<PAGE>
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, 1997
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, 1997 approximately 49,650,000 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>
May 31, August 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 46,043 $ 18,814
Marketable equity securities -- 11,278
Accounts receivable - net 23,740 20,478
Inventories 3,626 8,052
Prepaid expenses 14,853 18,513
Income taxes receivable -- 54,334
--------- ---------
TOTAL CURRENT ASSETS 88,262 131,469
--------- ---------
OTHER ASSETS
Fixed assets - net 36,985 42,779
Excess of cost over net assets acquired - net of accumulated
amortization of $16,576 and $13,052, respectively 24,075 54,939
Other assets 10,605 10,464
--------- ---------
TOTAL ASSETS $ 159,927 $ 239,651
--------- ---------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 18,044 $ 29,749
Short-term borrowings 5,550 5,321
Accrued expenses 82,701 78,506
Income taxes payable 3,177 724
Current portion of long-term debt 1,168 25,527
Obligation under capital leases - current 1,824 1,681
--------- ---------
TOTAL CURRENT LIABILITIES 112,464 141,508
--------- ---------
LONG-TERM LIABILITIES
Obligation under capital leases - noncurrent 2,529 3,685
Long-term debt 52,835 --
Other long-term liabilities -- 347
--------- ---------
TOTAL LIABILITIES 167,828 145,540
--------- ---------
MINORITY INTEREST (714) 522
STOCKHOLDERS' (DEFICIENCY) EQUITY
Preferred stock, $0.01 par value; 1,000 shares authorized;
None issued -- --
Common stock, $0.02 par value; 100,000 shares authorized;
50,121 and 50,041 shares issued, respectively 1,002 1,001
Additional paid in capital 172,514 165,782
Accumulated deficit (176,188) (70,642)
Treasury stock, 474 and 348 shares, respectively (2,904) (1,813)
Foreign currency translation adjustment (1,611) (754)
Unrealized gain on marketable equity securities -- 15
--------- ---------
TOTAL STOCKHOLDERS' (DEFICIENCY) EQUITY (7,187) 93,589
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 159,927 $ 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 Nine Months Ended
May 31, May 31,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 41,616 $ 62,639 $ 147,264 $ 215,012
COST OF REVENUES 25,466 25,806 78,019 162,522
--------- --------- --------- ---------
GROSS PROFIT 16,150 36,833 69,245 52,490
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses 28,476 30,791 90,732 111,184
Research & development expenses 6,621 7,155 23,588 18,559
Operating interest 417 2,150 1,625 5,255
Depreciation and amortization 4,394 3,671 12,554 10,867
Goodwill writedown 25,200 -- 25,200 --
Litigation settlements 8,300 -- 8,300 --
Downsizing charge 10,000 -- 10,000 --
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 83,408 43,767 171,999 145,865
--------- --------- --------- ---------
(LOSS) FROM OPERATIONS (67,258) (6,934) (102,754) (93,375)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 816 958 1,606 2,935
Interest expense (1,625) (593) (3,073) (1,711)
Other (expense) income (1,507) 565 (2,141) 4,239
--------- --------- --------- ---------
(LOSS) BEFORE INCOME TAXES (69,574) (6,004) (106,362) (87,912)
--------- --------- --------- ---------
PROVISION (BENEFIT) FOR INCOME TAXES 805 (1,800) 426 (28,260)
--------- --------- --------- ---------
NET (LOSS) BEFORE
MINORITY INTEREST (70,379) (4,204) (106,788) (59,652)
MINORITY INTEREST (675) (236) (1,242) (508)
--------- --------- --------- ---------
NET (LOSS) $ (69,704) $ (3,968) $(105,546) $ (59,144)
--------- --------- --------- ---------
NET (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (1.40) $ (0.08) $ (2.13) $ (1.20)
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 49,645 49,940 49,645 49,360
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' (DEFICIENCY) 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 -- -- -- -- -- 5,275
Exercise of Stock Options -- -- 80 1 169 --
Issuance of Warrants and Options -- -- -- -- 722 566
Purchase of Treasury Stock -- -- -- -- -- --
Foreign Currency Translation Loss -- -- -- -- -- --
Unrealized Loss on
Marketable Equity Securities -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance May 31, 1997 -- -- 50,121 $ 1,002 $ 181,786 $ (9,272)
--------- --------- --------- --------- --------- ---------
<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 (105,546) -- -- -- (105,546)
Deferred compensation expense -- -- -- -- 5,275
Exercise of Stock Options -- -- -- -- 170
Issuance of Warrants and Options -- -- -- -- 1,288
Purchase of Treasury Stock -- (1,091) -- -- (1,091)
Foreign Currency Translation Loss -- -- (857) -- (857)
Unrealized Loss on
Marketable Equity Securities -- -- -- (15) (15)
--------- --------- --------- --------- ---------
Balance May 31, 1997 $(176,188) $ (2,904) $ (1,611) -- $ (7,187)
--------- --------- --------- --------- ---------
</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>
Nine Months Ended
May 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Cash received from customers $ 165,654 $ 419,862
Cash paid to suppliers and employees (230,489) (438,691)
Interest received 1,606 2,935
Interest paid (4,698) (6,966)
Income taxes refunded (paid) 56,955 (2,394)
--------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES (10,972) (25,254)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Sale of marketable equity securities 10,240 14,643
Acquisition/Divestiture of subsidiaries, net 6,964 7,912
Acquisition of fixed assets, excluding capital leases (3,620) (11,204)
Acquisition of other assets (382) (2,068)
Other investing activities -- 212
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 13,202 9,495
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from Convertible Subordinated Notes 47,400 --
Proceeds from short-term borrowings 12,827 12,947
Repayment of short-term borrowings (12,657) (14,286)
Proceeds from mortgage -- 6,676
Payment of mortgage (2,524) (111)
Issuance of common stock -- 4
Exercise of stock options 170 3,502
Payment of obligation under capital leases (1,513) (166)
Payment of long-term debt (19,000) (4,613)
Other financing activities 460 127
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,163 4,080
--------- ---------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (164) (1,285)
--------- ---------
NET INCREASE (DECREASE) IN CASH 27,229 (12,964)
---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,814 44,749
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 46,043 $ 31,785
--------- ---------
</TABLE>
4
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
1997 1996
--------- ---------
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net (Loss) $(105,546) $ (59,144)
--------- ---------
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 37,754 10,867
Loss (Gain) on sale of marketable equity securities 1,010 (3,684)
Provision for returns and discounts 23,440 109,837
Deferred income taxes -- (7,022)
Minority interest in net earnings of consolidated subsidiary (1,242) (508)
Deferred compensation expense 5,275 2,294
Non-cash royalty charges 7,750 2,221
Litigation settlements 8,300 --
Other non-cash items 248 173
Change in assets and liabilities:
(Increase) in accounts receivable (20,543) (4,668)
Decrease (Increase) in inventories 1,377 (3,127)
(Increase) in prepaid expenses (2,688) (3,836)
Decrease in other current assets 330 1,288
(Decrease) in trade accounts payable (11,666) (14,280)
(Decrease) in accrued expenses (12,231) (32,026)
(Decrease) in income taxes payable -- (23,639)
Decrease in income taxes receivable 57,460 --
--------- ---------
Total adjustments 94,574 33,890
--------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $ (10,972) $ (25,254)
--------- ---------
</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.
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 those year-end adjustments could have been
allocated to the respective quarters.
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 losses from operations in fiscal 1996 and in the nine
months ended May 31, 1997, the uncertainty as to whether the
Company's products in development will achieve commercial success,
uncertainty in respect of the on-going support of the Company's
principal bank and uncertainty in respect of the resolution of
litigations, 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 and Divestiture - 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, par value $0.02 per share (the
"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.
On March 5, 1997, the Company completed the sale of
substantially all of the assets and certain liabilities of Acclaim
Redemption Games, Inc., formerly Lazer-Tron Corporation, for a
purchase price of $6,000 in cash.
4. Accounts Receivable - Accounts receivable are comprised of the
following:
<TABLE>
<CAPTION>
May 31, 1997 August 31, 1996
------------ ---------------
<S> <C> <C>
Receivables assigned to factor $16,934 $55,099
Less advances from factor 841 23,487
--- ------
Due from factor 16,093 31,612
Unfactored accounts receivable 4,549 12,031
Accounts receivable - foreign 21,781 20,229
Other receivables 3,352 5,472
Allowances for returns and discounts (22,035) (48,866)
-------- --------
$23,740 $20,478
------- -------
</TABLE>
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 May
31, 1997, 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
6
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in 000s, except per share data)
4. Accounts Receivable - (Continued)
advances for factored receivables are made pursuant to a revolving
credit and security agreement, which expires on January 31, 2000.
The Company draws down working capital advances and opens
letters of credit (up to an aggregate maximum of $20,000) 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 (8.5% at May
31, 1997) plus one percent per annum on such advances.
As of August 31, 1996 and November 30, 1996, the Company was
in default of various financial and other covenants under its
revolving credit facility including the prohibition on having a
"going concern" explanatory paragraph in the fiscal 1996 auditors'
report on its financial statements. The lender waived these past
defaults, conditioned upon the Company receiving at least $46,000
in net proceeds from the issuance of the Convertible Subordinated
Notes described more fully in Note 5. On February 26, 1997, the
Company received net proceeds of $47,400 from the issuance of such
Notes. The Company is current in its payment obligations under the
revolving credit facility. 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 and may
not incur losses in excess of specified amounts, among other
covenants. As of May 31, 1997, the Company was in default of
certain covenants, which default has been waived by the lender.
The Company is currently negotiating revised financial covenants
for future periods with the lender. Subsequent to May 31, 1997,
the Company was in default under the agreement with the lender
arising from the delivery to the lender of certain financial
projections, which default was waived by the lender through July
18, 1997. The Company anticipates that such default will be
permanently waived upon the delivery by the Company to the lender
of new projections in connection with the negotiation of revised
financial covenants. In connection with the establishment of a
research and development joint venture, the Company was in default
of certain covenants under the agreement with the lender, which
default has been waived through July 31, 1997 subject to the
Company's delivery to the lender of certain documents and
collateral.
