<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 February 28, 1998
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 incorporation (I.R.S. Employer Identification
or organization) No.)
One Acclaim Plaza, Glen Cove, New York 11542
--------------------------------------------
(Address of principal executive offices)
(516) 656-5000
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----
As at April 3, 1998, approximately 50,525,000 shares of Common Stock of the
Registrant were issued and outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
<TABLE>
<CAPTION>
February 28, August 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $40,417 $26,254
Accounts receivable - net 31,076 18,729
Inventories 1,856 3,546
Prepaid expenses 14,570 20,250
-------- --------
TOTAL CURRENT ASSETS 87,919 68,779
-------- --------
OTHER ASSETS
Fixed assets - net 31,320 34,268
Excess of cost over net assets acquired -
net of accumulated amortization of $18,161
and $17,104, respectively 22,490 23,547
Other assets 5,105 6,581
-------- --------
TOTAL ASSETS $146,834 $133,175
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Trade accounts payable $25,707 $17,007
Short-term borrowings 21 643
Accrued expenses 98,812 107,928
Income taxes payable 5,919 4,840
Current portion of long-term debt 724 1,002
Obligation under capital leases - current 1,460 1,515
-------- --------
TOTAL CURRENT LIABILITIES 132,643 132,935
-------- --------
LONG-TERM LIABILITIES
Long-term debt 52,293 52,655
Obligation under capital leases - noncurrent 1,796 2,264
Other long-term liabilities 7,456 4,553
-------- --------
TOTAL LIABILITIES 194,188 192,407
-------- --------
MINORITY INTEREST (157) (186)
STOCKHOLDERS' DEFICIENCY
Preferred stock, $0.01 par value; 1,000
shares authorized; none issued -- --
Common stock, $0.02 par value; 100,000 shares
authorized; 50,729 and 50,122 shares
issued, respectively 1,015 1,002
Additional paid in capital 178,597 173,373
Accumulated deficit (223,084) (229,870)
Treasury stock, 523 and 474 shares, respectively (3,103) (2,904)
Foreign currency translation adjustment (622) (647)
-------- --------
TOTAL STOCKHOLDERS' DEFICIENCY (47,197) (59,046)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $146,834 $133,175
-------- --------
</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 Six Months Ended
February 28, February 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $69,343 $52,310 $161,620 $105,648
COST OF REVENUES 33,227 27,761 77,228 52,552
-------- --------- -------- ---------
GROSS PROFIT 36,116 24,549 84,392 53,096
-------- --------- -------- ---------
OPERATING EXPENSES
Marketing and Sales 14,162 11,530 31,260 31,443
General and Administrative 12,672 18,220 26,753 34,873
Research and Development 9,273 12,184 17,617 22,276
-------- --------- -------- ---------
TOTAL OPERATING EXPENSES 36,107 41,934 75,630 88,592
-------- --------- -------- ---------
INCOME (LOSS) FROM OPERATIONS 9 (17,385) 8,762 (35,496)
-------- --------- -------- ---------
OTHER INCOME (EXPENSE)
Interest income 607 500 1,068 791
Interest expense (1,471) (715) (2,912) (1,449)
Other (expense) income (365) 42 (21) (634)
-------- --------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (1,220) (17,558) 6,897 (36,788)
PROVISION (BENEFIT) FOR INCOME TAXES 15 (380) 121 (380)
-------- --------- -------- ---------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST (1,235) (17,178) 6,776 (36,408)
-------- --------- -------- ---------
MINORITY INTEREST (5) (336) (10) (566)
-------- --------- -------- ---------
NET INCOME (LOSS) $(1,230) $(16,842) $6,786 $(35,842)
-------- --------- -------- ---------
BASIC AND DILUTED
EARNINGS (LOSS) PER SHARE $(0.02) $(0.34) $0.13 $(0.72)
-------- --------- -------- ---------
2
</TABLE>
See notes to consolidated financial statements.
<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, 1996 ---- ---- 50,041 $1,001 $180,895 $(15,113)
------------ ------------ ------ ------ -------- ---------
Net Loss ---- ---- ---- ---- ----
Issuances and Cancellations
of Warrants and Options ---- ---- ---- ---- 722 566
Deferred compensation expense ---- ---- ---- ---- ---- 6,134
Exercise of Stock Options ---- ---- 81 1 169 -----
Purchase of Treasury Stock ---- ---- ---- ---- ----
Foreign Currency Translation Gain ---- ---- ---- ---- ---- -----
Unrealized Loss on
Marketable Equity Securities ---- ---- ---- ---- ---- -----
------------ ------------ ------------ --------- ---------- ----------
Balance August 31, 1997 ---- ---- 50,122 $1,002 $181,786 $(8,413)
------------ ------------ ------ ------ -------- --------
Net Income ---- ---- ---- ---- ----
Issuance of Common Stock for
Litigation Settlements ---- ---- 575 12 1,988 -----
Issuances and Cancellations
of Warrants and Options ---- ---- ---- ---- 2,820 (1,889)
Deferred compensation expense ---- ---- ---- ---- ----- 2,236
Exercise of Stock Options ---- ---- 32 1 69 -----
Purchase of Treasury Stock ---- ---- ---- ---- ---- -----
Foreign Currency Translation Gain ---- ---- ---- ---- ---- -----
------------ ----------- ------------ -------- -------- ---------
Balance February 28, 1998 ---- ---- 50,729 $1,015 $186,663 $(8,066)
------------ ------------ ------ ------ -------- --------
</TABLE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' (DEFICIENCY) EQUITY
(in 000s, except per share data)
<TABLE>
<CAPTION>
Unrealized
Foreign Gain (Loss) On
Currency Marketable
Accumulated Treasury Translation Equity
Deficit Stock Adjustment Securities Total
------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance August 31, 1996 $(70,642) $(1,813) $(754) $15 $93,589
--------- -------- ------ --- -------
Net Loss (159,228) ---- ---- ---- (159,228)
Issuances and Cancellations
of Warrants and Options ---- ---- ---- ---- 1,288
Deferred compensation expense ---- ---- ---- 6,134
Exercise of Stock Options ---- ---- ---- ---- 170
Purchase of Treasury Stock ---- (1,091) ---- ---- (1,091)
Foreign Currency Translation Gain ---- ---- 107 ---- 107
Unrealized Loss on
Marketable Equity Securities ---- ---- ---- (15) (15)
------ -------- -------- ---- ---
Balance August 31, 1997 $(229,870) $(2,904) $(647) $0 $(59,046)
--------- -------- ------ -- ---------
Net Income 6,786 ---- ---- ---- 6,786
Issuance of Common Stock for
Litigation Settlements ---- ---- ---- ---- 2,000
Issuances and Cancellations
of Warrants and Options ---- ---- ---- ---- 931
Deferred compensation expense ---- ---- ---- ---- 2,236
Exercise of Stock Options ---- ---- ---- ---- 70
Purchase of Treasury Stock ---- (199) ---- ---- (199)
Foreign Currency Translation Gain ---- ---- 25 ---- 25
--------- -------- -- ---- --
Balance February 28, 1998 $(223,084) $(3,103) $(622) $0 $(47,197)
---------- -------- ------ -- ---------
</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>
Six Months Ended
February 28,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net Income (Loss) $6,786 $(35,842)
------ --------
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 6,824 8,160
Loss on sale of marketable securities -- 1,016
Provision for returns and discounts 20,646 16,557
Deferred income taxes -- (418)
Minority interest in net earnings of consolidated subsidiary (10) (566)
Deferred compensation expense 2,236 2,097
Non-cash royalty charges 1,363 4,906
Other non-cash items 669 599
Change in assets and liabilities, net of effects
of acquisitions:
Increase in accounts receivable (32,337) (49,957)
Decrease in inventories 1,708 2,278
Decrease (Increase) in prepaid expenses 5,577 (5,373)
Decrease in other current assets -- 198
Increase in trade accounts payable 8,712 321
Decrease in accrued expenses (8,255) (7,537)
Decrease in income taxes receivable 301 55,188
Increase in other long-term liabilities 2,903 --
------ --------
Total adjustments 10,337 27,469
------ --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 17,123 (8,373)
------ --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Sales of marketable equity securities -- 10,153
Acquisition of subsidiaries, net -- 1,000
Acquisition of fixed assets, excluding capital leases (1,395) (1,329)
Disposal of fixed assets 69 --
Acquisition of other assets -- (2,894)
Other investing activities 30 (98)
------ --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $(1,296) $6,832
------ --------
</TABLE>
4
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
February 28,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from Convertible Subordinated Notes -- $50,000
Payment of mortgage $(640) (2,226)
Proceeds from short-term bank loans -- 9,416
Payment of short-term bank loans (622) (10,267)
Exercise of stock options 70 40
Payment of obligation under capital leases (579) (826)
Payment of long-term debt -- (19,000)
Purchase of treasury stock (199) --
Miscellaneous financing activities 27 500
-- --
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,943) 27,637
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 279 (334)
NET INCREASE IN CASH 14,163 25,762
CASH AT BEGINNING OF PERIOD 26,254 18,814
------- --------
CASH AT END OF PERIOD $40,417 $44,576
------- --------
Supplemental schedule of noncash investing and financing activities:
1998 1997
---- ----
Acquisition of equipment under capital leases $16 $290
Cash paid (received) during the year for:
Interest $3,729 $2,657
Income taxes $(187) $(56,154)
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
1. Interim Period Reporting - The data contained in these financial statements
are unaudited and are subject to year-end adjustments; however, in the opinion
of management, all known adjustments (which consist only of normal recurring
accruals) have been made to present fairly the consolidated operating results
for the unaudited periods.
2. Liquidity - The accompanying consolidated financial statements have been
prepared assuming that Acclaim Entertainment, Inc. ("Acclaim"), together with
its subsidiaries (Acclaim and its subsidiaries are collectively hereinafter
referred to as the "Company"), will continue as a going concern. The Company's
working capital and stockholders' deficiencies at February 28, 1998, the
uncertainty as to whether the Company's products in development will achieve
commercial success and uncertainty in respect of the on-going support of the
Company's principal bank could impact the Company's ability to meet its
obligations as they become due. The consolidated financial statements do not
include any adjustments that might arise from the outcome of this uncertainty.
To enhance long-term liquidity, in fiscal 1997 and 1998 the Company decreased
its fixed operating costs, primarily by reducing the number of its personnel
and consolidating or eliminating certain operations. These expense reductions
and the release of a number of titles in the first half of fiscal 1998,
including new titles for the N64 hardware platform, contributed to the
Company's net earnings of $6,786 for the first half of fiscal 1998. In that
half year, the Company generated approximately $17,123 of cash from operating
activities. The Company's future long-term liquidity will be materially
dependent on its ability to develop and market new software products that
achieve widespread market acceptance for use with the hardware platforms that
dominate the market.
