<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACCLAIM ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 38-2698904
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
------------------------
ONE ACCLAIM PLAZA
GLEN COVE, NEW YORK 11542
(516) 656-5000
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREGORY E. FISCHBACH
CHIEF EXECUTIVE OFFICER
ACCLAIM ENTERTAINMENT, INC.
ONE ACCLAIM PLAZA
GLEN COVE, NEW YORK 11542
TELEPHONE: (516) 656-5000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copy to:
JAYSHREE PARTHASARATHY, ESQ.
ROSENMAN & COLIN LLP
575 MADISON AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 940-8800
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933. /x/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
AMOUNT TO BE AGGREGATE PRICE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITY TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
A Warrants......................................... 552,326 $1.72 $950,001 $281
Common Stock, $0.02 par value, underlying A
Warrants......................................... 552,326 $3.50 $1,933,141 $571
B Warrants......................................... 113,446 -- -- --
Common Stock, $0.02 par value, underlying B
Warrants......................................... 113,446 $12.00 $1,361,352 $402
Common Stock, $0.02 par value, underlying certain
warrants......................................... 600,000 $4.0625 $2,437,500 $720
</TABLE>
(1) Estimated, pursuant to Rule 457 (i) of the Securities Act of 1933, solely
for the purpose of determining the registration fee, based on (i) the negotiated
value of the A Warrants, (ii) the $3.50 initial exercise price per share of the
552,326 shares of Common Stock underlying the A Warrants, (iii) the $12.00
initial exercise price per share of the 113,446 shares of Common Stock
underlying the B Warrants and (iv) the $4.0625 initial exercise price per share
of the 600,000 shares of Common Stock underlying certain other warrants. No
purchase price is being paid for the A and B Warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET TO FORM S-1
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Forepart of the Registration Statement and Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Determination of Warrants Exercise Price
6. Dilution............................................. (1)
7. Selling Security Holders............................. (1)
8. Plan of Distribution................................. Outside Front Cover Page; Plan of Distribution
9. Description of Securities to be Registered........... Outside Front Cover Page; Description of Securities
10. Interests of Named Experts and Counsel............... (1)
11. Information with Respect to the Registrant........... Outside Front Cover Page; Summary; Market Price of
and Dividends on the Company's Common Equity and
Related Stockholder Matters; Capitalization;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Legal Proceedings;
Management; Security Ownership of Certain
Beneficial Owners and Management; Certain
Relationships and Related Transactions; Description
of Securities; Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... (1)
</TABLE>
- ------------------
(1) Omitted from Prospectus because the item is inapplicable or the answer is in
the negative.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JUNE 4, 1998
PROSPECTUS
552,326 A WARRANTS TO PURCHASE COMMON STOCK
113,446 B WARRANTS TO PURCHASE COMMON STOCK
1,265,772 SHARES OF COMMON STOCK
ACCLAIM ENTERTAINMENT, INC.
Acclaim Entertainment, Inc., a Delaware corporation (the 'Company'), is
issuing (i) 552,326 common stock purchase warrants (the 'A Warrants'), each to
purchase one share of its common stock, par value $0.02 per share (the 'Common
Stock'), and (ii) 113,446 common stock purchase warrants (the 'B Warrants'),
each to purchase one share of Common Stock, in connection with the settlement of
a class action lawsuit previously pending against Acclaim Redemption Games, Inc.
(formerly, Lazer-Tron Corporation; 'Lazer-Tron'), a subsidiary of the Company,
in the California Superior Court, County of Alameda, Eastern Division (the
'Superior Court') and the settlement of a class action lawsuit previously
pending against the Company in the United States District Court for the Eastern
District of New York (the 'Federal Court') and in accordance with a Stipulation
of Settlement dated October 8, 1997 (the 'Stipulation') between the Company and
the participants in such settlements. See 'Legal Proceedings.'
The A Warrants and the B Warrants (collectively, the 'Warrants') will each
be exercisable commencing on the issuance date thereof (the 'Effective Date').
The A Warrants entitle the holder to purchase one share of Common Stock at an
initial exercise price of $3.50 per share during the period commencing on the
Effective Date and ending February 18, 2001. The B Warrants entitle the holder
to purchase one share of Common Stock at an initial exercise price of $12.00 per
share during the period commencing on the Effective Date and ending February 18,
1999. See 'Description of Securities.' The proceeds of any such exercise of the
Warrants will be added to the Company's working capital. The Company has no
plans to list the Warrants for trading on any exchange.
This Prospectus also covers the offer and sale by the Company (i) to the
holders of the Warrants of up to 665,772 shares of Common Stock upon the
exercise of the Warrants (the 'Warrant Shares') and (ii) to Jeff Spangenberg of
up to 600,000 shares of Common Stock upon the exercise of warrants (the
'Spangenberg Warrants') issued to him by the Company in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 (the
'Securities Act'). The Spangenberg Warrants entitle Spangenberg to purchase an
aggregate of up to 600,000 shares of Common Stock at an initial exercise price
of $4.0625 per share, from time to time commencing on September 19, 1998 and
ending September 18, 2007.
The plaintiffs in the Superior Court and Federal Court actions who receive
the Warrants and Spangenberg have agreed to indemnify the Company, and the
Company has agreed to indemnify holders of the Warrants and Spangenberg, against
certain liabilities, including liabilities under the Securities Act. See 'Plan
of Distribution' for a description of the warrant agreements relating to the
Warrants and other arrangements between the Company and the participants to the
Superior Court and Federal Court actions and Spangenberg. Expenses of this
offering, estimated at $95,000, will be paid in full by the Company. Normal
commission expenses and brokerage fees, if any, will be paid individually by the
holder of the Warrants and/or Spangenberg.
SEE 'RISK FACTORS' BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE WARRANTS AND
SHARES OFFERED HEREBY.
------------------------
The Common Stock is traded on The Nasdaq Stock Market under the symbol
'AKLM.' On June 1, 1998, the last reported sale price of the Common Stock was
$5.0625 per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE , 1998.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including certain statements in 'SUMMARY,' 'MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS' and
'BUSINESS' sections, contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the 'Exchange Act'). When used in this Prospectus, the
words 'believe,' 'anticipate,' 'think,' 'intend,' 'plan,' 'will be,' 'strategy'
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 'RISK FACTORS' on pages 6 to 15, 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 inclusions 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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the 'Commission'). Such reports and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, 13th floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 40 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
a Web site at 'http://www.sec.gov' that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission.
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act with respect to the
registration of the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements contained herein concerning the contents of any documents
are not necessarily complete and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement. Each
such statement is qualified in its entirety by such reference. The Registration
Statement, as well as items of information omitted from this Prospectus but
contained in the Registration Statement and reports and other information filed
by the Company, may be inspected without charge at the public reference
facilities referred to above and copies of all or any part thereof may be
obtained from the Commission upon request and payment of the prescribed fee.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the Consolidated Financial Statements and notes thereto, appearing elsewhere in
this Prospectus. All references to a fiscal year are to the Company's fiscal
year which ends August 31.
THE COMPANY
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, which commenced in July 1994 through the acquisition
of Acclaim Comics, Inc. ('Acclaim Comics'); (ii) the distribution of Software
titles developed by other software publishers ('Affiliated Labels'), which
commenced in the first quarter of fiscal 1995; and (iii) the marketing of its
motion capture technology and studio services, which commenced in the first
quarter of fiscal 1995.
The Company believes 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. (Japan) and its subsidiary,
Nintendo of America, Inc., are collectively herein referred to as 'Nintendo'),
Sony Corporation (Sony Corporation and its subsidiary, Sony Computer
Entertainment of America, are collectively herein referred to as 'Sony') and
Sega Enterprises Ltd. ('Sega'), and Multimedia PCs. The industry is
characterized by rapid technological change, resulting in Entertainment Platform
and related Software product cycles. No single Entertainment Platform or system
has achieved long-term dominance in the interactive entertainment market. See
'Risk Factors--Industry Trends; Platform Transition; Technological Change.'
The Company recorded a loss from operations of $274.5 million and $150.9
million and a net loss (on an after-tax basis) of $221.4 million and $159.2
million for fiscal 1996 and 1997, respectively. The net loss for fiscal 1996
reflects write-offs of receivables, the establishment of additional receivables
and inventory reserves, severance charges incurred in connection with the
downsizing of the Company and the reduction of certain deferred costs, as well
as an operating loss for the year resulting primarily from price protection and
similar concessions granted to retailers at greater than anticipated levels in
connection with the Company's 16- and 32-bit Software. The net loss for fiscal
1997 reflects, among other things, a charge of $23.6 million for certain claims
and litigations for which the settlement obligation was then probable and
estimable, a writedown of $25.2 million to reduce the carrying value of the
goodwill associated with Acclaim Comics to its estimated undiscounted future
cash flows, and downsizing charges of $10 million.
Based on information available in 1994 and based on its historical
experience with respect to the transition from 8- to 16-bit platforms, the
Company believed that Software sales for 16-bit platforms would, although
continuing to decrease overall, still dominate the interactive entertainment
market in 1995 and that such sales would remain substantial through the 1996
holiday season. Accordingly, although the Company's strategy for the Christmas
1996 season was to develop Software for multiple Entertainment Platforms and
Multimedia PCs, the Company anticipated that substantially all of its revenues
in fiscal 1995 would be derived from its 16-bit Software sales. The Company also
anticipated that its sales of 32-bit and Multimedia PC Software in fiscal 1996
would grow as compared to fiscal 1995 but that the majority of its revenues in
fiscal 1996 would still be derived from 16-bit Software sales. However, the
16-bit Software market matured much more rapidly than anticipated by the
Company, the Company's Christmas 1995 16-bit Software sales were substantially
lower than anticipated
3
<PAGE>
and, by April 1996, the Company derived minimal profits from such Software sales
and made the decision to exit the 16-bit and portable cartridge markets.
As a result of the industry transition to 32- and 64-bit Entertainment
Platforms, the Company's Software sales during fiscal 1996 and fiscal 1997 were
significantly lower than in fiscal 1995. In addition, although the Company had
acquired three Software studios (and had incurred increases in fixed overhead
expenses), due to Software development lead times, the capacity of the studios
to develop titles to be marketed by the Company soon after their acquisition was
limited, and the Company continued to rely on independent studios for the
development of its titles and incurred royalty and other expense relating
thereto. Accordingly, in fiscal 1997, the Company effected certain measures,
including expense reductions and consolidation of certain operations, to align
its operating expenses with anticipated revenues.
The Company recorded net income 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 net income for the first six months of fiscal 1998
reflects primarily the increase in sales volume of the Company's Software for
Nintendo's 64-bit N64 platform.
The Company 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 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 as to the future growth of the
installed base of 32- and 64-bit Entertainment Platforms or Software therefor or
of the Company's results of operations and profitability in future periods. See
'Risk Factors.'
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
development of, and the generation of revenues from, the Company's other
entertainment operations.
A Delaware corporation, Acclaim was founded in 1987 and has overseas
operations in Japan, France, Germany, Spain and the United Kingdom.
The Company's principal executive offices are located at One Acclaim Plaza,
Glen Cove, New York 11542, and its telephone number is (516) 656-5000.
THE OFFERING
<TABLE>
<S> <C>
A Warrants................................ 552,326 A Warrants, each of which entitles the holder to purchase a
share of Common Stock at any time until February 18, 2001 at an
initial exercise price of $3.50 per share.
B Warrants................................ 113,446 B Warrants, each of which entitles the holder to purchase a
share of Common Stock at any time until February 18, 1999 at an
initial exercise price of $12.00 per share.
Common Stock.............................. 1,265,772 shares of Common Stock issuable upon exercise of the
Warrants and the Spangenberg Warrants.
</TABLE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the
Warrants. The proceeds from the exercise of the Warrants and the Spangenberg
Warrants will be added to the Company's working capital.
RISK FACTORS
See 'Risk Factors' for a discussion of certain factors that should be
considered in evaluating an investment in the Company.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto and the 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' section appearing elsewhere in this
Prospectus. The consolidated financial statement data as of and for the fiscal
years ended August 31, 1995, 1996 and 1997 are derived from, and are qualified
by reference to, the audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. The Consolidated Financial Statements of
the Company have been audited by Grant Thornton LLP, independent certified
public accountants, for the fiscal years ended August 31, 1993, 1994 and 1995.
The auditors' report for fiscal 1995 includes an emphasis paragraph as to
uncertainty relating to the eventual outcome of certain class action lawsuits.
The Consolidated Financial Statements of the Company for the fiscal years ended
August 31, 1996 and 1997 have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The auditors' report for fiscal 1997 includes an
explanatory paragraph relating to the Company's ability to continue as a 'going
concern' and, for fiscal 1996, indicates that the auditors were unable to review
the selected quarterly data in accordance with professional standards. The
consolidated financial statement data with respect to the fiscal years ended
August 31, 1993 and 1994 are derived from audited Consolidated Financial
Statements of the Company not included in this Prospectus. The consolidated
financial statement data as of and for the six months ended February 28, 1997
and 1998 has been derived from, and is qualified by reference to, the unaudited
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus. Such interim data, in the opinion of management, contain all
adjustments necessary for a fair presentation of such information. The results
of operations for the interim periods should not be taken as indicative of
results for the full year.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
FEBRUARY
FISCAL YEAR ENDED AUGUST 31, 28,
---------------------------------------------------------- ---------
1993 1994(1) 1995(2) 1996(3) 1997 1998
-------- -------- -------- --------- --------- ---------
(IN 000'S, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $327,091 $480,756 $566,723 $ 161,945 $ 165,411 $ 161,620
Cost of revenues................................. 183,820 249,902 291,474 191,790 89,818 77,228
-------- -------- -------- --------- --------- ---------
Gross profit (loss).............................. 143,271 230,854 275,249 (29,845) 75,593 84,392
-------- -------- -------- --------- --------- ---------
Selling, advertising, general and administrative
expenses........................................ 88,878 142,941 180,957 183,722 118,993 50,371
Research & development expenses.................. 3,036 4,626 10,126 34,582 30,824 17,617
Operating interest............................... 1,183 1,979 3,957 6,417 1,749 818
Depreciation and amortization.................... 3,227 3,838 9,543 14,910 16,220 6,824
Goodwill writedown............................... -- -- -- -- 25,200 --
Litigation settlements........................... -- -- -- -- 23,550 --
Downsizing charge................................ -- -- -- 5,000 10,000 --
Earnings (loss) from operations.................. 46,947 77,470 70,666 (274,476) (150,943) 8,762
-------- -------- -------- --------- --------- ---------
Other income (expense), net...................... 1,138 (475) 5,608 5,609 (8,117) (1,865)
-------- -------- -------- --------- --------- ---------
Earnings (loss) before income taxes and minority
interest........................................ 48,085 76,995 76,274 (268,867) (159,060) 6,897
-------- -------- -------- --------- --------- ---------
Net earnings (loss).............................. $ 28,185 $ 45,055 $ 44,770 $(221,368) (159,228) 6,786
-------- -------- -------- --------- --------- ---------
Weighted average common shares outstanding....... 36,220 38,200 42,665 49,515 49,670 50,556
Basic earnings (loss) per share.................. $ 0.78 $ 1.18 $ 1.05 $ (4.47) $ (3.21) $ 0.13
Stock options and warrants....................... 8,655 6,950 9,635 -- -- --
Diluted common shares outstanding................ 44,875 45,150 52,300 49,515 49,670 50,556
Diluted earnings (loss) per share................ $ 0.63 $ 1.00 $ 0.86 $ (4.47) $ (3.21) $ 0.13
<CAPTION>
1997
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $ 105,648
Cost of revenues................................. 52,552
---------
Gross profit (loss).............................. 53,096
---------
Selling, advertising, general and administrative
expenses........................................ 56,948
Research & development expenses.................. 22,276
Operating interest............................... 1,208
Depreciation and amortization.................... 8,160
Goodwill writedown............................... --
Litigation settlements........................... --
Downsizing charge................................ --
Earnings (loss) from operations.................. (35,496)
---------
Other income (expense), net...................... (1,292)
---------
Earnings (loss) before income taxes and minority
interest........................................ (36,788)
---------
Net earnings (loss).............................. (35,842)
---------
Weighted average common shares outstanding....... 49,700
Basic earnings per share......................... $ (0.72)
Stock options and warrants....................... --
Diluted common shares outstanding................ 49,700
Diluted earnings per share....................... $ (0.72)
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1997
---------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficiency)................................................................. $ (64,156)
Total assets................................................................................. 133,175
Current portion of long-term debt............................................................ 1,002
Long-term liabilities........................................................................ 59,472
Stockholders' (deficiency)................................................................... (59,046)
<CAPTION>
FEBRUARY 28, 1998
-----------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficiency $ (44,724)
Total assets............... 146,834
Current portion of long-ter 724
Long-term liabilities...... 61,545
Stockholders' (deficiency). (47,197)
</TABLE>
- ------------------
(1) Includes results of operations of Acclaim Comics from July 29, 1994.
(2) Includes results of operations of Iguana Entertainment, Inc. ('Iguana') from
January 4, 1995 and of Lazer-Tron for the entire year.
(3) Includes results of operations of Sculptured Software, Inc. ('Sculptured')
and Probe Entertainment Limited ('Probe') for the entire year.
(4) All common share information has been restated to reflect the three-for-two
stock split in the form of a 50% stock dividend distributed on August 23,
1993.
(5) For fiscal 1996 and 1997, the Company's pre-tax earnings from operations
were inadequate to cover fixed charges by $268.9 million and $159.1 million,
respectively.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors, among others, should be considered carefully in evaluating
the investment in the Company offered hereby.
Recent Operating Results
The Company's net revenues declined from $566.7 million in fiscal 1995 to
$161.9 million in fiscal 1996 and to $165.4 million in fiscal 1997 and 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
$44.8 million in fiscal 1995, a net loss of $221.4 million in fiscal 1996 and a
net loss of $159.2 million in fiscal 1997 and a net loss of $35.8 million for
the six months ended February 28, 1997 as compared to net earnings of $6.8
million for the six months ended February 28, 1998. The increase in revenues and
earnings in the 1998 period reflects primarily increased sales of the Company's
Software for the N64 platform. The loss for fiscal 1997 included, among other
things, charges for litigation settlements and other claims of $23.6 million, a
writedown of the goodwill associated with Acclaim Comics of $25.2 million and
downsizing charges of $10 million. The loss for fiscal 1996 included, among
other things, the second and fourth quarter special cartridge video charges
taken by the Company aggregating approximately $114 million.
The Company's revenues and operating results in fiscal 1996 and 1997
reflect principally the transition from 16-bit to 32- and 64-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 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.
In fiscal 1997, the Company effected a variety of cost reduction measures
to reduce its operating expenses. See '--Liquidity and Bank Relationships'
below. 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 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 '--Going Concern Considerations' below.
Liquidity and Bank Relationships
The Company used net cash in operations of approximately $7.3 million in
fiscal 1995, approximately $38.3 million in fiscal 1996 and approximately $29.2
million in fiscal 1997. The Company used net cash in 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 and the year ended August
31, 1997. Prior to the fiscal 1998 period, without giving effect to the tax
refund during the same period of fiscal 1997, the Company has experienced
negative cash flow from operations in recent periods primarily due to its net
losses, which 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.
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.
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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 a convertible
note offering (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
down a portion of its mortgage loan from Fleet Bank ('Fleet') and (iii) on March
5, 1997, sold substantially all of the assets and certain liabilities of Acclaim
Redemption Games, Inc. (formerly 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 hardware platforms that dominate the
interactive entertainment market.
The Company was in default of various financial covenants, negative
covenants relating to the disposition of assets, and affirmative covenants
relating to the grant of security interests in certain assets under its
revolving credit facility with its lead institutional lender, BNY Financial
Corporation ('BNY'), as of the end of each quarter of fiscal 1997, which
defaults have been waived by BNY. As of the end of the first two quarters of
fiscal 1997, the Company was also in default of certain cross default provisions
under agreements with Midland plc and Fleet Bank, which defaults were waived. As
of November 30, 1997 and February 28, 1998, the Company did not meet certain
financial covenants under its revolving credit facility with BNY; the resulting
events of default have been waived by BNY. 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.
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 (the
'Notes') issued in the Convertible Note Offering 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 terms or will be permitted by the
terms of the indenture (the 'Indenture') governing the Notes, or the Company's
existing indebtedness. There can be no assurance that the Company's operating
cash flows will be sufficient to meet its debt service requirements or to repay
the Notes at maturity or that the Company will be able to refinance the Notes or
other indebtedness at maturity. See '--Prior Rights of Creditors' below.
Prior Rights of Creditors
The Company has outstanding long-term debt (including current portions) of
$53 million at February 28, 1998. The Company's failure to make payments of
interest or principal on such indebtedness when due may result in defaults under
its agreements with respect to such indebtedness and under the Indenture.
Certain of such indebtedness is secured by liens on substantially all of the
assets of the Company.
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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 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 deficits of $(59.0) million at August 31, 1997 and $(47.2)
million 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.
Litigation
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. 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 its 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. See 'Legal Proceedings.'
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.
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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 Nintendo N64, Sony 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.
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.
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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.
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 calendar 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 fiscal 1995, 1996 and 1997, the Company derived 47%, 29% and 41% of its
gross revenues, respectively, from sales of Nintendo-compatible titles and 46%,
36% and 12% of its gross revenues, respectively, from sales of Sega-compatible
titles. In addition, in fiscal 1996 and 1997, the Company derived 19% and 28%,
respectively, of its gross revenues from sales of Sony-compatible titles. 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. 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 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
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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 Hardware 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 12 months, with the majority of sales occurring in
the first 90 to 120 days after release. The Company generally actively markets
its ten 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 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 in 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 Software 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
fiscal year ended August 31, 1997, sales of the Company's top title accounted
for approximately 33% of the Company's gross sales for that period and, 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 may permit 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.
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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.
In addition, the Company has offered and anticipates that it will continue
to offer stock-balancing programs for its PC Software. The Company has
established reserves for such programs, which have not been material to date. No
assurance can be given that future stock-balancing programs will not become
material and/or will not exceed the Company's reserves for such programs and, if
so exceeded, the Company's results of operations and financial condition could
be materially adversely affected.
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 titles 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 Software titles, when price has been a less
important factor in Software sales). The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than 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 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 titles, 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.
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 25%, 41% and 50% of the
Company's net revenues in fiscal 1995, 1996 and 1997, 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 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.
13
<PAGE>
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 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.
Absence of Public Market; Negotiated Exercise Price
The Company does not intend to list the Warrants for trading on any
exchange and does not anticipate that a market will develop for the Warrants or,
if developed, that it can be maintained.
The exercise price of the Warrants was established by negotiations between
the Company and counsel for plaintiffs in the Superior Court and Federal Court
actions and does not necessarily bear any relationship to the Company's book
value, assets, past operating results, financial condition, or other established
criteria of value
14
<PAGE>
and, accordingly, should not be regarded as an indication of any future market
price of the Warrants. See 'Plan of Distribution.'
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.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
There is no public market for the Warrants.
The Common Stock is traded on The Nasdaq Stock Market. On June 1, 1998, the
closing sale price of the Common Stock was $5.0625 per share. As of such date,
there were approximately 1,267 registered holders of record of the Common Stock.
The following table sets forth the range of high and low sales prices for
the Common Stock for each of the periods indicated:
<TABLE>
<CAPTION>
PRICE PERIOD HIGH LOW
- --------------------------------------------------- -------- -------
<S> <C> <C>
Fiscal Year 1996
First Quarter.................................... $28.19 $19.56
Second Quarter................................... 20.00 10.00
Third Quarter.................................... 13.63 7.63
Fourth Quarter................................... 11.88 7.31
Fiscal Year 1997
First Quarter.................................... 8.63 3.06
Second Quarter................................... 6.88 3.13
Third Quarter.................................... 5.88 2.94
Fourth Quarter................................... 5.00 3.50
Fiscal Year 1998
First Quarter.................................... 6.00 2.94
Second Quarter................................... 5.25 3.09
Third Quarter.................................... 8.19 5.00
Fourth Quarter (through June 1, 1998)............ 6.63 4.50
</TABLE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock and has no present intention to declare or pay cash dividends on the
Common Stock in the foreseeable future. The Company is subject to various
financial covenants with its lenders that could limit and/or prohibit the
payment of dividends in the future. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and Note 12 of the Notes to
Consolidated Financial Statements. The Company intends to retain earnings, if
any, which it may realize in the foreseeable future to finance its operations.
15
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the
Warrants. The proceeds from the exercise of the Warrants and the Spangenberg
Warrants will be added to the Company's working capital.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at February 28, 1998. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto, and
other information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
-----------------
<S> <C>
(IN THOUSANDS)
LIABILITIES:
Short-term:
Short-term borrowings........................................................................ $ 21
Current portion of long-term debt............................................................ 724
Obligations under capital leases--current.................................................... 1,460
-----------------
Total short-term debt..................................................................... 2,205
-----------------
Long-term debt:
Convertible Subordinated Notes............................................................... 50,000
Obligations under capital leases--non-current................................................ 1,796
Mortgage Note................................................................................ 2,293
-----------------
Total long-term debt...................................................................... 54,089
-----------------
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 shares issued............... 1,015
Additional paid-in capital................................................................... 178,597
Accumulated deficit.......................................................................... (223,084)
Treasury stock, 523 shares................................................................... (3,103)
Foreign currency translation adjustment...................................................... (622)
-----------------
Total stockholders' deficiency............................................................ (47,197)
-----------------
Total capitalization...................................................................... $ 9,097
-----------------
-----------------
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto and the 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' section appearing elsewhere herein. The
consolidated financial statement information as of and for the fiscal years
ended August 31, 1995, 1996 and 1997 are derived from, and are qualified by
reference to, the audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. The consolidated financial statement data
with respect to the fiscal years ended August 31, 1993 and 1994 are derived from
audited Consolidated Financial Statements of the Company not included in this
Prospectus. The Consolidated Financial Statements of the Company for the fiscal
years ended August 31, 1993, 1994 and 1995 have been audited by Grant Thornton
LLP, independent certified public accountants. The auditors' report for fiscal
1995 includes an emphasis paragraph as to uncertainty relating to the eventual
outcome of certain class action lawsuits. The Consolidated Financial Statements
of the Company for fiscal 1996 and 1997 have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The auditors' report for fiscal
1997 includes an explanatory paragraph relating to the Company's ability to
continue as a 'going concern' and, for fiscal 1996, indicates that the auditors
were unable to review the selected quarterly data in accordance with
professional standards. The selected financial statement data as of and for the
six months ended February 28, 1997 and 1998 has been derived from, and is
qualified by reference to, the unaudited Consolidated Financial Statements of
the Company included elsewhere in this Prospectus. Such interim data, in the
opinion of management, contain all adjustments necessary for a fair presentation
of such information. The results of operations for the interim periods should
not be taken as indicative of results for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, FEBRUARY 28,
---------------------------------------------------------- --------------------
1993 1994(1) 1995(2) 1996(3) 1997 1998 1997
-------- -------- -------- --------- --------- -------- --------
(IN 000'S, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $327,091 $480,756 $566,723 $ 161,945 $ 165,411 $161,620 $105,648
Cost of revenues........................... 183,820 249,902 291,474 191,790 89,818 77,228 52,552
Gross profit (loss)........................ 143,271 230,854 275,249 (29,845) 75,593 84,392 53,096
Selling, advertising, general and
administrative expenses.................. 88,878 142,941 180,957 183,722 118,993 50,371 56,948
Research and development expenses.......... 3,036 4,626 10,126 34,582 30,824 17,617 22,276
Operating interest......................... 1,183 1,979 3,957 6,417 1,749 818 1,208
Depreciation and amortization.............. 3,227 3,838 9,543 14,910 16,220 6,824 8,160
Goodwill writedown......................... -- -- -- -- 25,200 -- --
Litigation settlements..................... -- -- -- -- 23,550 -- --
Downsizing charge.......................... -- -- -- 5,000 10,000 -- --
Earnings (loss) from operations............ 46,947 77,470 70,666 (274,476) (150,943) 8,762 (35,496)
Other income
(expense), net........................... 1,138 (475) 5,608 5,609 (8,117) (1,865) (1,292)
Earnings (loss) before income taxes and
minority interest........................ 48,085 76,995 76,274 (268,867) (159,060) 6,897 (36,788)
Net earnings (loss)........................ $ 28,185 $ 45,055 $ 44,770 $(221,368) $(159,228) 6,786 (35,842)
Weighted average common shares
outstanding.............................. 36,220 38,200 42,665 49,515 49,670 50,556 49,700
Basic earnings (loss) per share............ $ 0.78 $ 1.18 $ 1.05 $ (4.47) $ (3.21) $ 0.13 $ (0.72)
Stock options and warrants................. 8,655 6,950 9,635 -- -- -- --
Diluted common shares outstanding.......... 44,875 45,150 52,300 49,515 49,670 50,556 49,700
Diluted earnings (loss) per share.......... $ 0.63 $ 1.00 $ 0.86 $ (4.47) $ (3.21) $ 0.13 $ (0.72)
BALANCE SHEET DATA:
Working capital (deficiency)............... $ 80,564 $131,820 $200,455 $ (10,039) $ (64,156) $(44,724) $ 11,149
Total assets............................... 206,771 335,878 442,827 239,651 133,175 146,834 239,651
Current portion of long-term debt.......... 87 1,538 25,196 25,527 1,002 724 1,261
Long-term liabilities...................... 2,538 41,754 461 4,032 59,472 61,545 55,932
Stockholders' equity (deficiency).......... 96,867 175,243 314,707 93,589 (59,046) (47,197) 58,397
</TABLE>
- ------------------
(1) Includes results of operations of Acclaim Comics from July 29, 1994.
(2) Includes results of operations of Iguana from January 4, 1995 and of
Lazer-Tron for the entire year.
(3) Includes results of operations of Sculptured and Probe for the entire year.
(4) All common share information has been restated to reflect the three-for-two
stock split in the form of a 50% stock dividend distributed on August 23,
1993.
(5) For fiscal 1996 and 1997, the Company's pre-tax earnings from operations
were inadequate to cover fixed charges by $268.9 million and $159.1 million,
respectively.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a developer, publisher and mass marketer of Software for use
with Entertainment Platforms and 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 Affiliated Labels; and
(iii) the marketing of its motion capture technology and studio services.
The Company believes the Software industry is driven by the size of the
installed base of Entertainment Platforms, such as those manufactured by
Nintendo, Sony and Sega, and 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 recorded a loss from operations of $274.5 million and $150.9
million and a net loss (on an after-tax basis) of $221.4 million and $159.2
million for fiscal 1996 and 1997, respectively. The net loss for fiscal 1996
reflects write-offs of receivables, the establishment of additional receivables
and inventory reserves, severance charges incurred in connection with the
downsizing of the Company and the reduction of certain deferred costs, as well
as an operating loss for the year resulting primarily from price protection and
similar concessions granted to retailers at greater than anticipated levels in
connection with the Company's 16- and 32-bit Software. The net loss for fiscal
1997 reflects, among other things, a charge of $23.6 million for certain claims
and litigations for which the settlement obligation was then probable and
estimable, a write-down of $25.2 million to reduce the carrying value of the
goodwill associated with Acclaim Comics to its estimated undiscounted future
cash flows, and downsizing charges of $10 million.
Based on information available in 1994 and based on its historical
experience with respect to the transition from 8- to 16-bit platforms, the
Company believed that Software sales for 16-bit platforms would, although
continuing to decrease overall, still dominate the interactive entertainment
market in 1995 and that such sales would remain substantial through the 1996
holiday season. Accordingly, although the Company's strategy for the Christmas
1995 season was to develop Software for multiple Entertainment Platforms and
Multimedia PCs, the Company anticipated that substantially all of its revenues
in fiscal 1995 would be derived from its 16-bit Software sales. The Company also
anticipated that its sales of 32-bit and Multimedia PC Software in fiscal 1996
would grow as compared to fiscal 1995 but that the majority of its revenues in
fiscal 1996 would still be derived from 16-bit Software sales. However, the
16-bit Software market matured much more rapidly than anticipated by the
Company, the Company's Christmas 1995 16-bit Software sales were substantially
lower than anticipated and, by April 1996, the Company derived minimal profits
from such Software sales and made the decision to exit the 16-bit and portable
cartridge markets.
As a result of the industry transition to 32- and 64-bit Entertainment
Platforms, the Company's Software sales during fiscal 1996 and fiscal 1997 were
significantly lower than in fiscal 1995. In addition, although the Company had
acquired three Software studios (and had incurred increases in fixed overhead
expenses), due to Software development lead times, the capacity of the studios
to develop titles to be marketed by the Company soon after their acquisitions
was limited, and the Company continued to rely on independent studios for the
development of its titles and incurred royalty and other expenses relating
thereto. Accordingly, in fiscal 1997,
18
<PAGE>
management effected certain measures, including expense reductions and
consolidation of certain operations, to align its operating expenses with
anticipated revenues. See '--Operating Expenses.'
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 periods reflect primarily the
increase in sales volume of the Company's Software for the N64 platform.
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 units 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 'Risk Factors.'
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 'Risk
Factors.'
The rapid technological advances in game systems have significantly changed
the look and feel of Software as well as the Software development process.
According to Company estimates, the average development cost for a title for
Entertainment Platforms and Multimedia PCs is currently between $1 million and
$2 million, an increase over the average development cost for a title on earlier
generation Entertainment Platforms. As a result of the Company's acquisitions of
Iguana, Sculptured and Probe in 1995 (two of which were completed in fiscal
1996), the Company's general and administrative expenses were substantially
higher in fiscal 1996 and fiscal 1997 as compared to prior periods. See 'Risk
Factors.' Such expenses in the aggregate had a material adverse impact on the
Company's profitability in fiscal 1996 and fiscal 1997.
