, 1995, respectively.
The increase in net cash used in financing activities in the three months
ended November 30, 1996 as compared to the three months ended November 30, 1995
is primarily attributable to decreased exercises of stock options and warrants
during the three months ended November 30, 1996 offset by higher payments in
respect of short-term loans in the three months ended November 30, 1995.
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, 1995 and 1996, amounts
outstanding under letters of credit were approximately $7 million and $4.4
million, respectively. Other than such letters of credit, the Company does not
currently have any material operating or capital expenditure commitments.
The Company has a revolving credit and security agreement with BNY
Financial Corporation ("BNY"), its principal domestic bank, which agreement
expires on January 31, 1999. 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 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 pre-approved basis. At
November 30, 1996, the factoring charge was 0.25% of the receivables assigned
and the interest on advances was at the bank's prime rate plus one percent. The
Company was at August 31, 1996 in default of its financial covenants under this
agreement, which default had been waived, but remains in default of the
prohibition of having a "going concern" paragraph in the auditors' report on
its financial statements. The Company is current in its payment obligations. In
connection with obtaining a waiver of defaults at August 31, 1996, the advance
formula was significantly modified to restrict and reduce the eligible
receivables and inventory against which advances and letters of credit would be
made, the financial covenants were made more restrictive on the Company and
were otherwise revised to reflect the decrease in sales, profitability and cash
flow of the Company and anticipated operations in future periods, and certain
additional events of default were added. The Company was, at November 30, 1996,
in default of its financial and other covenants under this agreement and is
currently seeking a waiver and new financial covenants with the bank. See
"Factors Affecting Future Performance -- Liquidity and Bank Relationships."
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 April 1995, $15 million of the Loan was repaid 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
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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 is in default of its
financial covenants, and the cross default provisions and certain other terms
of the Loan, but is in compliance with its payment obligations. The Company is
in preliminary negotiations with respect to paying off the Loan. See "Factors
Affecting Future Performance -- Liquidity and Bank Relationships."
As of August 31, 1996 and November 30, 1996, the Company is also in default
of its financial covenants and of the cross default provisions of the financing
arrangements with Fleet Bank ("Fleet") relating to the mortgage on its Corporate
headquarters. The Company is in compliance with its payment obligations under
this mortgage loan. The Company is discussing a waiver of the defaults with the
lender, including an immediate pay down of a portion of the loan and accelerated
payment terms for the balance of the loan. See "Factors Affecting Future
Performance -- Liquidity and Bank Relationships."
To provide for its short and long-term liquidity needs, the Company has
significantly reduced the number of its employees and is evaluating various
alternatives, including raising additional capital, the sale of certain assets
and renegotiation of debt covenants and repayment terms related to its
long-term debts. There can be no assurances that such capital infusion will be
available or that any such capital infusion, sale or renegotiation could be
effected on satisfactory terms. In addition, the Company's future liquidity
will be materially dependent on its ability to develop and market Software that
achieves widespread market acceptance for use with the hardware platforms that
dominate the market.
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 liquidity, financial condition and
results of operations. The Company is also party to certain class action
litigations. The ultimate outcome of the litigations cannot presently be
determined. Accordingly, no provision for any liability that may result upon
adjudication has been recognized in the accompanying financial statements. See
"Legal Proceedings."
Factors Affecting Future Performance
Future operating results of the Company depend upon many factors and are
subject to various risks and uncertainties. Some of the risks and uncertainties
which may cause the Company's operating results to vary from anticipated
results or which may materially and adversely affect its operating results are
as follows:
Recent Operating Results
The Company's net revenues declined from $134.4 million for the three
months ended November 30, 1995 to $53.3 million for the three months ended
November 30, 1996. The Company had net earnings of $0.6 million for the three
months ended November 30, 1995 and a net loss of $(19) million for the three
months ended November 30, 1996. The Company believes that sales of its 32- and
64-bit and PC CD Software will fall materially short of levels necessary to
offset the decline in 16-bit Software sales and that its revenues and operating
results from the sale of Software for the new hardware platforms and PC CD
Systems during the remainder of fiscal 1997 will be materially less than its
revenues and operating profits in fiscal 1994 and 1995. The Company may not be
able to offset the decline in 16-bit Software sales with increased sales of
Software for the new hardware platforms and PC CD Systems in fiscal 1998 and
beyond. In such event, the Company's results of operations and profitability
will continue to be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
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Liquidity and Bank Relationships
The Company's net cash used in operations was approximately $15.7 million
for the three months ended November 30, 1995 and the Company's net cash
provided by operations was approximately $30.5 million for the three months
ended November 30, 1996 primarily due to an approximately $53 million income
tax refund related to the carryback of its loss for fiscal 1996. Without giving
effect to such tax refund, the Company has experienced a decrease in net cash
from operations in recent periods primarily due to the industry transition from
16-bit to 32- and 64-bit hardware and Software. The Company anticipates that
its cash flows from operations will not be sufficient to cover its operating
expenses during the remainder of fiscal 1997. There can be no assurance that
the Company's operating expenses will not materially exceed cash flows
available from the Company's operations in future periods. To provide
liquidity, the Company has significantly reduced the number of its employees
and is evaluating various alternatives, including the raising of additional
capital, the sale of certain assets and the renegotiation of debt covenants and
repayment terms related to its long-term debts. There can be no assurance that
such capital infusion will be available or that any such capital infusion, sale
or renegotiation could be effected on satisfactory terms. In addition, the
Company's future liquidity will be materially dependent on its ability to
develop and market "hit" Software for the hardware platforms that dominate the
interactive entertainment market. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity."