3. Accounts Receivable
Accounts receivable are comprised of the following:
February 28, August 31,
1998 1997
---- ----
Receivables assigned to factor $40,772 $13,337
Advances due (from) to factor 17,587 (3,780)
------ --------
Due from factor 23,185 17,117
Unfactored accounts receivable 7,594 4,873
Accounts receivable - Foreign 22,877 12,434
Other receivables 2,098 3,085
Allowances for returns and discounts (24,678) (18,780)
-------- --------
$31,076 $18,729
------- --------
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 February 28, 1998, the factoring charge amounted
to 0.25% of the receivables assigned. The Company's obligations to the bank
are collateralized by all of Acclaim's and its North American subsidiaries'
accounts receivable, inventories and equipment. The advances for factored
receivables are pursuant to a revolving credit and security agreement, which
expires on January 31, 2000. Pursuant to the terms of the agreement, which can
be canceled 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.
6
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
3. Accounts Receivable - (Continued)
The Company draws down working capital advances and opens letters of credit
(up to an aggregate maximum of $20 million) against the facility in amounts
determined on a formula based on factored receivables, inventory and cost of
imported goods under outstanding letters of credit. Interest was charged at
the bank's prime lending rate per annum on such advances. Effective November
8, 1996, interest is charged at the bank's prime lending rate plus one percent
per annum (9.5% at February 28, 1998) on such advances. As of February 28,
1998, the Company did not meet certain financial covenants under its revolving
credit facility; the resulting events of default have been waived by the
lender.
Pursuant to the terms of certain distribution, warehouse and credit and
collection agreements, certain of the Company's foreign accounts receivable
are due from various foreign distributors. These receivables are not
collateralized and as a result management periodically monitors the financial
condition of these distributors. No additional credit risk beyond amounts
provided for collection losses is believed inherent in the Company's accounts
receivable. At February 28, 1998 and 1997, the balance due from one foreign
distributor was approximately 23% and 10%, respectively, of foreign accounts
receivable.
4. Long-Term Debt
Long-term debt consists of the following:
February 28, August 31,
1998 1997
---- ----
10% Convertible Subordinated
Notes due 2002 $50,000 $50,000
Mortgage note 3,017 3,657
------- -------
53,017 53,657
Less: current portion 724 1,002
------- -------
$52,293 $52,655
------- -------
5. Earnings (Loss) Per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share," which requires the
presentation of basic and diluted earnings per share. Basic earnings (loss)
per share is computed based upon the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed based upon the
weighted average number of common shares outstanding increased by dilutive
common stock options and warrants and the effect of assuming the conversion of
the outstanding 10% convertible subordinated notes, if dilutive. Prior year
earnings per share data has been restated to apply the provisions of SFAS 128.
The table below provides the components of the per share computations.
7
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
5. Earnings (Loss) Per Share (Continued)
<TABLE>
<CAPTION>
(in 000s except per share data) Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS Computation
Net income (loss) $(1,230) $(16,842) $6,786 $(35,842)
Weighted average
common shares outstanding 50,729 49,700 50,556 49,700
Basic earnings (loss) per share $(0.02) $(0.34) $0.13 $(0.72)
Diluted EPS Computation
Net income (loss) $(1,230) $(16,842) $6,786 $(35,842)
Weighted average
common shares outstanding 50,729 49,700 50,556 49,700
Stock options and warrants --- --- 3,244 ---
10% convertible subordinated notes --- --- ---- ---
------- ------- ------- -------
Diluted common shares outstanding 50,729 49,700 53,800 49,700
------- ------- ------- -------
Diluted earnings (loss) per share $(0.02) $(0.34) $0.13 $(0.72)
</TABLE>
The assumed conversion of the outstanding 10% convertible subordinated notes
was excluded from the above diluted earnings per share calculations since they
were anti-dilutive.
8
<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 Annual Report on Form 10-K for the year ended August 31, 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.
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 16 to 26, which could
cause actual events or the actual future results of the Company to differ
materially from any forward-looking statement. In light of the significant risks
and uncertainties inherent in the forward-looking statements included herein,
the inclusion of such statements should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
OVERVIEW
Acclaim Entertainment, Inc. ("Acclaim"), together with its subsidiaries
(Acclaim and its subsidiaries are collectively hereinafter referred to as the
"Company"), is a developer, publisher and mass marketer of interactive
entertainment software ("Software") for use with dedicated interactive
entertainment hardware platforms ("Entertainment Platforms") and multimedia
personal computer systems ("Multimedia PCs"). The Company operates its own
Software design studios and a motion capture studio, and markets and distributes
its Software in the major territories throughout the world. The Company's
operating strategy is to develop Software for the Entertainment Platforms and
Multimedia 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 emphasizes sports simulation and arcade-style
titles for Entertainment Platforms, and fantasy/role-playing, adventure and
sports simulation titles for Multimedia PCs. The Company intends to continue to
support its existing key brands (such as Turok: Dinosaur Hunter, NFL Quarterback
Club and NBA Jam) with the introduction of new titles supporting those brands
and to develop one or more additional key brands 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, to a lesser extent, in: (i) the development and
publication of comic books; (ii) the distribution of Software titles developed
by other Software publishers ("Affiliated Labels"); and (iii) the marketing of
its motion capture technology and studio services.
The Software industry is driven by the size of the installed base of
Entertainment Platforms, such as those manufactured by Nintendo Co., Ltd.
(Japan) (Nintendo Co., Ltd. and its subsidiary, Nintendo of America, Inc., are
collectively referred to as "Nintendo"), Sony Corporation (Sony Corporation and
its subsidiary, Sony Computer Entertainment of America, are collectively
referred to as "Sony") and Sega Enterprises Ltd. ("Sega"), and Multimedia PCs.
The industry is characterized by rapid technological change, resulting in
hardware platform and related Software product cycles. No single hardware
platform or system has achieved long-term dominance in the interactive
entertainment market.
The Company's results of operations and cash flows were materially
adversely affected during the fiscal years ended August 31, 1996 and 1997 by the
material decline in sales of the Company's 16-bit Software and the transition to
new 32- and 64-bit Entertainment Platforms and related Software. See "Factors
Affecting Future Performance--Industry Trends; Platform Transition;
Technological Change."
9
<PAGE>
The Company recorded a net loss of $(1.2) million and net income of $6.8
million for the three and six months ended February 28, 1998 as compared to a
net loss of $(16.8) million and $(35.8) million for the three and six months
ended February 28, 1997. The results for the 1998 three and six month periods
reflect primarily the increase in sales volume of the Company's Software for
Nintendo's 64-bit N64 platform ("N64").
Management believes, based on publicly available information and its own
estimates, that the installed base of 32- and 64-bit Entertainment Platforms in
the United States was between approximately 6 and 7 million and between
approximately 17 and 18 million units at the end of calendar 1996 and 1997,
respectively. Although management anticipates that such installed base will
continue to grow in calendar 1998 and that the Company's revenues in fiscal 1998
from sales of Software therefor will be higher than in fiscal 1997, the
Company's revenues from sales of Software for these Entertainment Platforms in
fiscal 1998 will not be comparable to its revenues from sales of 16-bit Software
in fiscal 1994 or 1995. Assuming the continued growth of the installed base of
32- and 64-bit Entertainment Platforms and the timely introduction and success
of the Company's Software therefor, management anticipates that the Company will
be profitable for fiscal 1998 as a whole. However, no assurance can be given as
to the future growth of the installed base of 32- and 64-bit Entertainment
Platforms or Software therefor, the timely introduction or success of the
Company's Software (particularly in light of the difficulty in predicting
product development schedules) or the Company's results of operations and
profitability in future periods. See Note 2 of Notes to Consolidated Financial
Statements and "Factors Affecting Future Performance."
In fiscal 1997, the Company effected a variety of cost reduction measures
to reduce its operating expenses. The Company realized the benefits of such
measures in the fourth quarter of fiscal 1997 and in the first half of fiscal
1998 in the form of reduced operating expenses as compared to prior periods. In
addition, in fiscal 1998, the Company consolidated or eliminated certain
operations. No assurance can be given that the Company will be able to maintain
its operating expenses at their current level or that the cost reduction
measures heretofore effected will not materially adversely affect the Company's
ability to develop and publish commercially viable titles, or that such
measures, whether alone or in conjunction with increased revenues, if any, will
be sufficient to generate operating profits in fiscal 1998 and beyond. See
"Factors Affecting Future Performance."
The Company's ability to generate sales growth and profitability will be
primarily dependent on the growth of the Software market for 32- and 64-bit
Entertainment Platforms and Multimedia PCs, the Company's ability to identify,
develop and publish 'hit' Software for Entertainment Platforms with significant
installed bases and Multimedia PCs, the continued success of the Company's cost
reduction efforts and its ability to develop and publish commercially viable
titles after giving effect to such efforts and, to a lesser extent, the
generation of increased revenues from the Company's other entertainment
operations.
RESULTS OF OPERATIONS
The following table sets forth certain statements of consolidated
operations data as a percentage of net revenues for the periods indicated:
10
<PAGE>
Three Months Ended Six Months Ended
February 28, February 28,
------------------ ----------------
1998 1997 1998 1997
----- ----- ----- -----
Domestic revenues 58.1% 56.0% 58.6% 51.2%
Foreign revenues 41.9 44.0 41.4 48.8
----- ----- ----- -----
Net revenues 100.0 100.0 100.0 100.0
Cost of revenues 47.9 53.1 47.8 49.7
----- ----- ----- -----
Gross profit 52.1 46.9 52.2 50.3
Marketing and sales 20.4 22.0 19.3 29.8
General and administrative 18.3 34.9 16.6 33.0
Research and development 13.4 23.3 10.9 21.1
----- ----- ----- -----
Total operating expenses 52.1 80.2 46.8 83.9
Earnings (loss) from operations 0.0 (33.2) 5.4 (33.6)
Other (expense), net (1.8) (0.3) (1.2) (1.2)
Earnings (loss) before income taxes (1.8) (33.6) 4.3 (34.8)
Net earnings (loss) (1.8) (32.2) 4.2 (33.9)
NET REVENUES
The Company's gross revenues were derived from the following product
categories:
Three Months Ended Six Months Ended
February 28, February 28,
------------------ ----------------
1998* 1997* 1998* 1997*
----- ----- ----- -----
64-bit Software 60.0% 45.0% 67.0% 22.0%
32-bit Software 26.0% 26.0% 20.0% 45.0%
Multimedia PC Software 8.0% 14.0% 8.0% 15.0%
Portable Software 5.0% 2.0% 3.0% 2.0%
16-bit Software 0.0% 9.0% 1.0% 12.0%
Other 1.0% 4.0% 1.0% 4.0%
- ------------
* The numbers in this chart do not give effect to sales credits and allowances
granted by the Company in the periods covered since the Company does not track
such credits and allowances by product category. Accordingly, the numbers
presented may vary materially from those that would be disclosed if the Company
were able to present such information as a percentage of net revenues.
The increase in the Company's net revenues from $52.3 million for the
quarter ended February 28, 1997 to $69.3 million for the quarter ended February
28, 1998 and from $105.6 million for the six months ended February 28, 1997 to
$161.6 million for the six months ended February 28, 1998 was predominantly due
to increased sales of the Company's N64 Software resulting from the release of
new N64 Software and the growth in the 64-bit Entertainment Platform market.