Sales credits and allowances for the three months ended May
31, 1997 and 1996 were $6,887 and $3,671, respectively, and for
the nine months ended May 31, 1997 and 1996 were $23,440 and
$109,837, respectively.
5. Long Term Debt - Long-term debt consists of the following:
May 31, August 31,
1997 1996
(A) 10% Convertible Subordinated Notes due 2002 $50,000 -----
(B) Term loan ----- $19,000
(C) Mortgage note 4,003 6,527
----- -----
54,003 25,527
Less: current portion 1,168 25,527
----- ------
$52,835 $ --
------- ------
7
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in 000s, except per share data)
5. Long Term Debt - (Continued)
(A) In February 1997, the Company issued $50,000 of unsecured
10% Convertible Subordinated Notes ("Notes") due March 1, 2002
with interest payable semiannually commencing September 1, 1997.
The Notes were sold at par with proceeds to the Company of
$47,400, net of expenses. The indenture governing the Notes
contains covenants that, among other things, substantially limit
the Company's ability to incur additional indebtedness, issue
preferred stock, pay dividends and make certain other payments.
The Notes are convertible into shares of Common Stock at any time
after April 26, 1997 and prior to maturity, unless previously
redeemed, at a conversion price of $5.18 per share, subject to
adjustment under certain conditions. The Notes are redeemable, in
whole or in part, at the option of the Company (subject to the
rights of holders of senior indebtedness) at 104% of the principal
balance at any time on or after March 1, 2000 through February 28,
2001 and at 102% of the principal balance thereafter to maturity.
(B) In conjunction with the acquisition of Acclaim Comics,
Inc., in July 1994, Acclaim Comics entered into a term loan
guaranteed by the Company which bore interest at a rate of LIBOR
plus 2.5%. The Company used $16,000 of the proceeds from the
issuance of the Notes to pay the remaining outstanding balance of
the term loan.
(C) Interest on the mortgage note, which, until April 30,
1997, was charged at the bank's prime lending rate and is
currently charged at the bank's prime lending rate (8.5% at May
31, 1997) plus one percent per annum, is payable in quarterly
installments that commenced on March 1, 1996. The principal amount
is payable in quarterly installments that commenced on May 1,
1996. The mortgage note is collateralized by a building (Corporate
Headquarters) with a carrying value of approximately $16,647. As
of August 31, 1996 and November 30, 1996, the Company was in
default of various financial and other covenants with the mortgage
lender. The mortgage lender waived these past defaults,
conditioned upon the mortgage lender receiving $2,000 from the net
proceeds from the issuance of the Notes and the Company
accelerating payment terms on the balance of the loan. The Company
used $2,000 of the proceeds from the issuance of the Notes to
repay a portion of the mortgage note and is obligated to make an
additional accelerated payment of $500 payable over nine months in
addition to quarterly payments of $181 payable until February 1,
2002, when the principal balance on the mortgage note is due.
6. Stock Options
On October 28, 1996, the Company granted options to purchase
an aggregate of 5,055 shares of Common Stock at an exercise price
of $3.94 per share, the market value of the Common Stock on such
date, to certain employees, other than directors, which options
were granted in lieu of previously granted options whose exercise
price was higher than $3.94. The vesting period for the new
options was identical to that of the old options and commenced on
October 28, 1996, the grant date.
On February 26, 1997, the Company granted options to purchase
an aggregate of 4,100 shares of Common Stock at an exercise price
of $4.88 per share, the market value of the Common Stock on such
date, to certain employees and directors, subject to stockholder
approval of an amendment to increase the number of shares subject
to the 1988 Stock Option Plan.
On April 30, 1997, the Company (i) granted options to purchase
an aggregate of 255 shares of Common Stock at an exercise price of
$3.38 per share, the market value of the Common Stock on such
date, to certain employees, and (ii) granted options to purchase
an aggregate of 3,621 shares of Common Stock at an exercise price
of $3.38 per share to certain employees, other than directors,
which options were granted in
8
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in 000s, except per share data)
6. Stock Options - (Continued)
lieu of previously granted options whose exercise price was higher
than $3.38. The new grants were made subject to stockholder
approval of an amendment to increase the number of shares subject
to the 1988 Stock Option Plan. The vesting period for the new
options was identical to that of the old options and commenced on
April 30, 1997, the grant date.
7. Operating Expense
In May 1997, the Company effected a downsizing and put into
place a plan to effect substantial cost reductions. Severance
charges and other costs related to the downsizing and proposed
cost reductions of approximately $10 million were recorded in the
third quarter of fiscal 1997. Management believes that the Company
will realize operating expense reductions resulting therefrom
commencing in the fourth quarter of fiscal 1997.
Due to continuing operating losses incurred by Acclaim Comics,
management's assessment of the current state of the comic book
industry and management's current projections for Acclaim Comics'
operations, management believes that there is an impairment in the
carrying value of the goodwill relating to the acquisition of
Acclaim Comics in July 1994. Accordingly, the Company recorded a
write-down of $25.2 million of goodwill in the quarter ended May
31, 1997 to reduce the carrying value of the goodwill associated
with Acclaim Comics to its estimated fair value.
In conjunction with certain litigations for which the
settlement obligation is currently probable and estimable (see
"Factors Affecting Future Performance - Litigation" and "Legal
Proceedings"), the Company recorded a primarily noncash charge of
$8.3 million in the quarter ended May 31, 1997. No assurance can
be given that the Company will not be required to record
additional material charges in future periods in conjunction with
the various litigations to which the Company is a party.
9
<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
Form 10-Q for the quarter ended February 28, 1997 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 such Form 10-K and Form 10-Q.
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 17 to 28, which could cause
actual events or the actual future results of the Company to
differ materially from any forward-looking statements. 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 developer, publisher and mass marketer of
interactive entertainment software products ("Software") for use
with dedicated interactive entertainment hardware platforms
("Entertainment Platforms") and multimedia personal computer
systems ("PCs"). The Company operates its own Software design
studios, a motion capture studio and markets and distributes its
products in the major territories throughout the world. The
Company's operating strategy is to develop Software for the
Entertainment Platforms and PCs that dominate the interactive
entertainment market at a given time or which the Company
perceives as having the potential for achieving mass market
acceptance. The Company's strategy is to emphasize sports
simulation and arcade-style titles for Entertainment Platforms,
and fantasy/role-playing, adventure and sports simulation titles
for PCs. The Company intends to continue to support its existing
key brands with the introduction of new titles supporting those
brands and to develop one additional key brand each year based on
its original and licensed properties, which may then be featured
on an annual basis in successive titles.
The Company also engages in: (i) the development and
publication of comic books; (ii) the distribution of Software
titles developed by other Software publishers; (iii) the marketing
of its motion capture technology and studio services; and (iv) the
distribution of coin-operated video arcade games.
The Software industry is driven by the size of the installed
base of Entertainment Platforms such as those manufactured by
Nintendo, Sony and Sega and PCs. The industry is characterized by
rapid technological change, resulting in Entertainment Platform
and related Software product cycles. No single Entertainment
Platform or system has achieved long-term dominance in the
interactive entertainment market.
Based on information available in 1994 and based on its
historical experience with respect to the transition from 8-bit to
16-bit platforms, the Company believed that Software sales for
16-bit platforms would, although continuing to decrease overall,
still dominate the interactive entertainment market in 1995 and
that such sales would remain substantial through the 1996 holiday
season. Accordingly, although the Company's strategy for the
Christmas 1995 season was to develop Software for multiple
Entertainment Platforms and PCs, the Company anticipated that
substantially all of its revenues in fiscal 1995 would be derived
from its 16-bit Software sales. The Company also anticipated that
its sales of 32-bit and PC Software in fiscal 1996 would grow as
compared to fiscal 1995 but that the majority of its revenues in
fiscal 1996 would still be derived from 16-bit Software sales.
However, the 16-bit Software market matured much more rapidly than
anticipated by the Company, the Company's Christmas 1995 16-bit
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<PAGE>
Software sales were substantially lower than anticipated and, by
April 1996, the Company derived minimal profits from such Software
sales and made the decision to exit the 16-bit and portable
cartridge markets.
In connection with the Company's decision to exit the 16-bit
and portable Software markets in April 1996, the Company recorded
a special cartridge video charge of approximately $48.9 million in
the second quarter of fiscal 1996, consisting of provisions of
approximately $28.8 million (reflected in net revenues), and
approximately $20.1 million (reflected in cost of revenues),
respectively, to adjust accounts receivable and inventories 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.
The Company recorded a loss from operations of $274.5 million
for fiscal 1996, which included an additional charge related to
16-bit and portable Software of $65.0 million in the fourth
quarter ended August 31, 1996, and a net loss (on an after tax
basis) of $221.4 million for fiscal 1996. The net loss for the
fourth quarter of fiscal 1996 of $162.2 million reflects
additional write-offs of receivables, the establishment of
additional receivables and inventory reserves, severance charges
incurred in the fourth quarter in connection with the downsizing
of the Company and the reduction of certain deferred costs, as
well as an operating loss for the period resulting primarily from
price protection and similar concessions granted to retailers at
greater than anticipated levels in connection with the Company's
16-bit and 32-bit Software. See "Factors Affecting Future
Performance."
As a result of the industry transition to 32-bit and 64-bit
Entertainment Platforms, the Company's Software sales during
fiscal 1996 and the nine months of fiscal 1997 were significantly
lower than for the comparable period in fiscal 1995 and the nine
months of fiscal 1996, respectively. Management expects that,
unless and until the installed base of 32-bit and 64-bit
Entertainment Platforms increases substantially, the Company's
unit sales and revenues from the sale of Software for these
platforms will be substantially lower than Software sales levels
achieved prior to fiscal 1996, when the current transition began.