At August 31, 1996, the Company was in default of various financial and
other covenants under the loan agreements with BNY, Midland and Fleet. BNY has
waived the financial defaults at August 31, 1996. The inclusion of the "going
concern" explanatory paragraph in the auditors' report on the Company's 1996
financial statements also constitutes an event of default under the Company's
agreement with BNY and its term loan facility with Midland. At November 30,
1996, the Company was in default of various financial and other covenants under
the loan agreements with BNY, Midland and Fleet. At January 10, 1997, the
Company's indebtedness aggregated $38 million. Although the Company is current
in its payments under all its existing facilities, the lenders have reserved
their rights and remedies in respect of the unwaived events of default,
including the right to accelerate the loans and demand immediate payment plus
interest, and foreclose on the collateral securing the loans if payment is not
made. The Company is currently seeking a waiver and new financial covenants
from BNY. The Company is in preliminary negotiations with respect to paying off
the Midland loan. The Company is discussing a waiver of the defaults with
Fleet, including a paydown of a portion of the Fleet loan and accelerated
payment terms for the balance of the loan. Although the Company believes it
will be able to remain in compliance with the new covenants currently being
sought with its lenders, and will generate adequate cash flow to service its
obligations under these facilities, there can be no assurance that additional
covenant defaults, or a payment default, will not occur in the future. The
Company's ability to meet these covenants and meet such obligations can be
affected by factors beyond its control. There can be no assurance that the
Company will be able to obtain waivers of the existing, or any future, default
or that the lenders will not exercise their remedies. In such event, the
Company's operations would be materially adversely affected.
Going Concern Considerations
The report of KPMG Peat Marwick LLP, independent auditors for the Company,
on the Company's financial statements for the year ended August 31, 1996
includes an explanatory paragraph relating to substantial doubt as to the
ability of the Company to continue as a going concern. The Company incurred
significant losses from operations in fiscal 1996 and in the first quarter of
fiscal 1997 and anticipates incurring material losses for the second quarter of
fiscal 1997 and losses for 1997. The Company is in default of various covenants
under the agreements with certain of its lenders, which defaults permit the
lenders to accelerate the loans and seek immediate repayment, foreclose on
collateral securing the loans if payment is not made, and seek other relief. In
addition, the Company has experienced, and expects to continue to experience
during fiscal 1997, negative cash flow from operations, and is a party to
significant litigation, including various class action lawsuits. A "going
concern" explanatory paragraph is expected to have a material adverse affect on
the terms of any bank financing or capital the Company may seek.
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Industry Trends; Platform Transition; Technological Change
The interactive entertainment industry is characterized by rapid
technological change, resulting in limited hardware platform and Software life
cycles. No single hardware platform or system has achieved long-term dominance.
The Company has historically derived substantially all of its revenues from the
publication and distribution of Software for then dominant hardware platforms.
The Company's revenues are subject to fluctuation during transition periods
when new hardware platforms have been introduced but none has achieved mass
market penetration.
The interactive entertainment industry is currently undergoing, and the
Company 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 hardware platforms incorporating more advanced processors and
operating systems, (ii) the impact of technological changes embodied in PC CD
Systems and software therefor, (iii) the development of electronic and wireless
delivery systems and (iv) the entry and participation of new companies in the
industry.