In connection with the Company's decision to exit the 16-bit and portable
Software markets in April 1996, the Company recorded a special cartridge video
charge of approximately $48.9 million in the second quarter of fiscal 1996,
consisting of provisions of approximately $28.8 million (reflected in net
revenues), and approximately $20.1 million (reflected in cost of revenues),
respectively, to adjust accounts receivable and inventories at February 29, 1996
to their estimated net realizable values in conjunction with management's
decision to exit the portable and 16-bit cartridge market.
The Company'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.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statements of consolidated
operations data as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
------------------------ --------------
1997 1996 1995 1998 1997
----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Domestic revenues................................................... 49.7% 58.7% 74.8% 58.6% 51.2%
Foreign revenues.................................................... 50.3 41.3 25.2 41.4 48.8
----- ------ ----- ----- -----
Net revenues........................................................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues.................................................... 54.3 118.4 51.4 47.8 49.7
----- ------ ----- ----- -----
Gross profit (loss)................................................. 45.7 (18.4) 48.6 52.2 50.3
Selling, advertising, general and administrative expenses........... 72.0 113.4 31.9 31.2 53.9
Research and development expenses................................... 18.6 21.4 1.8 10.9 21.1
Operating interest.................................................. 1.1 4.0 0.7 0.5 1.1
Depreciation and amortization....................................... 9.8 9.2 1.7 4.2 7.7
Goodwill writedown.................................................. 15.2 -- -- -- --
Litigation settlements.............................................. 14.2 -- -- -- --
Downsizing charge................................................... 6.1 3.1 -- -- --
----- ------ ----- ----- -----
Total operating expenses............................................ 137.0 151.1 36.1 46.8 83.9
Earnings (loss) from operations..................................... (91.3) (169.5) 12.5 5.4 (33.6)
Other (expense) income, net......................................... (4.9) 3.5 1.0 (1.2) (1.2)
Earnings (loss) before income taxes................................. (96.2) (166.0) 13.5 4.3 (34.8)
Net earnings (loss)................................................. (96.3) (136.7) 7.9 4.2 (33.9)
</TABLE>
NET REVENUES
The Company's gross revenues were derived from the following product
categories:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
----------------------- --------------
1997* 1996* 1995* 1998* 1997*
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
64-bit Software......................................................... 33.0 % -- -- 67.0 % 22.0 %
32-bit Software......................................................... 37.0 % 32.0 % 5.0 % 20.0 % 45.0 %
Multimedia PC Software.................................................. 15.0 % 12.0 % 4.0 % 8.0 % 15.0 %
Portable Software....................................................... 2.0 % 8.0 % 10.0 % 3.0 % 2.0 %
16-bit Software......................................................... 9.0 % 44.0 % 74.0 % 1.0 % 12.0 %
Other................................................................... 4.0 % 4.0 % 7.0 % 1.0 % 4.0 %
</TABLE>
- ------------------
* 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 was able to present such information as a percentage of net revenues.
20
<PAGE>
The increase in the Company's net revenues from $161.9 million for the year
ended August 31, 1996 to $165.4 million for the year ended August 31, 1997 was
predominantly due to sales of the Company's N64 title, Turok: Dinosaur Hunter,
and lower returns and allowances.
The decrease in the Company's net revenues from $566.7 million for the year
ended August 31, 1995 to $161.9 million for the year ended August 31, 1996 was
predominantly due to reduced unit sales of 16-bit Software, increased returns
and allowances relating primarily to 16-bit Software and a reduction in average
unit selling prices for 16-bit Software.
The Company's revenues and operating results in fiscal 1996 and 1997
reflect principally the industry transition from 16-bit to 32- and 64-bit
Entertainment Platforms. 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 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 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 as to the future growth of the
installed base of 32- and 64-bit Entertainment Platforms or of 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. Although the Company realized the benefits of
such measures in the fourth quarter of fiscal 1997 in the form of reduced
operating expenses as compared to prior quarters, no assurance can be given that
such measures 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 'Risk Factors.'
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. In fiscal 1997, sales of Turok: Dinosaur Hunter
accounted for approximately 33% of the Company's gross revenues. In fiscal 1996,
no single title accounted for a significant portion of the Company's gross
revenues and, in fiscal 1995, sales of NBA Jam Tournament Edition accounted for
approximately 19% of the Company's gross revenues.
In fiscal 1997, sales of Software manufactured by Interplay accounted for
approximately 9% of the Company's gross revenues. See 'Business--Distribution of
Affiliated Labels.'
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.
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, 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 platform) accounted for approximately 22%
of the Company's gross revenues and for the six months ended February 28, 1998
sales of Quarterback Club, 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.
The Company is substantially dependent on Sony, Sega and Nintendo as the
sole manufacturers of the hardware platforms marketed by them and as the sole
licensors of the proprietary information and technology needed to develop
Software for those platforms. For the years ended August 31, 1995, 1996 and
1997, the Company derived 47%, 29% and 41% of its gross revenues, respectively,
from sales of Nintendo-compatible Software, 46%, 36% and 12% of its gross
revenues, respectively, from sales of Sega-compatible Software and for
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the years ended August 31, 1996 and 1997, 19% and 28% of its gross revenues,
respectively, from sales of Software for the Sony PlayStation.
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 inventory; (ii)
the Company's product mix (i.e., the percentage of sales of Multimedia PC
Software and Software for CD-based Entertainment Platforms as compared to sales
of Software for cartridge-based Entertainment Platforms); 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 price
obtained for its Software sales. Similarly, lack of 'hit' titles or a low number
of 'hit' titles, resulting in lower average unit sales prices, adversely impacts
the Company's gross profits.
The Company's margins on sales of Multimedia PC and other CD Software
(currently, the 32-bit Sony PlayStation and Sega Saturn platforms) are higher
than those on cartridge Software (currently, the Nintendo N64 and GameBoy
platforms) 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 $(29.8) million ((18)% of net revenues) for the
year ended August 31, 1996 to $75.6 million (46% of net revenues) for the year
ended August 31, 1997 primarily due to lower levels of returns and allowances.
Gross profit decreased from $275.2 million (49% of net revenues) for the
year ended August 31, 1995 to a gross loss of $(29.8) million ((18)% of net
revenues) for the year ended August 31, 1996 primarily due to increased returns
and allowances relating to 16-bit Software.
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
Selling, advertising, general and administrative expenses decreased from
$183.7 million (113% of net revenues) for the year ended August 31, 1996 to
$119.0 million (72% of net revenues) for the year ended August 31, 1997. The
decrease is primarily attributable to personnel and other cost reduction efforts
initiated by the Company to reduce its operating expenses.
Selling, advertising, general and administrative expenses increased from
$180.9 million (32% of net revenues) for fiscal 1995 to $183.7 million (113% of
net revenues) for fiscal 1996. The dollar increase is primarily attributable to
increased overhead expenses relating to the operations of the studios in fiscal
1996. The percentage increase is primarily attributable to reduced sales volume.
Research and development expenses decreased from $34.6 million (21% of net
revenues) for the year ended August 31, 1996 to $30.8 million (19% of net
revenues) for the year ended August 31, 1997 due to cost reduction efforts
initiated by the Company (resulting in the reduction of ATG's activities and
other research and development activities in the Company's Glen Cove location).
Research and development expenses increased from $10.1 million (2% of net
revenues) in fiscal 1995 to $34.6 million (21% of net revenues) in fiscal 1996
due to the increase in Software development resulting from the acquisition of
the three Software studios in calendar 1995. A substantial portion of such
expenses were previously included as royalties paid to independent Software
studios.
Operating interest expense decreased from $6.4 million (4% of net revenues)
for the year ended August 31, 1996 to $1.8 million (1% of net revenues) for the
year ended August 31, 1997. The decrease was primarily attributable to decreased
sales volume and the resulting lower outstanding balances under the Company's
principal credit facility.
Operating interest expense increased from $4.0 million (0.7% of net
revenues) for fiscal 1995 to $6.4 million (4% of net revenues) for fiscal 1996.
The increase was primarily attributable to higher outstanding balances under the
Company's principal credit facility.
Depreciation and amortization increased from $9.5 million (2% of net
revenues) for fiscal 1995 to $14.9 million (9% of net revenues) for fiscal 1996
and to $16.2 million (10% of net revenues) for fiscal 1997. The increase in both
years is primarily attributable to depreciation relating to fixed assets held by
the Software studios and to the reduction, in fiscal 1996, of the estimated
remaining life of goodwill relating to Acclaim Comics from 40 to 20 years.
Downsizing charges of approximately $10 million relating primarily to
employee severance, lease commitments for idle facilities and write-offs of
non-productive fixed assets were recorded in fiscal 1997. Management believes
that the Company has begun to realize operating expense reductions resulting
therefrom commencing in the fourth quarter of fiscal 1997.
Due to continuing operating losses incurred by Acclaim Comics, management's
assessment of the current state of the comic book industry and management's
current projections for Acclaim Comics' operations, in fiscal 1997, management
believed that there was an impairment in the carrying value of the goodwill
relating to Acclaim Comics. Accordingly, in the third quarter of fiscal 1997,
the Company recorded a write-down of $25.2 million to reduce the carrying value
of the goodwill associated with Acclaim Comics to its estimated undiscounted
future cash flows.
In conjunction with certain claims and litigations for which the settlement
obligation is currently probable and estimable (see 'Risk Factors--Litigation'
and 'Legal Proceedings'), the Company recorded a charge of $23.6 million during
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.
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
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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 'Risk
Factors.'
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash in operating activities of approximately $29.2
million and $38.3 million during fiscal 1997 and 1996, respectively. An income
tax refund of approximately $54 million related to the carryback of the
Company's loss for fiscal 1996 was included in the net cash used in operating
activities during fiscal 1997. See '--Overview.'
The Company used net cash from operating activities of approximately $38.3
million and $7.3 million in fiscal 1996 and 1995, respectively. The decrease in
net cash from operations in fiscal 1996 as compared to fiscal 1995 was primarily
attributable to a decrease in cash received from customers. The decrease in cash
received from customers is primarily attributable to lower sales resulting from
the maturation of the 16-bit market and the related transition to 32- and 64-bit
platforms. See '--Overview.'
The Company derived net cash from investing activities of approximately
$14.5 million and $7.4 million during fiscal 1997 and 1996, respectively. The
increase in net cash from investing activities in fiscal 1997 as compared to
fiscal 1996 is primarily attributable to reduced expenditures for fixed assets,
offset by lower proceeds (approximately $10.2 million and $14.6 million in
fiscal 1997 and fiscal 1996, respectively) derived from the sale of marketable
securities (due to sales of a lower number of such securities).
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The Company derived net cash from investing activities of approximately
$7.4 million and $26.4 million in fiscal 1996 and 1995, respectively. The
decrease in net cash from investing activities in fiscal 1996 as compared to
fiscal 1995 is primarily attributable to lower proceeds (approximately $14.6
million and $57.2 million in fiscal 1996 and 1995, respectively) derived from
the sale of marketable securities (due to sales of a lower number of such
securities), partially offset by (i) higher cash associated with the acquisition
of certain subsidiaries (approximately $7.9 million from Sculptured and Probe in
fiscal 1996 as compared to $1.7 million from Lazer-Tron and Iguana in fiscal
1995), which reflects cash held by subsidiaries at the respective dates of
acquisition, and (ii) lower cash expended on the acquisition of fixed assets in
fiscal 1996 as compared to fiscal 1995. See Notes 5, 6 and 9 of Notes to
Consolidated Financial Statements.
The Company derived net cash from financing activities of approximately
$19.4 million and $5.0 million in fiscal 1997 and 1996, respectively, and used
net cash in financing activities of approximately $9.6 million during fiscal
1995. The increase in net cash derived from financing activities in fiscal 1997
as compared to fiscal 1996 is primarily attributable to the offering in February
1997 of $50.0 million of 10% Convertible Subordinated Notes ('Notes') due March
1, 2002 with interest payable semiannually commencing September 1, 1997. The
Notes were sold at par with proceeds to the Company of $47.4 million, net of
expenses. The Indenture contains covenants that, among other things,
substantially limit the Company's ability to incur additional indebtedness,
issue preferred stock, pay dividends and make certain other payments. The Notes
are convertible into shares of Common Stock at any time prior to maturity,
unless previously redeemed, at a conversion price of $5.18 per share, subject to
adjustment under certain conditions. The Notes are redeemable, in whole or in
part, at the option of the Company (subject to the rights of holders of senior
indebtedness) at 104% of the principal balance at any time on or after March 1,
2000 through February 28, 2001 and at 102% of the principal balance thereafter
to maturity.
In connection with its acquisition by the Company, Acclaim Comics entered
into a term loan agreement with Midland Bank plc ('Midland') for $40 million. On
February 26, 1997, the Company used $16 million of the proceeds from the
issuance of the Notes to repay in full the outstanding balance of the Midland
loan.
The increase in net cash provided by financing activities in fiscal 1996 as
compared to fiscal 1995 is primarily attributable to (i) proceeds from mortgage
financing of the Company's headquarters in Glen Cove, (ii) the restructuring of
the Midland financing in fiscal 1995, which required pre-payment of a portion of
such debt, and (iii) an increase in proceeds from short-term bank loans in
fiscal 1996. See Notes 10 and 12 of Notes to Consolidated Financial Statements.
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.
The income tax refund relating to the carryback of the Company's loss for fiscal
1996 was included in 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 Unaudited 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 from 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 proceeds
from the offering of the Notes in February 1997, which was partially offset by
the repayment of the Midland term loan and the partial repayment of the Fleet
mortgage note.
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, and August 31,
1997, the amount outstanding under letters of credit was approximately $11.5
million and $5.4 million, respectively. Other than such letters of credit, the
Company does not currently have any material operating or capital expenditure
commitments.
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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, 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. BNY 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 BNY'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
'Risk Factors--Liquidity and Bank Relationships.'
The Company is also party to a mortgage arrangement with Fleet relating to
its corporate headquarters. At February 28, 1998, and August 31, 1997, the
outstanding principal balance of the Fleet loan was $3.0 million and $3.7
million, respectively. See 'Risk Factors--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 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 'Risk Factors--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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BUSINESS
INTRODUCTION
The Company is a developer, publisher and mass marketer of Software for use
with Entertainment Platforms and 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's strategy is to emphasize 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, which commenced in July 1994 through the acquisition
of Acclaim Comics; (ii) the distribution of Affiliated Labels which commenced in
the first quarter of fiscal 1995; and (iii) the marketing of its motion capture
technology and studio services, which commenced in the first quarter of fiscal
1995. See 'Management's Discussion and Analysis of Financial Conditions and
Results of Operations.'
INTERACTIVE ENTERTAINMENT INDUSTRY OVERVIEW
The Company believes the Software industry is driven by the size of the
installed base of Entertainment Platforms (such as those manufactured by
Nintendo and Sega and Multimedia PCs. The industry is characterized by rapid
technological change, resulting in Entertainment Platform and related Software
product cycles. No single Entertainment Platform or system has achieved
long-term dominance in the interactive entertainment market.
The home interactive entertainment industry started a new period of growth
in 1985 when Nintendo introduced the NES, a ROM cartridge-based 8-bit system. In
1990, Sega introduced the 16-bit Genesis and, in 1991, Nintendo introduced the
16-bit cartridge-based SNES. The 16-bit systems were more sophisticated than the
8-bit systems, producing faster and more complex images with more life-like
animation and better sound effects. The industry experienced rapid rates of
growth commencing in 1992, fueled by sales of the 16-bit cartridge Entertainment
Platforms manufactured by Nintendo and Sega.
In 1993, Sega introduced the Sega CD, a CD player consisting of an
attachment for its 16-bit Genesis system. Atari launched Jaguar, its 64-bit
cartridge-based system, in November 1993 and Sega launched 32X, its 32-bit
cartridge-based attachment for its 16-bit Genesis system, in November 1994.
Sega and Sony launched 32-bit CD-based systems in Japan in November 1994.
Sega shipped its Saturn system in the United States commencing in May 1995 and
Sony released its PlayStation system in the United States in September 1995.
Nintendo released N64, its new 64-bit ROM cartridge-based system, in Japan in
June 1996, in North America in September 1996 and in Europe in February 1997.
Nintendo has announced plans to release a disk drive for the N64 platform in
both Japan and the United States in 1998.
The rapid technological advances in game systems have significantly changed
the look and feel of Software as well as the Software development process.
According to Company estimates, the average development cost for a title for
Entertainment Platforms and Multimedia PCs is currently between $1 and $2
million. Once a title is developed, the competition for shelf space in the
primary retail outlets is intense. Retailers typically prefer to deal with
companies that have track records of producing successful titles and a broad
product line. Additionally, Software titles, especially those for the
Entertainment Platforms market, require significant marketing support to
generate high sales volume. The introduction of faster microprocessors, graphics
accelerator chips, enhanced operating systems, and increases in memory and
processing power have facilitated the development of Software for the Multimedia
PC market. The increase in the installed base of Multimedia PCs has resulted in
an increased demand for Software capable of being used on such systems.
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The following tables set forth the Company's estimates, based on
information received from hardware manufacturers, retailers and industry
analysts, in respect of the number of units (in millions) of the identified
Entertainment Platforms listed below sold in the indicated territories:
[CHART APPEARS HERE]
SNES U.S.A. SNES Europe GENESIS U.S.A. GENESIS Europe
1991 1.70 1.20 1.50 1.20
1992 5.60 2.00 4.60 1.70
1993 4.50 2.20 5.50 2.00
1994 3.10 2.30 3.70 2.60
1995 2.40 1.70 2.20 2.10
1996 1.40 1.00 1.00 0.70
U.S.A. Europe U.S.A. Europe
Sony Sony U.S.A. Europe Sega Sega
PlayStation Playstation N64 N64 SATURN SATURN
1995 0.7 0.40 1.8 0.3 0.4
1996 2.2 1.70 4.5 1.0 0.5
1997 (estimated) 5.5 5.00 1.5 0.7 0.3
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PRODUCTS
Since inception, the Company has developed and sold Software for a variety
of dedicated Entertainment Platforms. Although older titles may continue to be
available for sale, the Company generally actively markets only its ten to 15
most recently released titles.
The life cycle of a title generally ranges from less than three months to
upwards of 12 months for the Company's key titles. The life cycle of a
particular title is dependent on its initial success. Although actual results
vary greatly from title to title, the retail sell-through of a title is
generally highest during the 90-120 days immediately after its introduction.
The Company plans to produce high quality titles and address a wide range
of interactive entertainment categories and audiences, such as puzzle, sports,
arcade conversions, action/adventure and fantasy.
In fiscal 1997, the Company released 26 32-bit titles, 14 Multimedia PC
titles and one 64-bit title. The Company made the decision to exit the 16-bit
and portable Software markets in April 1996. Since such time, the Company has
released two new 16-bit titles for the European market (Ultimate Mortal Kombat
on Nintendo SNES and Sega Genesis) and published three portable titles. The
Company may, from time to time, (a) publish 16-bit and/or portable titles
selectively to support its key brands and (b) if requested by a retailer,
produce additional units of a particular title(s) on a special order basis.
In fiscal 1998, the Company currently plans to release between eight and
ten titles for the N64 platform, between ten and 15 titles for the Sony
PlayStation, between eight and ten titles for Multimedia PCs, and between six
and eight titles for Nintendo's GameBoy portable platform.
SOFTWARE DEVELOPMENT
The Company's Software development strategy is driven by the hardware
platforms that are marketed and/or are anticipated to be marketed from time to
time, the time and cost of Software development for each platform, the cost of
manufacturing Software for a particular platform and the attendant gross margins
for Software. The development time for the Company's Software for both
Entertainment Platforms and Multimedia PCs is currently between 18 and 24
months. The cost of manufacturing cartridge Software is significantly higher
than CD Software. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
Currently, the Company's Software development efforts are focused on the
Nintendo N64, the Sony PlayStation and Multimedia PCs. The Company's product
development methods and organization are modeled on those used in the Software
entertainment industry. 'Producers' employed by the Company oversee and are
responsible for development of the Company's Software. The producers direct
teams comprised of either the Company's own Software studios or independent
Software studios and, among other things, manage and monitor the delivery
schedule and budget for each title, ensure that the title follows the approved
treatment and story boards, act as facilitators with licensors whose trademarks
or brands may be incorporated in the title, if necessary, and coordinate testing
and final approval of the title.
The Company constantly seeks new sources of brands from which to develop
Software and has historically obtained such rights from a variety of sources in
the comic book publishing (e.g., Shadowman and Turok: Dinosaur Hunter), sports
(e.g., NFL Quarterback Club), arcade (e.g., NBA Jam Extreme), film (e.g., Batman
and Robin), and other areas of the entertainment industry. Certain of the
contractual agreements granting the Company rights to use such brands are
restricted to individual properties and certain agreements cover a series of
properties or grant rights to create Software based on or featuring particular
personalities or icons over a period of time.
The Company has invested in the creation of programming tools and engines
that are used in the design and development of its Software. The Company
believes that these tools and engines allow for the creation of state of the art
Software. The Company has also invested in a motion capture studio for the
application of its animation technology.
In 1995, the Company expanded its ability to develop Software internally
through its acquisition of three Software studios: Iguana in January 1995 and
Sculptured and Probe in October 1995. Prior thereto, the Company
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relied exclusively on independent Software studios. The majority of the
Company's Software released in fiscal 1997 (including Turok: Dinosaur Hunter)
was developed internally and the Company anticipates that more than 70% of the
titles anticipated to be released in fiscal 1998 (including Extreme G and NFL
Quarterback Club) will be developed internally. The Company believes that
internal development allows it to control the product quality, timing of release
and cost of its Software. The Company is in the process of consolidating the
management and organizational structure of its Software studios in order to
coordinate their development efforts, enable them to maximize their proprietary
tools and engines and to reduce operating expenses. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
From time to time, the Company also enters into selected licensing
agreements with independent studios, developers and publishers to market and
distribute, in selected markets, Software titles developed by them. The Company
generally pays the publisher a royalty based on sales and retains the inventory
and marketing risk of such Software.
The Company checks Software developed by its internal and independent
Software studios prior to manufacture for defects ('bugs'). The Software
developed for the Entertainment Platforms are also tested by the hardware
manufacturers for bugs. The Company's Software for Multimedia PCs is tested for
bugs both internally and by independent testing organizations. To date, the
Company has not had to recall any titles due to bugs.
MARKETING AND ADVERTISING
The Company's marketing strategy is based on Software featuring (i)
original properties, (ii) brands, personalities and/or icons and (iii)
successful arcade properties. Original properties are generally titles created
by the Company's Software studios and are based upon an original story or
concept developed by the Company. The Company also creates Software based on or
featuring well-known or identifiable brands (such as NFL Quarterback Club and
NBA Jam) and personalities or icons (such as Spiderman, Turok: Dinosaur Hunter
and X-O Manowar) licensed or created by the Company. Arcade properties are
coin-operated games based upon which the Company creates Software.
The target consumer for the Company's Software for Entertainment Platforms
are primarily males aged 11 to 21 and, for Multimedia PCs, are primarily males
aged 15 to 25. In developing a strategy for the marketing of a title, the
Company seeks story concepts and brands, personalities or icons that it believes
will appeal to the imagination of its target consumer. The Company creates
marketing campaigns consistent with the target consumer for each title. The
Company markets its Software through television, radio, print, public relations,
the internet (websites, both its own and others') consumer contests and
promotions, publicity activities, and trade shows. In addition, the Company
enters into cooperative advertising arrangements with certain of its customers,
pursuant to which the Company's titles are featured in the retail customer's own
advertisements to its customers. Dealer displays and in-store merchandising are
also used to increase consumer awareness of the Company's titles.
The Company's ability to promote and market its titles is important to its
success. The Company's plan is to develop one or more key brands each year based
on its original properties, which may then be featured on an annual basis in
successive titles across multiple Entertainment Platforms. By creating key
brands, the Company is able to take advantage of cross-merchandising
opportunities, to benefit from economies of scale and to capitalize on the name
recognition of the brands in each subsequent year in which they are used.
PRODUCTION, SALES AND DISTRIBUTION
The Company believes that the most efficient way to distribute its Software
is by tailoring the distribution method to each geographic market and, when the
market can support it, the Company distributes directly through a subsidiary in
an effort to maximize revenues and profits.
Pursuant to the terms of its license with Sony, the Company is required to
purchase PlayStation Software from Sony. Sony generally manufactures and
delivers Software to the Company within four weeks after the placement by the
Company of a purchase order. Reorders are generally delivered within two weeks
by Sony.
The Company manufactures (through subcontractors) all of its Software for
Multimedia PCs and substantially all of its Sega Software. The cost of Sega
Software when manufactured by the Company, together
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with the royalties payable to Sega for such manufacturing, is slightly lower
than the cost of the Company's Software when manufactured by Sega. Orders for
Multimedia PC and Sega Software manufactured by the Company (through
sub-contractors) are generally filled within 20-30 days of the placement of the
order. Re-orders for such Software are generally filled within ten days.
According to the Company's agreements and arrangements with Nintendo, the
Company must purchase Software it develops for the Nintendo platforms from
Nintendo. The lead-time for the manufacture of cartridge Software is longer than
for CD Software. The Company places a purchase order and opens a letter of
credit with respect to a particular title and Nintendo manufactures and delivers
such Software to the Company generally within 45 to 90 days thereafter.
In North America, the Company's Software is sold by regional sales
representative organizations which receive commissions based on the net sales of
each product sold. The Company maintains an in-house sales management team to
supervise the sales representatives. The sales representatives also act as sales
representatives for certain of the Company's competitors. Two of the sales
representative organizations marketing the Software are owned in whole or in
part by James Scoroposki, an officer, director and stockholder of the Company.
See 'Certain Relationships and Related Transactions.'
The Company sells its Software primarily to mass merchandisers, large
retail toy store chains, department stores and specialty stores. The Company
does not have written agreements with its customers. The loss of any important
customer could have a material adverse effect on the Company.
The Company maintains sales, marketing and distribution offices in Japan,
France, Spain, Germany and the United Kingdom. The sales and distribution
activities of Acclaim's European subsidiaries are administered through a central
management division, Acclaim Europe, based in London. For sales in other
markets, the Company appoints regional distributors. The Company's key domestic
retail customers include Toys R Us, Walmart, Best Buy and Target. Sales to Toys
R Us accounted for approximately 11% and 12% of the Company's net revenues for
the years ended August 31, 1995 and 1997 and approximately 9% and 15% of the
Company's net revenues for the six months ended February 28, 1997 and 1998. No
single customer accounted for more than 10% of the Company's net revenues for
the year ended August 31, 1996.
The Company is generally not contractually obligated to accept returns,
except for defective inventory. However, in order to maintain retail
relationships, the Company permits its customers to return or exchange inventory
and provides price protection or other concessions for excess or slow-moving
inventory. The Company establishes reserves for such concessions; however,
concessions materially exceeded reserves therefor in fiscal 1996 and no
assurance can be given that such concessions will not exceed the reserves
established therefor in future periods. See 'Risk Factors--Inventory Management,
Risk of Product Returns' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
The Company's warranty policy is to provide the original purchaser with
replacement or repair of defective Software for a period of 90 days after sale.
To date, the Company has not experienced significant warranty claims.
PLATFORM LICENSE AGREEMENTS
The Company is party to agreements (the 'Sony Agreements') with Sony,
pursuant to which the Company received, among other things, a non-exclusive
license to develop and distribute Software for the Sony PlayStation platform in
North America, Japan and Europe. The Sony Agreements expire in December 1998.
In April 1992, the Company entered into an agreement with Sega (the 'Sega
Agreement') and has certain other arrangements, pursuant to which the Company
received the non-exclusive right to utilize the 'Sega' name and its proprietary
information and technology in order to develop and distribute Software titles
for use with various Sega platforms. The Sega Agreement, as amended, expired in
December 1995. The Company and Sega are operating in the ordinary course under
the terms of the expired Sega Agreement and such arrangements with respect to
older platforms and, with respect to the Saturn platform, under an oral
agreement and other arrangements. No assurance can be given that the Company
will be successful in negotiating a new agreement. The Company believes that the
terms of any new agreement with Sega, if one is entered into, will not impose
materially greater obligations on the Company than the Sega Agreement, although
there can be no assurance of that result.
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The Company has various license agreements with Nintendo (collectively, the
'Nintendo License Agreements') pursuant to which it has the nonexclusive right
to utilize the 'Nintendo' name and its proprietary information and technology in
order to develop and market Software titles for various 16-bit, portable and
64-bit Nintendo platforms in various territories throughout the world. The
Nintendo License Agreements for the different platforms expire at various times
between 1998 and 2000. The Company also develops and markets N64 Software in
Europe under an agreement with Nintendo.
The Company pays Nintendo a fixed amount per unit based, in part, on memory
capacity and chip configuration. Such amount includes the cost of manufacturing,
printing and packaging of the unit, as well as a royalty for use of Nintendo's
name, proprietary information and technology. The Company pays both Sony and
Sega a royalty fee. In addition, the Company pays the cost of manufacturing each
Software unit manufactured by Sony for the Company' this payment is made upon
manufacture of the units. The Company manufactures (through subcontractors)
substantially all of its Sega Software titles for worldwide distribution and
pays Sega a royalty for each Software unit so manufactured and sold; this
payment is made upon sale of the units by the Company. See '--Production, Sales
and Distribution.' All such fees and charges are subject to adjustment by Sony,
Nintendo and Sega at their discretion. The Company does not have the right to
manufacture any Software for the Sony PlayStation or Nintendo N64 platforms.
Sony, Nintendo and Sega have the right to review and evaluate, under
standards established by them, the content and playability of each Software
title and the right to inspect and evaluate all art work, packaging and
promotional materials used by the Company in connection with the Software. To
date, all of the Company's Software has been approved for publication by the
respective hardware manufacturers. The Company is responsible for resolving at
its own expense any warranty or repair claims brought with respect to the
Software. To date, the Company has not experienced any material warranty claims.
Under each of these license agreements, the Company bears the risk that the
information and technology licensed from Sony, Nintendo or Sega and incorporated
in the Software may infringe the rights of third parties and must indemnify
Sony, Nintendo or Sega with respect to, among other things, any claims for
copyright or trademark infringement brought against Sony, Nintendo or Sega and
arising from the development and distribution of the game programs incorporated
in the Software by the Company. To date, the Company has not received any
material claims of infringement; no assurance can be given that the Company will
not receive such claims in the future. See '--Patent, Trademark, Copyright and
Product Protection.'
Although the Company has historically been able to renew and/or negotiate
extensions of its Software license agreements with hardware developers, 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 Entertainment
Platforms. The inability to negotiate agreements with
developers of new Entertainment Platforms or the termination of all of the
Company's license agreements will, and the termination of any one of the
Company's license agreements could, have a material adverse effect on the
Company's financial position and results of operations.
INTELLECTUAL PROPERTY LICENSES
Certain of the Company's titles relate to properties licensed from third
parties, such as the NBA, and NFL and their respective players' associations.
Typically, the Company is obligated to make certain minimum guaranteed royalty
payments over the term of the license and to advance payment against such
guarantees, which payments can be recouped by the Company against certain
royalty payments otherwise due in respect of future sale. See 'Risk
Factors--Ability to Negotiate Future License Agreements.' License agreements
generally extend for a term of two to three years, are terminable in the event
of material breach (including failure to pay any amounts owing to the licensor
in a timely manner) by, or bankruptcy or insolvency of, the Company and certain
other events, and, in some cases, are renewable upon payment of certain minimum
guarantees or the attainment of specified sales levels during the term of the
license. Certain licenses are limited to specific territories or platforms. Each
license typically provides that the licensor retains the right to exploit the
licensed property for all other purposes, including the right to license the
property for use with other products and, in some cases, Software for other
interactive hardware platforms. See 'Risk Factors--Intellectual Property
Licenses and Proprietary Rights.'
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PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
Each of Sony, Nintendo and Sega incorporates a security device in the
Software and their respective hardware units in order to prevent unlicensed
software publishers from infringing Sony's, Nintendo's or Sega's proprietary
rights, as the case may be, by manufacturing games compatible with their
hardware. Under its various license agreements with Sony, Nintendo and Sega, the
Company is obligated to obtain or license any available trademark, copyright and
patent protection for the original work developed by the Company and embodied in
or used with the Software and to display the proper notice thereof, as well as
notice of the licensor's intellectual property rights, on all its Software.
Each Software title may embody a number of separately protected
intellectual properties: (i) the trademark for the brand featured in the
Software; (ii) the software copyright; (iii) the name and label trademarks, such
as 'LJN' and 'Acclaim'; and (iv) the copyright for Sony's, Nintendo's or Sega's
proprietary technical information.
The Company has registered the logo 'Acclaim' in the United States and in
certain foreign territories and owns the copyrights for many of its game
programs. 'Nintendo,' 'Nintendo Entertainment System,' 'Game Boy,' 'Super NES'
and 'N64' are trademarks of Nintendo of America, Inc.; 'Sega,' 'Sega Genesis,'
'Master System,' 'Sega MegaDrive,' 'Game Gear' and 'Saturn' are trademarks of
Sega and 'Sony,' 'Sony Computer Entertainment' and 'PlayStation' are trademarks
of Sony. The Company does not own the trademarks, copyrights or patents covering
the proprietary information and technology utilized in the NES, SNES, Game Boy,
N64, Genesis, Master System, MegaDrive, Game Gear, Saturn or PlayStation or, to
the extent licensed from third parties, the brands, concepts and game programs
featured in and comprising the Software. Accordingly, the Company must rely on
the trademarks, copyrights and patents of such licensors for protection of such
intellectual property from infringement. Under the Company's license agreements
with certain of the independent Software developers, the Company may bear the
risk of claims of infringement brought by third parties and arising from the
sale of Software and each of the Company and such developers has agreed to
indemnify the other for costs and damages incurred arising from such claims and
attributable to infringing proprietary information, if any, embodied in the
Software and provided by the indemnitor.