Management anticipates that the Company will continue to incur
material losses for the remainder of fiscal 1997 but that the
Company will be profitable in the first quarter of fiscal 1998.
However, no assurance can be given as to the future growth of the
installed base of 32-bit and 64-bit Entertainment Platforms or of
the Company's results of operations and profitability in future
periods. See "Factors Affecting Future Performance."
The Company is continuing to sell its existing 16-bit and
portable cartridge Software inventory and has released, and may
continue to release, 16-bit and/or portable Software selectively
to support its key brands and, if requested by a retailer, may
produce additional units of particular title(s) on a special order
basis. 16-bit and portable Software revenue represented only 4% of
total gross revenues for the quarter ended May 31, 1997.
The rapid technological advances in game systems have
significantly changed the look and feel of Software as well as the
Software development process. According to Company estimates, the
average development cost for a title three years ago was
approximately $300,000 to $400,000, while the current average
development cost for a title is between $1 million and $2 million.
As a result of the Company's acquisitions of Iguana Entertainment,
Inc. ("Iguana"), Sculptured Software, Inc. ("Sculptured") and
Probe Entertainment, Inc. ("Probe") in 1995 (two of which were
completed in 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 the nine
months of fiscal 1997 as compared to prior periods. See "Factors
Affecting Future Performance." Such expenses in the aggregate had
a material adverse impact on the Company's profitability in fiscal
1996 and in the nine months of fiscal 1997. Management plans to
reduce the dollar level of product development expenses in the
last quarter of fiscal 1997 and in fiscal 1998 as compared to
prior periods.
In August 1996, the Company downsized and reorganized some of
its operations. Severance charges and other costs related to the
downsizing of approximately $5 million were incurred in the fourth
quarter of fiscal 1996.
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<PAGE>
In May 1997, the Company effected another downsizing and put
into place a plan to effect substantial cost reductions. Severance
charges and other costs related to the downsizing and proposed
cost reductions of approximately $10 million were recorded in the
third quarter of fiscal 1997. Management believes that the Company
will realize operating expense reductions resulting therefrom
commencing in the fourth quarter of fiscal 1997.
Due to continuing operating losses incurred by Acclaim Comics,
management's assessment of the current state of the comic book
industry and management's current projections for Acclaim Comics'
operations, management believes that there is an impairment in the
carrying value of the goodwill relating to the acquisition of
Acclaim Comics in July 1994. Accordingly, the Company recorded a
write-down of $25.2 million of goodwill in the quarter ended May
31, 1997 to reduce the carrying value of the goodwill associated
with Acclaim Comics to its estimated fair value.
In conjunction with certain litigations for which the
settlement obligation is currently probable and estimable (see
"Factors Affecting Future Performance - Litigation" and "Legal
Proceedings"), the Company recorded a primarily noncash charge of
$8.3 million in the quarter ended May 31, 1997. No assurance can
be given that the Company will not be required to record
additional material charges in future periods in conjunction with
the various litigations to which the Company is a party.
The Company's ability to generate sales growth and
profitability will be materially dependent on (i) the growth of
the Software market for 32-bit and 64-bit Entertainment Platforms
and PCs, (ii) the Company's ability to identify, develop and
publish "hit" Software for Entertainment 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.
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 Nine Months Ended
May 31, May 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic revenues 46.0% 55.0% 50.0% 64.0%
Foreign revenues 54.0 45.0 50.0 36.0
---- ---- ---- ----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 61.2 41.2 53.0 75.6
---- ---- ---- ----
Gross profit 38.8 58.8 47.0 24.4
Selling, advertising, general and
administrative expenses 68.4 49.2 61.6 51.7
Research and development expenses 15.9 11.4 16.0 8.6
Operating interest 1.0 3.4 1.1 2.4
Depreciation and amortization 10.6 5.9 8.5 5.1
Goodwill writedown 60.6 -- 17.1 --
Litigation settlements 19.9 -- 5.6 --
Downsizing charge 24.0 -- 6.9 --
---- ---- --- ----
Total operating expenses 200.4 69.9 116.8 67.8
(Loss) from operations (161.6) (11.1) (69.8) (43.4)
Other income (expense), net (5.6) 1.5 (2.5) 2.5
----- --- ----- ---
(Loss) before income taxes (167.2) (9.6) (72.3) (40.9)
Net (loss) (167.5) (6.3) (71.7) (27.5)
</TABLE>
12
<PAGE>
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 Nine Months Ended
May 31, May 31,
1997 1996 1997 1996
---- ---- ---- ----
Portable Software 2.0% 5.0% 2.0% 8.0%
16-Bit Software 2.0% 16.0% 9.0% 49.0%
32-bit Software 19.0% 53.0% 38.0% 27.0%
64-bit Software 57.0% --- 32.0% ---
PC Software 17.0% 18.0% 16.0% 13.0%
Other 3.0% 8.0% 3.0% 3.0%
The decrease in the Company's net revenues from $62.6 million
for the three months ended May 31, 1996 to $41.6 million for the
three months ended May 31, 1997 was predominantly due to reduced
unit sales of 16-bit and 32-bit Software. The decrease in the
Company's net revenues from $215.0 for the nine months ended May
31, 1996 to $147.3 for the nine months ended May 31, 1997 was
predominantly due to reduced unit sales of 16-bit Software, which
were not offset by sales of 32-bit, 64-bit and PC Software. See
"Factors Affecting Future Performance."
Management anticipates that sales of the Company's 32-bit,
64-bit and PC 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.
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 May
31, 1996, no single product accounted for a significant portion of
the Company's gross revenues and, in the quarter ended May 31,
1997, Turok: Dinosaur Hunter (for the Nintendo 64-bit system)
accounted for approximately 57% of the Company's gross revenues.
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 May 31, 1996 and 1997, the
Company derived 11% and 60% of its gross revenues, respectively,
from sales of Nintendo-compatible Software, 33% and 4% of its
gross revenues, respectively, from sales of Sega-compatible
Software and 30% and 16% of its gross revenues, respectively, from
sales of Software for the Sony PlayStation.
Gross Profit
Gross profit fluctuates as a result of five factors: (i) the
level of returns, sales credits and allowances; (ii) the number of
"hit" products and average unit selling prices; (iii) the
percentage of sales of compact-disk ("CD") Software; (iv) the
percentage of foreign sales; and (v) the percentage of foreign
sales to third party distributors. All royalties payable to
Nintendo, Sony and Sega are included in cost of revenues.
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"
13
<PAGE>
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 (currently, the
32-bit Sony PSX and Sega Saturn systems and PCs) are higher than
those on cartridge Software (currently, the Nintendo N64 system)
as a result of significantly lower CD software product costs.
The Company's margins on foreign 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 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 $36.8 million (59% of net
revenues) for the three months ended May 31, 1996 to $16.2 million
(39% of net revenues) for the three months ended May 31, 1997
primarily as a result of higher levels of sales of cartridge
Software for the N64 system, which have a higher product cost than
CD software. Gross profit increased from $52.5 million (24% of net
revenues) for the nine months ended May 31, 1996 to $69.2 million
(47% of net revenues) for the nine months ended May 31, 1997.
Gross profit for the nine months ended May 31, 1996 reflected a
special cartridge video charge of $48.9 million for which there is
no comparable amount in the current nine month period.
Management anticipates that the Company's future gross profit
will be affected principally by (i) the percentage of returns,
sales credits and allowances 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 if the Company is required to institute stock-balancing
programs for its PC CD Software, the Company will experience
higher rates of returns of such product as compared to the
historical rate of return of cartridge Software. In such event,
management anticipates that its reserves for such returns will
increase, thereby offsetting a portion of the higher gross margins
generated from PC 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 $30.8 million (49% of net revenues) for the three
months ended May 31, 1996 to $28.5 million (68% of net revenues)
for the three months ended May 31, 1997 and decreased from $111.2
million (52% of net revenues) for the nine months ended May 31,
1996 to $90.7 million (62% of net revenues) for the nine months
ended May 31, 1997. The dollar decrease is primarily attributable
to reduced selling and advertising expenses resulting from
decreased sales volume and cost reduction efforts initiated by the
Company to reduce its operating expenses. The percentage increase
is primarily attributable to decreased sales volume.
Research and development increased from $18.6 million (9% of
net revenues) for the nine months ended May 31, 1996 to $23.6
million (16% of net revenues) for the nine months ended May 31,
1997 due to increased internal Software development resulting from
the acquisition of two Software studios in the first quarter of
fiscal 1996. Research and development expenses decreased from $7.2
million (11% of net revenues) for the three months ended May 31,
1996 to $6.6 million (16% of net revenues) for the three months
ended May 31, 1997 primarily due to cost reduction efforts
recently initiated by the Company.
14
<PAGE>
Operating interest expense was $2.1 million (3% of net
revenues) for the three months ended May 31, 1996 and $0.4 million
(1% of net revenues) for the three months ended May 31, 1997 and
$5.3 million (2% of net revenues) for the nine months ended May
31, 1996 and $1.6 million (1% of net revenues) for the nine months
ended May 31, 1997. The decrease was primarily attributable to
decreased sales volume and to lower outstanding balances under the
Company's principal credit facility.
Depreciation and amortization increased from $3.7 million (6%
of net revenue) for the three months ended May 31, 1996 to $4.4
million (11% of net revenues) for the three months ended May 31,
1997 and increased from $10.9 million (5% of net revenue) for the
nine months ended May 31, 1996 to $12.6 million (9% of net
revenues) for the nine months ended May 31, 1997. The increase is
primarily attributable to depreciation relating to fixed assets
held by the Software 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.