The Company's results of operations and profitability have been materially
adversely affected during the fiscal year ended August 31, 1996 and the quarter
ended November 30, 1996 largely by the material decline in sales of the
Company's 16-bit Software and the transition to the new platforms described
herein. There can be no assurance that any of the new platforms will achieve
market penetration similar to that achieved by the SNES and Genesis systems.
Substantially all of the Company's revenues in fiscal 1997 are anticipated
to be derived from the sale of Software designed to be played on the
PlayStation, Sega Saturn, N64 and various PC CD Systems. At any given time, the
Company has expended significant development and marketing resources on product
development for platforms (such as SNES and Genesis) that have had shorter life
cycles than the Company expected, as in fiscal 1996, or on products designed
for new platforms (such as the Playstation and N64) that have not yet achieved
large installed bases. The success of the Company's Software is significantly
affected by market acceptance and penetration of new hardware platforms and the
life cycle of older hardware platforms and the Company must predict accurately
the market acceptance, installed base and life cycle of each platform. If the
Company chooses not to develop Software titles for a platform that achieves a
significant installed base, discontinues development for a platform that has a
longer than expected life cycle, develops for a platform that does not achieve
a significant installed base or continues development for a platform that has a
shorter than expected life cycle, the Company's results of operations and
liquidity could be materially adversely affected.
Inventory Management; Risk of Returns
The Company is generally not contractually obligated to accept returns,
except for defective product. However, the Company permits its customers to
return or exchange Software titles and may provide price protection on titles
unsold by a customer. Management must make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Among the more significant estimates are allowances for estimated returns,
price concessions and other discounts. In fiscal 1996, price protection,
returns, exchanges and other concessions were materially higher than the
Company's reserves therefor, as a result of which the Company's results of
operations and liquidity in fiscal 1996 were materially adversely affected. The
Company believes that as of November 30, 1996 it has established adequate
reserves for future price protection, returns, exchanges and other similar
concessions. See Note 4 of Notes to Comsolidated Financial Statements. No
assurance can be given that future price protection, returns, exchanges and
other similar concessions will not exceed the Company's reserves therefor and,
if so exceeded, the Company's financial condition and results of operations
will be materially adversely affected.
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In addition, the Company has offered and anticipates that it will continue
to offer stock-balancing programs for its PC CD Software. The Company has
established reserves for such programs, which have not been material to date.
No assurance can be given that future stock-balancing programs will not become
material and/or will not exceed the Company's reserves for such programs and,
if so exceeded, the Company's results of operations and financial condition
could be materially adversely affected.
Products
A significant portion of the Company's revenues in any quarter are
generally derived from sales of Software in that quarter or in the immediately
preceding quarter. The life cycle of a Software title generally ranges from
less than three months to upwards of twelve months. Accordingly, the Company is
constantly required to develop, introduce and sell new Software in order to
generate revenues. The Company may not be able to develop, introduce and sell
new competitive titles on a timely basis, in which event its results of
operations and profitability would be materially adversely affected.
Increased Product Development Costs
In order to manage its Software development process and to ensure access to
a pool of Software developers and maintain confidentiality about its Software
titles, development tools and engines in an increasingly competitive market,
the Company acquired three Software development studios in 1995. The result of
such acquisitions was that the Company's fixed Software development and
operating costs were significantly higher in fiscal 1996 and in the first
quarter of fiscal 1997 as compared to its historical rate and were not offset
by revenues from Software developed by the studios. Accordingly, the Company's
results of operations and profitability were materially adversely affected in
fiscal 1996 and in the first quarter of fiscal 1997. No assurance can be given
that such costs will not continue to have a material adverse effect on the
Company's operations in future periods.
Product Development Schedules; Earnings Fluctuations
The timing of the release of Software titles can cause material quarterly
revenue and earnings fluctuations. 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 the new hardware platforms,
the use of new development tools and the learning process associated with
development for new technologies. As the industry trend toward more
sophisticated hardware platforms and PC CD Systems continues, the related
Software titles 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 in the past have caused, and in the future could cause,
the results of operations and net income for such quarter to fall materially
below anticipated levels.
In addition, the market for interactive entertainment Software is "hits"
driven. The release of "hit" titles for hardware have accounted for significant
portions of the Company's revenues. There can be no assurance that the Company
will be able to publish "hit" titles for hardware platforms with significant
installed bases.
Competition
The Software market is intensely competitive and is characterized by
constant introductions of new Software and advancing technologies.