A significant portion of the Company's revenues in any quarter are
generally derived from Software first released in that quarter or in the
immediately preceding quarter. For the three months ended February 28, 1997,
sales of Turok: Dinosaur Hunter (for the N64) accounted for approximately 45% of
the Company's gross revenues and for the three months ended February 28, 1998
sales of NHL Breakaway `98, Quarterback Club `98, Turok: Dinosaur Hunter and
Riven (each for multiple platforms) accounted for approximately 25%, 20%, 13%
and 10%, respectively, of the Company's gross revenues. For the six months ended
February 28, 1997, sales of Turok: Dinosaur Hunter (for the N64) accounted for
approximately 22% of the Company's gross revenues and for the six months ended
February 28, 1998 sales of Quarterback Club `98, Extreme G, NHL Breakaway `98
and Turok: Dinosaur Hunter (each for multiple platforms) accounted for
approximately 26%, 21%, 12% and 10%, respectively, of the Company's gross
revenues.
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The Company is substantially dependent on Nintendo, Sony and Sega 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 February 28, 1997 and
1998, the Company derived 51% and 65% of its gross revenues, respectively, from
sales of Nintendo-compatible Software, 17% and 26% of its gross revenues,
respectively, from sales of Software for the Sony PlayStation and 14% and less
than 1% of its gross revenues, respectively, from sales of Sega-compatible
Software. For the six months ended February 28, 1997 and 1998, the Company
derived 31% and 71% of its gross revenues, respectively, from sales of
Nintendo-compatible Software, 33% and 20% of its gross revenues, respectively,
from sales of Software for the Sony PlayStation and 17% and less than 1% of its
gross revenues, respectively, from sales of Sega-compatible Software.
GROSS PROFIT
Gross profit fluctuates as a result of three factors: (i) the number of
'hit' titles and average unit selling prices of the Company's Software; (ii) the
Company's product mix (i.e., the percentage of sales of Multimedia PC Software
and Software for compact-disk ("CD") based Entertainment Platforms, such as the
32-bit Sony PlayStation and Sega Saturn platforms, as compared to sales of
Software for cartridge-based Entertainment Platforms, such as the N64); and
(iii) 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 sales
price obtained for its Software. Similarly, lack of 'hit' titles or a low number
of 'hit' titles, resulting in lower average unit sales prices, adversely impacts
the Company's gross profits.
The Company's margins on sales of Multimedia PC and other CD Software are
higher than those on cartridge Software as a result of significantly lower CD
Software costs.
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 increased from $24.5 million (47% of net revenues) for the
quarter ended February 28, 1997 to $36.1 million (52% of net revenues) for the
quarter ended February 28, 1998 and from $53.1 million (50% of net revenues) for
the six months ended February 28, 1997 to $84.4 million (52% of net revenues)
for the six months ended February 28, 1998. The dollar increase is attributable
to increased sales volume and the percentage increase is attributable to higher
unit selling prices of the Company's Software.
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.
In addition, management anticipates that the Company's future gross profit
will be adversely impacted commencing in the second half of fiscal 1998 by the
cost of higher memory chips utilized in its N64 cartridges. Such higher memory
chips are anticipated to provide better game play.
The Company purchases substantially all of its Software (other than
Software sold in Japan) 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.
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OPERATING EXPENSES
In fiscal 1997, the Company effected a variety of cost reduction measures
to reduce its operating expenses. The Company realized the benefits of such
measures in the fourth quarter of fiscal 1997 and in the first six months of
fiscal 1998 in the form of reduced operating expenses as compared to prior
quarters. In addition, in fiscal 1998, the Company consolidated or eliminated
certain operations. No assurance can be given that the Company will be able to
maintain its operating expenses at their current level or that the cost
reduction measures heretofore effected will not materially adversely affect the
Company's ability to develop and publish commercially viable titles, or that
such measures, whether alone or in conjunction with increased revenues, if any,
will be sufficient to generate operating profits in fiscal 1998 and beyond. See
"Factors Affecting Future Performance."
Marketing and sales expenses increased from $11.5 million (22% of net
revenues) for the quarter ended February 28, 1997 to $14.2 million (20% of net
revenues) for the quarter ended February 28, 1998. The increase is primarily
attributable to higher selling expenses. Marketing and sales expenses decreased
from $31.4 million (30% of net revenues) for the six months ended February 28,
1997 to $31.3 million (19% of net revenues) for the six months ended February
28, 1998. The percentage decrease is primarily attributable to increased sales
volume.
General and administrative expenses decreased from $18.2 million (35% of
net revenues) for the quarter ended February 28, 1997 to $12.7 million (18% of
net revenues) for the quarter ended February 28, 1998 and decreased from $34.9
million (33% of net revenues) for the six months ended February 28, 1997 to
$26.8 million (17% of net revenues) for the six months ended February 28, 1998.
The decrease is primarily attributable to personnel and other cost reduction
efforts initiated by the Company to reduce its operating expenses.
Research and development expenses decreased from $12.2 million (23% of net
revenues) for the quarter ended February 28, 1997 to $9.3 million (13% of net
revenues) for the quarter ended February 28, 1998 and decreased from $22.3
million (21% of net revenues) for the six months ended February 28, 1997 to
$17.6 million (11% of net revenues) for the six months ended February 28, 1998
due to the consolidation of certain of the Company's studio operations and other
cost reduction efforts implemented by the Company.
Accrued downsizing expenses were $11.3 million at August 31, 1997.
Downsizing expenditures in the first half of fiscal 1998 were consistent with
the accrued downsizing charge at August 31, 1997. The majority of the remaining
accrued downsizing expenses, including those for the discontinuance in fiscal
1998 of the Company's coin-operated video arcade game subsidiary, will be paid
in the remainder of fiscal 1998 and relates to employee severance, lease
commitments for idle facilities and write-offs of non-productive fixed assets.
As of August 31, 1997, the Company had a U.S. tax net operating loss
carryforward of approximately $96 million. The Company had no U.S. federal
income tax expense in the first half of fiscal 1998 due to the utilization of a
portion of such net operating loss carryforwards. The provision for income taxes
of $0.1 million relates to state and foreign income taxes.
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). However,
the timing of the delivery of Software titles and the releases of new titles
cause material fluctuations in the Company's quarterly revenues and earnings,
which may cause the Company's results to vary from the seasonal patterns of the
industry as a whole.
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LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash in operating activities of approximately $(8.4)
million and derived net cash from operating activities of approximately $17.1
million during the six months ended February 28, 1997 and 1998, respectively. An
income tax refund of approximately $54 million relating to the carryback of the
Company's loss for fiscal 1996 was included in the net cash used in operating
activities during the fiscal 1997 period. The increase in net cash from
operations in the fiscal 1998 period as compared to the fiscal 1997 period is
primarily attributable to higher sales. See Note 2 of Notes to Consolidated
Financial Statements.
The Company derived net cash from investing activities of approximately
$6.8 million and used net cash in investing activities of approximately $(1.3)
million during the six months ended February 28, 1997 and 1998, respectively.
The decrease in net cash from investing activities in the fiscal 1998 period as
compared to the fiscal 1997 period is primarily attributable to the proceeds
(approximately $10.2 million) derived from the sale of marketable securities in
the fiscal 1997 period.
The Company derived net cash in financing activities of approximately $27.6
million and used net cash in financing activities of approximately $(1.9)
million in the six months ended February 28, 1997 and 1998, respectively. The
decrease in net cash provided by financing activities in the fiscal 1998 period
as compared to the fiscal 1997 period is primarily attributable to the offering
in February 1997 of $50 million of 10% convertible subordinated notes ("Notes")
due March 1, 2002, which was partially offset by the repayment of a term loan
and partial repayment of the mortgage note due to Fleet Bank ("Fleet").
The Company generally purchases its inventory of Sony, Nintendo and Sega
(to the extent not manufactured by the Company) Software by opening letters of
credit when placing the purchase order. At February 28, 1998, the amount
outstanding under letters of credit was approximately $11.5 million. Other than
such letters of credit, the Company does not currently have any material
operating or capital expenditure commitments.
In fiscal 1997, the Company commenced a year 2000 date conversion project
to address all necessary code changes, testing and implementation. Project
completion is planned for the middle of calendar 1999. Management anticipates
that the cost of the project will not be material to the Company's results of
operations or liquidity in fiscal 1998 or 1999. Management anticipates that the
Company's year 2000 date conversion project will be completed on a timely basis.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely also will be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems.
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 may 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
February 28, 1998, 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 February 28, 1998, the Company did not meet certain financial covenants under
its revolving credit facility; the resulting events of default have been waived
by the lender. See Note 3 of Notes to Consolidated Financial Statements and
"Factors Affecting Future Performance--Liquidity and Bank Relationships."
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The Company is also party to a mortgage arrangement with Fleet relating to
its corporate headquarters. At February 28, 1998, the outstanding principal
balance of the Fleet loan was $3.0 million. See "Factors Affecting Future
Performance--Liquidity and Bank Relationships."
Management believes, based on the currently anticipated growth of the
installed base of 32-and 64-bit Entertainment Platforms and the cost reduction
efforts effected by the Company, that the Company's cash flows from operations
will be sufficient to cover its operating expenses and such current obligations
as are required to be paid in the remainder of fiscal 1998. However, no
assurance can be given as to the sufficiency of such cash flows in fiscal 1998
or beyond. To provide for its short-and long-term liquidity needs, in fiscal
1997 and 1998, the Company significantly reduced the number of its employees,
consolidated or eliminated certain operations, raised $47.4 million of net
proceeds from the issuance of the Notes, and sold substantially all of the
assets of Acclaim Redemption Games, Inc. ("Lazer-Tron"). The Company's future
liquidity will be materially dependent on its ability to develop and market
Software that achieves widespread market acceptance for use with the hardware
platforms that dominate the market. There can be no assurance that the Company
will be able to publish Software 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. In conjunction with certain claims and litigations for which the
settlement obligation was probable and estimable, the Company recorded a charge
of $23.6 million in the year ended August 31, 1997. Approximately one-half of
the settlement amount is payable with non-cash items, such as stock or warrants,
approximately one-quarter is payable in cash and the remaining approximately
one-quarter is payable in cash or stock, at the Company's option. 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. See "Factors Affecting Future Performance--Litigation"
and "Legal Proceedings."
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", is
effective for transactions entered into in fiscal years beginning after December
15, 1997 (September 1, 1998 for the Company). SOP 97-2 indicates that revenue
for noncustomized software should be recognized when persuasive evidence of an
arrangement exists, the software has been delivered, the Company's selling price
is fixed or determinable and collectibility of the resulting receivable is
probable. The implementation of SOP 97-2 is not expected to have any impact on
the Company's results of operations.
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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 increased from $105.6 million for the six months
ended February 28, 1997 to $161.6 million for the six months ended February 28,
1998. The Company had net earnings of $6.8 million for the six months ended
February 28, 1998 as compared to a net loss of $(35.8) million for the six
months ended February 28, 1997. The increase in revenues and earnings in the
1998 period reflects primarily increased sales of the Company's Software for the
N64 platform. The Company's results in the prior two fiscal years, which
reflected decreases in net revenues as compared to fiscal 1994 and 1995 and net
losses in fiscal 1996 and 1997, were primarily attributable to the effects on
the Company of the industry transition from 16-bit to 32- and 64-bit
Entertainment Platforms and related Software. See "--Going Concern
Considerations."