In May 1997, the Company effected another downsizing and put
into place a plan to effect substantial cost reductions. Severance
charges and other costs related to the downsizing and proposed
cost reductions of approximately $10 million were recorded in the
third quarter of fiscal 1997. Management believes that the Company
will realize operating expense reductions resulting therefrom
commencing in the fourth quarter of fiscal 1997.
Due to continuing operating losses incurred by Acclaim Comics,
management's assessment of the current state of the comic book
industry and management's current projections for Acclaim Comics'
operations, management believes that there is an impairment in the
carrying value of the goodwill relating to the acquisition of
Acclaim Comics in July 1994. Accordingly, the Company recorded a
write-down of $25.2 million of goodwill in the quarter ended May
31, 1997 to reduce the carrying value of the goodwill associated
with Acclaim Comics to its estimated fair value.
In conjunction with certain litigations for which the
settlement obligation is currently probable and estimable (see
"Factors Affecting Future Performance - Litigation" and "Legal
Proceedings"), the Company recorded a primarily noncash charge of
$8.3 million in the quarter ended May 31, 1997. No assurance can
be given that the Company will not be required to record
additional material charges in future periods in conjunction with
the various litigations to which the Company is a party.
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 used net cash in operating activities of
approximately $11.0 million and $25.3 during the nine months ended
May 31, 1997 and 1996.
An income tax refund of approximately $53 million related to
the carryback of the Company's loss for fiscal 1996 was included
in the net cash used in operating activities during the nine
months ended May 31, 1997. 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 $13.2 million and $9.5 million during the nine
months ended May 31, 1997 and 1996, respectively.
15
<PAGE>
The increase in net cash from investing activities in the nine
months ended May 31, 1997 as compared to the nine months ended May
31, 1996 is primarily attributable to lower cash amounts expended
on the acquisition of fixed assets, partially offset by lower
proceeds from the sale of marketable equity securities.
The Company derived net cash from financing activities of
approximately $25.2 million during the nine months ended May 31,
1997 and derived net cash in financing activities of approximately
$4.1 million during the nine months ended May 31, 1996.
The increase in net cash derived from financing activities in
the nine months ended May 31, 1997 as compared to the nine months
ended May 31, 1996 is primarily attributable to the offering in
February 1997 of $50.0 million of 10% Convertible Subordinated
Notes ("Notes") due March 1, 2002 with interest payable
semiannually commencing September 1, 1997. The Notes were sold at
par with proceeds to the Company of $47.4 million net of expenses.
The indenture governing the Notes contains covenants that, among
other things, substantially limit the Company's ability to incur
additional indebtedness, issue preferred stock, pay dividends and
make certain other payments. The Notes are convertible into shares
of Common Stock at any time after April 26, 1997 and prior to
maturity, unless previously redeemed, at a conversion price of
$5.18 per share, subject to adjustment under certain conditions.
The Notes are redeemable, in whole or in part, at the option of
the Company (subject to the rights of holders of senior
indebtedness) at 104% of the principal balance at any time on or
after March 1, 2000 through February 28, 2001 and at 102% of the
principal balance thereafter to maturity.
In connection with its acquisition by the Company, Acclaim
Comics entered into a term loan agreement with Midland Bank plc
for $40 million. On February 26, 1997, the Company used $16
million of the proceeds from the issuance of the Notes to repay
the remaining outstanding balance of the term loan.
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 May
31, 1997, the amount outstanding under letters of credit was
approximately $3.7 million. 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, 2000. 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 May
31, 1997, 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. As of August 31, 1996 and November 30, 1996, the
Company was in default of various financial and other covenants
under its revolving credit agreement including the prohibition on
having a "going concern" explanatory paragraph in the fiscal 1996
auditors' report on its financial statements. The lender waived
these past defaults, conditioned upon the Company receiving at
least $46 million in net proceeds from the issuance of the Notes.
On February 26, 1997, the Company received net proceeds of $47.4
million from the issuance of the Notes. The Company is current in
its payment obligations under the revolving credit agreement. As
of May 31, 1997, the Company was in default of certain covenants,
which default has been waived by BNY. The Company is currently
negotiating revised financial covenants for future periods with
the bank. Subsequent to May 31, 1997, the Company was in default
under the agreement with BNY arising from the delivery to BNY of
certain financial projections, which default was waived by BNY
through July 18, 1997. The Company anticipates that such default
will be permanently waived upon the delivery by the Company to BNY
of new projections in connection with the negotiation of revised
financial covenants. In connection with the establishment of a
research and development joint venture, the Company was in default
of certain covenants under the agreement with BNY, which default
16
<PAGE>
has been waived through July 31, 1997 subject to the Company's
delivery to the lender of certain documents and collateral. See
Note 4 of the Notes to Consolidated Financial Statements and
"Factors Affecting Future Performance -- Liquidity and Bank
Relationships."
As of August 31, 1996 and November 30, 1996, the Company was
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.
On February 26, 1997, the Company used $2 million of the proceeds
from the issuance of the Notes to pay down a portion of the
mortgage note and the lender has waived the past defaults and is
obligated to make an additional accelerated payment of $500,000
payable over nine months in addition to quarterly payments of
$181,000 payable until February 1, 2002, when the principal
balance of the mortgage note is due. See Note 5 of the Notes to
Consolidated Financial Statements and "Factors Affecting Future
Performance -- Liquidity and Bank Relationships."
Management anticipates that the Company's cash flows from
operations will not be sufficient to cover its operating expenses
during the remainder of fiscal 1997 or into fiscal 1998. To
provide for its short- and long-term liquidity needs, the Company
has reduced the number of its employees, has raised $47.4 million
of net proceeds from the issuance of Notes, sold substantially all
of the assets of its redemption subsidiary and is currently
pursuing various alternatives, including further expense
reductions, the raising of additional capital, including
borrowings from hardware vendors, and the sale of certain other
assets. There can be no assurance that further cost reductions
will be effected or that additional capital infusions will be
available or that any capital infusions or sales of assets 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 Entertainment Platforms and PCs that
dominate the market. There can be no assurance that the Company
will be able to publish titles for Entertainment Platforms with
significant installed bases.
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, certain of which have been settled subject to court
approval.
In conjunction with certain litigations for which the
settlement obligation is currently probable and estimable (see
"Factors Affecting Future Performance - Litigation" and "Legal
Proceedings"), the Company recorded a primarily noncash charge of
$8.3 million in the quarter ended May 31, 1997. No assurance can
be given that the Company will not be required to record
additional material charges in future periods in conjunction with
the various litigations to which the Company is a party.
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 $215.0 million for
the nine months ended May 31, 1996 to $147.3 million for the nine
months ended May 31, 1997. The Company had a net loss of $(105.5)
million for the nine months ended May 31, 1997 and a net loss of
$(221.4) million in fiscal 1996. Adjustments in the fourth quarter
of fiscal 1996, on a pre-tax basis, aggregated $138.3 million, 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 those
year-end adjustments could have been allocated to the respective
quarters.
17
<PAGE>
The Company's revenues and operating results from the sale of its
Software for 32- and 64-bit hardware platforms and for PCs during
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 Entertainment Platforms and PCs 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."
Liquidity and Bank Relationships
The Company's net cash used in operations was approximately
$25.3 million and $11.0 million for the nine months ended May 31,
1996 and 1997, respectively. An approximately $53 million income
tax refund related to the carryback of its loss for fiscal 1996 is
included in the net cash used in operating activities for the 1997
period. The Company has experienced negative cash flow from
operations in recent periods primarily due to the industry
transition from 16-bit to 32- and 64-bit Entertainment Platforms
and related Software titles and due to increased operating
expenses.
The Company anticipates that its cash flows from operations
will not be sufficient to cover its operating expenses during the
remainder of fiscal 1997 or into fiscal 1998. 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 reduced the number of its employees, has raised approximately
$47.4 million of net proceeds from the issuance of the Notes, sold
substantially all the assets of its redemption subsidiary and is
currently pursuing various alternatives, including further expense
reductions, the raising of additional capital, including
borrowings from hardware vendors, and the sale of certain other
assets.
As discussed above, the Company (i) on February 26, 1997
consummated the offering of the Notes, (ii) used approximately
$16.0 million of the net proceeds from the offering of the Notes
to retire its term loan to Midland Bank plc and $2.0 million of
such proceeds to pay down a portion of its mortgage loan from
Fleet, (iii) recently effected a series of amendments to its loan
covenants with BNY and Fleet in connection with obtaining waivers
of its defaults under those agreements and (iv) on March 5, 1997,
sold substantially all of the assets and certain liabilities of
Acclaim Redemption Games, Inc. (formerly Lazer-Tron Corporation)
for $6 million in cash. There can be no assurance that additional
capital infusions will be available or that any additional capital
infusions or sales could be effected on satisfactory terms. In
addition to the foregoing, the Company's liquidity is materially
dependent in the short-term on the Company's ability to achieve
its anticipated sales levels for its titles, including Turok:
Dinosaur Hunter and in the future, on its ability to develop and
market "hit" Software for the Entertainment 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 and November 30, 1996, the Company was in
default of various financial and other covenants under its loan
agreements with BNY and Fleet. The inclusion of a "going concern"
paragraph in respect of the Company's fiscal 1996 audit report
also constituted an event of default under the loan facility with
BNY. BNY and Fleet have waived the defaults at August 31, 1996 and
November 30, 1996, including the "going concern" default. As of
May 31, 1997, the Company was in default of certain covenants,
which default was waived by BNY. The Company is currently
negotiating revised financial covenants for future periods with
BNY. Subsequent to May 31, 1997, the Company was in default under
the agreement with BNY arising from the delivery to BNY of certain
financial projections, which default was waived by BNY through
July 18, 1997. The Company anticipates that such default will be
permanently waived upon the delivery by the Company to BNY of new
projections in connection with the negotiation of revised
financial covenants. Although the Company believes it will be able
to achieve compliance with the new financial covenants being
negotiated with BNY, there can be no assurance that additional
covenant defaults, or a payment default, will not occur in the
future. In connection with the establishment of a research and
development joint venture, the Company was in default of certain
covenants under the
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agreement with BNY, which default has been waived through July 31,
1997 subject to the Company's delivery to the lender of certain
documents and collateral. The Company's ability to meet its
covenants and obligations can be affected by factors beyond its
control. There can be no assurance that the Company will be able
to obtain waivers of any future default or that the lenders will
not exercise their remedies including acceleration of the loans,
demand for immediate repayment and/or foreclosure on any
collateral securing such loans. In such event, the Company's
operations would be materially adversely effected.