There can be no assurance that the information and technology licensed or
developed by the Company will not be independently developed or misappropriated
by third parties.
COMPETITION
Competition to develop and market Software for the interactive
entertainment industry is intense. The Company's competitors include
Entertainment Platform manufacturers, most notably Nintendo, Sega and Sony, and
a number of independent software publishers licensed by hardware manufacturers.
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
game products requiring substantial investments in research and development.
While the Company's competitors vary in size from very small companies with
limited resources to very large corporations with greater financial, marketing
and product development resources than those of the Company, the Company
believes that it is one of the largest independent publishers of Software for
dedicated platforms in the United States. The market for Software for Multimedia
PCs is fragmented and the Company believes that it has a small share of that
market. Competition is increasing in this market as increasing numbers of
companies begin to develop on-line interactive computer games and interactive
networks and other new Software technologies.
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 relies upon its
marketing and sales abilities, capital resources, proprietary technology and
product development capability, product quality, and the depth of its worldwide
retail distribution channels and management experience to compete in the
interactive entertainment industry. No assurance can be given that the Company
will compete successfully on any of these factors. See 'Risk
Factors--Competition.'
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COMIC BOOK PUBLISHING
Through the acquisition of Acclaim Comics in July 1994, the Company
commenced its development and publication of comic books. To date, substantially
all of Acclaim Comics' revenues from third parties have been derived from sales
of comic books on a nonreturnable basis through unaffiliated distributors to the
comic book direct market, which consists of comic book specialty stores and mail
order comic book dealers. The balance of Acclaim Comics' revenues have been
derived from royalties paid by Acclaim for the use of Acclaim Comics' characters
in Software. The Company has not derived significant revenues from the sale of
Acclaim Comics products in fiscal 1995, 1996, 1997, or in the six months ended
February 28, 1998.
Acclaim Comics has created a superhero comic book series featuring
characters created or licensed by it, which are published under its 'VALIANT'
imprint. In 1995, Acclaim Comics entered into an agreement with Diamond Comic
Distributors, Inc. for exclusive distribution of these books. In fiscal 1997,
Acclaim Comics continued to publish comic books under its VALIANT imprint and to
launch publications under its Acclaim Books imprint, which is distributed
primarily by Penguin Books. At present, Acclaim Comics publishes under the
Acclaim Books imprint (a) Acclaim Young Reader books, featuring characters
licensed from Walt Disney, the Fox Children's Television Network and Saban
Entertainment, which were released in June 1997, and (b) Classics Illustrated
titles in a study guide format. The Classics Illustrated titles, which are
licensed from First Classics Inc., were released in January 1997.
The Company has released and intends to continue to release titles for a
variety of platforms based on characters licensed or created by Acclaim Comics,
such as Shadowman, Bloodshot and Turok: Dinosaur Hunter (released for N64 in
fiscal 1997). The Company plans to release in fiscal 1998 additional titles
based on Turok: Dinosaur Hunter for N64, GameBoy and Multimedia PC platforms.
Acclaim Comics' future revenues, if any, will depend on the licensing and
merchandising of its characters in interactive entertainment and other media
such as motion picture or television, the use of its characters in the Company's
Software and coin-operated games, increased sales of comic books, the
introduction of new comic titles, and Acclaim Comics' entry into the mass market
for distribution and sales of its comic books outside the United States.
Due to continuing operating losses incurred by Acclaim Comics, the
Company's assessment of the then current state of the comic book industry and
the Company's then current projections for Acclaim Comics' operations, in fiscal
1997, the Company believed that there was an impairment to the carrying value of
the goodwill relating to Acclaim Comics. Accordingly, the Company recorded a
write-down of $25.2 million in the third quarter of fiscal 1997 to reduce the
carrying value of the goodwill associated with Acclaim Comics to its estimated
undiscounted future cash flows. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
DISTRIBUTION OF AFFILIATED LABELS
The Company, through Acclaim Distribution, Inc. ('ADI'), commenced the
marketing and distribution of Affiliated Labels in October 1994. The Company
currently distributes Software for, among others, Interplay Productions
('Interplay'). The Company receives a distribution fee from such publishers. In
fiscal 1997, the Company derived approximately 9% of gross revenues from sales
of Software manufactured by Interplay. The Company has not derived significant
revenues from sales of Software manufactured by Interplay in the six months
ended February 28, 1998. To date, the Company has not received significant
revenues from sales of any other Affiliated Labels. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
MOTION CAPTURE SERVICES
The technology embodied in the Company's motion capture services was
developed in part by its Advanced Technologies Group ('ATG'). ATG was initially
established in January 1991 to develop tools that would enable the Company's
independent Software developers to create state of the art Software with
enhanced game play and product quality.
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With the advancement of CD-ROM technology, ATG's activities expanded to
include motion capture (a three-dimensional animation creation process) and the
design of tools for use in programming Software for CD-ROM platforms or
cartridge-based platforms utilizing 32- or 64-bit processors. The Company has
constructed a motion capture studio and has utilized its motion capture
technology in titles such as NFL Quarterback Club, NHL Breakaway '98 and Turok:
Dinosaur Hunter.
The Company believes that its motion capture technology may have
applications in other entertainment media and has marketed its technology and
studio services. Warner Bros. used the Company's motion capture technology and
studio services to create certain of the special effects for Batman and Robin,
which was released in the summer of 1997 and for Batman Forever, which was
released in the summer of 1995. New Line Cinema utilized the Company's motion
capture technology to create certain home video animation special effects for
Mortal Kombat and Twentieth Century Fox utilized the Company's motion capture
technology to create certain special effects for the 1995 motion picture, Power
Rangers.
To date, the Company's revenues from the licensing of its motion capture
technology and studio services have not been significant. No assurance can be
given that the Company will be successful in marketing its technology and
selling its studio services and, even if it were successful, that revenues
generated therefrom will be significant.
EMPLOYEES
The Company currently employs approximately 694 persons worldwide,
approximately 634 of whom are employed on a full-time basis and approximately
434 of whom are employed in the United States. The Company believes that its
relationship with its employees is satisfactory.
PROPERTIES
The Company's corporate headquarters are located in a 70,000 square foot
office building, which was purchased by the Company in fiscal 1994. The Company
also owns an 8,000 square foot office building in Glen Cove, New York, and also
owns a 10,000 square foot office building in Oyster Bay, New York, which has
been leased to a third party tenant.
In addition, the Company's United States subsidiaries lease and occupy
approximately 10,000 square feet of office space in New York, and approximately
71,000 square feet of office space in the aggregate in Utah and Texas.
The Company's foreign subsidiaries lease office space in Japan, France,
Germany and the United Kingdom.
LEGAL PROCEEDINGS
The Company and certain of its current and former 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 executed a settlement
agreement, which has been approved by the court.
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
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reported on October 17, 1995 for the fiscal year ended August 31, 1995. The
parties have executed a settlement agreement, which has been approved by the
court.
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 (Index
No. 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 has been approved by the court. The settlement is
subject to the effectiveness of the settlement of the action entitled In re:
Acclaim Ent. Shareholder Litigation described above.
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').
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 which requires, among other things, that the
Company issue the Warrants. 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
issuance by the Company of the Warrants and the offer and sale by the Company of
the shares of Common Stock underlying the Warrants is covered by the
Registration Statement of which this Prospectus forms a part.
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 (94 Civ. 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.
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('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 settlement
agreement, which is subject to 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, 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 ordinary
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 (including
those covered by the Registration Statement of which this Prospectus forms a
part), 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning directors and executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION AND PRINCIPAL OCCUPATION
- --------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Gregory E. Fischbach......................... 56 Co-Chairman of the Board, President and Chief
Executive Officer
James Scoroposki............................. 50 Co-Chairman of the Board, Senior Executive Vice
President, Secretary and Treasurer
Kenneth L. Coleman........................... 55 Director
Bernard J. Fischbach......................... 52 Director
Robert H. Groman............................. 55 Director
James Scibelli............................... 48 Director
Michael Tannen............................... 58 Director
</TABLE>
Gregory E. Fischbach, a founder of the Company, has been Chief Executive
Officer of the Company since its formation, a member of the Board of Directors
since 1987 and Co-Chairman of the Board of Directors since March 1989. Mr.
Fischbach was also President of the Company from its formation until January
1990 and has been President of the Company since October 1996. From June 1986
until January 1987, he was President of RCA/Ariola International, responsible
for the management of its record operations outside the U.S. and in charge of
its 17 operating subsidiaries.
James Scoroposki, a founder of the Company, has been Senior Executive Vice
President since December 1993, a member of the Board of Directors since 1987 and
Co-Chairman of the Board since March 1989. Mr. Scoroposki has been Secretary and
Treasurer of the Company since its formation. Mr. Scoroposki was also Chief
Financial Officer of the Company from April 1988 to May 1990 and Executive Vice
President of the Company from formation to November 1993. Since December 1979,
he has also been the President and sole shareholder of Jaymar Marketing Inc.
('Jaymar'), a sales representation organization. See 'Certain Relationships and
Related Transactions.'
Kenneth L. Coleman has been a member of the Board of Directors since July
1997. Mr. Coleman is currently Senior Vice President, Customer and Professional
Services, for Silicon Graphics, Inc. in Mountain View, California. For more than
the past five years, Mr. Coleman has held several positions at Silicon Graphics,
Inc.
Bernard J. Fischbach has been a member of the Board of Directors since 1987
and has been engaged in the private practice of law in Los Angeles, California
since 1976 with Fischbach, Perlstein, Lieberman & Yanny and its predecessor
firms. See 'Certain Relationships and Related Transactions.'
Robert H. Groman has been a member of the Board of Directors since 1989 and
has, for more than the preceding five years, been a partner in the general
practice law firm of Groman, Ross & Tisman, P.C. (and its predecessor firms)
located in Long Island, New York. See 'Certain Relationships and Related
Transactions.'
James Scibelli has been a member of the Board of Directors since 1995 and
has, since March 1986, served as president of Roberts & Green, Inc., a New York
financial consulting firm offering a variety of financial and investment
consulting services.
Michael Tannen has been a member of the Board of Directors since 1989 and
is currently the President and Chief Executive Officer of Tannen Media Ventures,
a media investment company. Since 1988, Mr. Tannen was the President and Chief
Executive Officer of InterVision, Inc., a subsidiary of Millicom Incorporated, a
company involved in publishing, television production and home video
distribution and sales. From June 1992 to October 1996, Mr. Tannen served as
Chief Executive Officer of Kinnevik Media Ventures, Ltd., a media service
subsidiary of A.B. Kinnevik, a Swedish conglomerate engaged, among other things,
in international satellite television broadcasting, cable television networks
and cellular mobile telephone and paging operations. From June 1992 to October
1996, Mr. Tannen also served as Chief Executive Officer of Television Holdings
International, S.A., a wholly owned subsidiary of A.B. Kinnevik.
Messrs. Gregory E. and Bernard J. Fischbach are brothers. There is no
family relationship among any other directors or executive officers of the
Company.
38
<PAGE>
The Company has agreed with each of Messrs. G. Fischbach and Scoroposki
pursuant to the terms of their respective employment agreements and/or
arrangements with the Company to use its best efforts to cause him to be elected
as a director.
There is no other arrangement or understanding pursuant to which any person
has been elected as a director or executive officer of the Company.
Certain of the Company's directors and/or executive officers were named as
defendants in various actions. See 'Legal Proceedings' for a description of such
matters.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee (the 'Audit Committee'), the
members of which are Messrs. Coleman, Groman, Scibelli and Tannen. The Audit
Committee has such powers as may be assigned to it by the Board of Directors
from time to time. It is charged with recommending to the Board of Directors the
engagement or discharge of independent public accountants, reviewing the plan
and results of the auditing engagement with the officers of the Company, and
reviewing with the officers of the Company the scope and nature of the Company's
internal accounting controls.
The Board of Directors also has a Compensation and Stock Option Committee
(the 'Compensation Committee'), the members of which are Messrs. Coleman and
Scibelli. The Compensation Committee has such powers as may be assigned to it by
the Board of Directors from time to time. It is charged with determining
compensation packages for the Chief Executive Officer and the Senior Executive
Vice President of the Company, establishing salaries, bonuses and other
compensation for the Company's executive officers and with administering the
Company's 1988 Stock Option Plan (the 'Plan'), the 1995 Restricted Stock Plan
and the Employee Stock Purchase Plan, and recommending to the Board of Directors
changes to each of the plans.
The Board of Directors has an Executive Committee (the 'Executive
Committee'), the members of which are Messrs. Tannen, Groman, Scibelli, B.
Fischbach and Scoroposki. The Executive Committee has such powers as may be
assigned to it by the Board of Directors from time to time. It was charged with
meeting with the management of the Company and monitoring management's efforts
in respect of the Company's plans for fiscal 1997.
39
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes all plan and non-plan compensation awarded
to, earned by or paid to the Company's Chief Executive Officer and its four
other executive officers (together, the 'Named Executive Officers') who were
serving as executive officers during and at the end of the last completed fiscal
year ended August 31, 1997 for services rendered in all capacities to the
Company and its subsidiaries for each of the Company's last three fiscal years:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------ UNDERLYING COMPENSATION*
SALARY BONUS OPTION/SARS -------------
NAME AND PRINCIPAL POSITION YEAR ($) ($) # ($)
- --------------------------------------------------- ---- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Gregory E. Fischbach .............................. 1997 $775,000 0 0 $21,600
Co-Chairman and 1996 775,000 0 150,000 19,200
Chief Executive Officer 1995 775,000 $2,775,000 150,000 19,200
James Scoroposki .................................. 1997 500,000 0 0 5,500
Co-Chairman, Senior 1996 500,000 0 150,000 5,100
Executive Vice President, 1995 500,000 2,350,000 150,000 4,600
Treasurer and Secretary
J. Mark Hattendorf ................................ 1997 275,000 0 315,000(1)
1996 250,000 0 0
0
0
Robert Holmes(2) .................................. 1997 605,000 0 0 0
1996 605,000 0 0 6,000
1995 550,000 2,350,000 325,000 6,000
Anthony Williams(3) ............................... 1997 225,000 0 392,500(4) 2,300
1996 225,000 0 0 2,100
1995 225,000 45,000 140,000 2,000
</TABLE>
- ------------------
* Represents dollar value of insurance premiums paid by the Company during the
fiscal year with respect to term life insurance for the benefit of the Named
Executive Officers.
(1) On October 28, 1996, the Company granted to Mr. Hattendorf options to
purchase an aggregate of 165,000 shares of Common Stock at an exercise price
of $3.94 per share, which options are included in fiscal 1997 and were
granted in lieu of, and subject to the cancellation of, options previously
granted in fiscal 1996. Mr. Hattendorf resigned from his positions with the
Company effective as of November 7, 1997. Pursuant to an agreement effective
as of November 7, 1997 between the Company and Mr. Hattendorf, the Company
agreed to grant Mr. Hattendorf options to purchase 165,000 shares of common
stock exercisable at a price of $3.9735 per share, which options will vest
upon grant and remain exercisable for one year from the date of grant. All
other options granted to Mr. Hattendorf expired effective as of November 7,
1997.
(2) Mr. Holmes relinquished his position as President of the Company on October
3, 1996. See '--Employment Contracts, Termination of Employment and
Change-in-Control Arrangements.'
(3) Mr. Williams was an Executive Vice President of the Company from July 1996
to February 1998, at which time he resigned from his position with the
Company. See '--Employment Contracts, Termination of Employment and Change-
in-Control Arrangements.'
(4) On October 28, 1996, the Company granted to Mr. Williams options to purchase
an aggregate of 392,500 shares of common stock at an exercise price of $3.94
per share, which options are included in fiscal 1997 and were granted in
lieu of, and subject to the cancellation of, options previously granted.
No restricted stock awards, stock appreciation rights or long-term
incentive plan awards (all as defined in the proxy regulations promulgated by
the Securities and Exchange Commission) were awarded to, earned by, or paid to
the Named Executive Officers during any of the Company's last three fiscal
years.
40
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of stock
options to purchase the Company's common stock, par value $0.02 per share (the
'Common Stock'), pursuant to the Plan granted to the Named Executive Officers
during the fiscal year ended August 31, 1997:
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTION/ EXERCISE OF PRICE APPRECIATION
UNDERLYING SARS GRANTED TO BASE FOR OPTION TERM
OPTION/SARS EMPLOYEES IN PRICE EXPIRATION -------------------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------- ----------- --------------- ----------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Gregory E. Fischbach...... 0 NA NA NA NA NA
James Scoroposki.......... 0 NA NA NA NA NA
J. Mark Hattendorf(1)..... 165,000 1.2% $3.94 10/28/2006 $ 424,970 $ 1,061,770
150,000 1.1 4.88 2/26/2007 246,087 824,995
Robert Holmes(2).......... 0 NA NA NA NA NA
Anthony Williams(3)....... 392,500 2.8 3.94 10/28/2006 1,010,915 2,525,726
All Stockholders(4)....... -- -- -- -- 124,893,442 316,504,503
</TABLE>
- ------------------------
(1) Mr. Hattendorf resigned from his positions with the Company effective as of
November 7, 1997. Pursuant to an agreement effective as of November 7, 1997
between the Company and Mr. Hattendorf, the Company agreed to grant Mr.
Hattendorf options to purchase 165,000 shares of common stock exercisable at
a price of $3.9735 per share, which options vested upon grant and remain
exercisable for one year from the date of grant. All other options granted
to Mr. Hattendorf expired effective as of November 7, 1997.
(2) Mr. Holmes relinquished his position as President of the Company on October
3, 1996.
(3) Mr. Williams resigned from his position as Executive Vice President of the
Company effective February 2, 1998.
(4) These figures were calculated assuming that the price of the 49,648,000
shares of Common Stock issued and outstanding on August 31, 1997 increased
from $4.00 per share at compound rates of 5% and 10% per year for ten years.
The purpose of including this information is to indicate the potential
realizable value at the assumed annual rates of stock price appreciation for
the ten-year option term for all of the Company's stockholders.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information with respect to each exercise of
stock options during the fiscal year ended August 31, 1997 by the Named
Executive Officers and the value at August 31, 1997 of unexercised stock options
held by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS IN-THE-MONEY OPTION/SARS
ON EXERCISE REALIZED(1) AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
NAME # ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Gregory Fischbach.................... 0 $0 1,515,000/150,000 $ 1,414,689/0
James Scoroposki..................... 0 0 1,575,000/150,000 1,414,689/0
Robert Holmes(2)..................... 0 0 1,550,418/108,334 920,919/0
J. Mark Hattendorf(3)................ 0 0 0/315,000 0/10,313
Anthony Williams(4).................. 0 0 183,333/359,167 301,771/22,448
</TABLE>
- ------------------------
(1) Fair market value of securities underlying the options at fiscal year end
minus the exercise price of the options.
(2) Mr. Holmes relinquished his position as President of the Company on October
3, 1996.
(3) Mr. Hattendorf resigned from his positions with the Company effective as of
November 7, 1997. Pursuant to an agreement effective as of November 7, 1997
between the Company and Mr. Hattendorf, the Company agreed to grant Mr.
Hattendorf options to purchase 165,000 shares of common stock exercisable at
a price of $3.9735 per share, which options vested upon grant and remain
exercisable for one year from the date of grant. All other options granted
to Mr. Hattendorf expired effective as of November 7, 1997.
(4) Mr. Williams resigned from his position as Executive Vice President of the
Company effective February 2, 1998.
41
<PAGE>
DIRECTORS' COMPENSATION
Directors who are not also employees of the Company receive a $10,000
annual fee, reimbursement of expenses for attending meetings of the Board and
generally receive an annual grant of options to purchase 18,750 shares under the
Plan. In addition, options may be granted under the Plan to non-employee
directors who render services to the Company and who are not also members of the
Compensation Committee. See 'Certain Relationships and Related Transactions.' In
fiscal 1997, Mr. B. Fischbach received options under the Plan to purchase
200,000 shares of Common Stock at an exercise price of $4.875 per share in
consideration of services rendered to the Company.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has employment agreements with each of Gregory Fischbach and
James Scoroposki, providing for Mr. G. Fischbach's employment as President and
Chief Executive Officer and for Mr. Scoroposki's employment as Senior Executive
Vice President, Secretary and Treasurer, for terms expiring in August 2000.
The agreements with Messrs. G. Fischbach and Scoroposki provide for annual
base salaries of $775,000 and $500,000, respectively, for the term of the
agreements. In addition, each of the agreements provides for annual bonus
payments to Mr. Fischbach in an amount equal to 3.25% of the Company's net
pre-tax profits for each fiscal year and to Mr. Scoroposki in an amount equal to
2.75% of the Company's net pre-tax profits for each fiscal year. The agreement
with Mr. Scoroposki specifically allows him to devote that amount of his
business time to the business of certain sales representative organizations
controlled by him as does not interfere with the services to be rendered by him
to the Company. The sales representative organizations under his control have
officers and employees who oversee the operations of such organizations. Mr.
Scoroposki attends board meetings of such companies but has no active
involvement in their day-to-day operations. Under the agreements, the Company
provides each of Messrs. G. Fischbach and Scoroposki with $2 million term life
insurance and disability insurance.
If the employment agreement of either of Messrs. G. Fischbach or Scoroposki
is terminated within one year after occurrence of a change in control of the
Company (other than a termination for cause) or if either of Messrs. G.
Fischbach or Scoroposki terminates his employment agreement upon the occurrence
of both a change in control of the Company and a change in the circumstances of
his employment, he would be entitled to receive severance benefits in an amount
equal to the total of (i) three years' base salary and (ii) three times the
largest bonus paid to him for the three fiscal years immediately preceding any
such termination of his employment.
The Company had an agreement in principle with Mr. Holmes for his
employment as President and Chief Operating Officer, which provided for an
annual base salary of $605,000. The term of the agreement was to expire on
August 31, 1999. The agreement guaranteed Mr. Holmes a 10% annual increase in
his base salary for the term of the agreement. In addition, the agreement
provided for annual bonus payments equal to 2.75% of the Company's net pre-tax
profits for each fiscal year. The Company provided Mr. Holmes with a $2 million
term life insurance policy and disability insurance. Under the agreement with
Mr. Holmes, if his employment was terminated within one year after the
occurrence of a change in control of the Company (other than a termination for
cause) or if he terminated his agreement upon the occurrence of both a change in
control of the Company and a change in the circumstances of his employment, he
would be entitled to receive severance benefits in an amount equal to the total
of (i) three years' base salary and (ii) three times the largest bonus paid to
him for the three fiscal years immediately preceding any such termination of his
employment. In October 1996, Mr. Holmes relinquished his roles as President and
Chief Operating Officer, but remained an employee of the Company under an
agreement in principle as a special advisor to the Board reporting to Mr. G.
Fischbach. On February 3, 1997, Mr. Holmes resigned his position as a director
of the Company and of its subsidiaries. The Company and Mr. Holmes have entered
into a severance and settlement agreement.
The Company also had an agreement in principle with Mr. Williams for his
employment as Executive Vice President and Chief Financial and Accounting
Officer, which provided for an annual base salary of $225,000. In July 1996, Mr.
Williams relinquished his roles as Chief Financial and Accounting Officer, but
retained his role as Executive Vice President under the terms of an agreement in
principle. The agreement was to expire on August 31, 1999. Mr. Williams was also
entitled to a bonus in an amount to be determined at the discretion of the Board
of Directors if the Company achieved certain financial performance objectives.
The Company provided
42
<PAGE>
Mr. Williams with a $1 million term life insurance policy and disability
insurance. If Mr. Williams' employment was terminated within one year after the
occurrence of a change in control of the Company (other than a termination for
cause) or if he terminated his agreement upon the occurrence of both a change in
control of the Company and a change in the circumstances of his employment, he
was entitled to receive severance benefits in an amount equal to the total of
(i) one year's base salary and (ii) two times the bonus paid to him for the
fiscal year immediately preceding any termination of his employment. The Company
and Mr. Williams have entered into a severance and settlement agreement.
Each of the agreements with Messrs. G. Fischbach, and Scoroposki provides
that, in the event of a change in control of the Company, all options
theretofore granted to each of them shall vest and become immediately
exercisable and the Company has agreed to indemnify each of them against any
excise taxes imposed on such executive by section 4999(a) of the Internal
Revenue Code of 1986, as amended (including all applicable taxes on such
indemnification payment).
Each of the agreements with Messrs. G. Fischbach and Scoroposki prohibits
disclosure of proprietary and confidential information regarding the Company and
its business to anyone outside the Company both during and subsequent to
employment. In addition, the employees agreed, for the duration of their
employment with the Company and for one year thereafter, not to engage in any
competitive business activity, nor to persuade or attempt to persuade any
customer, software developer, licensor, employee or other party with whom the
Company has a business relationship to sever its ties with the Company or reduce
the extent of its relationship with the Company.
In addition, at the end of their respective terms, if the agreements with
each of Messrs. G. Fischbach and Scoroposki are not renewed on substantially
similar terms, the employee would be entitled to receive severance benefits in
an amount equal to the total cash compensation paid to him during the 12-month
period immediately preceding such termination of his employment.
The Company had an employment agreement with Mr. Hattendorf for his
employment as Chief Financial Officer of the Company, which provided for an
annual base salary of $275,000. Mr. Hattendorf resigned from his positions with
the Company effective as of November 7, 1997. Pursuant to an agreement effective
as of November 7, 1997 between the Company and Mr. Hattendorf, the Company
agreed to grant Mr. Hattendorf options to purchase 165,000 shares of Common
Stock exercisable at a price of $3.9735 per share, which options vested upon
grant and remain exercisable for a period of one year from the date of grant.
All other options previously granted to Mr. Hattendorf expired immediately upon
the termination of his employment with the Company.
BENEFIT PLANS
The Company does not have a pension plan. For information with respect to
options granted to executive officers of the Company under the Plan, see page
41.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Coleman and Scibelli,
who are intended to be 'non-employee directors' within the meaning of Rule
16b-3(b)(3)(i) promulgated under the Exchange Act and 'outside directors' within
the contemplation of section 162(m)(4)(C)(i) of the Internal Revenue Code of
1986, as amended.
43
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 1, 1998
(except as otherwise indicated) with respect to the number of shares of Common
Stock beneficially owned by each person who is known to the Company to
beneficially own more than 5% of the Common Stock, the number of shares of
Common Stock beneficially owned by each director of the Company and each
executive officer of the Company, and the number of shares of Common Stock
beneficially owned by all executive officers and directors of the Company as a
group. Except as otherwise indicated, each such stockholder has sole voting and
investment power with respect to the shares beneficially owned by such
stockholder.
<TABLE>
<CAPTION>
PERCENT OF
COMMON
AMOUNT AND NATURE OF STOCK
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) OUTSTANDING
- ----------------------------------------------------------------------------- ----------------------- -----------
<S> <C> <C>
Gregory E. Fischbach(2) ..................................................... 7,398,151 13.7%
One Acclaim Plaza
Glen Cove, New York 11542
James Scoroposki(3) ......................................................... 6,852,451 12.7
One Acclaim Plaza
Glen Cove, NY 11542
Franklin Resources, Inc.(4) ................................................. 7,729,200 15.0
777 Mariners Island Boulevard
San Mateo, CA 94404
The Capital Group Companies, Inc.(5) ........................................ 4,789,100 9.3
333 South Hope Street
Los Angeles, CA 90071
Bernard J. Fischbach(6) ..................................................... 442,942 *
1925 Century Park East
Suite 1260
Los Angeles, CA 90067
Robert H. Groman(7) ......................................................... 121,250 *
196 Peachtree Lane
Roslyn Heights, NY 11577
Michael Tannen(8) ........................................................... 118,625 *
90 Riverside Drive, #5B
New York, NY 10024
James Scibelli(9) ........................................................... 73,250 *
2936 Bay Drive
Merrick, NY 11566
Kenneth L. Coleman .......................................................... 16,250 *
2011 North Shoreline Blvd.
Mountain View, CA 94043
All executive officers and directors as a group
(7 persons)(10) ........................................................... 14,674,091 25.8%
</TABLE>
- ------------------
* Less than 1% of class.
(1) Includes shares issuable upon exercise of warrants and options which are
exercisable within the next 60 days.
(2) Includes 2,477,500 shares issuable upon exercise of warrants and options,
36,276 shares held as co-trustee of trusts for the benefit of Mr.
Scoroposki's children and 156,276 shares settled by Mr. Gregory Fischbach
in trust for the benefit of his children. Each of Mr. G. Fischbach and Mr.
Scoroposki has agreed to vote, or cause to be voted, all shares of Common
Stock beneficially owned by him in the manner in which all shares of Common
Stock beneficially owned by the other are voted on all matters presented to
a vote of stockholders at any annual or special meeting of the Company's
stockholders.
(3) Includes 2,477,500 shares issuable upon exercise of warrants and options,
156,276 shares held as co-trustee of trusts for the benefit of Mr. G.
Fischbach's children and 36,276 shares settled by Mr. Scoroposki in trust
(Footnotes continued on next page)
44
<PAGE>
(Footnotes continued from previous page)
for the benefit of his children. Each of Mr. Scoroposki and Mr. G.
Fischbach has agreed to vote, or cause to be voted, all shares of Common
Stock beneficially owned by him in the manner in which all shares of Common
Stock beneficially owned by the other are voted on all matters presented to
a vote of stockholders at any annual or special meeting of the Company's
stockholders.
(4) Represents shares issuable upon conversion of Notes. Information in respect
of the beneficial ownership of Franklin Resources, Inc. has been derived
from its Schedule 13-G, dated November 10, 1997, filed on its behalf and on
behalf of Charles B. Johnson, Rupert H. Johnson, Jr. and Franklin Advisers,
Inc. with the Commission.
(5) Information in respect of the beneficial ownership of The Capital Group
Companies, Inc. has been derived from its Schedule 13G, dated May 8, 1998,
as of April 30, 1998, filed on its behalf and on behalf of Capital Guardian
Trust Company ('CGTC') with the Commission. The Company has been advised
that (a) CGTC is a bank as defined in Section 3(a) of the Securities Act
and a wholly-owned subsidiary of The Capital Group Companies, Inc., (b) as
of April 30, 1998, CGTC exercised investment discretion with respect to
4,039,100 shares of Common Stock as a result of its serving as the
investment manager of various institutional accounts, and (c) CGTC has the
power to direct the vote of 3,608,100 shares of Common Stock.
(6) Represents 266,666 shares issuable upon exercise of options and 156,276
shares held as co-trustee of trusts for the benefit of Mr. G. Fischbach's
children.
(7) Includes 118,750 shares issuable upon exercise of options.
(8) Includes 113,625 shares issuable upon exercise of options.
(9) Includes 56,250 shares issuable upon exercise of options.
(10) Includes 5,516,541 shares issuable upon exercise of warrants and options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. James Scoroposki, an officer, director and principal stockholder of the
Company, is the sole stockholder, a director and president of a sales
representative organization selling interactive entertainment software and a 50%
stockholder, a director and executive vice president of another sales
representative organization selling interactive entertainment software. Such
sales representative organizations act as sales representatives for the Company,
receive commissions from the Company with respect to interactive entertainment
software sold by them and will continue to do so during the fiscal year ending
August 31, 1998. For the fiscal year ended August 31, 1997, the commissions paid
by the Company to these sales representative organizations amounted to
approximately $535,000. The agreements between the Company and these sales
representatives are on terms that are at least as favorable to the Company as
could have been obtained from unaffiliated third parties. In addition to
representing the Company's titles, these companies also represent competitors of
the Company who distribute interactive entertainment software, and derive most
of their revenue from representing companies other than the Company.
Mr. Scoroposki is also the sole shareholder of The Crescent Club, which
provides restaurant services and related entertainment and meeting facilities to
the Company and will continue to do so for the fiscal year ending August 31,
1998. For the fiscal year ended August 31, 1997, payments made by the Company to
The Crescent Club amounted to approximately $66,000.
The firm of Fischbach, Perlstein, Liebermann & Yanny, of which Bernard J.
Fischbach, a director of the Company, is a partner, performs legal services for
the Company and will continue to do so for the fiscal year ending August 31,
1998. Payments made by the Company for said services amounted to approximately
$885,000 for the fiscal year ended August 31, 1997. In addition, in fiscal 1997,
Mr. Fischbach received options under the Plan to purchase 200,000 shares of
Common Stock at an exercise price of $4.875 per share in consideration of
services rendered to the Company.
The firm of Groman, Ross & Tisman, P.C. of which Robert H. Groman, a
director of the Company, is a partner, also performs legal services for the
Company and will continue to do so for the fiscal year ending August 31, 1998.
Payments made by the Company for said services amounted to approximately $38,000
for the fiscal year ended August 31, 1997.
45
<PAGE>
DESCRIPTION OF SECURITIES
The following is a brief summary of certain provisions of the capital stock
of the Company and the Warrants. Such summary does not purport to be complete
and is qualified by reference to (i) the actual text of the Company's
Certificate of Incorporation and by-laws, each as heretofore amended, a copy of
each of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part and (ii) the actual text of the warrant
agreement covering the A Warrants (the 'A Warrant Agreement') and the warrant
agreement covering the B Warrants (the 'B Warrant Agreement'; together with the
A Warrant Agreement, the 'Warrant Agreements'), each between the Company and
American Securities Transfer & Trust, Inc., as warrant agent (the 'Warrant
Agent'), a copy of the form of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
WARRANTS
Each A Warrant and B Warrant will entitle the registered holder thereof to
purchase one share of Common Stock (subject to adjustment as described below)
(i) for a period commencing on the Effective Date and ending February 18, 2001,
at an initial exercise price of $3.50 per share of Common Stock in the case of A
Warrants and (ii) for a period commencing on the Effective Date and ending on
February 18, 1999, at an initial price of $12.00 per share of Common Stock in
the case of B Warrants. A holder of A Warrants or B Warrants may exercise such
Warrants by surrendering the certificate evidencing such Warrants to the Warrant
Agent, together with the Purchase Form on the reverse of such certificate
properly completed and executed, together with payment of the applicable
exercise price. No fractional shares will be issued upon exercise of the
Warrants.