Based on publicly available information and its own estimates, the Company
believes that the installed base of 32- and 64-bit Entertainment Platforms in
the United States was between approximately 6 and 7 million and between
approximately 17 and 18 million units at the end of calendar 1996 and calendar
1997, respectively. Although the Company anticipates that such installed base
will continue to grow in the short term, no assurance can be given that the
installed base of such Entertainment Platforms will increase substantially or
that the Company's revenues from sales of Software therefor will increase
sufficiently to offset the reduction in revenues derived from sales of 16-bit
Software in prior years. Assuming the continued growth of the installed base of
32- and 64-bit Entertainment Platforms and the timely introduction and success
of the Company's Software therefor, management anticipates that the Company will
be profitable for fiscal 1998 as a whole. No assurance can be given as to the
future growth of the installed base of 32- and 64-bit Entertainment Platforms or
Software therefor, the timely introduction or success of the Company's Software
(particularly in light of the difficulty in predicting product development
schedules) or the Company's results of operations and profitability in future
periods.
In fiscal 1997, the Company effected a variety of cost reduction measures
to reduce its operating expenses. See "--Liquidity and Bank Relationships" below
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company realized the benefits of such measures in the fourth
quarter of fiscal 1997 and in the first six months of fiscal 1998 in the form of
reduced operating expenses as compared to prior quarters. In addition, in fiscal
1998, the Company consolidated or eliminated certain expenses. No assurance can
be given that the Company will be able to maintain its operating expenses at
their current level or that the cost reduction measures heretofore effected will
not materially adversely affect the Company's ability to develop and publish
commercially viable titles, or that such measures, whether alone or in
conjunction with increased revenues, if any, will be sufficient to generate
operating profits in fiscal 1998 and beyond.
Liquidity and Bank Relationships
The Company used net cash from operations of approximately $(8.4) million
and derived net cash from operations of approximately $17.1 million for the
first six months of fiscal 1997 and 1998, respectively. An income tax refund of
approximately $54 million relating to the carryback of the Company's loss for
fiscal 1996 was included in the net cash derived from operating activities
during the first six months of fiscal 1997. Prior to the fiscal 1998 period,
without giving effect to the tax refund during the same period of fiscal 1997,
the Company had experienced negative cash flow from operations in recent periods
primarily due to its net losses, which were primarily attributable to the
effects on the
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Company of the industry transition from 16-bit to 32- and 64-bit Entertainment
Platforms and related Software.
The Company believes, based on the anticipated continued growth of the
installed base of 32- and 64-bit Entertainment Platforms and the cost reduction
efforts effected by the Company, that its cash flows from operations will be
sufficient to cover its operating expenses and such current obligations as are
required to be paid in fiscal 1998. However, there can be no assurance that the
Company's operating expenses or current obligations will not materially exceed
cash flows available from the Company's operations in fiscal 1998 and beyond.
To provide liquidity, the Company (i) in fiscal 1997 and 1998,
significantly reduced the number of its employees and consolidated or eliminated
certain of its operations, (ii) on February 26, 1997, consummated the offering
of the Notes (the "Convertible Note Offering") and used approximately $16
million of the net proceeds of the Convertible Note Offering to retire its term
loan from Midland Bank plc ("Midland") and $2 million of such proceeds to pay a
portion of its mortgage loan from Fleet and (iii) on March 5, 1997, sold
substantially all of the assets and certain liabilities of Lazer-Tron for $6
million in cash. The Company's long-term liquidity will be materially dependent
on its ability to develop and market "hit" Software for the Entertainment
Platforms that dominate the interactive entertainment market. See Note 2 of
Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
As of February 28, 1998, the Company did not meet certain financial
covenants under its revolving credit facility; the resulting events of default
have been waived by the lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
There can be no assurance that additional covenant defaults, or a payment
default, will not occur in the future. The Company's ability to meet its
financial covenants and its payment 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. In such event, the Company's operations would be materially adversely
affected. See "--Going Concern Considerations."
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 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, is 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
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terms or will be permitted by the terms of the Indenture, 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 "--Prior Rights of Creditors" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Prior Rights of Creditors
The Company has outstanding long-term debt (including current portions) of
$53 million at February 28, 1998. See Note 4 of Notes to Consolidated Financial
Statements. 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 (the "Indenture") governing
the Notes. Certain of such indebtedness is secured by liens on substantially all
of the assets of the Company.
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 loan 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 the Company's existing loan 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 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 actions by IBJ Schroder Bank & Trust Company, as trustee (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 Acclaim's common stock, par value $0.02 per share (the "Common
Stock").
Going Concern Considerations
The Company's working capital declined from $(10.0) million at August 31,
1996 to $(64.2) million at August 31, 1997 and $(44.7) million at February 28,
1998 and the Company's stockholders' equity declined from $93.6 million at
August 31, 1996 to $(59.0) million at August 31, 1997 and $(47.2) million
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at February 28, 1998. The report of KPMG Peat Marwick LLP, independent auditors
for the Company, for fiscal 1997 includes an explanatory paragraph relating to
substantial doubt as to the ability of the Company to continue as a going
concern. A "going concern" explanatory paragraph could have a material adverse
effect on the terms of any bank financing or capital the Company may seek. See
Note 2 of Notes to Consolidated Financial Statements.
Litigation
In conjunction with certain claims and litigations for which the settlement
obligation was probable and estimable (see "Legal Proceedings"), the Company
recorded a charge of $23.6 million in the year ended August 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. Any additional charges to earnings
arising from an adverse result in such litigations or an inadequacy in the
charge recorded in fiscal 1997 could have a material adverse effect on the
financial condition and results of operations of 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 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 Multimedia 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 hardware
platform and Software life cycles.
No single hardware platform or system has achieved long-term dominance.
Accordingly, the Company must continually anticipate and adapt its Software
titles to emerging hardware 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 hardware platforms. The process of
developing Software titles 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 hardware 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
hardware platforms in order to allow sufficient lead time to develop and
introduce new Software titles on a timely basis. This generally requires the
Company to predict the probable success of hardware platforms as much as 12 to
24 months prior to the release of compatible Software.
Substantially all of the Company's revenues in fiscal 1997 and in the first
six months of fiscal 1998 were derived from the sale of titles designed to be
played on the N64, PlayStation, Sega Saturn and various Multimedia PCs. At any
given time, the Company has expended significant development and marketing
resources on product development for platforms (such as the 16-bit SNES and Sega
Genesis platforms) that could have shorter life cycles than the Company
expected, as in fiscal 1996, or on Software titles designed for new platforms
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 hardware platforms due to, among other things, the long
Software development lead times involved, it could be in the position, as it was
in fiscal 1996 and 1997, of marketing Software for (i) new hardware platforms
that have not yet achieved significant market penetration and/or (ii) hardware
platforms that have become or are becoming obsolete due to the introduction or
success of new hardware platforms. There can be no assurance that the Company
will be able to predict accurately such matters, and its failure to do so would
have a material adverse effect on the Company.
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Failure to develop Software titles for hardware 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 cash flows were materially
adversely affected during the fiscal years ended August 31, 1996 and 1997 by the
material decline in sales of the Company's 16-bit Software and the transition to
the new hardware platforms described herein. The Company is currently developing
Software for the Nintendo N64, the Sony PlayStation and Multimedia PCs. There
are a significant number of Software titles for the Entertainment Platform
market competing for limited shelf space. In addition, the 32- and 64-bit
Entertainment Platforms have not yet achieved market penetration similar to that
of the 16-bit Entertainment 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 Entertainment
Platforms. Based on publicly available information and its own estimates, the
Company believes that the installed base of 32- and 64-bit Entertainment
Platforms in the United States was between approximately 6 and 7 million and
between approximately 17 and 18 million units at the end of calendar 1996 and
1997, respectively. Although the Company anticipates that such installed base
will continue to grow in calendar 1998 and that the Company's revenues in fiscal
1998 from sales of Software therefor will be higher than in fiscal 1997, the
Company's revenues from sales of Software for the new Entertainment Platforms in
fiscal 1998 will not be comparable to its revenues from sales of 16-bit Software
in fiscal 1994 or 1995. No assurance can be given that the installed base of any
of the new Entertainment Platforms will grow substantially or that any of them
will achieve market penetration similar to that achieved by the Nintendo SNES
and Sega Genesis Entertainment Platforms.
Revenue and Earnings Fluctuations; Seasonality
The Company has historically derived substantially all of its revenues from
the publication and distribution of Software for then dominant hardware
platforms. The Company's revenues are subject to fluctuation during transition
periods, as occurred in fiscal 1996 and 1997, when new hardware 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 Software for new hardware
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 and adversely affected.
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The interactive entertainment industry is highly seasonal. Typically, net
revenues are highest during the last calendar quarter (which includes the
holiday buying season), decline in the first quarter, are lower in the second
calendar quarter and increase 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 titles 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
In the six months ended February 28, 1997 and 1998, the Company derived 31%
and 71% of its gross revenues, respectively, from sales of Nintendo-compatible
Software, 33% and 20% of its gross revenues, respectively, from sales of
Software for the Sony PlayStation and 17% and less than 1% of its gross
revenues, respectively, from sales of Sega-compatible Software and in the three
months ended February 28, 1997 and 1998, the Company derived 51% and 63% of its
gross revenues, respectively, from sales of Nintendo-compatible Software,17% and
27% of its gross revenues, respectively, from sales of Software for the Sony
PlayStation and 14% and less than 1% of its gross revenues, respectively, from
sales of Sega-compatible Software. Accordingly, the Company is substantially
dependent on Nintendo, Sony and Sega as the sole manufacturers of the
Entertainment Platforms marketed by them and as the sole licensors of the
proprietary information and technology needed to develop Software for those
Entertainment Platforms. The Entertainment 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
platforms. The Company has executed license agreements with Sony with respect to
the PlayStation platform in North America, Japan, Asia and Europe and with
Nintendo with respect to the N64 platform in North and South America and Japan.
The Company also develops and markets N64 Software in Europe under an oral
agreement with Nintendo. 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 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 the Entertainment Platforms developed by each of them. The Company
also relies upon the Entertainment Platform manufacturers for the manufacture of
certain cartridge and CD-based read-only memory ("ROM") Software.
Reliance on New Titles; 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 to 120 days after release. The Company generally actively
markets its 10 to 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
titles. In addition, consumer
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preferences for Software are difficult to predict, and few titles achieve
sustained market acceptance. There can be no assurance that new titles
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 titles and increase the importance of the Company's ability
to release titles on a timely basis.