NASDAQ Delisting and Liquidity of Common Stock
In order to maintain the listing of the Common Stock on the
NASDAQ National Market System (the "NMS"), the Company is
currently required, among other things, to maintain net tangible
assets of at least $1 million (which amount is anticipated to
increase to at least $2 million at August 31, 1997). At May 31,
1997, the Company did not meet this requirement. Accordingly, the
Common Stock may be delisted from trading on the NMS.
If the Common Stock were to be delisted from trading on the
NMS, in order to obtain relisting of the Common Stock on the NMS,
the Company must satisfy quantitative designation criteria which
it does not currently meet. No assurance can be given that the
Company will meet such relisting criteria in the near future. In
addition, although the NASDAQ Stock Market has proposed new
standards which raise the minimum net tangible assets requirement
for new listings to a level which the Company believes it will not
be able to meet in the near future, the Company does currently
meet the proposed alternative new standards to maintain
eligibility for trading on the NMS. No assurance can be given that
the proposed rules will be adopted or that the Company will be
able to rely on the proposed maintenance requirements at this time
in order to avoid delisting of the Common Stock.
If the Common Stock were to be delisted from trading on the
NMS, the Company may seek to have the Common Stock listed for
trading on the NASDAQ Small-Cap Market. Although the Company does
not meet the current listing criteria for the NASDAQ Small-Cap
Market, the Company does meet the proposed listing criteria.
Although the Company believes that new listing applications to the
NASDAQ are being evaluated under the proposed criteria, no
assurance can be given as to such evaluation or as to the
Company's ability to obtain listing for the Common Stock on the
NASDAQ Small-Cap Market or as to the Company's ability to meet the
maintenance requirements thereof.
If the Common Stock were to be delisted from trading on the
NMS and is neither relisted thereon nor listed for trading on the
NASDAQ Small-Cap Market, trading, if any, in the Common Stock may
continue to be conducted on the OTC Bulletin Board or in the
non-NASDAQ over-the-counter market.
Delisting of the Common Stock would result in limited release
of the market price of the Common Stock and limited news coverage
of the Company and could restrict investors' interest in the
Common Stock and materially adversely affect the trading market
and prices for the Common Stock and the Company's ability to issue
additional securities or to secure additional financing. In
addition, if the Common Stock were not listed and the trading
price of the Common Stock were less than $5.00 per share, the
Common Stock could be subject to Rule 15g-9 under the Securities
Exchange Act of 1934 which, among other things, requires that
broker/dealers satisfy special sales practice requirements,
including making individualized written suitability determinations
and receiving a purchaser's written consent prior to any
transaction. In such case, the Common Stock could also be deemed
to be a "penny stock" under the Securities Enforcement and Penny
Stock Reform Act of 1990, which would require additional
disclosure in connection with trades in the Common Stock,
including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements
could severely limit the liquidity of the Common Stock.
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Substantial Leverage and Ability to Service Debt
The Company's ability to satisfy its obligations to its
lenders will be dependent upon its future performance, which is
subject to prevailing economic conditions and financial, business
and other factors, including factors beyond the Company's control.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The level of the Company's indebtedness could have important
consequences to investors in the Company, because: (i) a portion
of the Company's cash flow from operations must be dedicated to
debt service, including with respect to the Notes and the
Company's existing bank obligations, and will not be available for
other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, or to pursue
possible expansion of its business or acquisitions, may be
limited; and (iii) the Company's level of indebtedness could limit
its flexibility in reacting to changes in the interactive
entertainment industry and economic conditions generally, making
it more vulnerable to adverse economic conditions and limiting its
ability to withstand competitive pressures or take advantage of
business opportunities. Certain of the Company's competitors
currently operate on a less leveraged basis, and are likely to
have significantly greater operating and financing flexibility
than the Company.
The Company believes that, based upon current levels of
operations, it should be able to meet its interest obligations on
the Notes, and its interest and principal obligations under its
bank agreements when due. However, if the Company cannot generate
sufficient cash flow from operations to meet its debt obligations
when due, the Company might be required to restructure or
refinance its indebtedness. There can be no assurance that any
such restructuring or refinancing will be effected on satisfactory
terms or will be permitted by the terms of the Indenture (the
"Indenture") dated as of February 26, 1997 between the Company and
IBJ Schroder Bank & Trust Company (the "Trustee") with respect to
the Notes, or the Company's existing indebtedness. There can be no
assurance that the Company's operating cash flows will be
sufficient to meet its debt service requirements or to repay the
Notes at maturity or that the Company will be able to refinance
the Notes or other indebtedness at maturity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Prior Rights of Creditors."
Prior Rights of Creditors
The Company has outstanding long-term debt (including current
portions) of $54.0 million at May 31, 1997. The Company's failure
to make payments of interest or principal on such indebtedness
when due may result in defaults under its agreements with respect
to such indebtedness and under the Indenture. Certain of such
indebtedness is secured by liens on substantially all of the
assets of the Company. See Note 5 of Notes to Consolidated
Financial Statements.
In addition, the Indenture provides that, upon the occurrence
of certain events (each a "Repurchase Event"), the Company may be
obligated to repurchase all or a portion of the outstanding Notes.
If a Repurchase Event were to occur and the Company did not have,
or could not obtain, sufficient financial resources to repurchase
the Notes, such failure to repurchase the Notes would constitute
an event of default under the Indenture. The occurrence of certain
Repurchase Events would also constitute a default under certain of
the Company's current debt agreements, including the Company's
main credit facility with BNY, and may constitute an event of
default under the terms of future agreements with respect to the
Company's borrowings. The default under the Indenture for the
Company's failure to effect a repurchase of the Notes would also
constitute an event of default under certain of such other
existing debt agreements.
Further, the Company's ability to meet its debt service
obligations are, in part, dependent upon its receipt of dividends
and other advances and transfers of funds from its subsidiaries.
The ability of the Company's subsidiaries to pay such dividends
and make such advances will be subject to applicable state and
foreign law regulating the payment of dividends and the terms of
the Company's existing bank
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agreements and the Indenture. A significant portion of the
Company's assets, operations, trade payables and other
indebtedness are located at subsidiaries of the Company and the
creditors of such subsidiaries would generally recover from the
assets of such subsidiaries on the obligations owed to them by
such subsidiaries prior to any recovery by creditors of the
Company and prior to any distribution of remaining assets to
equity holders of the Company.
An event of default with respect to the Company's current bank
agreements may result in acceleration of the Company's obligations
under such bank agreements or demand by the lenders for immediate
repayment and would entitle any secured creditor in respect of
such debt to proceed against the collateral securing such
defaulted loan. An event of default under the Indenture may result
in action by the Trustee on behalf of the holders of the Notes. In
the event of such acceleration by the Company's creditors or
action by the Trustee, holders of indebtedness would be entitled
to payment out of the assets of the Company. If the Company
becomes insolvent, is liquidated or reorganized, it is possible
that there will not be sufficient assets remaining after payment
to such creditors for any distribution to holders of Common Stock.
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 nine months of fiscal 1997
and anticipates incurring material losses for the remainder of
fiscal 1997. The Company was in default of various covenants under
the agreements with certain of its lenders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity." 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 effect on the terms of any bank financing or
capital the Company may seek in the future.
Litigation
The Company and certain of its directors and executive
officers are parties to various litigations, including federal
class actions, arising in connection with the December 1995
revision of the Company's previously announced earnings, the 1995
acquisition of Lazer-Tron Corporation, statements made with
respect to the Company's agreement with WMS Industries, Inc., a
dispute with Spectrum Holobyte California, Inc. and distribution
arrangements with Digital Pictures, Inc. and Sound Source
Interactive, Inc. The Company is also subject to a private order
of investigation from the Securities and Exchange Commission
arising out of 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 and various other
litigations and claims arising in the ordinary course of business.
See "Legal Proceedings." The Company could issue significant
amounts of its securities and/or use a portion of its cash in
order to settle such litigations. The Company could also be the
subject of additional material claims from the prior shareholders
of acquired companies alleging that the Company was to effect
registration statements for the resale by such stockholders of all
or a portion of their shares of Common Stock based on such
stockholders' inability to sell all or a portion of their shares
of Common Stock pursuant to such registration statements at times
when the Company's securities were publicly traded for prices
significantly higher than the current market price.
In conjunction with certain litigations for which the
settlement obligation is currently probable and estimable (see
"Factors Affecting Future Performance - Litigation" and "Legal
Proceedings"), the Company recorded a primarily noncash charge of
$8.3 million in the quarter ended May 31, 1997. No assurance can
be given that the Company will not be required to record
additional material charges in future periods in conjunction with
the settlement of the various litigations to which the Company is
a party.
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Any additional charges to earnings could have a material adverse
effect on the financial condition and results of operations of the
Company. Other than ordinary course litigations and the
litigations that have been heretofore settled, the resolution of
which the Company believes would not have a material adverse
effect on its business, an adverse result in the other litigations
to which the Company is a party could have a material adverse
effect on the Company. A portion of any settlement or judgment in
one or more of the litigations to which the Company is a party may
be covered by the Company's insurance.