The Warrants will be in registered form and may be presented to the Warrant
Agent for transfer, exchange or exercise at any time prior to their respective
expiration dates, at which time the Warrants become wholly void. The Company
does not intend to list the Warrants for trading on any exchange and it is not
expected that a market will develop for the Warrants.
For a holder of a warrant to exercise either the A Warrants or B Warrants,
there must be a current registration statement on file with the Commission.
While it is the Company's intention to file post-effective amendments when
necessary, there is no assurance that the Registration Statement of which this
Prospectus is a part will remain effective. If the Registration Statement is not
kept current for any reason, the Warrants will not be exercisable, and holders
thereof may be deprived of value. Moreover, if the shares of Common Stock
underlying the Warrants are not registered or qualified for sale in the state in
which a holder of Warrants resides, such holder might not be permitted to
exercise the Warrants. If the Company is unable to qualify the Common Stock
underlying such Warrants for sale in certain states, holders of the Warrants in
those states will have no choice but to sell such Warrants or allow them to
expire.
The Company has authorized and reserved for issuance the Warrant Shares,
which are sufficient to provide for the exercise of both the A Warrants and B
Warrants. When paid for and issued pursuant to the Warrant Agreements, each
Warrant Share will be fully paid and nonassessable.
Holders of A Warrants and B Warrants will not have any voting or other
rights as stockholders of the Company unless and until such warrants are
exercised and Warrant Shares issued pursuant thereto.
The respective exercise prices of the A Warrants and B Warrants are subject
to adjustment in the event of a stock dividend, recapitalization or
reclassification of Common Stock.
In the case of any capital reorganization, consolidation or merger of the
Company (other than in the cases referred to in the previous paragraph and other
than the consolidation or merger of the Company with or into another corporation
in which the Company is the continuing corporation), or the sale of all or
substantially all of the Common Stock or property, all outstanding A Warrants or
B Warrants which have not been exercised prior to or concurrently with the
closing of any such transaction will terminate immediately upon the closing.
Additionally, in the event of a sale or conveyance or other transfer of all or
substantially all the assets of the Company as part of a plan of liquidation of
the Company, all rights to exercise any A Warrant or B Warrant shall terminate
30 days after the Company gives written notice to each holder of
Warrants of such sale or conveyance.
46
<PAGE>
The Spangenberg Warrants were issued as of September 1997 by the Company to
Jeff Spangenberg, an employee of the Company. The Spangenberg Warrants are
exercisable from time to time commencing on September 19, 1998 and expiring
September 18, 2007 at an initial exercise price of $4.0625 per share (the fair
market value of a share of Common Stock as of the date of issuance of the
Spangenberg Warrants). Spangenberg may exercise the Spangenberg Warrants by
delivering to the Company written notice of exercise, specifying the price for
the warrants being exercised and by making payment therefor payable to the
Company.
COMMON STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock, of
which, as of the date hereof, 51,427,283 shares are issued and outstanding. As
of February 28, 1998, options to purchase an aggregate of approximately 15.6
million shares of Common Stock were outstanding under the Plan (of which options
to purchase approximately 6.4 million shares were exercisable as of such date),
123,540 shares have been issued under the 1995 Restricted Stock Plan, 290,007
shares are reserved for issuance upon exercise of options issued other than
under the Plan, 200,000 shares are reserved for issuance upon exercise of
warrants granted to BNY and 3,000,000 shares are reserved for issuance in
connection with the Company's Employee Stock Purchase Plan. The Company has also
reserved an aggregate of 2,625,000 additional shares of Common Stock for
issuance upon exercise of warrants granted to Messrs. G. Fischbach and
Scoroposki in connection with their execution of certain security agreements.
The outstanding Common Stock is fully paid and nonassessable.
The holders of Common Stock are entitled to one vote per share for the
election of directors and with respect to all other matters submitted to a vote
of stockholders. Shares of Common Stock do not have cumulative voting rights,
which means that the holders of more than 50% of such shares voting for the
election of directors can elect 100% of the directors if they choose to do so
and, in such event, the holders of the remaining shares so voting will not be
able to elect any directors.
The holders of Common Stock are entitled to receive such dividends as may
lawfully be declared from time to time by the Board of Directors at its
discretion, subject to the priorities accorded any class of preferred stock
which may be issued, and to the restrictions under the Indenture (described
above). The holders of Common Stock have no preemptive or conversion rights, nor
are there any redemption or sinking fund rights with respect to the Common
Stock.
Upon any liquidation, dissolution, or winding up of the Company, the
holders of Common Stock are entitled to receive all assets remaining after the
payment of corporate debts and liabilities, including the Notes and any
liquidation preferences of, and unpaid dividends on, any class of preferred
stock which then may be outstanding.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock, par
value $0.01 per share, none of which are currently outstanding. The Board of
Directors is empowered, without further action by the stockholders, to issue
from time to time one or more series of preferred stock (up to an aggregate of
1,000,000 shares), to fix the dividend rights, dividend rate, conversion rights,
rights and terms of redemption (including sinking fund provisions), redemption
prices, liquidation preferences, voting rights and other terms of any wholly
unissued series of preferred stock and to determine the designation of and
(subject to the aggregate limit of 1,000,000 shares) the number of shares
constituting any such unissued series. Such blanket power to issue preferred
stock could be viewed as an anti-takeover device, and might have an adverse
effect on the public stockholders. The Company has no plans to issue any
preferred stock. See 'Risk Factors--Anti Takeover Provisions.'
Series A Preferred Stock--The Company's Board of Directors has adopted
resolutions designating 200,000 shares of Series A Preferred Stock, no par value
per share, stated value $10 per share, none of which is currently issued and
outstanding.
The Board of Directors has not designated any other series of preferred
stock, other than the Series A Preferred Stock. Pursuant to the Indenture, the
Company has agreed not to issue any Preferred Stock other than in compliance
with the restrictions described above.
47
<PAGE>
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law generally restricts a
corporation from entering into certain business combinations with an interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) or its affiliates for a period of
three years after the date of the transactions in which the person became an
interested stockholder unless (i) the transaction is approved by the board of
directors of the corporation prior to such business combination, (ii) the
interested stockholder acquires 85% of the corporation's voting stock in the
same transaction in which it exceeds 15%, or (iii) the business combination is
approved by the board of directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. The Delaware
General Corporation Law provides that a corporation may elect not to be governed
by Section 203. At present, the Company does not intend to make such an
election. Section 203 may render more difficult a change in control of the
Company or the removal of incumbent management.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer, Inc., Denver, Colorado, is Transfer Agent and
Registrar for the Common Stock and the Warrants.
DETERMINATION OF WARRANTS EXERCISE PRICE
The $3.50 per share and $12.00 per share exercise prices of the A Warrants
and B Warrants, respectively, were determined by arms-length negotiations
between the Company and counsel for the plaintiffs in the Superior Court and
Federal Court actions. The $3.50 per share initial exercise price of the A
Warrants was based on the average market price of the Common Stock for the 20
days prior to September 12, 1997 (the date of execution of the settlement
agreement), minus a $.50 discount to such price. The $12.00 per share initial
exercise price of the B Warrants was based, in part, on the exercise price of
the warrants in exchange for which they are being issued.
The $4.0625 exercise price of the Spangenberg Warrants was based on the
fair market value of a share of Common Stock as of the date of issuance of the
Spangenberg Warrants.
PLAN OF DISTRIBUTION
The Warrants will be issued by the Company in connection with the
settlement of the Superior Court and Federal Court actions. The A Warrants will
be issued to current and former shareholders of the Company who are plaintiffs
in the Superior Court and Federal Court actions pursuant to a warrant issuance
notice. The B Warrants will be issued to holders of certain existing or expired
warrants to purchase shares of Common Stock (which warrants shall have been in
effect as of August 31, 1995) in exchange for such warrants. No sales or
distributions other than as disclosed herein will be effected until after this
Prospectus shall have been appropriately amended or supplemented, if required,
to set forth the terms thereof. Normal commission expenses and brokerage fees,
if any, will be paid individually by the holder of Warrants. The Warrants may be
sold directly or through brokers or dealers. The method by which the Warrants
may be sold include (a) a block trade (which may involve crosses) in which the
broker or dealer so engaged will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) exchange
distributions and/or secondary distributions in accordance with the rules of The
Nasdaq Stock Market; and (d) privately negotiated transactions. The holders of
Warrants may from time to time deliver all or a portion of the Warrants held by
them to cover a short sale or sales or upon exercise of a put equivalent
position. In addition, any Warrants that qualify for sale under Rule 144 or Rule
144A under the Securities Act may be sold under any such rules rather than
pursuant to this Prospectus.
The Company has agreed to indemnify the holders of Warrants, their
respective officers, directors, partners, employees, agents, counsel,
Plaintiffs' Settlement Counsel (as such term is defined in the Stipulation) and
each person, if any, who controls each holder of Warrants within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and
Spangenberg against certain liabilities, including liabilities under the
Securities Act.
48
<PAGE>
The holders of Warrants and Spangenberg have agreed to indemnify the
Company, each director and officer of the Company, and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, against certain liabilities, including
liabilities under the Securities Act.
All shares of Common Stock covered by this Prospectus will be issued by the
Company from time to time upon exercise of the Warrants and the Spangenberg
Warrants, as applicable.
LEGAL MATTERS
Certain legal matters in respect of the securities offered hereby will be
passed upon for the Company by Rosenman & Colin LLP, 575 Madison Avenue, New
York, New York 10022.
EXPERTS
The consolidated financial statements and schedule of Acclaim
Entertainment, Inc. and its subsidiaries as of and for the years ended August
31, 1997 and 1996 have been included in this Prospectus and in the registration
statement of which it forms a part in reliance upon the report of KPMG Peat
Marwick LLP ('KPMG'), independent certified public accountants, appearing
elsewhere in this Prospectus, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG contains an explanatory paragraph
that states that the Company's significant losses from operations in fiscal 1997
and 1996 and its working capital and stockholders' deficiencies at August 31,
1997 raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty. The report also indicates that the
auditors were unable to review the fiscal 1996 selected quarterly data in
accordance with professional standards. The consolidated financial statements
for the year ended August 31, 1995 included in this Prospectus have been audited
by Grant Thornton LLP ('GT'), independent certified public accountants, as
stated in their report appearing elsewhere in this Prospectus. The report of GT
for fiscal 1995 includes an emphasis paragraph as to uncertainty relating to the
eventual outcome of certain class action lawsuits.
49
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On July 24, 1996, at the recommendation of the Audit Committee, the Board
of Directors of the Company adopted a resolution (i) not to retain GT as the
Company's independent auditors for the fiscal year ending August 31, 1996 and
(ii) to engage KPMG as the Company's independent auditors for the fiscal year
ending August 31, 1996. GT was so advised on July 25, 1996.
The reports of GT on the Company's consolidated financial statements as of
and for the two years ended August 31, 1995 and 1994 did not contain an adverse
opinion or a disclaimer of opinion nor were they qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report of GT
on the Company's financial statements for the fiscal year ended August 31, 1995
contains a modification as to uncertainty relating to the eventual outcome of
certain class action lawsuits in which the Company and certain of its officers
and directors have been named as defendants. See Note 20 of Notes to
Consolidated Financial Statements.
During the Company's two most recent fiscal years ended August 31, 1995 and
in the interim period from September 1, 1995 through July 24, 1996 there were no
disagreements with GT on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of GT, would have caused them
to make reference thereto in their report(s) on the Company's financial
statements for such fiscal year(s) or for such interim period, except:
(a) A matter, which was resolved to GT's satisfaction, in respect of
the timing of the recognition of certain revenues from nonrefundable,
recoupable exclusivity fees, which had been included in revenues for the
fourth quarter of fiscal 1995 in the October 1995 announcement by the
Company of its financial results for fiscal 1995. The Audit Committee
and/or senior management of the Company, on the one hand, and GT, on the
other hand, had several discussions in respect of such matter. The matter
was resolved by the Company revising such announced financial results to
exclude such revenues from its financial results for fiscal 1995.
(b) A matter, which was resolved to GT's satisfaction, in respect of
the balance sheet presentation of a $19 million loan from Midland Bank plc.
As of August 31, 1995, the Company did not meet a financial ratio covenant
in the loan agreement relating to such loan. The Company's senior
management and GT discussed this matter, which was resolved by the Company
reclassifying the $19 million loan from long term debt to current
liabilities.
In addition, GT proposed several audit adjustments that were not recorded
by the Company because they were considered by the Company and GT to be
immaterial to the Company's consolidated financial statements for fiscal 1995
taken as a whole.
During the Company's two most recent fiscal years ended August 31, 1995 and
the interim period from September 1, 1995 through July 24, 1996, there were no
'reportable events' as defined in Item 304(a)(1)(v) of Regulation S-K
('Regulation S-K') promulgated under the Securities Exchange Act of 1934, except
as follows:
By letter dated April 15, 1996, GT advised the Company that they had
noted certain internal control structure matters that related to
significant deficiencies in the design or operation of the Company's
internal control structure, relating to the quality and depth of financial
management, analysis of significant estimates, lack of internal audit
function and accounting for capitalized software costs, that, in their
judgment, could adversely affect the Company's ability to record, process,
summarize and report financial data consistent with the assertions of
management in the Company's financial statements.
In May 1996, KPMG was retained to conduct a review of certain internal
controls to identify and assist the Company to implement any additional
necessary steps to strengthen its internal controls.
A member of the Audit Committee and/or senior management has discussed the
subject matter of each item described above with GT, and the Company has
authorized GT to respond fully to all inquiries of KPMG concerning the subject
matter thereof.
50
<PAGE>
In response to the Company's draft Form 8-K filing presented to GT, the
Company received the following letter dated July 31, 1996 from GT which was
filed as an Exhibit to the Company's Form 8-K filed with the Securities and
Exchange Commission:
Securities and Exchange Commission
Washington, D.C. 20549
Re: Acclaim Entertainment, Inc.
File No. 0-16986
Dear Sir or Madam:
We have read Item 4 of the Form 8-K of Acclaim Entertaiment, Inc. We
believe it should be supplemented and, in part, amended to reflect the
following:
With regard to the interim period from September 1, 1995 through
July 24, 1996, we were not engaged to perform timely reviews of the
fiscal 1996 quarterly consolidated financial statements of the
Registrant. On July 17, 1996, however, we were engaged to perform a
review of the quarterly consolidated financial statements of the
Registrant for each of the first three quarters of the fiscal year
ending August 31, 1996 in respect of the Registrant's filing on Form S-3
on behalf of certain selling shareholders. On July 25, 1996, the
Registrant orally advised us of our termination as their independent
accountants. In connection with such review, certain matters, which were
still pending at the time of our termination, may have resulted in
additional disagreements and/or reportable events had we completed our
procedures. These matters included the following:
o the recognition and/or disclosure of a settlement offer
pertaining to the Lazer-Tron class action litigations.
o the recoverability asessment pertaining to excess of costs over
net assets acquired attributable to Acclaim Comics, Inc.
o the findings of the 'internal controls audit' being conducted by
KPMG Peat Marwick.
With regard to reportable events, we had issued our Internal Control
Structure/Reportable Conditions letter dated April 15, 1996 (an initial
draft of which was provided to the Registrant on January 25, 1996)
summarizing reportable conditions and recommendations which specifically
addressed the Registrant's quality and depth of financial management,
analysis of significant estimates, lack of internal audit function and
accounting for capitalized software costs. Further, the reportable
conditions discussed therein are those that we had noted as of December 8,
1995 in conjunction with our audit of the Registrant's consolidated
financial statements as of and for the year ended August 31, 1995; we have
not updated our procedures regarding such matters since that date. We have
not discussed with the Audit Committee the subject matter of our Internal
Control Structure/Reportable Conditions letter, despite our requests to the
Registrant to meet with the Audit Committee for that purpose.
With regard to the subject matter of the disagreements set forth in
Item 4 which are contained in more detail in our Report to the Audit
Committee dated April 15, 1996 (an initial draft of which was provided to
the Registrant on January 18, 1996), please be advised that we had a
telephonic discussion on December 4, 1995 with the Audit Committee
addressing only disagreements that had occurred through that date.
In connection with the Registrant's filing on Form S-3 referred to
above, we requested the Proxy Statement for the upcoming Annual
Shareholders' meeting which would be incorporated by reference in the Form
S-3, thereby forming a part of the registration statement. Professional
standards require that we read such information. We were informed by the
Registrant as recently as July 23, 1996 that the Proxy Statement was not
available for our review. On July 24, 1996, through EDGAR, we independently
obtained a copy of such requested Proxy Statement and learned that the
Registrant had filed such Proxy Statement with the Securities and Exchange
Commission on July 18, 1996. We viewed this as a restriction placed by the
Registrant on information requested by us during the conduct of our
procedures.
With regard to the Registrant's retention of KPMG Peat Marwick to
conduct an 'internal controls audit,' we did not discuss this matter with
the Registrant's Audit Committee and/or senior management.
51
<PAGE>
However, as described in our Report to the Audit Committee dated April 15,
1996 (an initial draft of which was provided to the Registrant on January
18, 1996), we were informed by management that the Registrant's legal
counsel retained KPMG Peat Marwick to assist in responding to the
Securities and Exchange Commission's Division of Enforcement. Further, we
have no knowledge as to the specific matters on which KPMG Peat Marwick was
consulted.
* * * * *
With regard to the following statements made by the Registrant in Item
4 of Form 8-K dated July 24, 1996, we have no basis for agreeing or
disagreeing with:
o the first sentence of Item 4 with respect to the July 24, 1996
Board of Directors resolution.
o the last sentence to the first paragraph of Item 4 with respect
to the Registrant's press release and any information contained
therein.
o the last sentence to the second subparagraph (b) of the third
paragraph of Item 4 with respect to the matter referred to in
such paragraph being resolved with the bank.
o the sixth paragraph of Item 4 with respect to the May 1996
retention of KPMG to conduct an 'internal controls audit.'
Very truly yours,
GRANT THORNTON LLP
In response to GT's letter of July 31, 1996, the Company notes the
following:
(a) Notwithstanding the fact that GT was not retained to perform
formal reviews of the Company's financial statements for the first, second
and third quarters of fiscal 1996, GT provided the Company with extensive
advice and consultation regarding the appropriate presentation of such
quarterly financial statements and also advised on the accounting theories
and methodologies applied; and
(b) In connection with GT's review of the Company's quarterly
financial statements for each of the first three quarters of fiscal 1996 in
respect of the Company's Registration Statement on Form S-3, GT advised the
Company on Tuesday, July 23, 1996, that it had completed its review
procedures, that there were no outstanding issues for further discussion
and that GT would release its consent in connection with the Form S-3. In
addition, on Tuesday, July 23, 1996, the Company delivered to GT its
management representation letter, which generally signifies the completion
of the review procedure. The Company delivered to GT a copy of the Proxy
Statement relating to its annual meeting of stockholders to be held on
August 7, 1996. On July 24, 1996, the Company was advised by GT that, upon
review of the Proxy Statement, GT noted that auditors had not yet been
retained for fiscal 1996 and accordingly, GT would not release its consent
unless they were appointed as the Company's auditors for fiscal 1996. GT
subsequently raised the matters discussed in GT's letter, which are
disputed by the Company as indicated above.
52
<PAGE>
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors............................................ F-2
Report of Independent Certified Public Accountants......................... F-3
Consolidated Balance Sheets--August 31, 1997 and 1996...................... F-4
Statements of Consolidated Operations--Years Ended August 31, 1997, 1996
and 1995................................................................. F-5
Statements of Consolidated Stockholders' (Deficiency) Equity--Years Ended
August 31, 1997, 1996 and 1995........................................... F-6
Statements of Consolidated Cash Flows--Years Ended August 31, 1997, 1996
and 1995................................................................. F-7
Notes to Consolidated Financial Statements--Years Ended August 31, 1997,
1996 and 1995............................................................ F-9
Consolidated Balance Sheet--February 28, 1998 (unaudited).................. F-30
Statements of Consolidated Operations--Six Months Ended February 28, 1998
and 1997 (unaudited)..................................................... F-31
Statements of Consolidated Stockholders' (Deficiency) Equity--Six Months
Ended February 28, 1998 and 1997 (unaudited)............................. F-32
Statements of Consolidated Cash Flows--Six Months Ended February 28, 1998
and 1997
(unaudited).............................................................. F-33
Notes to Unaudited Consolidated Financial Statements--Six Months Ended
February 28, 1998 and 1997 (unaudited)................................... F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acclaim Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Acclaim
Entertainment, Inc. and Subsidiaries as of August 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' (deficiency) equity
and cash flows for the years then ended. In connection with our audit of the
consolidated financial statements, we also have audited the financial statement
schedule for the years ended August 31, 1997 and 1996. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Acclaim
Entertainment, Inc. and Subsidiaries as of August 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's significant losses from
operations in fiscal 1997 and 1996 and its working capital and stockholders'
deficiencies at August 31, 1997 raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The fiscal 1996 selected quarterly financial data in Note 21 contain
information that we did not audit, and, accordingly, we do not express an
opinion on that data. We attempted but were unable to review the quarterly data
in accordance with standards established by the American Institute of Certified
Public Accountants because we believe that the Company's internal control
structure policies and procedures for the preparation of interim financial
information during fiscal 1996 did not provide an adequate basis to enable us to
complete such a review.
KPMG PEAT MARWICK LLP
New York, New York
November 5, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders,
Acclaim Entertainment, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' (deficiency) equity and cash flows of Acclaim Entertainment, Inc.
and Subsidiaries for the year ended August 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Acclaim Entertainment, Inc. and Subsidiaries for the year ended August
31, 1995 in conformity with generally accepted accounting principles.
We have also audited financial statement schedule II of Acclaim
Entertainment, Inc. and Subsidiaries for the year ended August 31, 1995. In our
opinion, the financial statement schedule presents fairly, in all material
respects, the information required to be set forth therein.
As described in Note 20, the Company and certain officers have been named
as defendants in various class action claims, the outcome of which cannot
presently be determined. Accordingly, no provision for any liability that might
result upon the resolution of these matters has been made in the fiscal 1995
consolidated financial statements.
GRANT THORNTON LLP
New York, New York
December 8, 1995
F-3
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 26,254 $ 18,814
Marketable equity securities....................... -- 11,278
Accounts receivable--net........................... 18,729 20,478
Inventories........................................ 3,546 8,052
Prepaid expenses................................... 20,250 18,513
Income taxes receivable............................ -- 54,334
-------- --------
Total current assets.......................... 68,779 131,469
-------- --------
Other assets
Fixed assets--net.................................. 34,268 42,779
Excess of cost over net assets acquired--net of
accumulated amortization of $17,104 and $13,052,
respectively...................................... 23,547 54,939
Other assets....................................... 6,581 10,464
-------- --------
Total assets.................................. $133,175 $239,651
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current liabilities
Trade accounts payable............................. $ 17,007 $ 29,749
Short-term borrowings.............................. 643 5,321
Accrued expenses................................... 107,928 78,506
Income taxes payable............................... 4,840 724
Current portion of long-term debt.................. 1,002 25,527
Obligation under capital leases--current........... 1,515 1,681
-------- --------
Total current liabilities..................... 132,935 141,508
-------- --------
Long-term liabilities
Long-term debt..................................... 52,655 --
Obligation under capital leases--noncurrent........ 2,264 3,685
Other long-term liabilities........................ 4,553 347
-------- --------
Total liabilities............................. 192,407 145,540
-------- --------
Minority interest..................................... (186) 522
Stockholders' (deficiency) equity
Preferred stock, $0.01 par value; 1,000 shares
authorized; none issued........................... -- --
Common stock, $0.02 par value; 100,000 shares
authorized; 50,122 and 50,041 shares issued,
respectively...................................... 1,002 1,001
Additional paid in capital......................... 173,373 165,782
Accumulated deficit................................ (229,870) (70,642)
Treasury stock, 474 and 348 shares, respectively... (2,904) (1,813)
Foreign currency translation adjustment............ (647) (754)
Unrealized gain on marketable equity securities.... -- 15
-------- --------
Total stockholders' (deficiency) equity....... (59,046) 93,589
-------- --------
Total liabilities and stockholders'
(deficiency) equity.......................... $133,175 $239,651
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
NET REVENUES............................... $ 165,411 $ 161,945 $566,723
COST OF REVENUES........................... 89,818 191,790 291,474
--------- --------- --------
GROSS PROFIT (LOSS)........................ 75,593 (29,845) 275,249
--------- --------- --------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses............... 118,993 183,722 180,957
Research and development expenses........ 30,824 34,582 10,126
Operating interest....................... 1,749 6,417 3,957
Depreciation and amortization............ 16,220 14,910 9,543
Goodwill writedown....................... 25,200 -- --
Litigation settlements................... 23,550 -- --
Downsizing charge........................ 10,000 5,000 --
--------- --------- --------
Total operating expenses................. 226,536 244,631 204,583
--------- --------- --------
(LOSS) EARNINGS FROM OPERATIONS............ (150,943) (274,476) 70,666
OTHER INCOME (EXPENSE)
Interest income.......................... 2,186 3,845 2,131
Other (expense) income................... (5,702) 4,103 6,859
Interest expense......................... (4,601) (2,339) (3,382)
--------- --------- --------
(LOSS) EARNINGS BEFORE INCOME TAXES........ (159,060) (268,867) 76,274
--------- --------- --------
PROVISION FOR (BENEFIT FROM) INCOME
TAXES.................................... 882 (46,393) 31,625
--------- --------- --------
(LOSS) EARNINGS BEFORE MINORITY INTEREST... (159,942) (222,474) 44,649
--------- --------- --------
MINORITY INTEREST.......................... 714 1,106 121
--------- --------- --------
NET (LOSS) EARNINGS........................ $(159,228) $(221,368) $ 44,770
--------- --------- --------
--------- --------- --------
NET (LOSS) EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE......................... $ (3.21) $ (4.47) $ 0.86
--------- --------- --------
--------- --------- --------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING..... 49,670 49,515 52,300
--------- --------- --------
--------- --------- --------
</TABLE>
See notes to consolidated financial statements.
F-5
<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
-------------- --------------
(ACCUMULATED FOREIGN
ISSUED ISSUED ADDITIONAL DEFICIT) CURRENCY
-------------- -------------- PAID-IN DEFERRED RETAINED TREASURY TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS STOCK ADJUSTMENT
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AUGUST 31, 1994 -- -- 39,348 $ 787 $ 69,246 -- $ 106,571 $ (807 ) $ (554)
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
Net Earnings...................... -- -- -- -- -- -- 44,770 -- --
Issuances......................... -- -- 5,182 104 83,659 $(12,292) -- -- --
Deferred compensation expense..... -- -- -- -- -- 1,640 -- -- --
Exercise of Stock Options......... -- -- 628 13 4,170 -- -- -- --
Pooling of Interests with
Lazer-Tron...................... -- -- 1,123 22 10,609 -- 1,800 -- --
Tax Benefit from Exercise of Stock
Options......................... -- -- -- -- 1,101 -- -- -- --
Foreign Currency Translation
Gain............................ -- -- -- -- -- -- -- -- 1,365
Unrealized Gain on Marketable
Equity Securities............... -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
BALANCE AUGUST 31, 1995 -- -- 46,281 926 168,785 (10,652) 153,141 (807 ) 811
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
Net Loss.......................... -- -- -- -- -- -- (221,368) -- --
Issuances of Common Stock and
Options......................... -- -- 463 9 7,756 (7,765) -- -- --
Deferred compensation expense..... -- -- -- -- -- 3,304 -- -- --
Exercise of Stock Options and
Warrants........................ -- -- 552 11 3,711 -- -- -- --
Pooling of Interests with
Sculptured and Probe............ -- -- 2,745 55 (55) -- (2,415) -- --
Tax Benefit from Exercise of Stock
Options......................... -- -- -- -- 698 -- -- -- --
Employee shares returned or
repurchased..................... -- -- -- -- -- -- -- (1,006 ) --
Foreign Currency Translation
Loss............................ -- -- -- -- -- -- -- -- (1,565)
Unrealized Loss on Marketable
Equity Securities............... -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
BALANCE AUGUST 31, 1996 -- -- 50,041 1,001 180,895 (15,113) (70,642) (1,813 ) (754)
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
Net Loss.......................... -- -- -- -- -- -- (159,228) -- --
Issuances and Cancellations of
Warrants and Options............ -- -- -- -- 722 566 -- -- --
Deferred compensation expense..... -- -- -- -- -- 6,134 -- -- --
Exercise of Stock Options......... -- -- 81 1 169 -- -- -- --
Employee shares returned or
repurchased..................... -- -- -- -- -- -- (1,091 ) --
Foreign Currency Translation
Gain............................ -- -- -- -- -- -- -- -- 107
Unrealized Loss on Marketable
Equity Securities............... -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
BALANCE AUGUST 31, 1997 -- -- 50,122 $1,002 $181,786 $ (8,413) $ (229,870) $(2,904 ) $ (647)
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
MARKETABLE
EQUITY
SECURITIES TOTAL
-------------- ---------
<S> <C> <C>
BALANCE AUGUST 31, 1994 -- $ 175,243
-------------- ---------
Net Earnings...................... -- 44,770
Issuances......................... -- 71,471
Deferred compensation expense..... -- 1,640
Exercise of Stock Options......... -- 4,183
Pooling of Interests with
Lazer-Tron...................... -- 12,431
Tax Benefit from Exercise of Stock
Options......................... -- 1,101
Foreign Currency Translation
Gain............................ -- 1,365
Unrealized Gain on Marketable
Equity Securities............... $2,503 2,503
-------------- ---------
BALANCE AUGUST 31, 1995 2,503 314,707
-------------- ---------
Net Loss.......................... -- (221,368)
Issuances of Common Stock and
Options......................... -- --
Deferred compensation expense..... -- 3,304
Exercise of Stock Options and
Warrants........................ -- 3,722
Pooling of Interests with
Sculptured and Probe............ -- (2,415)
Tax Benefit from Exercise of Stock
Options......................... -- 698
Employee shares returned or
repurchased..................... -- (1,006)
Foreign Currency Translation
Loss............................ -- (1,565)
Unrealized Loss on Marketable
Equity Securities............... (2,488) (2,488)
-------------- ---------
BALANCE AUGUST 31, 1996 15 93,589
-------------- ---------
Net Loss.......................... -- (159,228)
Issuances and Cancellations of
Warrants and Options............ -- 1,288
Deferred compensation expense..... -- 6,134
Exercise of Stock Options......... -- 170
Employee shares returned or
repurchased..................... -- (1,091)
Foreign Currency Translation
Gain............................ -- 107
Unrealized Loss on Marketable
Equity Securities............... (15) (15)
-------------- ---------
BALANCE AUGUST 31, 1997 $ 0 $ (59,046)
-------------- ---------
-------------- ---------
</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.
F-6
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Net (Loss) Earnings.................... $(159,228) $(221,368) $ 44,770
--------- --------- --------
ADJUSTMENTS TO RECONCILE NET (LOSS)
EARNINGS TO NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization.......... 41,420 14,910 9,543
Loss (gain) on sale of marketable
securities.......................... 1,022 (3,690) (5,968)
Provision for returns and discounts.... 28,161 214,079 25,081
Deferred income taxes.................. -- 4,264 8,610
Minority interest in net (loss) of
consolidated subsidiary............. (714) (1,106) (121)
Deferred compensation expense.......... 6,134 3,304 1,640
Non-cash inventory charges............. -- 25,753 --
Non-cash royalty charges............... 15,010 30,432 --
Litigation settlements................. 23,550 -- --
Other non-cash items................... 1,403 1,577 1,751
CHANGE IN ASSETS AND LIABILITIES, NET
OF EFFECTS OF ACQUISITIONS:
(Increase) in accounts receivable... (28,480) (28,123) (35,754)
Decrease (Increase) in
inventories....................... 1,299 (17,842) 1,298
(Increase) Decrease in prepaid
expenses.......................... (10,250) 6,759 (17,345)
Decrease (Increase) in other current
assets............................ 319 (19) (8,813)
(Decrease) in trade accounts
payable........................... (11,598) (21,046) (23,031)
(Decrease) Increase in accrued
expenses.......................... (1,056) (14,612) 580
Increase (Decrease) in income taxes
payable........................... 4,873 (31,572) (9,507)
Decrease in income taxes
receivable........................ 54,334 -- --
Increase in other long-term
liabilities....................... 4,553 -- --
--------- --------- --------
Total adjustments................... 129,980 183,068 (52,036)
--------- --------- --------
Net cash (used in) operating
activities..................... (29,248) (38,300) (7,266)
--------- --------- --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Acquisition/divestiture of
subsidiaries, net................... 6,964 7,912 1,743
Sales of marketable equity
securities.......................... 10,241 14,599 57,160
Acquisition of fixed assets, excluding
capital leases...................... (2,671) (13,488) (29,862)
Disposal of fixed assets............... 334 133 284
Acquisition of other assets............ (340) (1,731) (2,919)
--------- --------- --------
Net cash provided by investing
activities........................ 14,528 7,425 26,406
--------- --------- --------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Proceeds from convertible subordinated
notes............................... 47,400 -- --
Proceeds from mortgage................. -- 6,676 --
Payment of mortgage.................... (2,870) (223) (1,342)
Proceeds from short-term bank loans.... 12,761 15,873 11,304
Payment of short-term bank loans....... (17,095) (14,337) (8,769)
Exercise of stock options.............. 170 3,722 4,183
Payment of obligation under capital
leases.............................. (2,376) (496) (292)
Issuance of common stock............... -- 4 1,398
Payment of long-term debt.............. (19,000) (6,196) (16,046)
Other financing activities............. 458 -- --
--------- --------- --------
Net cash provided by (used in)
financing activities.............. 19,448 5,023 (9,564)
--------- --------- --------
Effect of exchange rate changes on
cash................................ 2,712 (83) 497
--------- --------- --------
Net increase (decrease) in cash........ 7,440 (25,935) 10,073
Cash at beginning of year.............. 18,814 44,749 34,676
--------- --------- --------
Cash at end of year.................... $ 26,254 $ 18,814 $ 44,749
--------- --------- --------
--------- --------- --------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES--(CONTINUED)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------
1997 1996 1995
--------- --------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND
FINANCING ACTIVITIES:
<S> <C> <C> <C>
Acquisition of equipment under capital
leases.............................. $ 391 $ 4,631 $ 91
CASH PAID DURING THE YEAR FOR:
Interest............................... $ (6,350) $ (8,756) $ (7,339)
Income taxes received (paid)........... 57,148 18,719 (22,127)
</TABLE>
In fiscal 1995, the Company purchased all of the capital stock of Iguana
Entertainment, Inc. for $5,513, net of cash received. In connection with the
acquisition, liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired...... $ 9,179
Cash paid for the capital stock.... (5,513)
-------
Liabilities assumed................ $ 3,666
-------
-------
</TABLE>
In fiscal 1995, the Company issued 4,349 shares of its common stock, valued
at $71,472 in exchange for 3,403 Class A common shares of Tele-Communications,
Inc.