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The Company competes with a variety of companies who offer products that
compete directly with one or more of the Company's products. Typically, the
Company's chief competitor on a dedicated platform is the hardware manufacturer
of the platform, to whom the Company pays royalties and, in some cases,
manufacturing charges. Accordingly, the hardware manufacturers have a price,
marketing and distribution advantage with respect to Software marketed by them
and such advantage is particularly important in a mature or declining market
which supports fewer full-priced titles and customers make purchasing decisions
on non-"hit" products based in part on price (as compared to developing markets
with limited Software titles, when price has been comparatively a less
important factor in Software sales).
The Company's competitors also include a number of independent Software
publishers licensed by the hardware manufacturers. These competitors vary in
size from very small companies to companies with financial, managerial and
technical resources comparable to or greater than those of the Company.
No assurance can be given that the Company will be able to compete
successfully.
New Business Ventures
During the last two years, the Company has completed acquisitions, or has
commenced operations, of various new businesses including (i) the publication
of comic books, (ii) the distribution of Affiliated Labels Software, (iii) the
marketing of its motion capture technology and studio services, and (iv) the
distribution of coin-operated video games. The Company also acquired three
Software development studios in calendar 1995. The Company has made significant
investments and has incurred significant expenses in connection with the
acquisition/establishment of such businesses in fiscal 1995 and 1996, and
anticipates that it will continue to incur significant expenses in connection
with certain of the operations thereof. To date, none of such new businesses
has generated material revenues and there can be no assurance that such
businesses will generate material revenues or the timing thereof. To the extent
the Company continues to incur material expenses in connection with such
ventures during periods when they do not generate significant revenues, the
Company's results of operations and profitability will be materially adversely
affected.
Employees
The interactive entertainment industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel among
competitors. The ability to identify, hire and retain such personnel is
essential to the Company's success. No assurance can be given that the Company
will be able to attract and retain such personnel.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company was sued in an action entitled Digital Pictures, Inc. v.
Acclaim Entertainment, Inc.; Gregory E. Fischbach; and Anthony Williams (Case
No. 96-3-3301 TC) filed in December 1996 in the United States Bankruptcy Court
in the Northern District of California. The individual named defendants in this
action are directors and/or executive officers of the Company. The plaintiff
claims damages of approximately $845,000 allegedly owed to the plaintiff, an
accounting and unspecified compensatory, punitive and exemplary damages based
on allegations that the defendants falsified sales, failed to provide timely
statements and to pay amounts the Company owes the plaintiff pursuant to the
July 1994 Sales and Distribution Agreement between the Company and the
plaintiff under which the plaintiff granted the Company the exclusive worldwide
right to sell and distribute the plaintiff's software products for a term of
five years. In addition, the plaintiff alleges, among other things, fraud and
negligent misrepresentation. The Company intends to defend this action
vigorously.
The Company was also sued in an action entitled Sound Source Interactive,
Inc. v. Acclaim Distribution, Inc.; Acclaim Entertainment, Inc.; and DOES 1
through 100, inclusive (Case No. BC162531) filed in December 1996 in the
Superior Court of the State of California for the County of Los Angeles.
Defendant Acclaim Distribution, Inc. ("ADI") is a wholly owned subsidiary of
the Company. The plaintiff claims approximately $2.2 million of compensatory
and general damages and compensatory, general, special, consequential and
punitive damages in excess of $22 million based on allegations that the
defendants breached (i) the Sales and Distribution Agreement dated as of June
15, 1995 between ADI and the plaintiff (the "Sales and Distribution Agreement")
under which the plaintiff granted ADI the exclusive right to sell and
distribute the plaintiff's software products by, among other things, providing
the plaintiff with false accounting statements, misrepresenting product orders,
and failing to return or account for software products shipped by the plaintiff
to ADI and wrongfully retaining restock and distribution fees; and (ii) the
Termination Agreement dated as of March 31, 1996 between the plaintiff and ADI
pursuant to which the Sales and Distribution Agreement was terminated by,
amoung other things, failing to account, failing to pay monies due and failing
to return or account for software products shipped by the plaintiff to ADI. In
addition, the plaintiff alleges, among other things, fraud and negligent
misrepresentation. The Company intends to defend this action vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCLAIM ENTERTAINMENT, INC.
By: /s/ Gregory Fischbach January 14, 1997
------------------------
Gregory Fischbach,
Co-Chairman of the Board and
Chief Executive Officer
By: /s/ J. Mark Hattendorf January 14, 1997
-----------------------
J. Mark Hattendorf,
Executive Vice President and
Chief Financial and Accounting Officer
21
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