Industry Trends; Platform Transition; Technological Change
The interactive entertainment industry is characterized by,
and the Company anticipates that in both the short- and long-term
future it will continue to undergo, rapid technological change due
in large part to (i) the introduction of Entertainment Platforms
incorporating more advanced processors and operating systems, (ii)
the impact of technological changes embodied in PCs and Software
therefor, (iii) the development of electronic and wireless
delivery systems, and (iv) the entry and participation of new
companies in the industry. These factors have resulted in
Entertainment Platform and Software life cycles. As a result, the
Company must continually anticipate and adapt its products to
emerging Entertainment Platforms and systems and evolving consumer
preferences. There can be no assurance that the Company will be
successful in developing and marketing Software for new
Entertainment Platforms. No single Entertainment Platform or
system has achieved long-term dominance. The process of developing
Software products such as those offered by the Company is
extremely complex and is expected to become more complex and
expensive in the future as consumers demand more sophisticated and
elaborate features and as new platforms and technologies are
introduced.
Development of Software for emerging Entertainment Platforms
requires substantial investments in research and development for
new and improved technologies in the areas of graphics, sound,
digitized speech, music and video. Such research and development
must occur well in advance of the release of new Entertainment
Platforms in order to allow sufficient lead time to develop and
introduce new Software products on a timely basis. This generally
requires the Company to predict the probable success of future
Entertainment Platforms as much as 12 to 24 months prior to their
introduction.
Substantially all of the Company's revenues in fiscal 1997
have been, and are anticipated to continue to be, derived from the
sale of Software designed to be played on the Sony PlayStation,
the Sega Saturn, the Nintendo N64 and PCs. At any given time, the
Company has expended significant development and marketing
resources on product development for platforms (such as the 16-bit
Nintendo SNES and Sega Genesis platforms) that could have shorter
life cycles than the Company expected, as in fiscal 1996, or on
products designed for new platforms (such as the Sony PlayStation
and the Nintendo N64) that have not yet achieved large installed
bases. If the Company does not accurately predict the success,
size of the installed base and life cycle of existing or future
Entertainment 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 nine months of
fiscal 1997, of marketing Software for (i) new Entertainment
Platforms that have not yet achieved significant market
penetration and/or (ii) Entertainment Platforms that have become
or are becoming obsolete due to the introduction or success of new
Entertainment Platforms. There can be no assurance that the
Company will be able to accurately predict such matters, and its
failure to do so would have a material adverse effect on the
Company.
Failure to develop products for Entertainment Platforms that
achieve significant market acceptance, discontinuance of
development for a platform that has a longer than expected life
cycle, development for a platform that does not achieve a
significant installed base or continued development for a platform
that has a shorter than expected life cycle, may have a material
adverse effect on the Company's business, financial condition and
operating results.
The Company's results of operations and profitability have
been materially adversely affected during the fiscal year ended
August 31, 1996 and the nine months ended May 31, 1997, and are
anticipated to be so affected during the balance of fiscal 1997,
by the material decline in sales of the Company's 16-bit
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Software and the transition to the new Entertainment Platforms.
The Company is currently developing Software for the Sony
PlayStation, the Sega Saturn, the Nintendo N64 and PCs. There are
a significant number of Software titles for the 32-bit platform
market competing for limited shelf space. In addition, the 32-bit
(PlayStation and Saturn) and 64-bit (N64) platforms have not yet
achieved market penetration similar to that of the 16-bit
platforms (Nintendo SNES and Sega Genesis); accordingly, the
number of units of each Software title sold for these newer
Entertainment Platforms is significantly less than the number of
units of a title generally sold during 1993, 1994 and 1995 for the
16-bit platforms. There can be no assurance that any of the new
platforms will achieve market penetration similar to that achieved
by the Nintendo SNES and Sega Genesis systems.
Revenue and Earnings Fluctations; Seasonality
The Company has historically derived substantially all of its
revenues from the publication and distribution of Software for
then dominant Entertainment Platforms. The Company's revenues are
subject to fluctuation during transition periods, as occurred in
fiscal 1996 and the nine months of fiscal 1997, when new
Entertainment Platforms have been introduced but none has achieved
mass market penetration. In addition, the Company's earnings are
materially affected by the timing of release of new Software
titles produced by the Company. Product development schedules are
difficult to predict due, in large part, to the difficulty of
scheduling accurately the creative process and, with respect to
the Software for new Entertainment Platforms, the use of new
development tools and the learning process associated with
development for new technologies. Earnings may also be materially
impacted by other factors including, but not limited to (i) the
level and timing of market acceptance of Software titles, (ii)
increases or decreases in development, and/or promotion expenses
for new titles and new versions of existing titles, (iii) the
timing of orders from major customers and (iv) changes in shipment
volume.
A significant portion of the Company's revenues in any quarter
is generally derived from sales of new Software titles introduced
in that quarter or in the immediately preceding quarter. If the
Company were unable to commence volume shipments of a significant
new product during the scheduled quarter, the Company's revenues
and earnings would likely be materially and adversely affected in
that quarter. In addition, because a majority of the unit sales
for a product typically occur in the first 90 to 120 days
following the introduction of the product, the Company's earnings
may increase significantly in a period in which a major product
introduction occurs and may decline in the following period or in
periods in which there are no major product introductions. Certain
operating expenses are fixed and do not vary directly in relation
to revenue. Consequently, if net revenue is below expectations,
the Company's operating results are likely to be materially
adversely affected.
The interactive entertainment industry is highly seasonal.
Typically, net revenue is highest during the last calendar quarter
(which includes the holiday buying season), declines in the first
calendar quarter, is lowest in the second calendar quarter and
increases in the third calendar quarter. The seasonal pattern is
due primarily to the increased demand for Software during the
year-end holiday buying season. The Company's earnings, however,
vary significantly and are largely dependent on releases of major
new products and, as such, may not necessarily reflect the
seasonal patterns of the industry as a whole. The Company expects
that its operating results will continue to fluctuate
significantly in the future.
Dependence On Entertainment Platform Manufacturers;
Need For License Renewals
For the fiscal quarter ended May 31, 1997, the Company derived
60%, 4% and 16% of its gross revenues, respectively, from sales of
Nintendo-, Sega- and Sony-compatible products. Accordingly, the
Company is substantially dependent on Nintendo as the sole
manufacturer of N64 hardware and Software for that platform and as
the sole licensor of the proprietary information and the
technology needed to develop Software for that platform; on Sega
as the sole manufacturer of Saturn hardware and as the sole
licensor of the proprietary information and the technology needed
to develop Software for that platform; and on Sony as the sole
manufacturer of PlayStation hardware and Software for that
platform and as the sole licensor of the proprietary information
and the technology needed to develop Software for that
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platform. The dedicated hardware platform manufacturers have in
the past and may in the future limit the number of titles that the
Company can release in any year, which may limit any future growth
in sales.
The Company has historically been able to renew and/or
negotiate extensions of its Software license agreements with
Entertainment Platform developers. However, there can be no
assurance that, at the end of their current terms, the Company
will continue to be able to do so or that the Company will be
successful in negotiating definitive license agreements with
developers of new hardware systems. The Company has current,
executed license agreements with Sony with respect to the
PlayStation platform in the United States, Canada and Japan and is
operating under an oral agreement with respect to the development
and publishing of titles for the PlayStation in Europe. Currently,
the Company and Sega are operating in the ordinary course under
the terms of an agreement that expired in December 1995 and, with
respect to the Saturn platform, under an oral agreement and other
arrangements. The Company has executed an agreement with Nintendo
with respect to the N64 platform in Japan, covering the release of
approved titles, and an agreement with respect to the development
and production of one Software title for N64 in the Western
Hemisphere. The Company has yet to execute a formal agreement with
Nintendo with respect to further development of titles for the N64
platform in North American and Europe, although the Company has
been advised of the basic terms of such N64 license and is doing
business with Nintendo under an oral agreement and other
arrangements. There can be no assurance, however, that the Company
will be successful in negotiating agreements with respect to the
Sony PlayStation, Sega Saturn and Nintendo N64 platforms. The
inability to negotiate agreements with developers of new
Entertainment Platforms or the termination of all of the Company's
license agreements or other arrangements will, and the termination
of any one of the Company's license agreements or other
arrangements could, have a material adverse effect on the
Company's financial position and results of operations.
The Company depends on Nintendo, Sega and Sony for the
protection of the intellectual property rights to their respective
Entertainment Platforms and technology and their ability to
discourage unauthorized persons from producing Software for
Nintendo, Sega and Sony platforms. The Company also relies upon
the Entertainment Platform manufacturers for the manufacturing of
certain software cartridges and compact-disk based system-read
only memories for their platforms.
Reliance On New Products; Product Delays
The Company's ability to maintain favorable relations with
retailers and to receive the maximum advantage from its
advertising expenditures is dependent in part on its ability to
provide retailers with a timely and continuous flow of product.
The life cycle of a Software title generally ranges from less than
three months to upwards of twelve months, with the majority of
sales occurring in the first 90 - 120 days after release. The
Company generally actively markets its 10 - 15 most recent
releases. Accordingly, the Company is constantly required to
develop, introduce and sell new Software in order to generate
revenue and/or to replace declining revenues from previously
released products. In addition, consumer preferences for Software
are difficult to predict, and few Software products achieve
sustained market acceptance. There can be no assurance that new
products introduced by the Company will be released in a timely
fashion, will achieve any significant degree of market acceptance,
or that such acceptance will be sustained for any meaningful
period. Competition for retail shelf space, consumer preferences
and other factors could result in the shortening of the life cycle
for older products and increase the importance of the Company's
ability to release product on a timely basis.
The Company's current production schedules contemplate that
the Company will commence shipment of a number of new products in
the remainder of fiscal 1997 and in fiscal 1998. Shipment dates
will vary depending on the Company's own quality assurance
testing, as well as by the dedicated platform developers and other
development factors. The Company generally submits new games to
the dedicated platform manufacturers and other intellectual
property licensors for approval prior to development and/or
manufacturing. Rejection as a result of bugs in Software or a
substantial delay in approval of a product by a manufacturer or
licensor could have a material adverse effect on the Company's
financial condition and
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results of operations. In the past, the Company has experienced
significant delays in the introduction of certain new products.