See notes to consolidated financial statements.
F-8
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
A. Business
Acclaim Entertainment, Inc. and its subsidiaries ('Acclaim' or the
'Company') is a mass market entertainment company whose principal business to
date has been developing, publishing and distributing interactive entertainment
software. The Company also develops and publishes comic books, markets its
motion capture technology and studio services and distributes coin-operated
video arcade games.
B. Principles of Consolidation
The consolidated financial statements include the accounts of Acclaim and
its majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
C. Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
D. Marketable Equity Securities
The Company determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Securities are classified as held-to-maturity when the
Company has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost and investment income is included
in earnings. The Company classifies certain highly liquid securities as trading
securities. Trading securities are stated at fair value and unrealized holding
gains and losses are included in income. Securities that are not classified as
held-to-maturity or trading are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
holding gains and losses, net of tax, reported as a separate component of
stockholders' equity. The cost of securities sold is based on the specific
identification method.
E. Inventories
Inventories are stated at the lower of FIFO cost (first-in, first-out) or
market and consist principally of finished goods.
F. Prepaid Royalties
Royalty advances represent advance payments made to independent software
developers and licensors of intellectual properties. All such payments are
recoupable against future royalties in excess of minimum nonrefundable advances
made in respect of software developed or intellectual properties licensed under
the terms of the agreements. Prepaid royalties are expensed as selling expenses
at contractual royalty rates based on actual net product sales. That portion of
prepaid royalties deemed unlikely to be recovered through product sales is
charged to selling expenses. Royalty advances are classified as current and
noncurrent assets based on estimated net product sales within the next year.
G. Fixed Assets
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, or,
where applicable, the terms of the respective leases, whichever is shorter. The
asset values of capitalized leases are included in fixed assets and the
associated liabilities are reflected as obligations under capital leases.
F-9
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
H. Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is being amortized on the
straight-line basis over periods ranging from five to twenty years. As of August
31, 1997, the balance, net of accumulated amortization, is comprised of $21,220
related to the fiscal 1994 acquisition of Acclaim Comics, Inc., which is being
amortized on a straight-line basis over 20 years since the fourth quarter of
fiscal 1996, and previously over forty years, and $2,327 related to the
acquisition of Iguana Entertainment, Inc., which is being amortized over five
years (Note 5). It is the Company's policy to evaluate and recognize an
impairment of goodwill if it is probable that the recorded amounts are in excess
of anticipated undiscounted future cash flows.
Due to continuing operating losses incurred by Acclaim Comics, management's
assessment of the current state of the comic book industry and management's
current projections for Acclaim Comics' operations, in fiscal 1997, management
believed that there was an impairment in the carrying value of the goodwill
relating to the acquisition of Acclaim Comics. Accordingly, in the third quarter
of fiscal 1997 the Company recorded a write-down of $25,200 of goodwill to
reduce the carrying value of the goodwill associated with Acclaim Comics to its
estimated undiscounted future cash flows.
I. Net Revenues
Revenues are recorded when products are shipped to customers. The Company
is generally not contractually obligated to accept returns, except for defective
product. However, the Company permits its customers to return or exchange
product and may provide price protection on products unsold by a customer.
Revenue is recorded net of an allowance for estimated returns, price concessions
and other discounts. Such allowance is reflected as a reduction to accounts
receivable when the Company expects to grant credits for such items; otherwise,
it is reflected as a liability.
J. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
K. Long-Lived Assets
The Company reviews long-lived assets, such as fixed assets and certain
identifiable intangibles to be held and used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
L. Foreign Currency Translations
Assets and liabilities of foreign operations are translated at rates of
exchange at the end of the period, while results of operations are translated at
average exchange rates in effect for the period. Unrealized gains and losses
from the translation of foreign assets and liabilities are classified as a
separate component of stockholders' equity. Included in other income (expense)
are realized gains and (losses) from foreign currency transactions of $2,668,
($5,074), $2,917, ($2,832) and $5,092, ($4,576) in fiscal 1997, 1996, and 1995,
respectively. The Company does not enter into material foreign currency hedging
transactions.
F-10
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
M. Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options and warrants if the current market price of the underlying stock exceeds
the exercise price on the date of the grant. On September 1, 1996, the Company
adopted SFAS No. 123, 'Accounting for Stock-Based Compensation'. The Company has
elected not to implement the fair value based accounting method for employee and
director stock options and warrants, but has elected to disclose the pro forma
net earnings and pro forma earnings per share including employee and director
stock option and warrant grants made beginning in fiscal 1996 as if such method
had been used to account for stock-based compensation cost as described in SFAS
No. 123.
N. Financial Instruments
As of August 31, 1997, the fair value of certain financial instruments
including cash and equivalents, receivables, trade accounts payable, short-term
borrowings and certain other liabilities approximates book value due to the
short maturity of these instruments. The carrying value of the Company's
mortgage note payable approximated fair value since this instrument has a prime
based interest rate that is adjusted for market rate fluctuations. The fair
value of the 10% convertible Subordinated Notes at August 31, 1997 was
approximately $40,000, based on a quoted market value.
O. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to 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 period. Among the more significant estimates included in these
financial statements are the estimated allowances for returns and discounts, the
estimated valuation of inventory and the recoverability of advance royalty
payments and goodwill. Actual results could differ from those estimates.
P. Reclassifications
Certain reclassifications were made to prior period amounts to conform to
the current period presentation format.
2. LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company's
significant losses from operations in fiscal 1997 and 1996 and working capital
and stockholders' deficiencies at August 31, 1997 could impact the Company's
ability to meet its obligations as they become due.
The Company believed that the majority of its software revenues in fiscal
1996 and a portion of fiscal 1997 would be derived from 16-bit software sales.
However, the 16-bit software market matured much more rapidly than anticipated
by the Company (Note 3) and the installed base of new hardware platforms, such
as the Nintendo N64, from which the Company derived a significant portion of its
fiscal 1997 software revenues, was not yet significant compared to that for
16-bit software products. Due to these factors and the increased fixed operating
costs primarily attributable to the acquisition of software development studios,
the Company's results of operations and liquidity in fiscal 1997 were materially
adversely affected. Short-term liquidity concerns were alleviated in February
1997, when the Company received $47,400 from the issuance of unsecured 10%
Convertible Subordinated Notes (Note 12(A)) and in November, 1996 when it
received an income tax refund of approximately $54,000 related to the carryback
of its loss for fiscal 1996. The Company, to enhance its long-term
F-11
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
2. LIQUIDITY--(CONTINUED)
liquidity, in fiscal 1997 has significantly reduced the number of its personnel,
sold substantially all of the assets of its coin-operated redemption games
subsidiary, is consolidating certain of its studio operations to reduce their
overhead expenses and is also pursuing various alternatives, including the sale
of certain other assets and further expense reductions. In addition, through
October 31, 1997, the Company released a number of titles in the first quarter
of fiscal 1998, including two additional titles for the N64 hardware platform.
Shipments of these products, totaling approximately $40,000 were collateralized
under bank letters of credit. 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. SPECIAL CARTRIDGE VIDEO CHARGE (UNAUDITED)
In fiscal 1996 the Company's revenues were adversely affected due to new
hardware platform introductions and the resulting shift from demand for 16-bit
software to 32- and 64-bit software and PC CD software compatible with the new
hardware systems. Due to the relatively longer development period relating to
16-bit and 32-bit software products, the Company's strategic decisions to
support certain 16-bit and portable hardware systems and develop certain
software products were made well in advance of the time it became apparent that
the transition period commenced.
In addition, in fiscal 1996, the Company did not release 'hits' for
hardware platforms with significant installed bases, as it had in prior years
and offered concessions (primarily discounts) to its customers at higher than
anticipated levels in order to manage 16-bit software inventory levels. Finally,
the Company exited the 16-bit and portable software markets in April 1996.
As a result, the Company recorded a special cartridge video charge in the
second quarter of fiscal 1996 of $48,947 to adjust accounts receivable and
inventories to their estimated net realizable values. Due to the continued and
accelerated deterioration of the 16-bit and portable cartridge business
throughout 1996, the Company revised its estimates in the fourth quarter of
fiscal 1996 and recorded an additional charge of $65,031, primarily to adjust
accounts receivable and inventory to their revised estimated net realizable
values. The total charge of $113,978 for the year ended August 31, 1996 consists
of provisions of approximately $90,524 and $23,455, respectively, to adjust
accounts receivable and inventories related to 16-bit and portable Software to
their estimated net realizable values subsequent to the Company's decision to
exit such software market and is reflected as sales returns and allowances and
in cost of sales, respectively, in the statement of consolidated operations.
The following presents the effect of the special cartridge video charge
upon fiscal 1996 net revenues and cost of revenues:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Gross Revenues................... $ 376,024
Sales credits and allowances..... 123,555
----------
252,469
Special Cartridge Video Charge... 90,524
----------
Net revenues..................... $ 161,945
----------
Cost of revenues................. $ 168,335
Special Cartridge Video Charge... 23,455
----------
$ 191,790
----------
Gross Loss....................... $ (29,845)
----------
----------
</TABLE>
F-12
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
4. LICENSE AGREEMENTS
The Company has various license agreements with Nintendo Co., Ltd. (Japan)
(Nintendo Co., Ltd. and its subsidiary, Nintendo of America, Inc., are
collectively herein referred to as 'Nintendo') pursuant to which it has the
nonexclusive right to utilize the 'Nintendo' name and its proprietary
information and technology in order to develop and market interactive
entertainment software ('Software') for use with various 8-bit, 16-bit and
portable Nintendo platforms in various territories throughout the world. The
Company also has an agreement with Nintendo to develop and market N64 Software
titles in the Western Hemisphere. The license agreements with Nintendo for the
different platforms expire at various times through 2000.
In April 1992, the Company entered into an agreement with Sega Enterprises
Ltd. ('Sega'), pursuant to which the Company received the nonexclusive right to
utilize the 'Sega' name and its proprietary information and technology in order
to develop and distribute software titles for use with various Sega platforms.
The Company exercised its option to extend the Sega Agreement, which agreement,
as amended, expired in December 1995. The Company is currently negotiating a new
agreement with Sega. In the interim, the Company and Sega are continuing to
operate under the terms of the expired Sega Agreement, and with respect to the
Sega Saturn hardware platform are operating under an oral agreement. The Company
believes that the impact, if any, of a new agreement with Sega will not have a
material adverse effect on its financial condition or results of operations.
In December 1994, the Company entered into an agreement with Sony Computer
Entertainment of America pursuant to which the Company received the nonexclusive
right to utilize its proprietary information and technology in order to develop
and distribute Software titles for use with the Sony PlayStation(TM) in North
America, Europe and Asia for a four year period expiring in December 1998.
5. ACQUISITIONS AND DIVESTITURES
Sculptured Software, Inc.
On October 10, 1995, the Company acquired all the issued and outstanding
stock of Sculptured Software Inc., a software developer, pursuant to an
Agreement and Plan of Merger dated October 9, 1995 for 1,013 shares of the
Company's common stock.
The acquisition was accounted for as a pooling of interests and
accordingly, the Company's financial statements for the year ended August 31,
1996 include the results of Sculptured. Prior period financial statements were
not restated as the acquisition had an immaterial effect upon previously
reported revenue and net income of the consolidated entities.
Probe Entertainment Ltd.
On October 16, 1995, the Company acquired all the issued and outstanding
stock of Probe Entertainment Ltd., a software developer, pursuant to an
Agreement and Plan of Merger dated October 10, 1995 for 1,732 shares of the
Company's common stock.
The acquisition was accounted for as a pooling of interests and,
accordingly, the Company's financial statements for the year ended August 31,
1996 include the results of Probe. Prior period financial statements were not
restated as the acquisition had an immaterial effect upon previously reported
revenue and net income of the consolidated entities.
Iguana Entertainment, Inc.
On January 4, 1995, the Company acquired all the issued and outstanding
common stock of Iguana Entertainment, Inc., a developer of interactive video
games, pursuant to the terms of an Agreement and Plan of Merger dated December
20, 1994. The acquisition was accounted for as a purchase. Accordingly, the
operating
F-13
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
5. ACQUISITIONS AND DIVESTITURES--(CONTINUED)
results of Iguana are included in the Statements of Consolidated Operations from
the acquisition date. The acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition.
In consideration for the Iguana stock, the Company paid $5,000 in cash. The
total cost of the acquisition was $7,342, (which includes direct acquisition
costs) of which $2,357 was allocated to identifiable net tangible assets. The
remaining balance of $4,985 represents the excess of the purchase price over the
fair value of the net assets acquired, which is being amortized on a
straight-line basis over five years.
Pro forma results of operations, assuming the acquisition had been made at
the beginning of each year presented, would not be materially different from the
consolidated results reported.
Lazer-Tron Corporation
On August 31, 1995, the Company acquired all the issued and outstanding
common stock of Lazer-Tron Corporation, a developer and manufacturer of
coin-operated redemption games pursuant to an Agreement and Plan of Merger dated
March 22, 1995. Under the terms of the agreement, Lazer-Tron shareholders
received .314 of a share of the Company's common stock for each Lazer-Tron
share. Accordingly, the Company issued 1,123 shares of its common stock for all
the outstanding shares of Lazer-Tron common stock. Additionally, outstanding
options and warrants to acquire Lazer-Tron were converted to options and
warrants to acquire 318 shares of the Company's common stock.
The acquisition was accounted for as a pooling of interests and,
accordingly, the Company's financial statements for the year ended August 31,
1995 have been restated to include the results of Lazer-Tron. Prior period
financial statements were not restated as the acquisition had an immaterial
effect upon previously reported revenue and net income of the consolidated
entities.
On March 5, 1997, the Company completed the sale of substantially all the
assets and certain liabilities of Lazer-Tron for $6,000 in cash. In connection
with the sale, the Company granted options to purchase 198 shares of Common
Stock to Lazer-Tron's employees under the 1988 Stock Option Plan with a fair
value of $720. Including related costs, no gain or loss resulted from this
transaction.
6. MARKETABLE EQUITY SECURITIES
Marketable equity securities at August 31, 1996 consisted primarily of
Class A Common Shares of Tele-Communications, Inc. Such shares have been
classified as 'available for sale ' securities and accordingly are stated at
fair market value. Unrealized holding gains of $15 (net of income taxes of $11)
at August 31, 1996 are classified as a separate component of stockholders'
equity. In fiscal 1997, other expense includes realized losses from the sale of
marketable equity securities of $(1,022). In fiscal 1996 and 1995 other income
includes realized gains from the sale of marketable equity securities of $3,690
and $5,968, respectively.
On October 19, 1994, Acclaim Cable Holdings, Inc. a wholly-owned subsidiary
of the Company, entered into a Partnership Agreement (the 'Partnership
Agreement') with TCI GameCo Ventures, Inc., an indirect wholly-owned subsidiary
of Tele-Communications, Inc. ('TCI'), for the creation of a Delaware limited
partnership (the 'Joint Venture'), the interests in which are indirectly held
65% by the Company and 35% by TCI. The Company and TCI are currently dissolving
the Joint Venture.
In connection with the execution of the Partnership Agreement, the Company
entered into an Exchange Agreement (the 'Exchange Agreement') with TCI and TCI
GameCo Holdings, Inc. ('TCI Sub'), pursuant to which the Company issued and sold
to TCI Sub 4,349 shares of the Company's common stock in exchange for 3,403
shares of Class A Common Stock of TCI.
F-14
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
7. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
Receivables assigned to factor......... $ 13,337 $ 55,099
Advances due (from) to factor.......... (3,780) 23,487
-------- ---------
Due from factor........................ 17,117 31,612
Unfactored accounts receivable......... 4,873 12,031
Accounts receivable--Foreign........... 12,434 20,229
Other receivables...................... 3,085 5,472
Allowances for returns and discounts... (18,780) (48,866)
-------- ---------
$ 18,729 $ 20,478
-------- ---------
-------- ---------
</TABLE>
Pursuant to a factoring agreement, the Company's principal bank acts as its
factor for the majority of its North American receivables, which are assigned on
a pre-approved basis. At August 31, 1997, the factoring charge amounted to 0.25%
of the receivables assigned. The Company's obligations to the bank are
collateralized by all of the Company's and its North American subsidiaries'
accounts receivable, inventories and equipment. The 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. In February 1997, certain bank fees were paid with the
issuance of immediately exercisable warrants to purchase 200 shares of Common
Stock at an exercise price of $3.97 per share, which warrants expire on February
19, 2006. The fair value of the warrants of $568 was expensed in fiscal 1997.
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 August 31, 1997) on such advances. As of August 31, 1997, the
Company was in default of certain covenants under its revolving credit facility,
which defaults 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 certain 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 August 31,
1997 and 1996, the balance due from a distributor was approximately 25% and 19%,
respectively, of foreign accounts receivable.
F-15
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
8. PREPAID EXPENSES
Prepaid expenses are comprised of the following:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Royalty advances................................................................ $ 4,322 $ 6,783
Prepaid advertising costs....................................................... 1,470 2,868
Prepaid product costs........................................................... 8,826 2,879
Other prepaid expenses.......................................................... 5,632 5,983
------- -------
$20,250 $18,513
------- -------
------- -------
</TABLE>
Prepaid advertising costs consist principally of advance payments in
respect of television and other media advertising. Advertising expenses are
charged to income as incurred. Prepaid product costs represent advance payments
against future product purchases in Europe.
9. FIXED ASSETS
The major classes of fixed assets are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Buildings and improvements..................................................... $ 24,110 $ 24,724
Furniture, fixtures and equipment.............................................. 32,821 34,490
Automotive equipment........................................................... 1,296 1,680
-------- --------
58,227 60,894
Less: accumulated depreciation................................................. (23,959) (18,115)
-------- --------
$ 34,268 $ 42,779
-------- --------
-------- --------
</TABLE>
The estimated useful lives of these assets are:
<TABLE>
<S> <C>
Buildings and improvements....................... 1 to 20 years
Furniture, fixtures and equipment................ 1 to 7 years
Automotive equipment............................. 3 to 5 years
</TABLE>
10. SHORT-TERM BORROWINGS
Short-term borrowings at August 31, 1997 consisted of $643 outstanding
under a short-term loan from a bank in France. The short-term loan provides for
borrowings of up to $660. The average annual interest rate applicable to the
loan for the year ended August 31, 1997 was approximately 5%. The loan was
repaid in September 1997. At August 31, 1996, short-term borrowings consisted of
notes payable to banks in Japan of $3,671 and $1,650 outstanding under lines of
credit with two domestic banks. The notes payable to banks in Japan matured
within 90 days and were collateralized by inward letters of credit from
distributors. The average annual interest rate applicable to the bank loans for
the year ended August 31, 1996 was approximately 2%. Such agreement also
provided that the bank has the right to offset cash of the Company collected
under the inward letters of credit and deposited with it against the associated
short-term notes. The credit agreement with one domestic bank provided for
borrowings of up to $2,000 for general working capital purposes and was due on
demand. Borrowings under the agreement bore interest at the bank's prime rate
plus one percent (9.25% at August 31, 1996) and were based upon a percentage of
eligible accounts receivable. The balance at August 31, 1996 was $1,300 which
was repaid in December 1996. A revolving line of credit agreement with the other
F-16
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
10. SHORT-TERM BORROWINGS--(CONTINUED)
domestic bank provided for borrowings of up to $500 and was renewable yearly
with interest charged at one and one-half percent above the bank's prime rate
(9.75% at August 31, 1996). The balance at August 31, 1996 was $350.
11. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Accrued royalties payable and licensing obligations............................ $ 31,902 $28,090
Accrued selling expenses and sales allowances.................................. 22,941 30,804
Accrued litigation settlements (Note 20(a)).................................... 18,017 --
Accrued downsizing expenses.................................................... 11,300 5,000
Accrued payroll and payroll taxes.............................................. 2,010 2,229
Other accrued taxes............................................................ 6,077 4,290
Accrued interest expense....................................................... 2,569 --
Other accrued expenses......................................................... 13,112 8,093
-------- -------
$107,928 $78,506
-------- -------
-------- -------
</TABLE>
In fiscal 1996, to enhance its long-term liquidity, the Company decided to
significantly reduce the number of its personnel and accrued $5,000 of
downsizing expenses for employee severance costs, the majority of which was paid
in fiscal 1997 in accordance with the accrual. In May 1997, the Company again
reduced its number of personnel and accrued an additional $10,000 for severance
and other costs associated with this downsizing of the Company. The majority of
the costs will be paid in fiscal 1998 and relate to employee severance, with the
remainder relating to lease commitments for idle facilities and write-offs of
non-productive fixed assets.
12. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1997 1996
------- -------
<S> <C> <C>
(A) 10% Convertible Subordinated Notes due 2002................................. $50,000 --
(B) Term loan................................................................... -- $19,000
(C) Mortgage note............................................................... 3,657 6,527
------- -------
53,657 25,527
Less: current portion........................................................... 1,002 25,527
------- -------
$52,655 $ --
------- -------
------- -------
</TABLE>
(A) In February 1997, the Company issued $50,000 of unsecured 10%
Convertible Subordinated Notes ('Notes') due March 1, 2002 with interest payable
semiannually commencing September 1, 1997. The Notes were sold at par with
proceeds to the Company of $47,400, net of expenses. The indenture governing the
Notes contains covenants that, among other things, substantially limit the
Company's ability to incur additional indebtedness, issue preferred stock, pay
dividends and make certain other payments. The Notes are convertible into shares
of Common Stock prior to maturity, unless previously redeemed, at a conversion
price of $5.18 per share, subject to adjustment under certain conditions. The
Notes are redeemable in whole or in part, at the option of the Company (subject
to the rights of holders of senior indebtedness) at 104% of the principal
balance at any
F-17
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
12. LONG-TERM DEBT--(CONTINUED)
time on or after March 1, 2000 through February 28, 2001 and at 102% of the
principal balance thereafter to maturity.
(B) In conjunction with the acquisition of Acclaim Comics, Inc. in July
1994, Acclaim Comics entered into a term loan guaranteed by the Company which
bore interest at a rate of LIBOR plus 2.5%. The Company used $16,000 of the
proceeds from the issuance of the Notes to repay the remaining outstanding
balance of the term loan.
(C) Interest on the mortgage note until April 30, 1997 was charged at the
bank's prime lending rate and is currently charged at the bank's prime lending
rate plus one percent per annum (9.5% at August 31, 1997). The mortgage note is
collateralized by a building (Corporate Headquarters) with a carrying value of
approximately $16,405. As of August 31, 1996 and November 30, 1996, the Company
was in default of various financial and other covenants with the mortgage
lender. The mortgage lender waived these past defaults, conditioned upon the
mortgage lender receiving $2,000 from the net proceeds from the issuance of the
Notes and the Company accelerating payment terms on the balance of the loan. The
Company used $2,000 of the proceeds from the issuance of the Notes to repay a
portion of the mortgage note and under the Note Modification Agreement dated
September 11, 1997 is obligated to make an additional accelerated payment of
$500 payable over nine months through January 1998 in addition to quarterly
payments of $181 payable until February 1, 2002.
13. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
The Company is committed under various capital leases for equipment
expiring at various dates through 2006. Future minimum payments required under
such leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
AUGUST 31,
---------------------------------------------------------------------------------------------
<S> <C>
1998......................................................................................... $ 1,806
1999......................................................................................... 1,455
2000......................................................................................... 402
2001......................................................................................... 282
2002......................................................................................... 199
Thereafter................................................................................... 241
-------
Total minimum lease payments................................................................. 4,385
Less: amount representing interest........................................................... 606
Present value of net minimum lease payments.................................................. $ 3,779
-------
-------
</TABLE>
The present value of net minimum lease payments is reflected in the August
31, 1997 balance sheet as current and noncurrent obligations under capital
leases of $1,515 and $2,264, respectively.
F-18
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
13. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES--(CONTINUED)
The Company has operating leases for rental space and equipment which
expire on various dates through 2006. The leases provide for contingent rentals
based upon escalation clauses. Future minimum rental payments required under
such leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
AUGUST 31,
----------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................... $ 2,831
1999.................................................................................... 2,628
2000.................................................................................... 2,299
2001.................................................................................... 1,871
2002.................................................................................... 1,383
Thereafter.............................................................................. 2,926
------------
Total minimum operating lease payments.................................................. $ 13,938
------------
------------
</TABLE>
14. PROVISION FOR (BENEFIT FROM) INCOME TAXES
The provision for (recovery of) income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- -------- -------
<S> <C> <C> <C>
Current:
Federal.................................. $ -- $(52,808) $20,131
Foreign.................................. $ 860 1,453 (457)
State.................................... 22 -- 2,240
----- -------- -------
882 (51,355) 21,914
----- -------- -------
Deferred:
Federal.................................. 75 4,264 8,880
Foreign.................................. (75) -- (270)
----- -------- -------
-- 4,264 8,610
----- -------- -------
Charge in lieu of income taxes............. -- 698 1,101
----- -------- -------
Total income tax provision (benefit)....... $ 882 $(46,393) $31,625
----- -------- -------
----- -------- -------
</TABLE>
The charge in lieu of income taxes relates to the tax benefit arising from
the exercise of nonqualified stock options and disqualifying dispositions of
incentive stock options.
A reconciliation of the federal statutory income tax rate with the
effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Statutory tax rate..................................... (35.0)% (35.0)% 35.0%
State income taxes, net of federal income tax
benefit.............................................. -- -- 2.2
Increase in valuation allowance........................ 27.2 12.2 --
Net operating loss carryback benefit at less than
statutory rate....................................... -- 4.2 --
Nondeductible expenses................................. 6.8 0.9 2.1
Foreign tax rate differential, net of foreign tax
credits.............................................. -- 0.1 0.2
Other.................................................. 1.6 0.3 2.0
----- ----- ----
Effective income tax rate.............................. 0.6% (17.3)% 41.5%
----- ----- ----
----- ----- ----
</TABLE>
F-19
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
14. PROVISION FOR (BENEFIT FROM) INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities recorded on the consolidated balance sheets
as of August 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
DEFERRED DEFERRED
DEFERRED TAX DEFERRED TAX
TAX ASSETS LIABILITIES TAX ASSETS LIABILITIES
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Reserves and allowances... $ 17,677 -- $ 13,711 --
Investment in
subsidiary.............. -- -- 2,879 --
Accrued expenses.......... 13,171 -- 1,750 --
Federal net operating loss
carryforwards........... 33,600 -- 8,750 --
Foreign net operating loss
carryforwards........... 10,903 -- 5,644 --
Other..................... 1,395 -- 806 $ 75
---------- --- ---------- -----------
76,746 -- 33,540 75
Valuation allowance....... 76,746 -- 33,465 --
---------- --- ---------- -----------
-- -- $ 75 $ 75
---------- --- ---------- -----------
---------- --- ---------- -----------
</TABLE>
As of August 31, 1997, the Company has a U.S. tax net operating loss
carryforward of approximately $96,000 expiring in fiscal 2011 and 2012. At
August 31, 1997 the Company has provided a valuation allowance of $76,746
against its net deferred tax assets due to the Company's recent pre-tax losses
and lack of significant offsetting objective evidence that the deferred tax
assets are realizable. If the entire deferred tax asset were realized, $71 would
be allocated to paid-in capital with the remainder reducing income tax expense.
A provision for additional taxes on income which would become payable upon
the repatriation of the earnings from its foreign subsidiaries has not been
provided since, upon repatriation, the tax consequences of such distributions
would be substantially offset by available foreign tax credits.
15. (LOSS) EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
(Loss) earnings per common share and common share equivalents are computed
by dividing net (loss) earnings by the weighted average number of common shares
and dilutive common share equivalents (stock options and warrants) outstanding.
The weighted average number of common shares and common share equivalents used
in computing net (loss) earnings per common share for the years ended August 31,
1997, 1996 and 1995 were 49,670, 49,515 and 52,300, respectively.
Statement of Financial Accounting Standards No. 128 'Earnings Per Share' is
required to be adopted for interim and annual periods ending after December 15,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and restate all prior periods. Basic and
diluted earnings per share will replace primary and fully diluted earnings per
share. The dilutive effect of stock options and other common stock equivalents
will be excluded from the calculation of basic earnings per share, but will be
reflected in diluted earnings per share. The implementation of SFAS No. 128
would not have had an impact on fiscal 1997 net loss per share.
16. STOCK OPTION PLAN
The Company adopted the 1988 Stock Option Plan which, as amended, provides
for the grant of up to 15,000 shares of its common stock to employees, directors
and consultants and expires in May 1998. On September 17, 1997, the stockholders
authorized an increase from 15,000 to 25,000 in the number of shares subject to
options under the plan. The exercise price per share of all incentive stock
options heretofore granted
F-20
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
16. STOCK OPTION PLAN--(CONTINUED)
has been the market price, or 110% thereof for certain employees, or, for
non-incentive options, not less than 85% of market price, of the Company's
common stock on the date of grant. The exercise price for all options granted to
employees in fiscal 1997 was at the market price of the common stock on the date
of grant. Generally, outstanding options become exercisable evenly over a three
year period from the date of grant (although this may be accelerated due to
retirement or death). Outstanding options must generally be exercised within ten
years from the date of grant or, with respect to incentive options, within five
years from the date of grant for certain employees. At August 31, 1997, options
to purchase approximately 5,460 shares were exercisable and no options to
purchase shares were available for future grant.
Transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
-------------------------- EXERCISE
INCENTIVE NON-INCENTIVE PRICE
--------- ------------- ------------
<S> <C> <C> <C>
Outstanding, August 31, 1994....... 3,558 5,004 $ 0.89-21.75
--------- -------------
Conversion of Lazer-Tron Options... 108 27 $ 5.41-40.61
Granted............................ 1,596 2,861 $13.75-24.00
Exercised.......................... (464) (43) $ 1.95-17.92
Cancelled.......................... (427) (2,022) $ 3.92-20.63
--------- -------------
Outstanding, August 31, 1995....... 4,371 5,827 $ 0.89-40.61
--------- -------------
Granted............................ 1,239 2,799 $ 6.38-24.75
Exercised.......................... (384) (95) $ 0.89-17.92
Cancelled.......................... (241) (1,234) $ 1.95-26.88
--------- -------------
Outstanding, August 31, 1996....... 4,985 7,297 $ 1.95-37.42
--------- -------------
Granted............................ 8,754 5,242 $ 3.38-7.88
Exercised.......................... (80) (1) $ 1.95-5.92
Cancelled.......................... (7,976) (3,156) $ 1.95-40.61
--------- -------------
Outstanding, August 31, 1997....... 5,683 9,382 $ 1.95-24.00
--------- -------------
--------- -------------
</TABLE>
The options outstanding as of August 31, 1997 are summarized in ranges as
follows:
Incentive Options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF INCENTIVE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE EXERCISE PRICE OPTIONS OUTSTANDING REMAINING LIFE
----------------------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C>
$1.95-3.94......................... $ 3.56 4,874 9
$3.95-5.92......................... $ 4.64 777 10
$5.93-13.75........................ $11.33 32 8
------
5,683
------
------
</TABLE>
Non-Incentive Options:
<TABLE>
<CAPTION>
NUMBER OF NON-
WEIGHTED AVERAGE INCENTIVE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE EXERCISE PRICE OPTIONS OUTSTANDING REMAINING LIFE
----------------------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C>
$1.95-3.94......................... $ 3.16 5,817 7
$3.95-9.49......................... $ 5.60 1,559 9
$9.50-24.00........................ $14.68 2,006 7
------
9,382
------
------
</TABLE>
F-21
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
16. STOCK OPTION PLAN--(CONTINUED)
In addition, options to purchase 37 shares of common stock at $4.17 per
share, 31 shares of common stock at $2.08 per share, 11 shares of common stock
at $3.92 per share, 37 shares of common stock at $16 per share and 167 shares of
common stock at $3.375 per share were granted outside the 1988 Stock Option Plan
and are outstanding at August 31, 1997.
The per share weighted-average fair value of stock options granted during
fiscal 1997 and 1996 was $2.49 and $5.09, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1997--expected dividend yield of 0%, risk free interest rate of
5.94%, expected stock volatility of 96%, and an expected option life of 3 years;
1996--expected dividend yield of 0%, risk free interest rate of 6.03%, expected
stock volatility of 77%, and an expected option life of 3 years.