The Company's current production schedules contemplate that the Company
will commence shipment of a number of new titles during the remainder of fiscal
1998. Shipment dates will vary depending on the Company's own quality assurance
testing, as well as that by the applicable dedicated platform manufacturer, 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 the approval of a product by an
Entertainment Platform manufacturer or licensor could have a material adverse
effect on the Company's financial condition and results of operations. In the
past, the Company has experienced significant delays in the introduction of
certain new titles. There can be no assurance that such delays will not occur or
materially adversely affect the Company in the future. It is likely that in the
future certain new titles 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 titles 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 hardware platforms with significant installed bases. During the
six months ended February 28, 1998, sales of the Company's top four titles
accounted for approximately 69% 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 hardware 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 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 inventory and provides price protection or other concessions
for excess or slow-moving inventory. 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 of such estimates are allowances for estimated
returns, price concessions and other discounts. At the time of 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 and exchanges 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, at February 28, 1998, 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.
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In addition, the Company has offered and anticipates that it will continue
to offer stock-balancing programs for its Multimedia 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.
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 studios in calendar
1995. The result of such acquisitions was that commencing in fiscal 1996 the
Company's fixed Software development and overhead costs were significantly
higher as compared to historical levels. These costs further contributed to the
Company's results of operations and profitability being materially adversely
affected in fiscal 1996 and 1997. Although the Company has consolidated certain
of its studio operations to reduce their overhead expenses, 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 is highly competitive. Only a small
percentage of titles introduced in the Software market achieve any degree of
sustained market acceptance. Competition is based primarily upon quality of
titles, 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 titles. Typically, the
Company's chief competitor on an Entertainment Platform is the hardware
manufacturer of the platform, to whom the Company pays royalties and, in some
cases, manufacturing charges. Accordingly, the hardware manufacturers have a
price, marketing and distribution advantage with respect to Software marketed by
them and such advantage is particularly important in a mature or declining
market which supports fewer full-priced titles and is characterized by customers
who make purchasing decisions on titles based primarily on price (as compared to
developing markets with limited 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 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 Entertainment Platform and Multimedia PC Software
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
Software. 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.
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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 National Basketball
Association, the 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 independent developers for the
development of a significant portion of its Software 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.
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 Multimedia PC titles, 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 third parties to copy illegally the
Company's titles or to reverse engineer or otherwise obtain and use information
that the Company regards as proprietary. Illegal copying occurs within the
Software industry, and if a significant amount of illegal copying of the
Company's published titles or titles distributed by it were to occur, the
Company's business, operating results and financial condition could be
materially adversely affected. Policing illegal use of the Company's titles is
difficult, and Software piracy can be expected to be a persistent problem.
Further, the laws of certain countries in which the Company's titles are or may
be distributed do not protect the Company and its intellectual property rights
to the same extent as the laws of the United States.
The Company believes that its Software, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. However, as
the number of titles 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 titles 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 titles.
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 44% and 42% of the Company's
net revenues for the three months ended February 28, 1997 and 1998,
respectively, and approximately 49% and 41% of the Company's net revenues for
the six months ended February 28, 1997 and 1998, respectively. The Company
expects that international sales will continue to account for a significant
portion of its net
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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 believes exposure to foreign currency
losses is not 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 titles is essential to achieve market penetration.
The Company may incur incremental costs and experience delays in localizing its
titles. 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.
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 upon 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 (subject to certain
limitations imposed by the Indenture) 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. 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
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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 revenues 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 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.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company 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 in the Northern District
of California. The plaintiff seeks an accounting and compensatory, punitive and
exemplary damages in an amount equal to at least $8 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 titles for a term of five years. In
addition, the plaintiff alleges, among other things, fraud and negligent
misrepresentation. The parties have agreed on settlement terms, subject to
documentation and court approval.
The Company and certain of its current and former 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
in 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. The parties have executed a settlement
agreement, which is subject to court approval.
By summons and complaint dated December 11, 1995, certain of the Company's
current and former 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. The parties have executed a
settlement agreement, which is subject to court approval.
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,
negligence and negligent misrepresentation. In addition, certain former
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, v. 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 (as so consolidated, the
"Lazer-Tron State Actions").
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The Company and certain of its current and former 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 (the "Campbell Action"), 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 Campbell 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 proceedings with the action entitled In re
Acclaim Ent. Shareholder Litigation discussed above.
The parties to the Lazer-Tron State Actions and the Campbell Action have
entered into a settlement agreement. The settlement was approved by the Superior
Court of the State of California, which also dismissed the Lazer-Tron State
Actions. The Eastern District of New York dismissed the Campbell Action.
The Company and certain of its current and former 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 (CV 94 1501) (the "WMS Action"). The plaintiffs, on behalf
of a class of the Company's stockholders, consisting of all those who purchased
the Common 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. The
parties have executed a memorandum of understanding setting forth settlement
terms of the WMS Action. The settlement is subject to documentation and court
approval.
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 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. In connection with the settlement of the WMS Action, the
Company has agreed to assign to the plaintiffs in the WMS Action 50% of the
proceeds, if any, recovered from Mt. Hawley.
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 fully to 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 New York State Department of Taxation and Finance (the "Department"),
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,
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is due to the State. 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.
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.
In conjunction with claims arising from certain of the Company's
acquisitions and then pending litigations for which the settlement obligation
was probable and estimable, the Company recorded a charge of $23.6 million
during the year ended August 31, 1997. Approximately one-half of the settlement
amount is payable with non-cash items, such as stock or warrants, approximately
one-quarter is payable in cash and the remaining approximately one-quarter is
payable in cash or stock, at the Company's option. If the settlement terms of
such litigations are not documented or approved as currently anticipated, the
Company may be required to record additional charges in future periods.
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. Confidential License Agreement, effective as of February 20, 1997,
between Nintendo of America, Acclaim Entertainment, Inc. and Acclaim
Entertainment Ltd.
(b) Reports on Form 8-K
None.
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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 April 7, 1998
Gregory Fischbach
Co-Chairman of the Board;
Chief Executive Officer;
President; Director
By: James Scoroposki April 7, 1998
James Scoroposki
Co-Chairman of the Board;
Executive Vice President;
Treasurer; Secretary;
Director; and Acting
Chief Financial and
Accounting Officer
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CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
THE REDACTED INFORMATION IN SCHEDULE 1.
CONFIDENTIAL LICENSE AGREEMENT
FOR NINTENDO 64 VIDEO GAME SYSTEM
(Western Hemisphere)
THIS AGREEMENT is entered into between NINTENDO OF AMERICA INC., a
Washington corporation with an address for notice purposes of 4820 150th Avenue
N.E., Redmond, WA 98052 (Fax: 206-882-3585) ("NINTENDO") and ACCLAIM
ENTERTAINMENT, INC., a New York corporation with an address for notice purposes
of 71 Audrey Avenue, Oyster Bay, NY 11771 (Fax: 516-624-2885), Attention:
President ("LICENSEE").
NINTENDO and LICENSEE acknowledge and agree as follows:
1. RECITALS
1.1 NINTENDO markets and sells a high-quality video game system,
including hardware, software and an input controller, marketed by NINTENDO under
its trademarks "Nintendo 64(TM)" and "N64(TM)", for playing video games.
1.2 LICENSEE desires to gain access to and rights to utilize highly
proprietary programming specifications, development tools, trademarks and other
valuable intellectual property rights in order to develop video game software
and to purchase and sell such video game software from NINTENDO for play on the
Nintendo 64 system, which system was developed by NCL and Silicon Graphics, Inc.
1.3 NINTENDO is willing to grant a license to utilize such proprietary
information and intellectual property rights and to sell video game software to
LICENSEE upon the terms and conditions set forth in this Agreement.
2. DEFINITIONS
2.1 "Artwork" shall mean the final art and mechanical formats for the
Licensed Product including the Game Cartridge box, user instruction manual with
consumer precautions and warranty, Game Cartridge label and inserts.
2.2 "Competing Systems" shall mean hardware platforms, whether marketed
now or in the future, designed to play interactive video games, including, but
without limitation: Apple/Bandai Pippin or Atmark, Atari Jaguar, Atari Lynx, 3DO
Real, Matsushita M2, Phillips CD-I Interactive Player, Sega Master System, Sega
Genesis, Sega CD, Sega Game Gear, Sega CD/X, Sega Nomad, Sega 32X, Sega Saturn,
Sega Pico, Sony PSX/Playstation and SNK Neo Geo.
2.3 "Effective Date" shall mean the last date in which all parties
shall have signed this Agreement.
2.4 "Exclusive Licensed Product" shall mean the audiovisual work
tentatively entitled "TUROK: DINOSAUR HUNTER", in its current form and as
hereafter developed, including any adaptation, translation, derivative, sequel
or substantially similar game which is sold by LICENSEE as a Licensed Product
under this Agreement.
2.5 "Game Cartridge(s)" shall mean interchangeable plastic cartridges
adapted for use with the N64 System, housing the Game embodied in electronic
memory devices or comparable medium authorized by NINTENDO for storing and
playing Games on the N64 System.
2.6 "Game(s)" shall mean video game software compatible with the N64
System developed under this Agreement.
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2.7 "Guidelines" shall mean the "Nintendo 64 Packaging Guidelines" and
the "Nintendo 64 Development Manual" setting forth trademark, copyright and
related artwork standards, as published from time to time by NINTENDO.
2.8 "Independent Contractor" shall mean any third party agent,
consultant, contractor or independent programmer, other than LICENSEE.
2.9 "Licensed Copyright(s)" shall mean various copyrights in printed
materials, art or logo designs, trade dress, computer software, microcode,
electronic circuitry and rights in integrated circuit layout designs employed in
the N64 System.
2.10 "Licensed Intellectual Properties" shall mean individually,
collectively or in any combination, the Licensed Inventions, Licensed
Proprietary Information, Licensed Copyrights and Licensed Trademarks.
2.11 "Licensed Invention(s)" shall mean improvements and inventions
concerning the N64 System, including inventions which are or may become the
subject matter of various patents or patent applications.
2.12 "Licensed Product(s)" shall mean Game Cartridges (or comparable
medium authorized by Nintendo) for employing the Licensed Intellectual
Properties and having electronic memory devices storing the Games.
2.13 "Licensed Proprietary Information" shall mean any of the following
information relating to the N64 System: (a) all current or future information,
know-how, techniques, methods, information, tools, emulator boards, software
development specifications, and/or trade secrets, (b) any patents or patent
applications, (c) any business, marketing or sales data information, and (d) any
other information or data relating to development, design, operation,
manufacturing, marketing or sales. "Licensed Proprietary Information" shall
include information disclosed to LICENSEE by NINTENDO, NINTENDO's affiliated
companies, SGI, and/or other third parties working with NINTENDO. Such Licensed
Proprietary Information shall include all confidential information disclosed,
whether in writing, orally, visually, or in the form of drawings, technical
specifications, software, samples, pictures, models, recordings, or other
tangible items which contain or manifest, in any form, the Licensed Proprietary
Information. Licensed Proprietary Information shall not include: (a) data and
information which was in the public domain prior to LICENSEE's receipt of the
same hereunder, or which subsequently becomes part of the public domain by
publication or otherwise, except by LICENSEE's wrongful act or omission, (b)
data and information which LICENSEE can demonstrate, through written records
kept in the ordinary course of business, was in its possession without
restriction on use or disclosure, prior to its receipt of the same hereunder and
was not acquired directly or indirectly from NINTENDO under an obligation of
confidentiality which is still in force, (c) data and information which LICENSEE
can show was received by it from a third party who did not acquire the same
directly or indirectly from NINTENDO and to whom LICENSEE has no obligation of
confidentiality, (d) data and information which is required to be disclosed by
an authorized governmental or judicial entity, provided that LICENSEE shall
notify NINTENDO at least thirty (30) days prior to such disclosure.