There can be no assurance that such delays will not occur and
materially adversely affect the Company in the future. It is
likely that in the future certain new products will not be
released in accordance with the Company's internal development
schedule or the expectations of public market analysts and
investors. A significant delay in the introduction of, or the
presence of a defect in, one or more new products could have a
material adverse effect on the ultimate success of such product.
If the Company is not able to develop, introduce and sell new
competitive titles on a timely basis, its results of operations
and profitability would be materially adversely affected.
Reliance On "Hit" Titles
The market for Software is "hits" driven and accordingly the
Company's future success is dependent in large part on its ability
to develop and market "hit" titles for Entertainment Platforms
with significant installed bases. During the quarter ended May 31,
1997, sales of the Company's top title accounted for approximately
57% of the Company's gross sales for that period. There can be no
assurance that the Company will be able to publish "hit" titles
for Entertainment Platforms with significant installed bases and,
if it is unable to do so for any reason, its financial condition,
results of operations and profitability could be materially
adversely affected, as they were in fiscal 1996 and in the nine
months of fiscal 1997.
Inventory Management; Risk of Product 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 and discounts on slow moving 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. At the time of product shipment,
the Company establishes reserves in respect of such estimates
taking into account the potential for product returns and other
discounts based on historical return rates, seasonality, retail
inventories and other factors. 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
May 31, 1997, it has established adequate reserves for future
price protection, returns, exchanges and other concessions but
there can be no assurance that the Company's reserves therefor
will not be exceeded, which event would have a material adverse
effect on the Company's financial condition and results of
operations.
In addition, the Company has offered and anticipates that it
will continue to offer stock-balancing programs for its PC
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. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Increased Product Development Costs
In order to manage its Software development process and to
ensure access to a pool of Software developers, development tools
and engines in an increasingly competitive market, the Company
acquired three Software development studios in calendar 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 nine months of fiscal 1997 as compared to
its historical rate and were not offset by revenues from Software
developed by the studios. These costs further contributed to the
Company's results of operations and profitability being materially
adversely affected in fiscal 1996 and in the nine months of
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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.
Competition
The market for consumer Software products is highly
competitive. Only a small percentage of products introduced in the
Software market achieve any degree of sustained market acceptance.
Competition is based primarily upon price, access to retail shelf
space, product enhancements, ability to operate on popular
platforms, availability of titles (including "hits"), new product
introductions, marketing support and distribution systems.
The Company competes with a variety of companies which offer
products that compete directly with one or more of the Company's
products. Typically, the Company's chief competitor on an
Entertainment Platform is the hardware manufacturer of that
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 is characterized by customers who make
purchasing decisions on non-"hit" products based primarily on
price (as compared to developing markets with limited Software
titles, when price has been a less important factor in Software
sales). The Company's competitors vary in size from very small
companies with limited resources to very large corporations with
greater financial, marketing and product development resources
than those of the Company, such as Nintendo, Sega and Sony. The
Company's competitors also include a number of independent
Software publishers licensed by the hardware manufacturers.
Additionally, the entry and participation of new industries
and companies, including diversified entertainment companies, in
markets in which the Company competes may adversely affect the
Company's performance in such markets. The availability of
significant financial resources has become a major competitive
factor in the Software industry, principally as a result of the
technical sophistication of advanced multimedia computer game
products requiring substantial investments in research and
development. In particular, many of the Company's competitors are
developing on-line interactive computer games and interactive
networks that will be competitive with the Company's products. As
competition increases, significant price competition and reduced
profit margins may result. In addition, competition from new
technologies may reduce demand in markets in which the Company has
traditionally competed. Prolonged price competition or reduced
demand as a result of competing technologies would have a material
adverse effect on the Company's business, financial condition and
operating results. No assurance can be given that the Company will
be able to compete successfully.
Intellectual Property Licenses and Proprietary Rights
To date, most of the Company's Software incorporates for
marketing purposes properties or trademarks owned by third
parties, such as the World Wrestling Federation, the National
Basketball Association, National Football League or their
respective players' associations, which properties are licensed to
the Company. In addition, the Company in the past has obtained
agreements with outside developers for the development of a
significant portion of its Software under such agreements with
independent developers, and in such cases the Company usually
acquires copyrights to the underlying Software and obtains the
exclusive right to such Software for a period of time and may have
a limited period in which to market and distribute Software. To
the extent future product releases are not derived from the
Company's proprietary properties, the Company's future success
will also be dependent upon its ability to procure licenses for
additional popular intellectual properties. There is intense
competition for such licenses, and there can be no assurance that
the Company will be successful in acquiring additional
intellectual property rights with significant commercial value.
There can be no assurance that such licenses will be available on
reasonable terms or at all.
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The Company relies primarily on a combination of copyrights,
trade secret laws, patent and trademark laws, nondisclosure
agreements and other copy protection methods to protect its
product and proprietary rights. It is the Company's policy that
all employees and third-party developers sign nondisclosure
agreements. There can be no assurance that these measures will be
sufficient to protect the Company's intellectual property rights
against infringement. The Company has "shrinkwrap" license
agreements with the end users of its PC products, but the Company
relies on the copyright laws to prevent unauthorized distribution
of its other Software. Existing copyright laws afford only limited
protection. However, notwithstanding the Company's rights to its
Software, it may be possible for unauthorized third parties to
illegally copy the Company's products or to reverse engineer or
otherwise obtain and use information that the Company regards as
proprietary. Unauthorized illegal copying occurs within the
Software industry, and if a significant amount of unauthorized
copying of the Company's published products or products
distributed by it were to occur, the Company's business, operating
results and financial condition could be materially adversely
affected. Policing illegal unauthorized use of the Company's
products is difficult, and Software piracy can be expected to be a
persistent problem. Further, the laws of certain countries in
which the Company's products are or may be distributed do not
protect the Company's products and intellectual property rights to
the same extent as the laws of the United States.
The Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of
third parties. However, as the number of Software products in the
industry increases, the Company believes that claims and lawsuits
with respect to Software infringement will increase. From time to
time, third parties have asserted that features or content of
certain of the Company's products may infringe upon intellectual
property rights of such parties, and the Company has asserted that
third parties have likewise infringed the Company's proprietary
rights; certain of these claims have resulted in litigation by and
against the Company. To date, no such claims have had an adverse
effect on the Company's ability to develop, market or sell its
products. There can be no assurance that existing or future
infringement claims by or against the Company will not result in
costly litigation or require the Company to license the
intellectual property rights of third parties. See "Legal
Proceedings."
The owners of intellectual property licensed by the Company
generally reserve the right to protect such intellectual property
against infringement.
International Sales
International sales represented approximately 54% of the
Company's net revenues for the fiscal quarter ended May 31, 1997.
The Company expects that international sales will continue to
account for a significant portion of its net revenues in future
periods. International sales are subject to inherent risks,
including unexpected changes in regulatory requirements, tariffs
and other economic barriers, fluctuating exchange rates,
difficulties in staffing and managing foreign operations and the
possibility of difficulty in accounts receivable collection.
Because the Company does not believe exposure to foreign currency
losses is currently material, the Company currently has no formal
financial instruments in place as a hedge against foreign currency
risks. In some markets, localization of the Company's products is
essential to achieve market penetration. The Company may incur
incremental costs and experience delays in localizing its
products. These or other factors could have a material adverse
effect on the Company's future international sales and,
consequently, on the Company's business, operating results and
financial condition.
New Business Ventures
During the last three fiscal 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 and/or
establishment of such businesses in fiscal 1995 and
27
<PAGE>
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.
Dependence on Key Personnel and Employees
The interactive entertainment industry is characterized by a
high level of employee mobility and aggressive recruiting among
competitors for personnel with technical, marketing, sales,
product development and management skills. 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 or that it will not
experience significant cost increases in order to do so.
In particular, the Company is highly dependent on the
management services of Gregory Fischbach, Co-Chairman of the Board
and Chief Executive Officer, and James Scoroposki, Co-Chairman of
the Board and Senior Executive Vice President of the Company. The
loss of the services of any of the Company's senior management
could have a material adverse effect on the Company's business,
operating results, and financial condition. Although, the Company
has employment agreements with Messrs. Fischbach and Scoroposki,
there can be no assurance that such employees will not leave or
compete with the Company. The Company's failure to attract
additional qualified employees or to retain the services of key
personnel could materially and adversely affect the Company's
business, operating results and financial condition.
Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue
shares of preferred stock and to determine the designations,
preferences and rights and the qualifications or restrictions of
those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other
corporate actions, could have the effect of making it more
difficult for a third-party to acquire a majority of the
outstanding voting stock of the Company. In addition, the Company
is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, this
statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed
manner. Employment arrangements with certain members of the
Company's management provide for severance payments upon
termination of their employment after a "change in control" of the
Company as defined in such agreements.
Volatility of Stock Price
There has been a history of significant volatility in the
market prices of companies engaged in the Software industry,
including the Company. It is likely that the market price of the
Common Stock will continue to be highly volatile. Factors such as
the timing and market acceptance of product introductions by the
Company, the introduction of products by the Company's
competitors, loss of key personnel of the Company, variations in
quarterly operating results or changes in market conditions in the
Software industry generally may, have a significant impact on the
market price of the Common Stock. In the past, the Company has
experienced significant fluctuations in its operating results and,
if the Company's future revenue or operating results or product
releases do not meet the expectations of public market analysts
and investors, the price of the Common Stock would likely be
materially adversely affected. In addition, the stock market has
experienced and continues to experience extreme price and volume
fluctuations
28
<PAGE>
which have affected the market price of Software companies and
companies in the interactive entertainment industry and which have
often been unrelated to the operating performance of these
companies.