The Company applied APB Opinion No. 25 in accounting for its stock option
grants and, accordingly, no compensation cost has been recognized in the
financial statements for its employee stock options which have an exercise price
equal to or greater than the fair value of the stock on the date of the grant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss and
net loss per share would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net loss:
As reported............................................................... $(159,228) $(221,368)
Pro forma................................................................. $(163,593) $(221,440)
Net loss per share:
As reported............................................................... $ (3.21) $ (4.47)
Pro forma................................................................. $ (3.29) $ (4.47)
</TABLE>
Pro forma net loss reflects only options granted in fiscal 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to September 1, 1995 was not
considered.
17. EQUITY
At August 31, 1997 and 1996, 2,625 stock warrants were outstanding and
exercisable. The stock warrants entitle the holders thereof to purchase 1,500
shares of common stock at $2.42 per share and 1,125 shares of common stock at
$3.00 per share. The stock warrants expire in 2001.
In addition, outstanding stock warrants to purchase shares of Lazer-Tron
Corporation (Note 5) were converted into warrants entitling the holders thereof
to purchase 17 shares of common stock at $30.57 per share at August 31, 1997 and
1996 and 40 shares of common stock at $9.55 per share at August 31, 1997 and
1996. In addition, certain of such warrants entitle the holders thereof to
receive warrants to purchase 20 shares of common stock at $15.92 per share at
August 31, 1997 and 1996. These warrants expire at various times through 1999.
Deferred compensation at August 31, 1997 and 1996 includes $5,736 and
$8,194, respectively, which represents escrowed common stock on behalf of
certain executives pursuant to employment agreements. The common stock is
ratably released from escrow and the fair value of the common stock is recorded
as expense when earned over the five-year term of the agreements, and are
recoverable by the Company if the executive's employment with the Company is
terminated upon the occurrence of certain events specified in the respective
employment agreements.
F-22
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
17. EQUITY--(CONTINUED)
In fiscal 1996 the Company issued 463 shares of restricted common stock to
employees. The fair value of the common stock issued of $4,990 is being expensed
when earned over the five-year period that the restrictions lapse. In fiscal
1997, in accordance with the settlement of a claim against the Company, the
Company accelerated the vesting of certain restricted shares of common stock and
recorded the related deferred compensation as an expense in fiscal 1997. If
employment with the Company is terminated by the employee, any remaining
restricted shares will be returned to the Company. Deferred compensation
includes $1,495 at August 31, 1997 and $4,576 at August 31, 1996 related to such
restricted stock awards.
Also included in deferred compensation at August 31, 1997 and 1996 is
$1,182 and $2,343, respectively, related to fiscal 1996 grants of stock options
with exercise prices less than the fair value of the Company's common stock on
the date of grant. Total deferred compensation was $2,775, which will be
expensed at varying amounts through 1999.
18. MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS
A. Major Suppliers and Customers
The Company is substantially dependent on Nintendo as the sole manufacturer
of N64, SNES and Game Boy hardware and a significant portion of the Software for
those platforms and as the sole licensor of the proprietary information and the
technology needed to develop the Software for those platforms; on Sega as the
sole manufacturer of Saturn, Genesis, Master System, Game Gear and Sega CD
hardware and a portion of Software for those platforms and as the sole licensor
of the proprietary information and the technology needed to develop Software for
those platforms; and on Sony as the sole manufacturer of PlayStation hardware
and all of the Software for that platform. In fiscal years 1997, 1996 and 1995,
the Company derived 41%, 29% and 47% of its gross revenues, respectively, from
sales of Nintendo-compatible products, in fiscal years 1997, 1996 and 1995, the
Company derived 12%, 36%, and 46% of its gross revenues, respectively, from
sales of Sega-compatible products and in fiscal years 1997 and 1996, the Company
derived 28% and 19% of its gross revenues, from sales of Sony-compatible
products.
The Company markets its products primarily to mass merchandise companies,
large retail toy store chains, department stores and specialty stores. No one
customer accounted for more than 10% of revenues for the year ended August 31,
1996. Sales to one customer represented 12% and 11% of revenues for the years
ended August 31, 1997 and 1995, respectively.
B. Related Party Transactions
Sales commissions are payable to two companies owned or controlled by one
of the Company's principal stockholders for sales obtained by these companies.
These commissions amounted to approximately $535, $515 and $2,249 for the years
ended August 31, 1997, 1996 and 1995, respectively, of which $66 and $1 are
included in accrued expenses at August 31, 1997 and 1996, respectively.
F-23
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
19. OPERATIONS IN GEOGRAPHIC AREAS
The Company is primarily engaged in one industry segment, the development,
marketing and distribution of Software products. The following information sets
forth geographic information for the Company's net revenues, (loss) earnings
from operations and identifiable assets.
<TABLE>
<CAPTION>
UNITED STATES EUROPE JAPAN OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended August 31, 1997:
Sales to unaffiliated customers........ $ 82,158 $72,401 $ 8,348 $ 2,504 -- $ 165,411
Transfers between geographic areas..... 4,269 -- -- 90 $ (4,359) --
------------- ------- ------- ------- ------------ ------------
Total net revenues..................... $ 86,427 $72,401 $ 8,348 $ 2,594 $ (4,359) $ 165,411
------------- ------- ------- ------- ------------ ------------
(Loss) earnings from operations........ $(154,877) $ 4,146 $ (687) $ 475 -- $ (150,943)
------------- ------- ------- ------- ------------ ------------
Identifiable assets at August 31,
1997................................. $ 108,132 $24,055 $ 859 $ 129 -- $ 133,175
------------- ------- ------- ------- ------------ ------------
Year ended August 31, 1996:
Sales to unaffiliated customers........ $ 57,742 $86,043 $14,945 $ 3,215 -- $ 161,945
Transfers between geographic areas..... 6,368 -- -- 91 $ (6,459) --
------------- ------- ------- ------- ------------ ------------
Total net revenues..................... $ 64,110 $86,043 $14,945 $ 3,306 $ (6,459) $ 161,945
------------- ------- ------- ------- ------------ ------------
(Loss) earnings from operations........ $(281,159) $ 6,041 $ 1,369 $ (727) $ -- $ (274,476)
------------- ------- ------- ------- ------------ ------------
Identifiable assets at August 31,
1996................................. $ 204,749 $23,415 $ 9,442 $ 2,045 $ -- $ 239,651
------------- ------- ------- ------- ------------ ------------
Year ended August 31, 1995:
Sales to unaffiliated customers........ $ 428,868 $95,556 $27,274 $15,025 $ -- $ 566,723
Transfers between geographic areas..... 11,388 102 -- -- (11,490) --
------------- ------- ------- ------- ------------ ------------
Total net revenues..................... $ 440,256 $95,658 $27,274 $15,025 $(11,490) $ 566,723
------------- ------- ------- ------- ------------ ------------
Earnings from operations............... $ 45,457 $17,732 $ 1,872 $ 5,605 $ -- $ 70,666
------------- ------- ------- ------- ------------ ------------
Identifiable assets at August 31,
1995................................. $ 410,873 $19,259 $10,462 $ 2,233 $ -- $ 442,827
------------- ------- ------- ------- ------------ ------------
------------- ------- ------- ------- ------------ ------------
</TABLE>
Export sales from the U. S. have been insignificant during each of the
years in the three year period ended August 31, 1997.
20. COMMITMENTS AND CONTINGENCIES
(a) Legal Proceedings and Claims
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 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 case is scheduled for trial in January 1998. The Company
intends to defend this action vigorously.
The Company was also sued in an action entitled Sound Source Interactive,
Inc. v. Acclaim Distribution, Inc.; Acclaim Entertainment, Inc.; and DOES 1
through 100, inclusive filed in December 1996 in the Superior Court of the State
of California for the County of Los Angeles. The plaintiff claims compensatory,
general, special and consequential damages in excess of $22 million and punitive
damages based on allegations that the defendants breached (i) the Sales and
Distribution Agreement dated as of June 15, 1995 between ADI and the plaintiff
(the 'Sales and Distribution Agreement') under which the plaintiff granted ADI
the exclusive right to sell and distribute the plaintiff's software titles by,
among other things, providing the plaintiff with false
F-24
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
20. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
accounting statements, misrepresenting product orders, and failing to return or
account for software titles shipped by the plaintiff to ADI and wrongfully
retaining restocking and distribution fees; and (ii) the Termination Agreement
dated March 31, 1996 between the plaintiff and ADI pursuant to which the Sales
and Distribution Agreement was terminated by, among other things, failing to
account, failing to pay monies due and failing to return or account for software
titles shipped by the plaintiff to ADI. In addition, the plaintiff alleges,
among other things, fraud and negligent misrepresentation. The Company intends
to defend this action vigorously.
The Company was also sued in an action entitled Spectrum Holobyte
California, Inc.; Microprose Software, Inc. v. Acclaim Entertainment, Inc. filed
in January 1997 in the United States District Court for the Northern District of
California. In that complaint, plaintiffs Spectrum Holobyte California, Inc.
('Spectrum') and Microprose Software, Inc. ('Microprose') allege that the
Company breached a confidential settlement agreement among the parties dated
November 4, 1996 (the 'Settlement Agreement'). The purpose of the Settlement
Agreement was to resolve a suit brought by the Company in 1996, which included
counterclaims by Spectrum and Microprose, regarding each party's allegations of
infringement of its exclusive rights to intellectual property licensed to it by
Wizards of the Coast, Inc. The property involves the characters, depictions and
game methodology of Magic: The Gathering, a popular fantasy adventure story and
card game created by Wizards of the Coast, Inc. Plaintiffs allege that the
Company breached the Settlement Agreement by failing to release the appropriate
number of games of Magic: The Gathering--BattleMage in the United States and the
United Kingdom by January 10, 1997, the date provided for in the Settlement
Agreement. Plaintiffs seek unspecified monetary damages, attorneys' fees and
costs. The Company intends to defend this action vigorously.
In January 1997, the Company was sued in an action entitled Ocean of
America, Inc. v. Acclaim Entertainment, Inc. in the Supreme Court of the State
of New York, County of Nassau, and an amended complaint was filed in March 1997.
The plaintiff alleges non-payment under a license agreement entered into between
the plaintiff and the Company, and seeks damages in the aggregate amount of
approximately $6.5 million plus costs, expenses and legal fees. The parties are
currently negotiating settlement terms with respect to this action.
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, 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 agreed on settlement terms, subject to documentation
and 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 (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 agreed on settlement terms, subject to documentation and 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 in the Superior Court of the State of
California, County
F-25
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
20. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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, 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').
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'), 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 Southern 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, which was approved by the Superior Court of
the State of California and will become final after the expiration of an appeal
period and the entry of a dismissal order relating to the Campbell Action by the
Eastern District of New York.
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 (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, 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.
F-26
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
20. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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.
In October 1997, the Company entered into a settlement agreement with the
former sole shareholder of Sculptured, pursuant to which, among other things,
his employment with Sculptured was terminated, the Company agreed to make
certain payments and issue shares of common stock to him and transferred the
trademark and name 'Sculptured' and 'Sculptured Software' to him in exchange for
the release of claims, if any, arising from the Company's 1995 acquisition of
Sculptured.
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 those litigations and claims arising in connection with
certain of the Company's acquisitions for which the settlement obligation is
currently probable and estimable, the Company recorded a charge of $23,550
during the year ended August 31, 1997. Of the $22,570 of accrued litigation
settlements at August 31, 1997, approximately $10,955 will be paid in cash and
approximately $11,615 will be paid with non-cash items, such as warrants and
Common Stock, if settlements are finalized in accordance with the proposed
terms. In the balance sheet, $18,017 is included in accrued expenses and $4,553
is included in other long-term liabilities. The cash portions of the settlements
are expected to be paid over various periods ranging from at the time of final
settlement to over the three years after final settlement. The warrants to be
issued generally will have exercise prices of $0.50 less than the fair market
value of the stock on the day the price is set, will be exercisable for three
years and provide for a cashless net option exercise. One settlement agreement
provides that, based on the market value of the stock during the three year
period following final settlement, additional shares of Common Stock could be
issued or a portion of the shares issued could be returned to the Company.
A portion of any settlement or award arising from or out of one or more of
the above litigations may be covered by the Company's insurance.
The Company may incur charges in connection with litigations which have not
yet been settled or for settled litigations if not documented and approved as
currently anticipated and an adverse result in such litigations could have a
material adverse effect on the Company.
(b) At August 31, 1997, the Company and its subsidiaries had outstanding letters
of credit aggregating approximately $5,400 for the purchase of merchandise. The
Company's subsidiaries had independent line of credit facilities totalling
approximately $10,000 with various banks at August 31, 1997.
(c) Trade accounts payable include $4,060 and $3,100 at August 31, 1997 and
1996, respectively, which were collateralized under outstanding letters of
credit.
(d) The Company has established an Employee Savings Plan (the 'Plan') effective
January 1, 1995, which qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. The Plan is available to all U.S. employees
who meet the eligibility requirements. Under the Plan, participating employees
may elect to defer a portion of their pretax earnings, up to the maximum allowed
by the Internal Revenue Service (up to the lessor of 15% of compensation or
$9,500 for calendar year 1997). All amounts vest immediately. Generally, the
Plan assets in a participant's account will be distributed to a participant or
his or her beneficiaries upon termination of employment, retirement, disability
or death. All Plan administrative fees are paid by the Company.
F-27
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
20. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Generally, the Company does not provide its employees (other than certain
officers) any other postretirement or postemployment benefits, except
discretionary severance payments upon termination of employment.
(e) The Company has entered into employment agreements with certain of its
directors and officers which provide for annual bonus payments based on
consolidated income before income taxes, in addition to their base compensation.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial information for
fiscal 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1996 1997 1997 1997 TOTAL
------------ ------------ ------- ---------- --------
<S> <C> <C> <C> <C> <C>
Gross Revenues....................... $ 63,095 $ 59,110 $48,503 $ 22,864 $193,572
Sales credits and allowances......... 9,757 6,800 6,887 4,717 28,161
------------ ------------ ------- ---------- --------
Net revenues......................... 53,338 52,310 41,616 18,147 165,411
Cost of revenues..................... 24,792 27,761 25,466 11,799 89,818
Net loss............................. (19,000) (16,842) (69,704) (53,682) (159,228)
Net loss per share................... $ (0.38) $ (0.34) $ (1.40) $ (1.08) $ (3.21)
</TABLE>
In the fourth quarter of fiscal 1997, the Company recorded litigation
settlement expenses of $15,250.
During the second half of fiscal 1996, the deterioration of the 16-bit
cartridge and portable software market accelerated. Retail inventories were
higher than anticipated and the Company's sales of its 16-bit products, as well
as its other software products, continued to require more retail incentives,
including price concessions. As a result, the Company's financial statements in
the fourth quarter include several adjustments to accrue additional sales
credits and allowances, reduce inventory to its net realizable value and write
off prepaid royalties. The Company also accrued the costs associated with a
reduction in its work force and to increase goodwill amortization. On a pre-tax
basis, these fourth quarter adjustments are as follows:
<TABLE>
<S> <C>
Adjustments to estimated net realizable value of 16-bit cartridge and portable software
accounts receivable and inventory......................................................... $ 65,000
Adjustments to estimated net realizable value of other accounts receivable and inventory.... 29,000
Write-offs of prepaid royalties............................................................. 31,000
Write-off of capitalized software costs..................................................... 8,000
Provision for severance costs............................................................... 5,000
Accelerated amortization of goodwill........................................................ 300
--------
$138,300
--------
--------
</TABLE>
A portion of these adjustments relate to prior quarters. However, the
Company was unable to determine a reasonable method to allocate the adjustments
since a combination of customer retail sales practices, sales concessions
originating outside the Company's financial reporting process and changing
16-bit and portable software market conditions make more accurate estimates of
the period in which these charges belong impractical to determine.
F-28
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN 000S, EXCEPT PER SHARE DATA)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
The following table sets forth certain quarterly financial information for
fiscal 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
1995 1996 1996 1996 TOTAL
------------ ------------ ------- ---------- --------
<S> <C> <C> <C> <C> <C>
Gross Revenues....................... $154,162 $104,377 $66,310 $ 51,175 $376,024
Sales credits and allowances......... 19,715 86,451* 3,671 104,242* 214,079
------------ ------------ ------- ---------- --------
Net revenues......................... 134,447 17,926 62,639 (53,067) 161,945
Cost of revenues..................... 80,295 56,422* 25,806 29,267* 191,790
Net (loss) earnings.................. 595 (55,771) (3,968) (162,224) (221,368)
Net (loss) earnings per share........ $ 0.01 $ (1.12) $ (0.08) $ (3.28) $ (4.47)
</TABLE>
- ------------------
* Includes amounts relating to the special cartridge video charge as follows:
<TABLE>
<CAPTION>
QUARTER ENDED (IN MILLIONS)
------------------------------------
FEBRUARY 29, AUGUST 31,
1996 1996 TOTAL
------------ ---------- ------
<S> <C> <C> <C>
Sales credits and allowances................................... $ 28.8 $ 61.7 $ 90.5
Cost of revenues............................................... 20.1 3.3 23.4
----- ----- ------
$ 48.9 $ 65.0 $113.9
----- ----- ------
----- ----- ------
</TABLE>
The sum of the quarterly net earnings per share amounts do not equal the
annual amount reported, as per share amounts are computed independently for each
quarter and for the twelve months based on the weighted average common and
common equivalent shares outstanding in each such period.
F-29
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED AND IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 40,417
Accounts receivable--net........................... 31,076
Inventories........................................ 1,856
Prepaid expenses................................... 14,570
------------
Total current assets.......................... 87,919
------------
Other assets
Fixed assets--net.................................. 31,320
Excess of cost over net assets acquired--net of
accumulated amortization
of $18,161....................................... 22,490
Other assets....................................... 5,105
------------
Total assets.................................. $ 146,834
------------
------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Trade accounts payable............................. $ 25,707
Short-term borrowings.............................. 21
Accrued expenses................................... 98,812
Income taxes payable............................... 5,919
Current portion of long-term debt.................. 724
Obligation under capital leases--current........... 1,460
------------
Total current liabilities..................... 132,643
------------
Long-term liabilities
Long-term debt..................................... 52,293
Obligation under capital leases--noncurrent........ 1,796
Other long-term liabilities........................ 7,456
------------
Total liabilities............................. 194,188
------------
Minority interest..................................... (157)
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 shares issued............................. 1,015
Additional paid in capital......................... 178,597
Accumulated deficit................................ (223,084)
Treasury stock, 523 shares......................... (3,103)
Foreign currency translation adjustment............ (622)
------------
Total stockholders' deficiency................ (47,197)
------------
Total liabilities and stockholders'
deficiency.................................... $ 146,834
------------
------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-30
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED AND 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)
------- -------- -------- --------
</TABLE>
See notes to unaudited consolidated financial statements.
F-31
<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
-------------- --------------
FOREIGN
ISSUED ISSUED ADDITIONAL CURRENCY
-------------- -------------- PAID-IN DEFERRED ACCUMULATED TREASURY TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCK ADJUSTMENT
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AUGUST 31, 1996............ -- -- 50,041 $1,001 $180,895 $(15,113) $ (70,642) $(1,813 ) $ (754)
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
Net Loss.......................... -- -- -- -- -- (159,228) -- --
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........ -- -- -- -- -- -- (1,091 ) --
Foreign Currency Translation
Gain............................ -- -- -- -- -- -- -- -- 107
Unrealized Loss on Marketable
Equity Securities............... -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
BALANCE AUGUST 31, 1997............ -- -- 50,122 $1,002 $181,786 $ (8,413) $ (229,870) $(2,904 ) $ (647)
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
Net Income........................ -- -- -- -- -- 6,786 -- --
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........ -- -- -- -- -- -- -- (199 ) --
Foreign Currency Translation
Gain............................ -- -- -- -- -- -- -- -- 25
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
BALANCE
FEBRUARY 28, 1998 (unaudited)..... -- -- 50,729 $1,015 $186,663 $ (8,066) $ (223,084) $(3,103 ) $ (622)
--
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
------ ------ ------ ------ ---------- ------------ ------------ -------- ----------
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
MARKETABLE
EQUITY
SECURITIES TOTAL
-------------- ---------
<S> <C> <C>
BALANCE AUGUST 31, 1996............ $ 15 $ 93,589
-------------- ---------
Net Loss.......................... -- (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)
Foreign Currency Translation
Gain............................ -- 107
Unrealized Loss on Marketable
Equity Securities............... (15) (15)
-------------- ---------
BALANCE AUGUST 31, 1997............ $ 0 $ (59,046)
-------------- ---------
Net Income........................ -- 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)
Foreign Currency Translation
Gain............................ -- 25
-------------- ---------
BALANCE
FEBRUARY 28, 1998 (unaudited)..... $ 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 unaudited consolidated financial statements.
F-32
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED AND 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
-------- --------
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:
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 unaudited consolidated financial statements.
F-33
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(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:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
------------
<S> <C>
Receivables assigned to factor.................. $ 40,772
Advances due (from) to factor................... 17,587
-----------
Due from factor................................. 23,185
Unfactored accounts receivable.................. 7,594
Accounts receivable--Foreign.................... 22,877
Other receivables............................... 2,098
Allowances for returns and discounts............ (24,678)
-----------
$ 31,076
-----------
</TABLE>
Pursuant to a factoring agreement, the Company's principal bank acts as its
factor for the majority of its North American receivables, which are assigned on
a pre-approved basis. At 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.
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,
F-34
<PAGE>
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(IN 000S, EXCEPT PER SHARE DATA)
3. ACCOUNTS RECEIVABLE--(CONTINUED)
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:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
------------
<S> <C>
10% Convertible Subordinated Notes due 2002.......... $ 50,000
Mortgage note........................................ 3,017
------------
53,017
Less: current portion................................ 724
------------
$ 52,293
------------
</TABLE>
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.
<TABLE>
<CAPTION>
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.
F-35
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Special Note Regarding Forward-Looking
Statements................................... 2
Available Information.......................... 2
Summary........................................ 3
Risk Factors................................... 6
Market Price of and Dividends on the Company's
Common Equity and Related Stockholder
Matters...................................... 15
Use of Proceeds................................ 16
Capitalization................................. 16
Selected Consolidated Financial Information.... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 27
Legal Proceedings.............................. 35
Management..................................... 38
Security Ownership of Certain Beneficial Owners
and Management............................... 44
Certain Relationships and Related
Transactions................................. 45
Description of Securities...................... 46
Determination of Warrants Exercise Price....... 48
Plan of Distribution........................... 48
Legal Matters.................................. 49
Experts........................................ 49
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....... 50
Financial Statements........................... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
ACCLAIM ENTERTAINMENT, INC.
552,326 A WARRANTS TO PURCHASE COMMON STOCK
113,446 B WARRANTS TO PURCHASE COMMON STOCK
1,265,772 SHARES OF
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
JUNE , 1998
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of issuance and distribution of the Warrants and the Warrant
Shares are to be paid by the Company. The following itemized list is an estimate
of the expenses:
<TABLE>
<S> <C>
SEC registration fee....................................... $ 1,974.00
Legal fees and expenses.................................... 50,000.00
Accounting fees and expenses............................... 27,500.00
Transfer fees.............................................. 5,000.00
Miscellaneous.............................................. 10,526.00
-----------
Total................................................. $ 95,000.00
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Registrant provides that any person
may be indemnified against all expenses and liabilities to the fullest extent
permitted by the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of Delaware, the law of the
state in which the Registrant is incorporated, empowers a corporation, within
certain limitations, to indemnify any person against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any suit or proceeding to which he
is a party by reason of the fact that he is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, as long as he acted in
good faith and in a manner which he reasonably believed to be in, or not opposed
to, the best interests of the corporation. With respect to any criminal
proceeding, he must have had no reasonable cause to believe his conduct was
unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company made grants of options to purchase approximately 4,100,000
shares of Common Stock in February 1997 under the 1988 Stock Option Plan (the
'Plan'). The options described herein were issued pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act of 1933 (the
'Securities Act').
The Company made grants of options to purchase approximately 3,876,000
shares of Common Stock in April 1997 under the Plan. The options described
herein were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
The Company made grants of options to purchase approximately 15,000 shares
of Common Stock in May 1997 under the Plan. The options described herein were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
The Company made grants of options to purchase approximately 589,600 shares
of Common Stock in July 1997 under the Plan. The options described herein were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
The Company made grants of options to purchase approximately 112,500 shares
of Common Stock in August 1997 under the Plan. The options described herein were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
The Company made grants of options to purchase approximately 800,000 shares
of Common Stock in September 1997 under the Plan. The options described herein
were issued pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act.
II-1
<PAGE>
The Company issued warrants to purchase 600,000 shares of Common Stock to
an employee as of September 1997. The warrants described herein were issued
pursuant to an exemption from registration provided by Section 4(2) of the
Securities Act.
The Company made grants of options to purchase approximately 190,000 shares
of Common Stock in October 1997 under the Plan. The options described herein
were issued pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act.
The Company made grants of options to purchase approximately 165,000 shares
of Common Stock in November 1997 under the Plan. The options described herein
were issued pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act.
The Company made grants of options to purchase approximately 975,000 shares
of Common Stock in December 1997 under the Plan. The options described herein
were issued pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act.
The Company made grants of options to purchase approximately 422,500 shares
of Common Stock in January 1998 under the Plan. The options described herein
were issued pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act.
The Company made grants of options to purchase approximately 732,950 shares
of Common Stock in May 1998 under the Plan. The options described herein were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
No underwriter was involved in the foregoing issuances.
ITEM 16. EXHIBITS
(a) The following documents are filed as a part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, filed on April 21, 1989, as amended (Registration
Number 33-28274) (the '1989 S-1'))
3.2 -- Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.2 to the 1989 S-1)
3.3 -- Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit
4(d) to the Company's Registration Statement on Form S-8, filed on May 19, 1995 (Registration Number
33-59483) (the '1995 S-8'))
3.4 -- Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 4(e) to the 1995
S-8)
4.1 -- Specimen form of the Notes (incorporated by reference to Exhibit 4.2 to the Company's Report on Form
8-K filed on March 14, 1997 (File No. (0-16986)(the 'Note Description 8-K'))
4.2 -- Indenture, dated as of February 26, 1997, between Acclaim Entertainment, Inc. and IBJ Schroder Bank
& Trust Company, as Trustee (incorporated by reference to Exhibit 4.3 to the Note Description 8-K)
4.3 -- Specimen form of the Company's Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Company's Annual Report on Form 10-K for the year ended August 31, 1989, as amended (File No.
0-16986) (the '1989 10-K'))
4.4* -- Form of Warrant Agreement between the Company and American Securities Transfer & Trust, Inc., as
warrant agent, relating to A Warrants
4.5* -- Form of A Warrant (included in Exhibit 4.4)
4.6* -- Form of Warrant Agreement between the Company and American Securities Transfer & Trust, Inc., as
warrant agent, relating to B Warrants
4.7* -- Form of B Warrant (included in Exhibit 4.6)
5* -- Form of opinion of Rosenman & Colin LLP
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.1** -- Employment Agreement dated as of September 1, 1994 between the Company and Gregory Fischbach;
Amendment No. 1, dated as of December 8, 1996, between the Company and Gregory Fischbach
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended August 31, 1996 (File No. 0-16986)(the '1996 10-K'))
10.2** -- Employment Agreement dated as of September 1, 1994 between the Company and
J. Scoroposki; Amendment No. 1, dated as of December 8, 1996, between the Company and
James Scoroposki (incorporated by reference to Exhibit 10.2 to the 1996 10-K)
10.3** -- 1988 Option Plan (incorporated by reference to Exhibit 4(a) to the Company's 1995 S-8)
10.4 -- Revolving Credit and Security Agreement, dated as of January 1, 1993, between the Company, Acclaim
Distribution Inc., LJN Toys, Ltd., Acclaim Entertainment Canada, Ltd. and Arena Entertainment Inc.,
as borrowers, and BNY Financial Corporation, as lender, as amended and restated on February 28, 1995
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1995 (File No. 0-16986) (the '1995 10-Q')) as further amended and
modified by (i) the Amendment and Waiver, dated November 8, 1996, (ii) the Amendment, dated November
15, 1996, (iii) the Blocked Account Agreement dated November 14, 1996, (iv) Letter Agreement, dated
December 13, 1996 and (v) Letter Agreement, dated February 24, 1997 (incorporated by reference to
Exhibit 10.4 to the Company's Report on Form 8-K filed on March 14, 1997 (File No. 0-16986) (the
'1997 8-K'))
10.5 -- Restated and Amended Factoring Agreements, dated as of February 28, 1995, between the Company and
BNY Financial Corporation ('BNY') (incorporated by reference to Exhibit 10.2 to the 1995 10-Q) as
further amended and modified by the Amendment to Factoring Agreements, dated February 24, 1997,
between the Company and BNY (incorporated by reference to Exhibit 10.5 to the 1997 8-K)
10.6*** -- License Agreement, dated as of December 14, 1994, by and between Sony Computer Entertainment of
America and the Company (incorporated by reference to Exhibit 10.6 to the 1996 10-K)
10.7+ -- Confidential License Agreement between Nintendo of America and the Company, effective as of February
20, 1997 (incorporated by reference to Exhibit 1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 28, 1998 (File No. 0-16986))
10.8** -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement on Form S-8) (Registration No. 333-51967)
21 -- Subsidiaries of Registrant (incorporated by reference to Exhibit 21 to the Company's Annual Report
on Form 10-K for the year ended August 31, 1997 (File No. 0-16986))
23.1* -- Consent of KPMG Peat Marwick LLP
23.2* -- Consent of Grant Thornton LLP
23.3* -- Consent of Rosenman & Colin LLP (included in Exhibit 5)
24.1* -- Power of Attorney (included on page II-3)
</TABLE>
- ------------------
* Filed herewith.
** Management contract or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)3 of this report.
*** Confidential treatment has been granted with respect to certain information
contained in this exhibit.
+ Confidential treatment has been requested with respect to certain
information contained in this exhibit.
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II--Allowance for Returns and Discounts.
All other schedules have been omitted because they are not applicable, or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the 'Calculation of
Registration Fee' table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Nassau and State of New York on May 29, 1998.
ACCLAIM ENTERTAINMENT, INC.
By: /s/
----------------------------------
Gregory E. Fischbach
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gregory E. Fischbach and James Scoroposki, and
each or either of them, his true and lawful attorney-in-fact and agent, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all the exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite or necessary to be done
in and about the premises as fully, to all intents and purposes, as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ Co-Chairman of the Board; Chief Executive May 29, 1998
- ------------------------------------------ Officer; President; Director
Gregory E. Fischbach
/s/ Co-Chairman of the Board; Senior Executive May 29, 1998
- ------------------------------------------ Vice President; Treasurer; Secretary;
James Scoroposki Acting Chief Financial Officer; Director
/s/ Director May 29, 1998
- ------------------------------------------
Kenneth L. Coleman
/s/ Director May 29, 1998
- ------------------------------------------
Bernard J. Fischbach
/s/ Director May 29, 1998
- ------------------------------------------
Robert H. Groman
/s/ Director May 29, 1998
- ------------------------------------------
James Scibelli
Director May , 1998
- ------------------------------------------
Michael Tannen
</TABLE>
II-5
<PAGE>
SCHEDULE II
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
ALLOWANCE FOR RETURNS AND DISCOUNTS
(IN 000S)
<TABLE>
<CAPTION>
PROVISIONS FOR
BALANCE AT RETURNS BALANCE AT
BEGINNING OF AND RETURNS AND END OF
PERIOD PERIOD DISCOUNTS DISCOUNTS PERIOD
- ---------------------------------------------------------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended August 31, 1995................................ $ 35,327 $ 25,081 $ 40,773 $ 19,635
Year ended August 31, 1996................................ $ 19,635 $214,079 $ 158,348 $ 75,366*
Year ended August 31, 1997................................ $ 75,366 $ 28,161 $ 65,847 $ 37,680*
</TABLE>
- ------------------
*As of August 31, 1997 and 1996, $18,900 and $26,500 were included in accrued
sales allowances.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ---------------------------------------------------------------------------------------------- ----------
<S> <C> <C> <C>
3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-1, filed on April 21, 1989, as amended
(Registration Number 33-28274) (the '1989 S-1'))
3.2 -- Amendment to the Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.2 to the 1989 S-1)
3.3 -- Amendment to the Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 4(d) to the Company's Registration Statement on Form S-8, filed on May 19,
1995 (Registration Number 33-59483) (the '1995 S-8'))
3.4 -- Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 4(e)
to the 1995 S-8)
4.1 -- Specimen form of the Notes (incorporated by reference to Exhibit 4.2 to the Company's
Report on Form 8-K filed on March 14, 1997 (File No. (0-16986)(the 'Note Description
8-K'))
4.2 -- Indenture, dated as of February 26, 1997, between Acclaim Entertainment, Inc. and IBJ
Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.3 to
the Note Description 8-K)
4.3 -- Specimen form of the Company's Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended August 31,
1989, as amended (File No. 0-16986) (the '1989 10-K'))
4.4* -- Form of Warrant Agreement between the Company and American Securities Transfer & Trust,
Inc., as warrant agent, relating to A Warrants
4.5* -- Form of A Warrant (included in Exhibit 4.4)
4.6* -- Form of Warrant Agreement between the Company and American Securities Transfer & Trust,
Inc., as warrant agent, relating to B Warrants
4.7* -- Form of B Warrant (included in Exhibit 4.6)
5* -- Form of opinion of Rosenman & Colin LLP
10.1** -- Employment Agreement dated as of September 1, 1994 between the Company and Gregory
Fischbach; Amendment No. 1, dated as of December 8, 1996, between the Company and
Gregory Fischbach (incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended August 31, 1996 (File No. 0-16986)(the '1996
10-K'))
10.2** -- Employment Agreement dated as of September 1, 1994 between the Company and
J. Scoroposki; Amendment No. 1, dated as of December 8, 1996, between the Company and
James Scoroposki (incorporated by reference to Exhibit 10.2 to the 1996 10-K)
10.3** -- 1988 Option Plan (incorporated by reference to Exhibit 4(a) to the Company's 1995 S-8)
10.4 -- Revolving Credit and Security Agreement, dated as of January 1, 1993, between the
Company, Acclaim Distribution Inc., LJN Toys, Ltd., Acclaim Entertainment Canada, Ltd.
and Arena Entertainment Inc., as borrowers, and BNY Financial Corporation, as lender, as
amended and restated on February 28, 1995 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995
(File No. 0-16986) (the '1995 10-Q')) as further amended and modified by (i) the
Amendment and Waiver, dated November 8, 1996, (ii) the Amendment, dated November 15,
1996, (iii) the Blocked Account Agreement dated November 14, 1996, (iv) Letter
Agreement, dated December 13, 1996 and (v) Letter Agreement, dated February 24, 1997
(incorporated by reference to Exhibit 10.4 to the Company's Report on Form 8-K filed on
March 14, 1997 (File No. 0-16986) (the '1997 8-K'))
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ---------------------------------------------------------------------------------------------- ----------
<S> <C> <C> <C>
10.5 -- Restated and Amended Factoring Agreements, dated as of February 28, 1995, between the
Company and BNY Financial Corporation ('BNY') (incorporated by reference to Exhibit 10.2
to the 1995 10-Q) as further amended and modified by the Amendment to Factoring
Agreements, dated February 24, 1997, between the Company and BNY (incorporated by
reference to Exhibit 10.5 to the 1997 8-K)
10.6*** -- License Agreement, dated as of December 14, 1994, by and between Sony Computer
Entertainment of America and the Company (incorporated by reference to Exhibit 10.6 to
the 1996 10-K)
10.7+ -- Confidential License Agreement between Nintendo of America and the Company, effective as
of February 20, 1997 (incorporated by reference to Exhibit 1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1998 (File No. 0-16986))
10.8** -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement on Form S-8) (Registration No. 333-51967)
21 -- Subsidiaries of Registrant (incorporated by reference to Exhibit 21 to the Company's
Annual Report on Form 10-K for the year ended August 31, 1997 (File No. 0-16986))
23.1* -- Consent of KPMG Peat Marwick LLP
23.2* -- Consent of Grant Thornton LLP
23.3* -- Consent of Rosenman & Colin LLP (included in Exhibit 5)
24.1* -- Power of Attorney (included on page II-3)
</TABLE>
- ------------------
* Filed herewith.