2.14 "Licensed Trademarks" shall mean registered and unregistered
trademarks and trademark applications used in connection with the N64 System,
including "Nintendo(R)", "Nintendo 64(R)", "N64(TM)," "Official Nintendo Seal of
Quality(R)" and trade dress in the N64 System.
2.15 "Marketing Materials" shall mean marketing, advertising or
promotional materials which incorporate the Licensed Intellectual Properties
which are developed by or for LICENSEE to promote the sale of the Licensed
Products.
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2.16 "N64 Letter Agreement" shall mean the letter agreement between the
parties dated June 17, 1994 referring to the Exclusive Licensed Product.
2.17 "NCL" shall mean NINTENDO's parent company, Nintendo Co., Ltd. of
Kyoto, Japan.
2.18 "Nintendo 64 System" and "N64 System" shall mean the 64-bit
Nintendo 64 video game system, including the hardware, software and input
controller marketed by NINTENDO and Nintendo Co., Ltd.
2.19 "Other Agreements" shall mean that certain Non-Disclosure
Agreement for Nintendo 64 entered into between NINTENDO and LICENSEE with an
effective date of June 9, 1994.
2.20 "Product Proposal" shall mean a written proposal which provides a
detailed explanation of the Game.
2.21 "Schedule 1" shall mean the "Nintendo of America Inc. Price Sheet
N64 Licensed Game Paks" attached to this Agreement and incorporated by reference
into this Agreement.
2.22 "SGI" shall mean Silicon Graphics, Inc. and/or MIPS Technologies,
Inc.
2.23 "Term" shall mean three (3) years from the Effective Date.
2.24 "Territory" shall mean all countries within the Western
Hemisphere, including the United States, Canada, South America, Central America,
Mexico and all applicable territories and possessions.
3. GRANT OF LICENSE; RESERVATION OF RIGHTS BY NINTENDO
3.1 Grant. For the Term and in the Territory, NINTENDO hereby grants to
LICENSEE, and LICENSEE hereby accepts under the terms and conditions set forth
in this Agreement, a nonexclusive license to employ the Licensed Intellectual
Properties solely to develop and sell video games incorporated into Game
Cartridges for play on the N64 System. Except as may be permitted under a
separate written authorization from NINTENDO or Nintendo Co., Ltd., LICENSEE
shall not use the Licensed Intellectual Properties for any other purpose.
3.2 Reservation of Rights in the Licensed Intellectual Properties.
LICENSEE acknowledges NINTENDO and Nintendo Co., Ltd.'s right, title, and
interest in and to the Licensed Intellectual Properties and the goodwill
associated with the Licensed Trademarks. LICENSEE will not at any time do or
cause to be done any act or thing which in any way impairs or is intended to
impair any part of such right, title, interest or goodwill. LICENSEE shall not
represent that it has any ownership in the Licensed Intellectual Properties. Use
of the Licensed Intellectual Properties shall not create any right, title or
interest therein in LICENSEE's favor.
3.3 Reservation of Rights of Distribution Outside the Territory.
LICENSEE shall market and sell the Licensed Products only in the Territory.
LICENSEE shall not directly or indirectly export any Licensed Products from the
Territory nor shall LICENSEE knowingly permit or assist any third party in doing
so.
3.4 Reservation of Rights to Reverse Engineer. LICENSEE may utilize and
study the design, performance and operation of the N64 System and the Licensed
Proprietary Information solely for the purpose of developing software which is
compatible with the N64 System for license under this Agreement. LICENSEE shall
not, directly or indirectly, reverse engineer or aid or assist in the reverse
engineering of all or any part of the N64 System, including the hardware,
software, input controller and/or tools. For
NINTENDO 64 LICENSE AGREEMENT
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purposes of this Agreement, "reverse engineering" shall mean: (a) the x-ray
electronic scanning and/or physical or chemical stripping of semiconductor
components; (b) the disassembly, decompilation, decryption, simulation,
debugging or code tracing of microcode; and/or (c) the disassembly,
decompilation, decryption, simulation, debugging or code tracing of object code
or executable code, specifically including, but not limited to, any NINTENDO
supplied or developed libraries or microcode. The limitations set forth in this
Section 3.4 shall not preclude LICENSEE from engaging in reverse engineering of
any Game code which was developed solely by LICENSEE and related only to the
Game and was not supplied by nor derived from any code supplied by NINTENDO.
3.5 Reservation of Rights of Electronic Transmission. LICENSEE shall
not directly or indirectly duplicate, distribute or transmit Games via
electronic means or any other means now known or hereafter devised, including
without limitation, wireless, cable, fiber optic means, telephone lines,
satellite transmission, microwave or radio waves or over a network of
interconnected computers or other devices. Notwithstanding this limitation,
LICENSEE shall not be prohibited from the electronic transmission of Games
during the development process for the sole purpose of facilitating development;
provided, however, that no right of retransmission shall attach to any such
transmission, and, provided further, that LICENSEE shall use reasonable security
measures, customary within the industry, to reduce the risk of unauthorized
interception or retransmission of such transmissions.
3.6 Notification Obligations. LICENSEE shall promptly notify NINTENDO
of the loss or unauthorized use or disclosure of any Licensed Proprietary
Information and shall promptly act to recover any such information and/or
prevent further breach of the confidentiality obligations herein.
4. CONFIDENTIALITY
4.1 Disclosure of Proprietary Information. NINTENDO has and shall
during the Term provide LICENSEE with highly proprietary development
information, development tools, emulation systems, programming specifications
and related resources and information constituting and incorporating the
Licensed Proprietary Information to enable LICENSEE to develop video games for
use with the N64 System.
4.2 Confidentiality of Licensed Proprietary Information. LICENSEE shall
maintain all Licensed Proprietary Information as strictly confidential and will
use such Licensed Proprietary Information only in accordance with this
Agreement. LICENSEE shall limit access to the Licensed Proprietary Information
to LICENSEE's employees having a strict need to know and shall advise such
employees of their obligation of confidentiality as provided herein. LICENSEE
shall require each such employee to retain in confidence the Licensed
Proprietary Information pursuant to a written non-disclosure agreement between
LICENSEE and such employee. LICENSEE shall use its best efforts to ensure that
its employees working with or otherwise having access to Licensed Proprietary
Information shall not disclose or make unauthorized use of the Licensed
Proprietary Information.
4.3 Agent/Consultant Confidentiality. LICENSEE shall not disclose the
Licensed Proprietary Information to any Independent Contractor without
NINTENDO's prior written approval. Each approved Independent Contractor shall be
required to enter into a written non-disclosure agreement with NINTENDO prior to
receiving any access to or disclosure of the Licensed Proprietary Information.
4.4 SGI as a Third-Party Beneficiary. LICENSEE hereby acknowledges and
agrees that SGI shall be a third-party beneficiary of LICENSEE's confidentiality
obligations as set forth in this Section 4.
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5. DEVELOPMENT; QUALITY STANDARDS; ARTWORK; MANUFACTURING
5.1 Development and Sale of the N64 System Programs. During the Term,
LICENSEE may develop Games and/or sell Licensed Products for the N64 System in
accordance with this Agreement.
5.2 Exclusivity; Exclusive Licensed Product. For the Exclusive Licensed
Product, LICENSEE agrees that, commencing on the Effective Date and continuing
for a period of one (1) year from NINTENDO's first shipment of such Exclusive
Licensed Product to LICENSEE, the Game incorporated into such Exclusive Licensed
Product shall not be sold anywhere in the Territory by LICENSEE or by any third
party for play on any Competing System. Except as provided herein with regard to
the Exclusive Licensed Product, or as may otherwise be limited by the legitimate
intellectual property rights of NINTENDO or any third party, LICENSEE shall
retain all rights with regard to the adaptation of Games for development and
sale in any other format, including on any Competing System.
5.3 Submission of Game Concept. Before commencing development of a
Game, LICENSEE shall submit to NINTENDO for approval, a Product Proposal. Such
Product Proposal must include a detailed explanation of the manner in which the
Game will utilize and exploit: (a) the unique 3-D capabilities and high quality
graphics display of the N64 System; (b) the complex, high-capacity processing
speed of the N64 System; and, (c) the dynamic interfaces and touch control
features of the unique N64 System controller. For that purpose, the Product
Proposal shall include: (a) a description of the proposed Game; (b) the
development team profile, including information regarding any Independent
Contractor which LICENSEE proposes to retain to work on the Game; (c) a
description of any special hardware or software requirements; and, (d) the
anticipated completion date of the proposed Licensed Product. Subsequent to
acceptance and approval of a Product Proposal, LICENSEE shall notify NINTENDO in
writing of any material proposed changes in the Product Proposal and/or the
proposed Licensed Product. From time to time, at approximately quarterly
intervals or such other reasonable times NINTENDO may establish for purposes of
ensuring utilization and exploitation of the N64 System in the manner set forth
above, LICENSEE shall submit work-in-progress on the Game to NINTENDO for
further review in accordance with the criteria set forth herein. NINTENDO shall
not unreasonably withhold or delay any approval provided for herein and shall
give such approval or disapproval in a prompt manner.
5.4 Delivery of Completed Game. Upon completion of a Game, LICENSEE
shall deliver to NINTENDO one (1) prototype of the Game in a format specified by
NINTENDO, together with written user instructions and a complete screen text
script. NINTENDO shall promptly evaluate the Game with regard to: (a) its
technical compatibility with and error-free operation on the N64 System; (b) the
suitability of the Game content, taking into account reasonable standards set
forth in the Guidelines; and, (c) whether the Game achieves the objectives set
forth in LICENSEE's approved Product Proposal. LICENSEE shall have satisfied the
Game content suitability criteria by providing NINTENDO with proof that the Game
has been provided with a certificate of a rating other than ADULTS ONLY (or its
equivalent) from the Entertainment Software Ratings Board or comparable
independent ratings body which reviews and certifies product for violent or
sexual content.
5.5 Approval of Completed Game. NINTENDO shall, within a reasonable
period of time after receipt, approve or disapprove such Game. If such Game is
disapproved, NINTENDO shall specify in writing the reasons for such disapproval
and state what corrections and/or improvements are necessary. After making the
necessary corrections and/or improvements, LICENSEE shall submit a revised Game
for approval by NINTENDO. The approval of any Game by NINTENDO shall not relieve
LICENSEE of its sole responsibility for the development, quality and operation
of the Game or in any way create any warranty for a Licensed Product by
NINTENDO. NINTENDO shall not unreasonably withhold or delay any approval
provided for herein.
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5.6 Development and Quality of Artwork. In connection with the
submission of a proposed Licensed Product to NINTENDO, LICENSEE shall submit all
Artwork to NINTENDO. All Artwork shall conform to the requirements set forth in
the Guidelines. Within fifteen (15) business days of receipt of the Artwork,
NINTENDO shall approve or disapprove the Artwork based upon the Guidelines. If
any of the Artwork is disapproved, NINTENDO shall specify in writing the reasons
for such disapproval and state what corrections and/or improvements are
necessary. After making the necessary corrections and/or improvements to the
disapproved Artwork, LICENSEE shall resubmit new Artwork for approval by
NINTENDO. NINTENDO shall not unreasonably withhold or delay its approval of any
Artwork.