29
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of its directors and/or executive
officers were 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 for the Northern District of
California. The plaintiff seeks an accounting and compensatory,
punitive and exemplary damages in an amount equal to at least $7.5
million 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 compensatory, general, special
and consequential damages in excess of $22 million and punitive
damages 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, among 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.
The Company was also sued in an action entitled Spectrum
Holobyte California, Inc.; Microprose Software, Inc. v. Acclaim
Entertainment, Inc., (Case No. 97-0247 MEJ) filed in January 1997
in the United States District Court for the Northern District of
California. In that complaint, plaintiffs allege that the Company
breached a confidential settlement agreement among the parties
dated November 4, 1996. The purpose of the settlement agreement
was to resolve a suit brought by the Company in 1996, which
included counterclaims by Spectrum and Microprose, regarding each
party's allegations of infringement of their respective exclusive
rights to intellectual property licensed to them by Wizards of the
Coast, Inc. The property involves the character, depictions and
game methodology of Magic: The Gathering, a popular
fantasy-adventure story and card game created by Wizards of the
Coast, Inc. Plaintiffs allege that the Company breached the
settlement agreement by failing to release the appropriate number
of games of Magic: The Gathering--BattleMage in the United States
and the United Kingdom by January 10, 1997, the date provided for
in the Settlement Agreement. Plaintiffs seek unspecified monetary
damages, attorneys' fees and costs. The Company intends to defend
this action vigorously.
The Company and certain of its directors and/or executive
officers were sued in various complaints filed in December 1995,
which were consolidated into an action entitled In re: Acclaim
Ent. Shareholder Litigation, 95 Civ. 4979 (E.D.N.Y.) (TCP) in the
United States District Court for the Eastern District of New York.
The plaintiffs, on behalf of a class of the Company's
stockholders, claim unspecified damages arising from the Company's
December 4, 1995 announcement that it was revising results for the
fiscal year ended August 31, 1995 to reflect a decision to defer
$18 million of revenues and $10.5 million of net income previously
reported on October 17, 1995 for the fiscal year ended August 31,
1995. Defendants
30
<PAGE>
have answered the complaint and discovery is in progress. The
parties are currently negotiating settlement terms with respect to
this action.
By summons and complaint dated December 11, 1995, certain of
the Company's directors and/or executive officers were named as
defendants, and the Company was named as a nominal defendant, in a
shareholder derivative action entitled Eugene Block v. Gregory E.
Fischbach, James Scoroposki, Robert Holmes, Bernard J. Fischbach,
Michael Tannen, Robert H. Groman and James Scibelli, defendants,
and Acclaim Entertainment, Inc., Nominal Defendant, (CV 95-036316)
(Supreme Court of the State of New York, County of Nassau) (the
"Derivative Action"). The Derivative Action was brought on behalf
of the Company (as nominal defendant), alleging that the
individual defendants violated their fiduciary duties to the
Company in connection with the Company's revision of its revenues
for the fiscal year ended August 31, 1995. Plaintiff alleges that
the individual defendants (1) breached their duty of care and
candor, (2) caused the Company to waste corporate assets, and (3)
breached their duty of good faith, and, accordingly, seeks
unspecified damages. Plaintiffs withdrew their complaint and on
October 2, 1996 filed an amended complaint. The Court has denied
defendants' motion to dismiss based on plaintiffs' failure to make
a proper demand. The parties are currently negotiating settlement
terms with respect to this action.
The Company and certain of its directors and/or executive
officers also are defendants in an action entitled Adrienne
Campbell and Donna Sizemore, individually and on behalf of all
others similarly situated, v. Acclaim Entertainment, Inc., Anthony
R. Williams, James Scoroposki, and Robert Holmes, C-95-04395
(EFL), which was commenced in the United States District Court for
the Northern District of California. In that action, plaintiffs,
two former shareholders of Lazer-Tron, filed a class action
complaint on December 8, 1995 on behalf of all former Lazer-Tron
shareholders who exchanged their Lazer-Tron stock for Common Stock
pursuant to the August 31, 1995 merger transaction. Plaintiffs
allege violations of Sections 10(b), 14(a) and 14(e) of the
Securities Exchange Act of 1934, Sections 11 and 12(2) of the
Securities Act of 1933, fraud and breach of fiduciary duty. On
October 8, 1996, the Judicial Panel on Multidistrict Litigation
ordered the transfer of the action from the Northern District of
California to the United States District Court for the Eastern
District of New York for coordinated or consolidated pretrial
proceeding with the actions entitled In re Acclaim Ent.
Shareholder Litigation discussed above. The parties have agreed to
the terms of a settlement of this action, subject to court
approval.
The Securities and Exchange Commission (the "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 has provided
documents to the Commission, and the Commission has taken
testimony from Company representatives. The Company intends to
fully cooperate with the Commission in its investigation. No
assurance can be given as to whether there will be any litigation
or, if so, as to the outcome of this matter.
The Company's subsidiary, Lazer-Tron, was sued in an action
entitled Eric Goldstein, on behalf of himself and all others
similarly situated, v. Lazer-Tron Corporation, Norman B.
Petermeier, Matthew F. Kelly, Bryan M. Kelly, Morton Grosser, Bob
K. Pryt and Roger V. Smith (V-009846-7) in the Superior Court of
the State of California, County of Alameda, Eastern Division. The
plaintiffs allege, among other things, breach of fiduciary duty,
abuse of control and negligence. In addition, certain directors
and officers of Lazer-Tron have been named as defendants in an
action entitled Adrienne Campbell, individually and on behalf of
all others similarly situated, b. Norman B. Petermeier, Matthew F.
Kelly, Bryan M. Kelly, Morton Grosser, Bob K. Pryt, Roger V. Smith
and Does 1 through 50, inclusive, Civil No. 760717-4, in the
Superior Court of the State of California, County of Alameda. The
plaintiffs, on behalf of a class of Lazer-Tron's shareholders,
claim damages based on allegations that, as a result of lack of
due diligence by the named defendants in fully investigating the
proposed acquisition by the Company of Lazer-Tron, the defendants
breached their fiduciary duties to Lazer-Tron's shareholders.
These two actions have been consolidated and are scheduled to be
tried in May. The parties have agreed to the terms of a settlement
of this action, subject to court approval.
31
<PAGE>
The Company and certain of its directors and/or executive
officers were sued in various complaints filed in April 1994,
which were consolidated into an action entitled In re Acclaim
Entertainment, Inc. Securities Litigation (CIV 94 1501) (the "WMS
Action"). The plaintiffs, on behalf of a class of the Company's
stockholders consisting of all those who have purchased Acclaim
stock for the period January 4, 1994 to March 30, 1994, claim
damages arising from (i) the Company's alleged failure to comply
with the disclosure requirements of the securities laws in respect
of the Company's relationship with WMS Industries Inc. ("WMS") and
the status of negotiations on and the likelihood of renewal of an
agreement with WMS, pursuant to which WMS granted the Company a
right of first refusal to create software for "computer games",
"home video games" and "handheld game machines" based on arcade
games released by WMS through March 21, 1995 (ii) statements made
by the Company's representative that rumors relating to the
nonrenewal of the agreement were "unsubstantiated" and that talks
between the Company and WMS were continuing, which allegedly were
materially false and misleading and (iii) a claim that the
defendants should have disclosed the likely nonrenewal of the
agreement. Discovery is complete. The parties are currently
negotiating settlement terms with respect to this action.
The Company has also asserted a third-party action against its
insurance company, Mt. Hawley Insurance Company ("Mt. Hawley")
based on Mt. Hawley's disclaimer of coverage for liability which
may result from the WMS Action and for fees and expenses up to the
amount of the policy incurred in connection with the defense of
the WMS Action. A separate trial of this action after the trial of
the WMS Action has been ordered.
The New York State Department of Taxation and Finance,
following a field audit of the Company with respect to franchise
tax liability for its fiscal years ended August 31, 1989, August
31, 1990 and August 31, 1991, has notified the Company that a
stock license fee (plus interest and penalties) of approximately
$1.9 million, relating to the Company's outstanding capital stock
as of 1989, is due to the State of New York. The Company is
contesting the fee and a petition denying liability has been
filed. No assurance can be given as to the outcome of this matter.
A portion of any settlement or award arising from or out of
one or more of the above litigations may be covered by the
Company's insurance. The Company is also party to various
litigations arising in the course of its business, the resolution
of none of which, the Company believes, will have a material
adverse effect on the Company's liquidity or results of
operations. Other than the ordinary course litigations and the
litigations that have been heretofore settled, the resolution of
which the Company believes would not have a material adverse
affect on its business, an adverse result in the other litigations
to which the Company is a party could have a material adverse
effect on the Company.
The Company could also be the subject of additional material
claims from the prior shareholders of companies acquired by the
Company and for whom the Company was to effect registration
statements for the resale by such shareholders of all or a portion
of their shares of Common Stock and based on such shareholders'
inability to sell all or a portion of their shares of Common Stock
pursuant to such registration statements at times when the
Company's securities were publicly traded at prices significantly
higher than the current market price.
In conjunction with certain litigations for which the
settlement obligation is currently probable and estimable, the
Company recorded a primarily noncash charge of $8.3 million in the
quarter ended May 31, 1997. No assurance can be given that the
Company will not be required to record additional material charges
in future periods in conjunction with the various litigations to
which the Company is a party.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
32
<PAGE>
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated March 14, 1997 with
respect to the issuance of convertible debt.
(ii) Current Report on Form 8-K dated March 14, 1997 with
respect to certain bank waivers.
33
<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: Gregory Fischbach July 11, 1997
--------------------
Gregory Fischbach,
Co-Chairman of the Board and
Chief Executive Officer
By: J. Mark Hattendorf July 11, 1997
--------------------
J. Mark Hattendorf,
Executive Vice President and
Chief Financial and Accounting Officer
34
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