** Management contract or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)3 of this report.
*** Confidential treatment has been granted with respect to certain information
contained in this exhibit.
+ Confidential treatment has been requested with respect to certain
information contained in this exhibit.
<PAGE>
-------------------------------------------------------------------------------
ACCLAIM ENTERTAINMENT, INC.
and
American Securities Transfer & Trust, Inc.
Warrant Agent
WARRANT AGREEMENT
Dated as of , 1998
-------------------------------------------------------------------------------
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of _________________, 1998, between
ACCLAIM ENTERTAINMENT, INC., a Delaware corporation (the "Company"), and
American Securities Transfer & Trust, Inc. (the "Warrant Agent").
WHEREAS, the Company proposes to issue Five Hundred Fifty Two
Thousand Three Hundred Twenty Six (552,326) common stock purchase warrants (the
"Warrants"), each to purchase one share of its common stock, par value $.02 per
share (the "Common Stock") (the shares of Common Stock issuable on exercise of
the Warrants being referred to herein as the "Warrant Shares"), in connection
with the settlement of a class action lawsuit (the "Action") previously pending
against Lazer-Tron Corporation, a former subsidiary of the Company, in the
California Superior Court for the Eastern Division of Alameda County (the
"Superior Court") and the settlement of a class action lawsuit previously
pending against the Company in federal district court in the Eastern District of
New York (the "Federal Court") in accordance with a Stipulation of Settlement
dated [October 8], 1997 (the "Stipulation") between the Company and the
participants in such settlement, following the "Effective Date" of the
Settlement and pursuant to the "Plan of Distribution" (as such terms are defined
in the Stipulation) and following effectiveness of the registration statement
referred in Section 2.3 hereof;
WHEREAS, the Company proposes to issue certificates evidencing
the Warrants (the "Warrant Certificates");
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, division, transfer, exchange, redemption and
surrender of the Warrants, the issuance of certificates representing the
Warrants, the exercise of the warrants, and the rights of the registered holders
thereof;
WHEREAS, a registration statement covering the Warrants and
the Warrant Shares is to be filed by the Company with the United States
Securities and Exchange Commission (the "SEC" pursuant to Section 2.3 hereof);
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein contained and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the registered
holders of the Warrants and the Warrants Agent, the parties hereto hereby agree
as follows:
1
<PAGE>
ARTICLE I
DISTRIBUTION OF WARRANT CERTIFICATES
Section 1.1 Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act on behalf of the Company in accordance with
the instructions hereinafter set forth, and the Warrant Agent hereby accepts
such appointment.
Section 1.2 Form of Warrant Certificates. The Warrant
Certificates shall be issued in registered form only and, together with the
forms of election to purchase Warrant Shares and of assignment to be printed on
the reverse thereof, shall be substantially in the form of Exhibit A attached
hereto and, in addition, may have such letters, numbers or other marks of
identification or designation and such legends, summaries, or endorsements
stamped, printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as, in any particular case, may be required in the opinion of counsel for the
Company, to comply with any law or with any rule or regulation of any securities
exchange, regulatory authority or agency, or to conform to customary usage. The
Warrants Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrants Certificates) and shall be numbered serially with the letter
"W".
Section 1.3 Execution of Warrant Certificates. The Warrant
Certificates shall be executed on behalf of the Company by its Chairman or
President or any Executive Vice President attested to by its Secretary or
Assistant Secretary, either manually or by facsimile signature printed thereon.
The Warrant Certificates shall be manually countersigned and (except as set
forth in Sections 1.4 and 2.2 hereof) dated the date of countersignature by the
Warrant Agent and shall not be valid for any purpose unless so countersigned and
dated. In case any authorized officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company either
before or after delivery thereof by the Company to the Warrant Agent, the
signature of such person on such Warrant Certificates, nevertheless, shall be
valid and such Warrant Certificates may be countersigned by the Warrant Agent,
and issued and delivered to those persons entitled to receive the Warrants
represented thereby with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
Section 1.4 Registration. On or prior to the 15th business day
following the entry of an order by the Superior Court approving the Settlement,
the Company shall deliver to the Warrant Agent an adequate supply of Warrant
Certificates executed on behalf of the Company as described in Section 1.3
hereof. These Warrant Certificates, shall initially be registered in the names
of those persons who are finally entitled under the Warrant Issuance Notice (as
defined in the Stipulation) to receive Warrant Certificates (the "Authorized
Warrant Holders"). Each such Warrant Certificate shall have imprinted on its
face the date of ____________, 1998 [the earlier of (i) the effectiveness of the
registration statement referenced in Section 2.3 hereof and (ii) February 18,
1998] (the "Commencement Date"). Within 15 business days (or as soon as is
otherwise practicable) after the later of (i) receipt of
2
<PAGE>
the Warrant Issuance Notice identifying the Authorized Warrant Holders and (ii)
written notification from the SEC that the registration of Warrants and Warrant
Shares has been declared effective pursuant to Section 2.3 hereof, the Warrant
Agent shall have mailed or caused to have been mailed such Warrant Certificates
to the Authorized Warrant Holders, provided that at such time the Warrant Agent
shall have received notice that the "Federal Court Litigation" (as defined in
the Stipulation) is no longer subject to appeal.
The Warrant Agent shall maintain books for the transfer and
registration of the Warrant Certificates in accordance with its regular
practice. The Warrant Certificates shall be registered in a Warrant Register as
they are issued. The Company and the Warrant Agent shall be entitled to treat
the registered owner(s) of the Warrant Certificates (the "Holder(s)") as the
owner(s) in fact thereof (notwithstanding any notation of ownership or other
writing on the Warrant Certificates made by anyone other than the Company or the
Warrant Agent), for the purpose of any exercise thereof and for all other
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary.
Section 1.5 Transfer of Warrants. The Warrant Certificates
shall be transferable only on the books of the Company maintained at the office
of the Warrant Agent designated for such purpose upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, which endorsement shall be guaranteed by a member firm of a national
securities exchange, a commercial bank (not a savings bank or a savings and loan
association) or trust company located in the United States or a member of the
National Association of Securities Dealers, Inc. (hereafter, "Signatures
Guaranteed"). In all cases of transfer by an attorney, the original power of
attorney, duly approved, or a copy thereof, duly certified, shall be deposited
and remain with the Warrant Agent. In case of transfer by executor,
administrators, guardians or other legal representatives, duly authenticated
evidence of their authority shall be produced, and may be required to be
deposited and remain with the Warrant Agent in its discretion.
A reasonable service charge may be imposed by the Warrant Agent upon
the Holder for any exchange or registration of transfer of Warrant Certificates.
The Company may require payment by a Holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
ARTICLE II
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
Section 2.1 Exercise Price. Each Warrant Certificate shall,
when signed and countersigned as provided in Section 1.3, entitle the Holder
thereof to purchase from the Company one share of Common Stock for each Warrant
evidenced thereby, at the purchase price of Three Dollars and Fifty Cents
($3.50) per share (the "Exercise Price"). Except as the context otherwise
requires, the term "Exercise Price" as used in this Agreement shall mean the
purchase price of one share of Common Stock, reflecting all appropriate
adjustments made in
3
<PAGE>
accordance with the provisions of Article III hereof.
Section 2.2 Exercisability of Warrants and Registration of
Warrant Shares. Each Warrant may be exercised at any time after (i) the
Commencement Date and (ii) after the Warrant Shares have been effectively
registered under the Securities Act of 1933, as amended (the "Securities Act")
pursuant to a Registration Statement (as hereinafter defined) filed with and
declared effective by the SEC, as provided in Section 2.3 hereof (provided that
at such time the Plan of Distribution shall have been approved by the Superior
Court and shall be final and non-appealable), and such other action as may be
required by Federal or state law relating to the issuance or distribution of
securities shall have been taken, until 5:00 p.m., New York City time, on the
third anniversary of the Commencement Date (the "Exercise Deadline") unless
extended in accordance with Section ___. After the Exercise Deadline, any
unexercised Warrants will be void and all rights of Holders shall cease. Each
Warrant Certificate shall have the Exercise Deadline imprinted on its face.
Subject to Section 2.3 hereof, the Company shall use reasonable good faith
efforts to keep available for delivery upon the exercise of Warrants a
prospectus that meets the requirements of Section 10 of the Securities Act,
until the earlier of the date by which all Warrants are exercised or the
Exercise Deadline, unless the Company determines that, by virtue of an amendment
of the Securities Act or otherwise, the effectiveness of such registration or
the delivery of such prospectus is not required at the time Warrant Shares are
to be issued.
In the event that, in the judgment of the Company, it is
advisable to suspend use of the prospectus described in this Section 2.2, due to
(i) any request by the SEC or any other federal or state governmental authority
for amendments or supplements to a Registration Statement or related prospectus
or for additional information; (ii) the issuance by the SEC or any other federal
or state governmental authority of any stop order suspending the effectiveness
of a Registration Statement or the initiation or threat of any proceedings for
that purpose; (iii) the receipt by the Company of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Common Stock for sale in any jurisdiction or the initiation or threat of any
proceeding for such purpose; (iv) the existence of any fact or the happening of
any event which makes any statement of a material fact in such Registration
Statement or related prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue or which would require the making of
any changes in the Registration Statement or prospectus in order that, in the
case of the Registration Statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the case
of the prospectus, it will not contain any untrue statement of a material fact
or omit to state any material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; (v) the
Company's determination that a post-effective amendment to a Registration
Statement would be appropriate, or (vi) pending material corporate developments
or similar material events that have not yet been publicly disclosed and as to
which the Company believes public disclosure will be prejudicial to the Company,
the Company shall give written notice to the Warrant Agent to the effect of the
foregoing and to the effect that the Warrants may not be exercised during such
time
4
<PAGE>
period (the "Blackout Period"). In the event that a Holder seeks to exercise a
Warrant during the Blackout Period, the Warrant Agent will notify the Holder, in
accordance with Section 6.15 hereof, that a Blackout Period is in effect. In no
event shall the Company call more than two (2) sixty (60) day Blackout Periods
in any calendar year, nor may it call a Blackout Period sixty (60) days prior to
the Exercise Deadline.
Section 2.3 Registration of Warrants and Warrant Shares.
(a) The Company shall, within 15 business days after the Company files
its annual report on Form 10K for the fiscal year ended August 31, 1997 (and in
no event prior to such filing), at the Company's sole cost and expense (other
than the fees and disbursements of counsel for the Holders and the underwriting
discounts, if any) prepare and file with the SEC a registration statement on
Form S-1 or any other available form approved by the SEC (the "Registration
Statement") registering the Warrants and the Warrant Shares and will use its
reasonable best efforts through its officers, directors, auditors, and counsel
to cause such Registration Statement to become effective within 120 days
thereafter.
(b) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Holders, its officers, directors, partners,
employees, agents, counsel, Plaintiffs' Settlement Counsel (as that term is
defined in the Stipulation) and each person, if any, who controls any such
person within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all loss, liability, charge, claim, damage and expense
whatsoever (which shall include, for all purposes of this Section 2.3, but not
be limited to, attorneys' fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation) as and when incurred, arising out of,
based upon or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Registration Statement,
preliminary prospectus or final prospectus (as from time to time amended and
supplemented) or any amendment or supplement thereto, relating to the sale of
any of the Warrants or Warrant Shares or (B) in any application or other
document or communication (in this Section 2.3 collectively called an
"application") executed by or on behalf of a Holder or based upon written
information furnished by or on behalf of a Holder filed in any jurisdiction in
order to register or qualify any of the Warrants or Warrant Shares under the
securities or blue sky laws thereof or filed with the SEC or any securities
exchange; or any omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements made therein not
misleading, unless (x) such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
a Holder by or on behalf of such Holder expressly for inclusion in any
Registration Statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(y) such loss, liability, charge, claim, damage or expense arises out of a
Holder's failure to comply with the terms and provisions of this Agreement, or
(ii) any breach of any representation, warranty, covenant or agreement of a
Holder contained in this Agreement. The foregoing agreement to indemnify shall
be in addition to any remedy a
5
<PAGE>
Holder may otherwise have, including remedies arising under this Agreement.
If any action is brought against a Holder or any of its
officers, directors, partners, employees, agents or counsel, if any, or any
controlling persons of such person (an "indemnified party") in respect of which
indemnity may be sought against the Company pursuant to the foregoing paragraph,
such indemnified party or parties shall promptly notify the Company in writing
of the institution of such action (but the failure so to notify shall not
relieve the Company from any liability other than pursuant to this Section
2.3(b)) and the Company shall promptly assume the defense of such action,
including the employment of counsel (reasonably satisfactory to such indemnified
party or parties) provided that the indemnified party shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party or parties unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action or the Company shall not
have promptly employed counsel reasonably satisfactory to such indemnified party
or parties to have charge of the defense of such action or such indemnified
party or parties shall have reasonably concluded that there may be one or more
legal defenses available to it or them or to other indemnified parties which are
different from or additional to those available to the Company, in any of which
events such fees and expenses shall be borne by the Company and the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this Section 2.3 to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without its written consent. The Company shall not,
without the prior written consent of each indemnified party that is not released
as described in this sentence, settle or compromise any action, or permit a
default or consent to the entry of judgment in or otherwise seek to terminate
any pending or threatened action, in respect of which indemnity may be sought
hereunder (whether or not any indemnified party is a party thereto) unless such
settlement, compromise, consent or termination includes an unconditional release
of each indemnified party from all liability in respect of such action. The
Company agrees promptly to notify the Holders of the commencement of any
litigation or proceedings against the Company or any of it officers or directors
in connection with the sale of any Warrants or Common Stock or any preliminary
prospectus, prospectus, Registration Statement, or amendment or supplement
thereto, or any application relating to any sale of any Warrants or Common
Stock.
(c) The Holders agree to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall have signed any
Registration Statement covering the Warrants or the Common Stock held by the
Holders, each other person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act and its
or their respective counsel and Plaintiffs' Settlement Counsel (as that term is
defined in the Stipulation), to the same extent as the foregoing indemnity from
the Company to the Holders in Section 2.3(b) hereof but only with respect to
statements or omissions, if any, made in any Registration Statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holders by or on
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behalf of a Holder, expressly for inclusion in any such Registration Statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto or in any application, as the case may be. If any action shall be
brought against the Company or any other person to be so indemnified based on
any such Registration Statement, preliminary prospectus, or final prospectus, or
any amendment or supplement thereto or in any application, and in respect of
which indemnity may be sought against a Holder pursuant to this Section 2.3(c) a
Holder shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 2.3(b).
(d) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 2.3(b)
or 2.3(c) (subject to the limitations thereof) but it is found in a final
judicial determination, not subject to further appeal, that such indemnification
may not be enforced in such case, even though this Agreement expressly provides
for indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act or otherwise, then
the Company (including for this purpose any contribution made by or on behalf of
any director of the Company, any officer of the Company who signed any such
Registration Statement, any controlling person of the Company, and its or their
respective counsel) as one entity, and the Holders (including for this purpose
any contribution by or on behalf of an indemnified party) as a second entity,
shall contribute to the losses, liabilities, claims, damages and expenses
whatsoever to which any of them may be subject, on the basis of relevant
equitable considerations such as the relative fault of the Holders and the
Company in connection with the facts which resulted in such losses, liabilities,
claims, damages and expenses. The relative fault, in the case of an untrue
statement, alleged untrue statement, omission or alleged omission shall be
determined by, among other things, whether such statement, alleged statement,
omission or alleged omission relates to information supplied by a Holder or the
Company, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement, alleged statement, omission or
alleged omission. Each Holder and the Company agree that it would be unjust and
inequitable if the respective obligations of the Holders and the Company for
contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages and expenses (even if the Holders
and the other indemnified parties were treated as one entity for such purpose)
or by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 2.3(d). No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 2.3(d)
each person, if any, who controls a Holder within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee, agent and counsel of a Holder or control person
shall have the same rights to contribution as the Company or control person and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed any such Registration Statement, each director of
the Company, and its or their respective counsel shall have the same rights to
contribution as the Company, subject in each case to the provisions of
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this Section 2.3(d). Anything in this Section 2.3(d) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 2.3(d) is intended to supersede any right to contribution under the
Securities Act, the Exchange Act or otherwise.
(e) Notwithstanding the foregoing provisions of this Section
2.3, in the event the Stipulation and/or the Plan of Distribution shall be the
subject of appeal by members of the Settlement Class or other persons, the
Company may in its sole discretion, cease its efforts to file or to cause the
declaration of effectiveness of the Registration Statement and/or cause the
withdrawal of such Registration Statement. Upon resolution of such appeal, the
Company shall forthwith use its reasonable best efforts to file or cause the
declaration of effectiveness of the Registration Statement.
Section 2.4 Procedure for Exercise of Warrants. (a) During the
period specified in and subject to the provisions and limitations set forth in
Section 2.2 hereof, Warrants may be exercised by surrendering the Warrant
Certificates representing such Warrants to the Warrant Agent at 938 Quail
Street, Suite 101, Lakewood, Colorado 80215 attention: Trust Department (the
"Principal Office") or at such other location as the Warrant Agent may specify
in writing to the Holders with the election to purchase form set forth on the
reverse side of the Warrant Certificate duly completed and executed, with
Signature Guaranteed under certain circumstances as set forth in the purchase
form, accompanied by payment in full to the Warrant Agent for the account of the
Company of the Exercise Price in effect at the time of such exercise, together
with such taxes as are specified in Section 6.1 hereof, for each share of Common
Stock with respect to which such Warrants are being exercised. Such Exercise
Price and taxes shall be paid in full by certified or official bank check, or by
United States Postal Service money order, payable in United States currency to
the order of the Warrant Agent for the account of the Company.
(b) In lieu of any cash payment to be made by a Holder of the Exercise
Price pursuant to the preceding paragraph, during the period specified in and
subject to the provisions and limitations set forth in Section 2.2 hereof, the
Holder may, at its option, exchange his Warrant, in whole or in part (a "Warrant
Exchange"), into the number of Warrant Shares determined in accordance with this
paragraph, by surrendering the Warrant to the Warrant Agent accompanied by a
notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the Common Stock issuable upon such Warrant Exchange
and, if applicable, a new warrant of like tenor evidencing the balance of the
Warrant Shares remaining subject to such Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, a Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient
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obtained by dividing (A) the product of the Total Number times the existing
Exercise Price by (B) the then Market Price of a share of Common Stock. As used
in this Agreement, the term "Market Price" shall mean the average closing price
of the Company's Common Stock on the Nasdaq National Market System, or, if the
Company's Common Stock is not so listed on the Nasdaq National Market, then on
the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, during the twenty
(20) consecutive business days (as such term is used on the Nasdaq National
Market System or a domestic over-the-counter market, as the case may be) ending
three days prior to the date of the "Notice of Exchange" or if later the
"Exchange Date" (as such terms are defined in Section 2.4 hereof). Upon request
of the Warrant Agent, the Company shall provide to the Warrant Agent a written
presentation of the Market Price for the period requested by the Warrant Agent.
(c) The date on which a Warrant is exercised in accordance with this
Section 2.4 is sometimes referred to herein as the "Date of Exercise" of such
Warrant. In the event that a Blackout Period, as described in Section 2.2 hereof
is in effect, the Warrant Agent will notify the Holder, in accordance with
Section 6.15 hereof, that a Blackout Period is in effect and that the Warrants
surrendered may not be exercised during the Blackout Period. In this event, the
date that the Company notifies the Warrant Agent that the Blackout Period has
ended will be the Date of Exercise unless the Holder notifies the Warrant Agent,
in writing, prior to the end of the Blackout Period that he withdraws his
surrender of the Warrant Certificates.
Section 2.5 Issuance of Warrant Shares. As soon as practicable
after the Date of Exercise of any Warrant, the Warrant Agent shall deposit the
proceeds received, if any, from the exercise of the Warrants, and promptly,
after clearance of checks received in payment of the Exercise Price pursuant to
such Warrants, shall issue a certificate or certificates for the number of full
Warrant Shares to which the Holder thereof is entitled, registered in accordance
with the instructions set forth in the election to purchase. The Company
covenants that the Warrant Shares which shall be issuable upon exercise of the
Warrants and payment, if any, of the Exercise Price in compliance with this
Agreement and the Warrant Certificate shall, pursuant to and in accordance with
the terms of this Agreement, be validly authorized and issued, fully paid and
nonassessable, and free from all taxes, liens and charges created by the Company
in respect of the issue thereof. Certificates representing such Warrant Shares
shall be delivered by the Warrant Agent in such names and denominations as are
required for delivery to, or in accordance with the instructions of, the Holder.
Each person in whose name any such certificate for Warrant Shares issued shall
for all purposes be deemed to have become the holder of record of the Warrant
Shares represented thereby on the Date of Exercise of the Warrants resulting in
the issuance of such Warrant Shares, irrespective of the date of issuance or
delivery of such certificate for Warrant Shares; provided, however, that if, at
the date of the surrender of such Warrants and payment of the Exercise Price,
the transfer books for the Warrant Shares purchasable upon the exercise of such
Warrants shall be closed, the certificates for the Warrant Shares in respect of
which such Warrants are then exercised shall be issuable as of the date on which
such books shall
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next be opened (whether before or after the Exercise Deadline) and until such
date the Warrant Agent shall be under no duty to deliver any certificate for
such Warrant Shares; provided, further, that the transfer books of record,
unless otherwise required by law, shall not be closed at any one time for a
period longer than twenty (20) days.
Section 2.6 Certificates for Unexercised Warrants. Subject to
Section 2.4(b) hereof, if less than all of the Warrants represented by a Warrant
Certificate are exercised, the Warrant Agent shall execute and mail, by
first-class mail, within thirty (30) days of the Date of Exercise, to the Holder
of such Warrant Certificate, or such other person as shall be designated in the
election to purchase, a new Warrant Certificate representing the number of
Warrants not exercised. In no event shall a fraction of a Warrant be exercised,
and the Warrant Agent shall distribute no Warrant Certificates representing
fractions of Warrants under this or any other Section of this Agreement.
Section 2.7 Reservation of Shares. The Company shall at all
times reserve and keep available for issuance upon the exercise of Warrants a
number of its authorized but unissued shares or treasury shares, or both, of
Common Stock that will be sufficient to permit the exercise in full of all
outstanding Warrants. The transfer agent for the Company's Common Stock and
every subsequent transfer agent for the Company's capital stock issuable upon
the exercise of Warrants, will be irrevocably authorized and directed at all
times to reserve a number of authorized shares as shall be required for such
purpose. The Company will keep a copy of this Agreement on file with the
transfer agent for the Company's Common Stock and with every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of the Warrants. The Warrant Agent is hereby irrevocably authorized to
requisition from time to time from such transfer agent the stock certificates
required to honor outstanding Warrants upon exercise thereof in accordance with
the terms of this Agreement. The Company will supply such transfer agent with
duly executed stock certificates for such purposes and will provide or otherwise
make available any cash which may be payable as provided in Section 3.9 hereof.
All Warrant Certificates surrendered in the exercise of the rights thereby
evidenced shall be canceled by the Warrant Agent and retained by the Warrant
Agent pursuant to Section 5.2 hereof.
Section 2.8 Disposition of Proceeds. Upon the exercise of any
Warrant, the Warrant Agent shall promptly deposit all funds received by it for
the purchase of Warrant Shares into a non-interest-bearing escrow account as
directed in writing by the Company. All funds deposited in the escrow account
shall be disbursed on a weekly basis to the Company, or as otherwise requested
by the Company in writing. A detailed accounting statement relating to the
number of Warrants exercised, names of Holders of such exercised Warrants and
the net amount of funds remitted will be given to the Company with each such
disbursement.
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ARTICLE III
ADJUSTMENTS AND NOTICE PROVISIONS
Section 3.1 Adjustment of Exercise Price. Subject to the
provisions of this Article III, the Exercise Price in effect from time to time
shall be subject to adjustment, as follows:
(a) In case the Company shall (i) declare a dividend payable
in stock or make some other distribution on the outstanding shares of
its Common Stock in shares of its Common Stock, (ii) subdivide or
reclassify the outstanding shares of its Common Stock into a greater
number of shares or (iii) combine or reclassify the outstanding shares
of its Common Stock into a smaller number of shares, the Exercise
Price, in effect immediately after the record date for such dividend or
distribution or the effective date of such division, reclassification
or combination shall be proportionately adjusted by multiplying the
then Exercise Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
event and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such event, and the product
so obtained shall thereafter be the Exercise Price then in effect. Such
adjustment shall be made successively whenever any event specified
above shall occur.
(b) All calculations under this Section 3.1 shall be made to
the nearest thousandth of a cent.
Section 3.2 No Adjustments to Exercise Price. No adjustment in
the Exercise Price in accordance with the provisions of paragraph (a) of Section
3.1 hereof need be made if such adjustment would amount to a change in such
Exercise Price of less than ten cents; provided, however, that the amount by
which any adjustment is not made by reason of the provision of this Section 3.2
shall be carried forward and taken into account at the time of any subsequent
adjustment in the Exercise Price.
Section 3.3 Adjustment to Number of Shares. Upon each
adjustment of the Exercise Price pursuant to Paragraph (a) of Section 3.1, each
Warrant shall thereupon evidence the right to purchase that number of shares of
Common Stock (calculated to the nearest hundredth of a share) obtained by
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment upon exercise of the Warrant by the Exercise Price in effect
immediately prior to such adjustment and dividing the product so obtained by the
Exercise Price in effect immediately after such adjustment.
Section 3.4 Reorganizations. In case of any capital
reorganization, consolidation or merger of the Company (other than in the cases
referred to in Section 3.1 hereof, and other than the consolidation or merger of
the Company with or into another
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corporation in which the Company is the continuing corporation and which does
not result in any reclassification of the outstanding shares of Common Stock or
the conversion of such outstanding shares of Common Stock into shares of other
stock or other securities or property), or the sale of all or substantially all
of the Company's stock or property, (any of the foregoing events hereinafter
referred to as a "Reorganization"), all outstanding Warrants which have not been
exercised prior to or concurrently with the closing of any such transaction will
terminate immediately upon the closing. Additionally, in the event of sale or
conveyance or other transfer of all or substantially all of the assets of the
Company as a part of a plan for liquidation of the Company, all rights to
exercise any Warrant shall terminate thirty (30) days after the Company gives
written notice to each Holder that such sale or conveyance or other transfer has
been consummated in the manner specified in section 6.15 hereof.
Section 3.5 Exercise Price Not Less Than Par Value. In no
event shall the Exercise Price be adjusted below the par value per share of the
Common Stock.
Section 3.6 Notice of Certain Action. In the event the
Company shall:
(a) declare any dividend payable in stock to the holders of
its Common Stock or make any other distribution in property other than
cash to the holders of its Common Stock; or
(b) offer to the holders of its Common Stock as such rights to
subscribe for or purchase any shares of any class of stock or any other
rights or opinions; or
(c) effect any reclassification of its Common Stock (other
than a reclassification involving merely the subdivision or combination
of outstanding shares of Common Stock), Reorganization or the
liquidation, dissolution or winding up of the Company;
then, in each such case, the Company shall cause notice of such proposed action
to be mailed to the Warrant Agent. Such notice shall specify the date on which
the books of the Company shall close, or a record be taken, for determining
holders of Common Stock entitled to receive such stock dividend or other
distribution or such rights or options, or the date on which such
reclassification, Reorganization, liquidation, dissolution or winding up shall
take place or commence, as the case may be, and the date as of which it is
expected that holders shall be entitled to receive securities or other property
deliverable upon such action, if any such date has been fixed. The Company shall
also cause copies of such notice to be mailed to each Holder of a Warrant
Certificate in the manner specified in Section 6.15 hereof. Such notice shall be
mailed, in the case of any action covered by Subsection 3.6(a) or 3.6(b) above,
at least ten (10) days prior to the record date for determining holders of the
Common Stock for purposes of receiving such payment or offer, and in the case of
any action covered by Subsection 3.6(c) above, at least ten (10) days prior to
the earlier of the date upon which such
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action is to take place or any record date to determine holders of Common Stock
entitled to receive such securities or other property.
Section 3.7 Notice of Adjustments. Whenever any adjustment is
made pursuant to this Article III, the Company shall cause notice of such
adjustment to be mailed to the Warrant Agent within fifteen (15) days
thereafter, such notice to include in reasonable detail (i) the events
precipitating the adjustment, (ii) the computation of any adjustments and (iii)
the Exercise Price, the number of shares or the securities or other property
purchasable upon exercise of each Warrant after giving effect to such
adjustment. The Warrant Agent shall be entitled to rely on such notice and any
adjustment therein contained and shall not be deemed to have knowledge of any
such adjustment unless and until it shall have received such notice. The Warrant
Agent shall within fifteen (15) days after receipt of such notice from the
Company cause a similar notice to be mailed to each Holder.
Section 3.8 Warrant Certificate Amendments. Irrespective of
any adjustments pursuant to this Article III, Warrant Certificates theretofore
or thereafter issued need not be amended or replaced, but certificates
thereafter issued shall bear an appropriate legend or other notice of any
adjustments.
Section 3.9 Fractional Shares. The Company shall not be
required upon the exercise of any Warrant to issue fractional shares of Common
Stock which may result from adjustments in accordance with this Article III to
the Exercise Price or number of shares of Common Stock purchasable under each
Warrant. If more than one Warrant is exercised at one time by the same Holder,
the number of full shares of Common Stock which shall be deliverable shall be
computed based on the number of shares deliverable in exchange for the aggregate
number of Warrants exercised. With respect to any final fraction of a share
called for upon the exercise of any Warrant or Warrants, the Company, at its
option, shall either (i) issue a full share of Common Stock to the Holder in
respect of such fraction or (ii) pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the market value of a share
of Common Stock, as determined by the Warrant Agent on the basis of the market
price per share of Common Stock on the business day next preceding the date of
such exercise. For the purposes of this Section 3.9, the market price per share
of Common Stock for such day shall mean (i) the average of the high and low bid
and ask prices of the Common Stock on the Nasdaq National Market System for such
day; or (ii) if the Common Stock is not then traded on such exchange, then the
last known price paid per share by a purchaser of such stock in an arm's-length
transaction.
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ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS
OF HOLDERS OF WARRANT CERTIFICATES
Section 4.1 Rights of Warrant Holders. No Warrant Certificate
shall entitle the registered holder thereof, as such, to any of the rights of a
stockholder of the Company, including, without limitation, the right to vote, to
receive dividends and other distributions, to receive any notice of, or to
attend, meetings of stockholders or any other proceedings of the Company.
Section 4.2 Lost, Stolen, Mutilated or Destroyed Warrant
Certificates. If any Warrant Certificate shall be mutilated, apparently lost,
stolen or destroyed, the Company in its discretion may direct the Warrant Agent
to execute and deliver, in exchange and substitution for and upon cancellation
of a mutilated Warrant Certificate, or in lieu of or in substitution for an
apparently lost, stolen or destroyed Warrant Certificate, a new Warrant
Certificate for the number of Warrants represented by the Warrant Certificate so
mutilated, apparently lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such Warrant Certificate, and of
the ownership thereof, and indemnity, if requested, all satisfactory to the
Company and the Warrant Agent. Applicants for such substitute Warrant
Certificates shall also comply with such other reasonable regulations and pay
such other reasonable charges incidental thereto as the Company or Warrant Agent
may prescribe. Any such new Warrant Certificate shall constitute an original
contractual obligation of the Company, whether or not the allegedly mutilated,
lost or stolen or destroyed Warrant Certificate shall be at any time enforceable
by anyone.