5.7 Appointment of NCL as Manufacturer. LICENSEE hereby appoints NCL,
and NCL hereby accepts appointment, as manufacturer of the Licensed Products.
LICENSEE shall purchase from NCL through NINTENDO all of its requirements for
the Licensed Products. NCL shall have the sole responsibility for establishing
and fulfilling all aspects of the manufacturing process, including selecting the
location of and specifications for any manufacturing facilities, appointing
suppliers and subcontractors, and managing all work-in-progress and finished
goods inventory. NCL shall acquire and retain responsibility for all equipment,
tooling, molds or masks used in connection with the manufacture of the Licensed
Products.
5.8 Manufacture of Licensed Products. Upon approval of a Game and the
Artwork and upon receipt from LICENSEE of an order in accordance with Section 7
herein, NCL will manufacture the Licensed Products for LICENSEE, including the
Artwork.
5.9 Retention of Sample Licensed Products. NCL may, at its own expense,
manufacture samples of the Licensed Products, only to the extent necessary, to
be used by NINTENDO for archival purposes, legal proceedings against infringers
of the Licensed Intellectual Properties, and for other lawful purposes.
6. PURCHASE PRICE; PAYMENT; DELIVERY OF COMPLETED LICENSED PRODUCT
6.1 Minimum Initial Orders. Upon placement of an initial order,
LICENSEE shall order a minimum quantity of Ten Thousand (10,000) units of a
Licensed Product.
6.2 Subsequent Minimum Orders. LICENSEE may subsequently order
additional Licensed Product in a minimum quantity of Five Thousand (5,000) units
per title.
6.3 Purchase Price. The purchase price to be paid by LICENSEE to
NINTENDO for the Licensed Products shall be in accordance with NINTENDO's
pricing schedule currently set forth in the attached Schedule 1. The purchase
price includes the cost of manufacturing, printing and packaging the Licensed
Products and a royalty for the use of the Licensed Intellectual Properties.
Schedule 1 is subject to change by NINTENDO at any time without notice.
6.4 Payment. At the time an order is placed, LICENSEE shall provide to
NINTENDO an irrevocable letter of credit in favor of NINTENDO and payable at
sight, issued by a bank acceptable to NINTENDO and confirmed, at LICENSEE's
expense, if requested by NINTENDO. The letter of credit shall be in United
States dollars in an amount equal to the purchase price of the Licensed Products
ordered. All associated banking charges are for LICENSEE's account.
6.5 Shipment and Delivery. The Licensed Products shall be delivered
F.O.B. Japan, with shipment at LICENSEE's direction and expense. Delivery shall
be made within a reasonable period of time following placement of LICENSEE's
order. Orders may be delivered by NINTENDO in partial shipments, each directed
to no more than two (2) destinations designated by LICENSEE in the Territory.
Title to the Licensed Products shall vest in accordance with the terms of the
applicable letter of credit.
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7. MARKETING, SALE AND RENTAL OF THE LICENSED PRODUCTS
7.1 Marketing Materials. LICENSEE agrees that any Marketing Materials
shall all be of high quality and shall comply with the Guidelines.
7.2 Submission of Proposed Marketing Materials. Prior to actual use or
distribution, LICENSEE shall submit to NINTENDO for review and evaluation
initial samples of all Marketing Materials. NINTENDO shall, within fifteen (15)
business days of receipt of such samples, approve or disapprove of the quality
of such samples. If any of the samples are disapproved as to quality, NINTENDO
shall specify the reasons for such disapproval and state what corrections and/or
improvements are necessary. After making the necessary corrections and/or
improvements to the disapproved samples, LICENSEE may resubmit new samples for
approval by NINTENDO as to quality. No Marketing Materials shall be distributed
or utilized by LICENSEE without obtaining prior written approval as to quality
by NINTENDO. NINTENDO shall not unreasonably withhold or delay its approval of
the proposed Marketing Materials.
7.3 Warranty and Repair. With respect to the Licensed Product, LICENSEE
shall provide to the original consumer a minimum ninety (90) day limited
warranty, comparable to that offered by NINTENDO. LICENSEE shall also provide to
the original consumer, either directly or indirectly through authorized service
centers, reasonably accessible product service, including out-of-warranty
service for a period of three (3) years following sale of the Licensed Product.
In the event LICENSEE is unable to obtain sufficient quantities of repair parts
for service obligations from defective and/or product returns, NINTENDO shall
cooperate in providing reasonable quantities of repair parts to LICENSEE at its
standard cost.
7.4 Business Facilities; Sales of Game Cartridges. LICENSEE agrees to
develop, maintain and utilize during the Term: (a) suitable office facilities
within the Territory, adequately staffed to enable LICENSEE to fulfill all
responsibilities under this Agreement; (b) necessary warehouse, distribution,
marketing, sales, collection and credit operations to facilitate proper handling
of the Licensed Product; and, (c) customer service and game counseling support,
including telephone service, to adequately support the Licensed Product.
7.5 Defects; Recall. In the event of a material programming defect in
the Licensed Product, which defect in the reasonable judgment of NINTENDO would
significantly impair the ability of a consumer to play the Licensed Product,
NINTENDO may require the LICENSEE to recall the Licensed Product and undertake
suitable repairs or replacements prior to sale.
7.6 Rental. In the event LICENSEE elects to engage in the commercial
rental of the Licensed Products within the Territory on such terms and
conditions as LICENSEE shall determine, LICENSEE shall secure appropriate
authorizations and/or assignments from the author(s) of the copyrightable
elements in the computer programs for the Licensed Product. LICENSEE shall
clearly provide notice on the Artwork for each Licensed Product of any rental
right or reservation thereof.
7.7 Nintendo Promotional Materials, Publications and Events. At its
option, NINTENDO may: (a) insert in the packaging for the Licensed Product
promotional materials concerning Nintendo Power(R) magazine; (b) utilize screen
shots, package art and related art and information regarding the Licensed
Product in Nintendo Power(R) or other media or marketing programs which promote
NINTENDO products; and (c) exercise public performance rights of the Licensed
Product, related trademarks and art in NINTENDO sponsored contests, tours and
events which generally promote NINTENDO products.
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8. LICENSEE'S COPYRIGHTS AND TRADEMARKS
8.1 Copyright and Trademark Warranties. LICENSEE represents and
warrants that, throughout the Territory, LICENSEE is either: (a) the sole owner
of all right, title and interest in and to the trademarks, copyrights and
Artwork used on or in association with the Licensed Products; or (b) the holder
of sufficient rights to the trademarks, copyrights and Artwork which have been
licensed from a third party for use in the Licensed Product.
8.2 Licensee's Indemnification. LICENSEE shall indemnify and hold
NINTENDO harmless from any claims, losses, liabilities, damages, expenses and
costs, including, without limitation, reasonable attorneys' fees and costs,
which result in whole or in part from: (a) a breach of any of the
representations or warranties provided by LICENSEE herein; (b) any claim of
infringement of any third party's intellectual property rights with respect to
the Licensed Product, excluding claims based solely upon NINTENDO's trademarks,
copyrights and patents; (c) any claim of bodily injury (including death) or
property damage arising out of, or in connection with, the development, sale
and/or use of any of the Licensed Products, or (d) any act or omission, whether
negligent of otherwise, of LICENSEE or its employees or agents, including, but
not limited to, claims of product liability. NINTENDO shall give LICENSEE prompt
written notice of the assertion of any such claim, provided, further, that
LICENSEE shall have the right to select counsel and control the defense and/or
settlement of any such claim, subject to the right of NINTENDO to participate in
any such action or proceeding at its own expense with counsel of its own choice.
NINTENDO shall indemnify and hold LICENSEE harmless from any claims, losses,
liabilities, damages, expenses and costs, including, without limitation,
reasonable attorneys' fees and costs, which result from any act or omission,
whether negligent of otherwise, of NINTENDO or its employees or agents,
including, but not limited to, claims of product liability.
8.3 Insurance. LICENSEE shall, at its own expense, obtain a policy of
general liability insurance by a recognized insurance company. Such policy of
insurance shall be in an amount of not less than Five Million Dollars
($5,000,000 USD) and shall provide for adequate protection against any suits,
claims, loss or damage by the Licensed Products. Such policy shall name NINTENDO
as an additional insured and may not be canceled without thirty (30) days prior
written notice to NINTENDO. A Certificate of Insurance shall be provided to
NINTENDO's Licensing Department within thirty (30) days of the Effective Date.
If LICENSEE fails to maintain such insurance during the Term, NINTENDO may
secure and maintain such insurance at LICENSEE's expense.
9. LIMITATION OF LIABILITY
9.1 Disclaimer of Licensed Intellectual Properties. NINTENDO makes no
representations, guarantees or warranties concerning the scope or validity of
the Licensed Intellectual Properties, and does not warrant that the sale of the
Licensed Products by LICENSEE will not infringe upon the patent, trade secret,
copyright, mask work or trademark rights of another in the Territory. THE RISK
OF INFRINGEMENT IS HEREBY ASSUMED BY LICENSEE, SUBJECT TO PROVISIONS OF THE
ABOVE SECTION 8.2(b).
9.2 Warranty Disclaimer. NINTENDO DISCLAIMS ANY AND ALL WARRANTIES OF
THE LICENSED PRODUCTS AS BETWEEN NINTENDO AND LICENSEE AND AS BETWEEN NINTENDO
AND ANY THIRD PARTY PURCHASERS FROM LICENSEE. LICENSEE PURCHASES AND ACCEPTS ALL
LICENSED PRODUCTS FROM NINTENDO ON AN "AS IS" AND "WHERE IS" BASIS AND WITHOUT
ANY WARRANTIES, EXPRESS OR IMPLIED. WITH RESPECT TO THE LICENSED PRODUCTS,
NINTENDO DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A GENERAL
OR PARTICULAR PURPOSE AND SHALL IN NO EVENT BE LIABLE FOR ANY INCIDENTAL AND/OR
CONSEQUENTIAL DAMAGES OF LICENSEE, ITS RETAILERS OR CUSTOMERS. LICENSEE SHALL
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BE SOLELY RESPONSIBLE FOR PROVIDING WARRANTY AND REPAIR/REPLACEMENT SERVICES FOR
ANY DEFECTIVE LICENSED PRODUCTS.
10. INFRINGEMENT OF LICENSED INTELLECTUAL PROPERTIES AND
LICENSEE'S TRADEMARKS AND COPYRIGHTS
10.1 Reporting. In the event: (a) any claim is asserted against either
party alleging that any of the Licensed Intellectual Properties or a Licensed
Product constitutes an infringement of another's rights; or, (b) either party
discovers that any of the Licensed Intellectual Properties or LICENSEE's
copyrights or trademarks used in connection with the Licensed Products have been
infringed by a third party, then the party with such knowledge shall promptly
notify the other party.
10.2 Licensed Intellectual Properties. NINTENDO shall have the sole
right, at its expense, to commence and/or defend a legal action or negotiate a
settlement relating to any alleged infringement by the Licensed Intellectual
Properties. LICENSEE agrees to give reasonable assistance in any such legal
action, but at no expense to it. NINTENDO shall be entitled to all of the
recovery or damages collected as a result of such legal action or negotiated
settlement. In the event of a legal action against LICENSEE alleging an
infringement by the Licensed Intellectual Properties as incorporated into
LICENSEE's Licensed Products which NINTENDO affirmatively elects in writing not
to defend, LICENSEE may defend or settle such legal action, at its option and
expense. NINTENDO agrees to provide reasonable assistance in defending any such
legal action. LICENSEE agrees to keep NINTENDO fully informed with respect to
developments in any such legal action and to provide NINTENDO reasonable notice
of the terms of any proposed settlement and to consider any comments by NINTENDO
before settlement is made.
10.3 Infringement of Licensed Products. LICENSEE shall take reasonable
steps to abate any infringement of LICENSEE's copyrights and trademarks in the
Licensed Products. LICENSEE shall also take all reasonable and necessary steps,
including legal action, to defend against any alleged infringement caused by any
of LICENSEE's software programs developed under this Agreement or any Artwork,
title or designation used in conjunction with any of the Licensed Products.
NINTENDO shall give to LICENSEE reasonable assistance and cooperation in any
such legal action, but at no expense to NINTENDO.
11. TERM AND TERMINATION
11.1 Default or Breach. In the event that either party is in default or
commits a breach of this Agreement which is not cured within thirty (30) days
after written notice thereof, then this Agreement shall automatically terminate
at the end of such thirty (30) days notice or upon a later date if specified in
such notice.
11.2 Termination Other Than by Breach. Upon the expiration of this
Agreement or its termination other than by LICENSEE's breach, LICENSEE shall
have a period of one hundred eighty (180) days to sell any unsold Licensed
Products. All Licensed Products in LICENSEE's control following expiration of
such sell-off period, shall be destroyed by LICENSEE within ten (10) days.
11.3 Termination by LICENSEE's Breach. If this Agreement is terminated
by NINTENDO as a result of a breach of its terms and conditions by LICENSEE,
LICENSEE shall immediately cease all distribution, promotion or sale of any
Licensed Products. All Licensed Products in LICENSEE's control as of such
termination shall be destroyed by LICENSEE within ten (10) days.
11.4 Licensed Intellectual Property Rights. Upon expiration and/or
termination of this Agreement, LICENSEE will cease all use of the Licensed
Intellectual Properties for any purpose, and will not disclose to third parties
any Licensed Proprietary Information. LICENSEE shall also return to NINTENDO all
writings, drawings, models, data and other materials and things in LICENSEE's
possession
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or in the possession of any past or present employee, agent or contractor
receiving the information through LICENSEE, which constitute or relate to or
disclose any Licensed Proprietary Information without making copies or otherwise
retaining any such information.
11.5 Termination by Nintendo's Breach. If this Agreement is terminated
by LICENSEE as a result of a breach of its terms or conditions by NINTENDO,
LICENSEE may continue to sell the Licensed Products in the Territory until the
expiration of the Term, at which time the provisions herein relating to
termination other than by default of LICENSEE shall apply to any unsold Licensed
Products.
12. GENERAL PROVISIONS
12.1 Nonassignability/Sublicensing. This Agreement is personal to
LICENSEE and may not be sold, assigned, delegated, sublicensed or otherwise
transferred or encumbered, including by operation of law or by the sale or
transfer of more than fifty percent (50%) of the stock, assets or ownership
interest or control of LICENSEE, without the prior written consent of NINTENDO.
12.2 Force Majeure. Neither party shall be liable for any breach of
this Agreement occasioned by any cause beyond the reasonable control of such
party, including governmental action, war, riot or civil commotion, fire,
natural disaster, labor disputes, restraints affecting shipping or credit, delay
of carriers, inadequate supply of suitable materials, or any other cause which
could not with reasonable diligence be controlled or prevented by the parties.
In the event of material shortages, including shortages of microcomputer chips
necessary for production of the Licensed Products, NINTENDO reserves the right
to allocate essential materials among itself and its licensees in good faith.
12.3 Waiver; Severability; Integration. The failure of any party to
enforce any provision of this Agreement shall not be construed to be a waiver of
such provision or of the right of such party to thereafter enforce such
provision. In the event that any term, clause or provision of this Agreement
shall be construed to be or adjudged invalid, void or unenforceable, such term,
clause or provision shall be construed as severed from this Agreement, and the
remaining terms, clauses and provisions shall remain in effect. This Agreement
constitutes the entire agreement between the parties relating to the subject
matter hereof, provided, however, that the Other Agreements shall remain in
effect, except as may be modified by specific reference herein. All prior
negotiations, representations, agreements and understandings, including the N64
Letter Agreement, are merged into, extinguished by and completely expressed by
this Agreement. Any amendment to this Agreement shall be in writing, signed by
both parties.
12.4 Governing Law: Venue. This Agreement shall be governed by, subject
to and construed under the laws of the State of Washington. Any legal actions
prosecuted or instituted by NINTENDO or by LICENSEE under this Agreement, with
respect to any matters arising under or growing out of this Agreement, shall
only be brought in a court of competent jurisdiction in King County, Washington
and each party hereby consents to the jurisdiction and venue of such courts for
such purposes.
12.5 Equitable Relief. LICENSEE acknowledges that in the event of its
breach of this Agreement, no adequate remedy at law may be available to NINTENDO
and that NINTENDO shall be entitled to seek injunctive or other equitable relief
in addition to any relief available at law.
12.6 Attorneys' Fees. In the event it is necessary for either party of
this Agreement to undertake legal action to enforce any of the terms, conditions
or rights contained herein, or to defend any such action, then the prevailing
party in any such action shall be entitled to recover from the other party all
reasonable attorneys' fees, costs and expenses relating to such legal action.
NINTENDO 64 LICENSE AGREEMENT
PAGE 10
<PAGE>
12.7 Notices. All notices required or permitted under this Agreement
shall be sufficiently given when: (a) personally served or delivered; (b)
deposited, postage prepaid, with a guaranteed air courier service, addressed as
stated herein, or to such other person or address either party may designate in
a notice; or, (c) by facsimile, with an original sent concurrently by first
class U.S. mail. Notice shall be deemed effective upon the earlier of actual
receipt or two (2) business days after transmittal.
12.8 Counterparts; Signature by Facsimile. This Agreement may be signed
in counterparts, which shall together constitute a complete Agreement. A
signature transmitted by facsimile shall be considered an original for purposes
of this Agreement.
IN WITNESS WHEREOF, NINTENDO and LICENSEE have entered into this Agreement on
the dates set forth below.
NINTENDO: LICENSEE:
NINTENDO OF AMERICA INC. ACCLAIM ENTERTAINMENT, INC.
By: /s/ By: /s/
-------------------------------- ------------------------------
Its: Executive Vice President, Its: CEO
Administration Date: 7/9/97
Date: 9/2/97
NINTENDO 64 LICENSE AGREEMENT
PAGE 11
<PAGE>
SCHEDULE 1
NINTENDO OF AMERICA INC. PRICE SHEET
N64 LICENSED GAME PAKS
Memory Capacity NOA Price
32 Megabit $
32 Megabit + E(2)ROM $
64 Megabit $
64 Megabit + E(2)ROM $
96 Megabit $
96 Megabit + E(2)ROM $
Price includes an instruction manual up to 40 pages. There will be an extra
charge for manuals larger than 40 pages (including the front and back cover).
EXTRA PACKAGING
(Must be ordered with product on separate PO)
Game Pak Box $
Instruction Manual
(under 40 pages) $
Instruction Manual
(over 40 pages) $
Game Pak Label $
Game Pak Poster $
Warranty Card $
ALL PRICES SUBJECT TO CHANGE WITHOUT PRIOR NOTICE
1/30/97
<PAGE>
FIRST AMENDMENT
TO CONFIDENTIAL LICENSE AGREEMENT FOR
NINTENDO 64 VIDEO GAME SYSTEM
THIS FIRST AMENDMENT ("First Amendment") amends that certain "Confidential
License Agreement for Nintendo 64 Video Game System" dated September 2, 1997
("Original Agreement") between Nintendo of America Inc. ("Nintendo") and Acclaim
Entertainment, Inc. ("Licensee").
NOW, THEREFORE, the parties agree as follows:
1. The opening paragraph is hereby deleted in its entirety and replaced as
follows:
THIS AGREEMENT is entered into between NINTENDO OF AMERICA
INC., a Washington corporation with an address for notice
purposes of 4820 150th Avenue N.E., Redmond, WA 98052 (Fax:
425-882-3585) (hereinafter referred to as "NINTENDO"), and
ACCLAIM ENTERTAINMENT, INC., a New York corporation with an
address for notice purposes of One Acclaim Plaza, Glen Cove,
NY 11542 (Fax: 516-656-2040), Attention: President and ACCLAIM
ENTERTAINMENT LTD., a United Kingdom corporation with an
address for notice purposes of 112-120 Brompton Road,
Knightsbridge, London SW3 1JJ, United Kingdom (Fax:
011-44-171-225-0033), Attention: President (hereinafter
collectively referred to as "LICENSEE").
2. Section 2.3, Definition of Effective Date, is hereby deleted in its entirety
and replaced as follows:
"Effective Date" shall mean February 20, 1997.
3. This First Amendment shall be effective upon the Effective Date and may be
executed in counterparts, which together shall constitute a single First
Amendment. For the convenience of the parties, transmission of an authorized
signature by facsimile shall be acceptable. Except as set forth herein, all
terms and conditions of the Original Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have entered into this First Amendment.
NINTENDO: LICENSEE:
NINTENDO OF AMERICA INC. ACCLAIM ENTERTAINMENT, INC.
By: /s/ By: /s/
------------------------------ -------------------------------
Name: John Bauer Name: Gregory Fischbach
Title: Executive Vice President, Its: CEO, President and Chairman
Administration Date: October 31, 1997
Date: 11/14/97
ACCLAIM ENTERTAINMENT LTD.
By: /s/
--------------------------------
Name: Gregory Fischbach
Title: CEO, President and Chairman
Date: October 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 40,417
<SECURITIES> 0
<RECEIVABLES> 55,754
<ALLOWANCES> (24,678)
<INVENTORY> 1,856
<CURRENT-ASSETS> 87,919
<PP&E> 35,610
<DEPRECIATION> (4,290)
<TOTAL-ASSETS> 146,834
<CURRENT-LIABILITIES> 132,643
<BONDS> 50,000
0
0
<COMMON> 1,015
<OTHER-SE> (48,212)
<TOTAL-LIABILITY-AND-EQUITY> 146,834
<SALES> 182,266
<TOTAL-REVENUES> 161,620
<CGS> 77,228
<TOTAL-COSTS> 75,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,912)
<INCOME-PRETAX> 6,897
<INCOME-TAX> 121
<INCOME-CONTINUING> 6,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,786
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