ARTICLE V
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
Section 5.1 Split Up, Combination, Exchange and Transfer of
Warrant Certificates. Prior to the Exercise Deadline, Warrant Certificates,
subject to the provisions of Section 5.2, may be split-up, combined or exchanged
for other Warrant Certificates representing a like aggregate number of Warrants
or may be transferred in whole or in part. Any Holder desiring to split-up,
combine or exchange a Warrant Certificate or Warrant Certificates shall make
such request in writing delivered to the Warrant Agent at its Principal Office
and shall surrender the Warrant Certificate or Warrant Certificates so to be
split-up, combined or exchanged at said office. Subject to any applicable laws,
rules or regulations restricting transferability, any restriction on
transferability that may appear on a Warrant Certificate in accordance with the
terms hereof, or any "stop-transfer" instructions the Company may give to the
Warrant Agent to implement any such restriction (which instructions the Company
is expressly authorized to give), transfer of outstanding Warrant
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Certificates may be effected by the Warrant Agent from time to time upon the
books of the Company to be maintained by the Warrant Agent for that purpose,
upon a surrender of the Warrant Certificate to the Warrant Agent at its
Principal Office, with the assignment form set forth in the Warrant Certificate
duly executed and with Signature Guaranteed. Upon any such surrender for
split-up, combination, exchange or transfer, the Warrant Agent shall execute and
deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested. The Warrant Agent shall not
be required to effect any split-up, combination, exchange or transfer which will
result in the issuance of a Warrant Certificate evidencing a fraction of a
Warrant. The Warrant Agent may require the holder to pay a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
split-up, combination, exchange or transfer of Warrant Certificates prior to the
issuance of any new Warrant Certificate.
Section 5.2 Cancellation of Warrant Certificates. Any Warrant
Certificate surrendered upon the exercise of Warrants or for split-up,
combination, exchange or transfer, or purchased or otherwise acquired by the
Company, shall be canceled and shall not be reissued by the Company; and, except
as provided in Section 2.6 in case of the exercise of less than all of the
Warrants evidenced by a Warrant Certificate or in Section 5.1 in case of a
split-up, combination, exchange or transfer, no Warrant Certificate shall be
issued hereunder in lieu of such canceled Warrant Certificates. Any Warrant
Certificate so canceled shall be held by the Warrant Agent (unless otherwise
directed by the Company) and destroyed not earlier than seven (7) years after
such cancellation. The Warrant Agent shall furnish to the Company written
confirmation of the destruction of the Warrant Certificates so canceled.
ARTICLE VI
PROVISIONS CONCERNING THE
AGENT AND OTHER MATTERS
Section 6.1 Payment of Taxes and Charges. The Company will
from time to time promptly pay to the Warrant Agent, or make provisions
satisfactory to the Warrant Agent for the payment of, all taxes and charges that
may be imposed by the United States or any state upon the Company or the Warrant
Agent in connection with the issuance or delivery of any Warrant Shares, but any
transfer taxes in connection with the issuance of Warrant Certificates or
certificates for Warrant Shares in any name other than that of the Holder of the
Warrant Certificates surrendered shall be paid by such Holder; and, in such
case, the Company shall not be required to issue or deliver any Warrant
Certificate or certificate for Warrant Shares until such taxes shall have been
paid or it has been established to the Company's satisfaction that no tax is
due.
Section 6.2 Resignation or Removal of Warrant Agent. The
Warrant Agent may resign its duties and be discharged from all further duties
and liabilities hereunder after giving at least thirty (30) days' notice in
writing to the Company, except that such shorter
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notice may be given as the Company shall, in writing, accept as sufficient. Upon
comparable notice to the Warrant Agent, the Company may remove the Warrant
Agent; provided, however, that in such event the Company shall appoint a new
Warrant Agent, as hereinafter provided, and the removal of the Warrant Agent
shall not be effective until a new Warrant Agent has been appointed and has
accepted such appointment. If the office of Warrant Agent becomes vacant by
resignation or incapacity to act or otherwise, the Company shall appoint in
writing a new Warrant Agent. If the Company shall fail to make such appointment
within a period of thirty (30) days after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent
or by the Holder of any Warrant Certificate, then the Holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Warrant Agent. Any new Warrant Agent, whether appointed by the Company
or by such a court, shall be a bank which is a member of the Federal Reserve
System. Any new Warrant Agent appointed hereunder shall execute, acknowledge and
deliver to the former Warrant Agent last in office, and to the Company, an
instrument accepting such appointment under substantially the same terms and
conditions as are contained herein, and thereupon such new Warrant Agent without
any further act or deed shall become vested with the rights, powers, duties and
responsibilities of the Warrant Agent and the former Warrant Agent shall cease
to be the Warrant Agent; but if for any reason it becomes necessary or expedient
to have the former Warrant Agent execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the former Warrant
Agent.
Section 6.3 Notice of Appointment. Not later than the
effective date of the appointment of a new Warrant Agent the Company shall cause
notice thereof to be mailed to the former Warrant Agent and the transfer agent
for the Company's Common Stock, and shall forthwith cause a copy of such notice
to be mailed to each Holder of a Warrant Certificate. Failure to mail such
notice, or any defect contained therein, shall not affect the legality or
validity of the appointment of the successor Warrant Agent.
Section 6.4 Merger of Warrant Agent. Any company into which
the Warrant Agent may be merged or with which it may be consolidated or any
company resulting from any merger or consolidation to which the Warrant Agent
shall be a party, or any company to which the Warrant Agent may transfer its
stockholder services business, shall be the successor Warrant Agent under this
Agreement without further act, provided that such company would be eligible for
appointment as a successor Warrant Agent under the provisions of Section 6.2
hereof. Any such successor Warrant Agent may adopt the prior countersignature of
any predecessor Warrant Agent and distribute Warrant Certificates countersigned
but not distributed by such predecessor Warrant Agent, or may countersign the
Warrant Certificates in its own name.
Section 6.5 Company Responsibilities. The Company agrees that
it shall (i) pay the Warrant Agent the agreed upon remuneration for its services
as Warrant Agent hereunder and will reimburse the Warrant Agent upon demand for
all expenses, advances, and
16
<PAGE>
expenditures that the Warrant Agent may reasonably incur in the execution of its
duties hereunder (including reasonable fees and expenses of its counsel); (ii)
provide the Warrant Agent, upon request, with sufficient funds to pay any cash
due pursuant to Section 3.9 upon exercise of Warrants; and (iii) perform,
execute, acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all further and other acts, instruments and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing by the Warrant Agent of the provisions of this Agreement.
Section 6.6 Purchase of Warrants by the Company. The Company
shall have the right, except as limited by law, other agreement or herein, to
purchase or otherwise acquire Warrants at such times, in such manner and for
such consideration as it may deem appropriate.
Section 6.7 Certification for the Benefit of Warrant Agent.
Whenever in the performance of its duties under this Agreement the Warrant Agent
shall deem it necessary or desirable that any matter be proved or established or
that any instructions with respect to the performance of its duties hereunder be
given by the Company prior to taking or suffering any action hereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established, or such
instructions may be given, by a certificate or instrument signed by the Chairman
of the Board, the President, an Executive Vice President, the Secretary or the
Treasurer of the Company and delivered to the Warrant Agent. Such certificate or
instrument may be relied upon by the Warrant Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement; but in its
discretion the Warrant Agent may in lieu thereof accept other evidence of such
matter or may require such further or additional evidence as it may deem
reasonable.
Section 6.8 Liability of Warrant Agent. The Warrant Agent
shall be liable hereunder solely for its own negligence or willful misconduct.
The Warrant Agent shall act hereunder solely as an agent in a ministerial
capacity for the Company and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only. The Warrant Agent will not incur any
liability or responsibility to the Company or to any Holder of any Warrant
Certificate for any action taken, or any failure to take action, in reliance on
any paper, document or instrument reasonably believed by the Warrant Agent to be
genuine and to have been signed, sent or presented by the proper party or
parties. The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof by the
Company or in respect of the validity or execution of any Warrant Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Warrant Certificate or the Stipulation; nor shall it be responsible
for the making of any adjustment required under the provisions of Article III
hereof or
17
<PAGE>
responsible for the manner, method or amount of any such adjustment or the facts
that would require any such adjustment; nor shall it by any act hereunder be
deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock or other securities to be issued
pursuant to this Agreement or any Warrant Certificate or as to whether any
shares of Common Stock or other securities will when issued be validly
authorized and issued and fully paid and nonassessable.
Section 6.9 Use of Attorneys, Agents and Employees. The
Warrant Agent may execute and exercise any of the rights or powers hereby vested
in it or perform any duty hereunder either itself or by or through its
attorneys, agents or employees.
Section 6.10 Indemnification. The Company agrees to indemnify
the Warrant Agent and save it harmless against any and all losses, expenses or
liabilities, including judgments, costs and reasonable counsel fees arising out
of or in connection with its acceptance of its position hereunder and in
carrying out the terms hereof, except as a result of the negligence or willful
misconduct of the Warrant Agent.
Section 6.11 Acceptance of Agency. The Warrant Agent hereby
accepts the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth.
Section 6.12 Instructions from the Company. The Warrant Agent
is hereby authorized and directed to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board, the
President, an Executive Vice President, the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer or
officers.
Section 6.13 Changes to Agreement. The Warrant Agent may,
without the consent or concurrence of any Holder, by supplemental agreement or
otherwise, join with the Company in making any changes or corrections in this
Agreement that shall in the judgment of the Company (i) be required to cure any
ambiguity or to correct any defective or inconsistent provision or clerical
omission or mistake or manifest error herein contained, (ii) add to the
covenants and agreements of the Company or the Warrant Agent in this Agreement
such further covenants and agreements thereafter to be observed, or (iii) result
in the surrender of any right or power reserved to or conferred upon the Company
or the Warrant Agent in this Agreement, but which changes or corrections do not
or will not adversely affect, alter or change the rights, privileges or
immunities of the Holders of Warrant Certificates. The Warrant Agent shall be
entitled to rely on such Company counsel's written advice. Otherwise the
Agreement may be amended by the written consent of the Company and the
affirmative vote or written consent of Holders holding not less than two-thirds
of the then outstanding Warrants.
18
<PAGE>
Section 6.14 Assignment. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns.
Section 6.15 Notices. Any notice or demand required by this
Agreement to be given or made by the Warrant Agent or by the Holder to or on the
Company shall be sufficiently given or made if sent by first-class or registered
mail, postage prepaid, addressed (until another address is filed in writing by
the Company with the Warrant Agent) as follows:
Acclaim Entertainment, Inc.
One Acclaim Plaza
Glen Cove, New York 11542
Attention: Gregory E. Fischbach
Any notice or demand required by this Agreement, to be given or made by the
registered Holder of any Warrant Certificate or by the Company to or on the
Warrant Agent shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing with the Company by the Warrant Agent), as follows:
American Securities Transfer & Trust, Inc.
938 Quail Street
Suite 101
Lakewood, Colorado 80215
Attention: Trust Department (Acclaim Entertainment, Inc.)
Any notice or demand required by this Agreement to be given or made by the
Company or the Warrant Agent to or on the Holder of any Warrant Certificate
shall be sufficiently given or made, whether or not such Holder receives the
notice, if sent by first-class or registered mail, postage prepaid, addressed to
such Holder at his last address as shown on the books of the Company maintained
by the Warrant Agent.
Section 6.16 Defects in Notice. Failure to file any
certificate or notice or to mail any notice, or any defect in any certificate or
notice pursuant to this Agreement shall not affect in any way the rights of any
Holder or the legality or validity of any adjustment made pursuant to Section
3.1 hereof, or any transaction giving rise to any such adjustment, or the
legality or validity of any action taken or to be taken by the Company.
Section 6.17 Governing Law. The validity, interpretation and
performance of this Agreement, of each Warrant Certificate issued hereunder and
of the respective terms and provisions thereof shall be governed by the internal
laws of the State of Delaware, without reference to principles of conflict of
laws.
Section 6.18 Standing. Nothing in this Agreement expressed
and nothing that
19
<PAGE>
may be implied from any of the provisions hereof is intended, or shall be
construed, to confer upon, or give to, any person or corporation other than the
Company, the Warrant Agent, and the Holders any right, remedy or claim under or
by reason of this Agreement or of any covenant, condition, stipulation, promise
or agreement contained herein; and all covenants, conditions, stipulations,
promises and agreements contained in this Agreement shall be for the sole and
exclusive benefit of the Company and the Warrant Agent and their successors, and
the Holders.
Section 6.19 Headings. The descriptive headings of the
articles and sections of this Agreement are inserted for convenience only and
shall not control or affect the meaning or construction of any of the provisions
hereof.
Section 6.20 Counterparts. This Agreement may be executed in
any number of counterparts, each of which so executed shall be deemed to be an
original; but such counterparts shall together constitute but one and the same
instrument.
Section 6.21 Conflict of Interest. The Warrant Agent and any
stockholder, director, officer or employee of the Warrant Agent may buy, sell or
deal in any of the Warrant Certificates or other securities of the Company or
become pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though the Warrant Agent were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
Section 6.22 Availability of the Agreement. The Warrant Agent
shall keep copies of this Agreement available for inspection by holders of
Warrants during normal business hours at its stock transfer department. Copies
of this Agreement may be obtained upon written request addressed to the Company
at the address set forth in Section 6.15.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, and their corporate seals affixed and attested,
all as of the day and year first above written.
ACCLAIM ENTERTAINMENT, INC.
By:
-----------------------------------------
Title:
[Corporate Seal]
Attests:
- --------------------------
Title:
AMERICAN SECURITIES TRANSFER &
TRUST, INC.
By:
-----------------------------------------
Title:
[Corporate Seal]
Attest:
- --------------------------
Title:
21
<PAGE>
[FORM OF WARRANT CERTIFICATE]
EXERCISABLE ON OR AFTER _______________, 1998
VOID AFTER 5:00 P.M., NEW YORK CITY TIME
ON ____________, 2001
W________________ ____________ Warrants
ACCLAIM ENTERTAINMENT, INC.
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED CUSIP __________
_______________________, or his, her or its registered assigns, is the
registered holder of the number of Warrants (the "Warrants") set forth above.
Each Warrant entitles the holder thereof to purchase from Acclaim Entertainment,
Inc., a corporation incorporated under the laws of the State of Delaware (the
"Company"), subject to the terms and conditions set forth hereinafter and in the
Warrant Agreement hereinafter referred to, one fully paid and nonassessable
share of Common Stock, $.02 par value per share, of the Company (the "Common
Stock"). The Warrants may be exercised at any time or from time to time on or
after __________, 1998 (the "Commencement Date") and must be exercised before
5:00 P.M., New York City time, on __________, 2001 (the "Exercise Deadline").
Upon the Exercise Deadline, all rights evidenced by the Warrants shall cease and
the Warrants shall become void, and the holders thereof shall have no rights
thereunder. Subject to the provisions of the Warrant Agreement, the holder of
each Warrant shall have the right to purchase from the Company until the
Exercise Deadline (and the Company shall issue and sell to such holder of a
Warrant) one fully paid and nonassessable share of Common Stock (a "Warrant
Share") at an exercise price (the "Exercise Price") of $3.50 upon surrender of
this Warrant Certificate to the Company at the office of the Warrant Agent (as
defined in the Warrant Agreement) designated by the Warrant Agent for such
purpose with the form of election to purchase appearing on this Warrant
Certificate duly completed and signed, together with (i) payment of the Exercise
Price in cash or certified or official bank check payable to the order of the
Warrant Agent or (ii), in lieu of any cash payment to be made pursuant to sub
paragraph (i) hereof, an election made by the holder of this Warrant Certificate
to exchange his Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this paragraph, by
surrendering this Warrant Certificate to the Warrant Agent stating such holder's
intent to effect such exchange, the number of Warrant Shares to be exchanged and
the date on which the Holder requests that such Warrant Exchange occur (the
"Notice of Exchange"). The Warrant Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Common Stock issuable upon such Warrant Exchange and, if applicable, a new
warrant of like tenor evidencing the balance of the Common Stock remaining
subject to such Warrant, shall be issued as of the Exchange Date and delivered
to the holder within seven (7) days following the Exchange Date. In connection
with any Warrant Exchange, a Warrant shall represent the right to subscribe for
and acquire the number of Warrant Shares (rounded to the next highest integer)
equal to (i) the number of Warrant Shares specified by the Holder in its Notice
of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to
the quotient obtained by dividing (A) the product of the Total Number times the
existing Exercise Price by (B) the then Market Price (as defined in the Warrant
Agreement) of a share of Common Stock.
The Exercise Price or number of Warrant Shares for which the Warrants
are exercisable are subject to change or adjustment upon the occurrence of
certain events set forth in the Warrant Agreement.
REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET
FORTH ON THE REVERSE SIDE HEREOF, AND SUCH FURTHER PROVISIONS SHALL FOR ALL
PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS
CERTIFICATE.
This Warrant shall be governed by and construed in accordance with the
laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed by its duly authorized officers.
Dated: ACCLAIM ENTERTAINMENT, INC.
-------------------------------
By:
----------------------------------
Its
----------------------------------
ATTEST:
By:
----------------------------
Countersigned:
AMERICAN SECURITIES TRANSFER &
TRUST, INC., AS WARRANT AGENT
By:
----------------------------
Its
----------------------------
[Reverse Side]
<PAGE>
This Warrant Certificate is subject to all of the terms and conditions
of the Warrant Agreement, dated as of ________________, 1998 (the "Warrant
Agreement"), between the Company and the Warrant Agent, to all of which terms
and conditions the registered holder of the Warrant consents by acceptance
hereof. The Warrant Agreement is incorporated herein by reference and made a
part hereof and reference is made to the Warrant Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Warrant Agent, the Company and the registered holders of
Warrant Certificates. Copies of the Warrant Agreement are available for
inspection at the principal office of the Warrant Agent or may be obtained upon
written request addressed to the Warrant Agent at its principal stockholder
services office in 938 Quail Street, Suite 101, Lakewood, Colorado 80215 or may
be obtained upon written request addressed to the Company at One Acclaim Plaza,
Glen Cove, New York, 11542, Attn: Gregory E. Fischbach.
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractional shares, but shall make
adjustment therefor in cash on the basis of the current market value of any
fractional interest as provided in the Warrant Agreement.
This Warrant Certificate may be exchanged or transferred, at the option
of the holder, upon presentation and surrender hereof to the Warrant Agent, for
other Warrant Certificates of different denominations, entitling the holder
hereof to purchase in the aggregate the same number of Warrant Shares. If the
Warrants evidenced by this Warrant Certificate shall be exercised in part, the
holder hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Certificates evidencing the number of Warrants not so exercised.
The holder of this Warrant Certificate shall not, by virtue hereof, be
entitled to any of the rights of a stockholder in the Company, either at law or
in equity, including, without limitation, the right to vote, to receive
dividends and other distributions, or to attend or receive any notice of
meetings of stockholders or any other proceedings of the Company, and the rights
of the holder are limited to those expressed in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock are
closed for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such transfer until the date of the
reopening of said transfer books.
Every holder of this Warrant Certificate, by accepting the same,
consents and agrees with the Company, the Warrant Agent and with every other
holder of a Warrant Certificate that:
(a) this Warrant Certificate is transferable on the registry
books of the Warrant Agent only upon the terms and conditions set forth
in the Warrant Agreement and
(b) the Company and the Warrant Agent may deem and treat the
person in whose name this Warrant Certificate is registered as the
absolute owner hereof (notwithstanding any notation of ownership or
other writing hereon made by anyone other than the Company or the
Warrant Agent) for all purposes whatever and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.
This Warrant Certificate shall not be valid or enforceable for any
purpose until it shall have been countersigned by the Warrant Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM = as tenants in common
TEN ENT = as tenants by the entireties
JT TEN = as joint tenants with right of survivorship
and not as tenants in common
COM PROP = as community property
UNIF GIFT MIN ACT = ________________ Custodian ________________
(Custodian) (Minor)
under Uniform Gifts to Minors Act
___________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
PURCHASE FORM
Dated: ________________, 19___
The undersigned hereby irrevocably exercises this Warrant to purchase
__________ shares of Common Stock and herewith makes payment of $__________ in
payment of the Exercise Price thereof on the terms and conditions specified in
this Warrant Certificate, surrenders this Warrant Certificate and all right,
title and interest herein to the Company and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer Identification or Social Security Number:______________________________
Signature__________________________________
If such number of Warrant Shares is less than the aggregate number of Warrant
Shares purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the balance of such Warrant Shares to be registered in
the name and at the address specified below and delivered thereto.
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer Identification or Social Security Number:______________________________
Signature__________________________________
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever. If the certificate
representing the Warrant Shares or any Warrant Certificate representing
Warrants not exercised is to be registered in a name other than that in
which this Warrant Certificate is registered, the signature of the
holder hereof must be guaranteed.
Signature Guaranteed:
___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15
<PAGE>
WARRANT ASSIGNMENT FORM
FOR VALUE RECEIVED _________________________________________________
hereby sells, assigns and transfers to:
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer Identification or Social Security Number:______________________________
the right to purchase up to _____________________ Warrant Shares represented by
this Warrant and does hereby irrevocably constitute and appoint
___________________________________________________________ Attorney-in-fact to
transfer said Warrant on the behalf of the Company, with full power of
substitution in the premises.
Dated:_____________________ _________________________________________________
Signature of registered holder
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signatures Guaranteed:
_________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15
<PAGE>
- --------------------------------------------------------------------------------
ACCLAIM ENTERTAINMENT, INC.
and
American Securities Transfer & Trust, Inc.
Warrant Agent
WARRANT AGREEMENT
Dated as of , 1998
- --------------------------------------------------------------------------------
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of _________________, 1998, between
ACCLAIM ENTERTAINMENT, INC., a Delaware corporation (the "Company"), and
American Securities Transfer & Trust, Inc. (the "Warrant Agent").
WHEREAS, the Company proposes to issue One Hundred Thirteen
Thousand Four Hundred Forty Six (113,446) common stock purchase warrants (the
"Warrants"), each to purchase one share of its common stock, par value $.02 per
share (the "Common Stock") (the shares of Common Stock issuable on exercise of
the Warrants being referred to herein as the "Warrant Shares"), in connection
with the settlement of a class action lawsuit (the "Action") previously pending
against Lazer-Tron Corporation, a former subsidiary of the Company, in the
California Superior Court for the Eastern Division of Alameda County (the
"Superior Court") and the settlement of a class action lawsuit previously
pending against the Company in federal district court in the Eastern District of
New York (the "Federal Court") in accordance with a Stipulation of Settlement
dated [October 8], 1997 (the "Stipulation") between the Company and the
participants in such settlement, following the "Effective Date" of the
Settlement and pursuant to the "Plan of Distribution" (as such terms are defined
in the Stipulation) and following effectiveness of the registration statement
referred in Section 2.3 hereof;
WHEREAS, the Company proposes to issue certificates evidencing
the Warrants (the "Warrant Certificates");
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, division, transfer, exchange, redemption and
surrender of the Warrants, the issuance of certificates representing the
Warrants, the exercise of the warrants, and the rights of the registered holders
thereof;
WHEREAS, a registration statement covering the Warrants and
the Warrant Shares is to be filed by the Company with the United States
Securities and Exchange Commission (the "SEC" pursuant to Section 2.3 hereof);
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein contained and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the registered
holders of the Warrants and the Warrants Agent, the parties hereto hereby agree
as follows:
1
<PAGE>
ARTICLE I
DISTRIBUTION OF WARRANT CERTIFICATES
Section 1.1 Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act on behalf of the Company in accordance with
the instructions hereinafter set forth, and the Warrant Agent hereby accepts
such appointment.
Section 1.2 Form of Warrant Certificates. The Warrant
Certificates shall be issued in registered form only and, together with the
forms of election to purchase Warrant Shares and of assignment to be printed on
the reverse thereof, shall be substantially in the form of Exhibit A attached
hereto and, in addition, may have such letters, numbers or other marks of
identification or designation and such legends, summaries, or endorsements
stamped, printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as, in any particular case, may be required in the opinion of counsel for the
Company, to comply with any law or with any rule or regulation of any securities
exchange, regulatory authority or agency, or to conform to customary usage. The
Warrants Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrants Certificates) and shall be numbered serially with the letter
"W".
Section 1.3 Execution of Warrant Certificates. The Warrant
Certificates shall be executed on behalf of the Company by its Chairman or
President or any Executive Vice President attested to by its Secretary or
Assistant Secretary, either manually or by facsimile signature printed thereon.
The Warrant Certificates shall be manually countersigned and (except as set
forth in Sections 1.4 and 2.2 hereof) dated the date of countersignature by the
Warrant Agent and shall not be valid for any purpose unless so countersigned and
dated. In case any authorized officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company either
before or after delivery thereof by the Company to the Warrant Agent, the
signature of such person on such Warrant Certificates, nevertheless, shall be
valid and such Warrant Certificates may be countersigned by the Warrant Agent,
and issued and delivered to those persons entitled to receive the Warrants
represented thereby with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
Section 1.4 Registration. On or prior to the 15th business day
following the entry of an order by the Superior Court approving the Settlement,
the Company shall deliver to the Warrant Agent an adequate supply of Warrant
Certificates executed on behalf of the Company as described in Section 1.3
hereof. These Warrant Certificates, shall initially be registered in the names
of those persons who are entitled under the Plan of Distribution and/or the
Stipulation to receive Warrant Certificates (the "Authorized Warrant Holders").
Each such Warrant Certificate shall have imprinted on
2
<PAGE>
its face the date of ____________, 1998 [the earlier of (i) the effectiveness of
the registration statement referenced in Section 2.3 hereof and (ii) February
18, 1998] (the "Commencement Date"). Within 15 business days (or as soon as
practicable) after written notification from the SEC that the registration of
the Warrants and Warrant Shares has been declared effective pursuant to Section
2.3 hereof, the Warrant Agent shall have mailed or caused to have been mailed
such Warrant Certificates to the Authorized Warrant Holders, provided that at
such time (i) the Warrant Agent shall have received notice that the "Federal
Court Litigation" (as defined in the Stipulation) is no longer subject to appeal
and (ii) the Authorized Warrant Holders shall have (i) delivered to the Warrant
Agent the Van Kasper Warrant or the Private Placement Warrant (as defined in the
Stipulation) to be cancelled in exchange for the Warrants issuable to such
Authorized Warrant Holders hereunder, (ii) delivered to Cotchett & Pitre, one of
Plaintiffs' Settlement Counsel (as defined in the Stipulation), a proof of claim
(a "Proof of Claim") for the Sales Agent Warrant or (iii) delivered to the
Company an affidavit and indemnity of lost security with respect thereto. In the
case and at such time as an affidavit and indemnity of lost security or a valid
copy of a Proof of Claim is delivered to the Company pursuant to this Section
1.4, the Company shall promptly instruct the Warrant Agent to issue Warrant
Certificates to such Authorized Warrant Holders.
The Warrant Agent shall maintain books for the transfer and
registration of the Warrant Certificates in accordance with its regular
practice. The Warrant Certificates shall be registered in a Warrant Register as
they are issued. The Company and the Warrant Agent shall be entitled to treat
the registered owner(s) of the Warrant Certificates (the "Holder(s)") as the
owner(s) in fact thereof (notwithstanding any notation of ownership or other
writing on the Warrant Certificates made by anyone other than the Company or the
Warrant Agent), for the purpose of any exercise thereof and for all other
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary.
Section 1.5 Transfer of Warrants. The Warrant Certificates
shall be transferable only on the books of the Company maintained at the office
of the Warrant Agent designated for such purpose upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, which endorsement shall be guaranteed by a member firm of a national
securities exchange, a commercial bank (not a savings bank or a savings and loan
association) or trust company located in the United States or a member of the
National Association of Securities Dealers, Inc. (hereafter, "Signatures
Guaranteed"). In all cases of transfer by an attorney, the original power of
attorney, duly approved, or a copy thereof, duly certified, shall be deposited
and remain with the Warrant Agent. In case of transfer by executor,
administrators, guardians or other legal representatives, duly authenticated
evidence of their authority shall be produced, and may be required to be
deposited and remain with the Warrant Agent in its discretion.
A reasonable service charge may be imposed by the Warrant Agent upon
the
3
<PAGE>
Holder for any exchange or registration of transfer of Warrant Certificates.
The Company may require payment by a Holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
ARTICLE II
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
Section 2.1 Exercise Price. Each Warrant Certificate shall,
when signed and countersigned as provided in Section 1.3, entitle the Holder
thereof to purchase from the Company one share of Common Stock for each Warrant
evidenced thereby, at the purchase price of Twelve Dollars ($12.00) per share
(the "Exercise Price"). Except as the context otherwise requires, the term
"Exercise Price" as used in this Agreement shall mean the purchase price of one
share of Common Stock, reflecting all appropriate adjustments made in accordance
with the provisions of Article III hereof.
Section 2.2 Exercisability of Warrants and Registration of
Warrant Shares. Each Warrant may be exercised at any time after (i) the
Commencement Date and (ii) after the Warrant Shares have been effectively
registered under the Securities Act of 1933, as amended (the "Securities Act")
pursuant to a Registration Statement (as hereinafter defined) filed with and
declared effective by the SEC, as provided in Section 2.3 hereof (provided that
at such time the Plan of Distribution shall have been approved by the Superior
Court and shall be final and non-appealable), and such other action as may be
required by Federal or state law relating to the issuance or distribution of
securities shall have been taken, until 5:00 p.m., New York City time, on the
first anniversary of the Commencement Date (the "Exercise Deadline") unless
extended in accordance with Section ___. After the Exercise Deadline, any
unexercised Warrants will be void and all rights of Holders shall cease. Each
Warrant Certificate shall have the Exercise Deadline imprinted on its face.
Subject to Section 2.3 hereof, the Company shall use reasonable good faith
efforts to keep available for delivery upon the exercise of Warrants a
prospectus that meets the requirements of Section 10 of the Securities Act,
until the earlier of the date by which all Warrants are exercised or the
Exercise Deadline, unless the Company determines that, by virtue of an amendment
of the Securities Act or otherwise, the effectiveness of such registration or
the delivery of such prospectus is not required at the time Warrant Shares are
to be issued.
In the event that, in the judgment of the Company, it is
advisable to suspend use of the prospectus described in this Section 2.2, due to
(i) any request by the SEC or any other federal or state governmental authority
for amendments or supplements to a Registration Statement or related prospectus
or for additional information; (ii) the issuance by the SEC or any other federal
or state governmental authority of any stop order suspending the effectiveness
of a Registration Statement or the initiation or threat of any proceedings for
that purpose; (iii) the receipt by the Company of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Common Stock for sale in any jurisdiction or
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the initiation or threat of any proceeding for such purpose; (iv) the existence
of any fact or the happening of any event which makes any statement of a
material fact in such Registration Statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
or which would require the making of any changes in the Registration Statement
or prospectus in order that, in the case of the Registration Statement, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the prospectus, it will not
contain any untrue statement of a material fact or omit to state any material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; (v) the Company's determination that
a post-effective amendment to a Registration Statement would be appropriate, or
(vi) pending material corporate developments or similar material events that
have not yet been publicly disclosed and as to which the Company believes public
disclosure will be prejudicial to the Company, the Company shall give written
notice to the Warrant Agent to the effect of the foregoing and to the effect
that the Warrants may not be exercised during such time period (the "Blackout
Period"). In the event that a Holder seeks to exercise a Warrant during the
Blackout Period, the Warrant Agent will notify the Holder, in accordance with
Section 6.15 hereof, that a Blackout Period is in effect. In no event shall the
Company call more than two (2) sixty (60) day Blackout Periods in any calendar
year, nor may it call a Blackout Period sixty (60) days prior to the Exercise
Deadline.
Section 2.3 Registration of Warrants and Warrant Shares.
(a) The Company shall, within 15 business days after the Company files
its annual report on Form 10K for the fiscal year ended August 31, 1997 (and in
no event prior to such filing), at the Company's sole cost and expense (other
than the fees and disbursements of counsel for the Holders and the underwriting
discounts, if any) prepare and file with the SEC a registration statement on
Form S-1 or any other available form approved by the SEC (the "Registration
Statement") registering the Warrants and the Warrant Shares and will use its
reasonable best efforts through its officers, directors, auditors, and counsel
to cause such Registration Statement to become effective within 120 days
thereafter.
(b) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Holders, its officers, directors, partners,
employees, agents, counsel, Plaintiffs' Settlement Counsel (as that term is
defined in the Stipulation) and each person, if any, who controls any such
person within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all loss, liability, charge, claim, damage and expense
whatsoever (which shall include, for all purposes of this Section 2.3, but not
be limited to, attorneys' fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or
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litigation) as and when incurred, arising out of, based upon or in connection
with (i) any untrue statement or alleged untrue statement of a material fact
contained (A) in any Registration Statement, preliminary prospectus or final
prospectus (as from time to time amended and supplemented) or any amendment or
supplement thereto, relating to the sale of any of the Warrants or Warrant
Shares or (B) in any application or other document or communication (in this
Section 2.3 collectively called an "application") executed by or on behalf of a
Holder or based upon written information furnished by or on behalf of a Holder
filed in any jurisdiction in order to register or qualify any of the Warrants or
Warrant Shares under the securities or blue sky laws thereof or filed with the
SEC or any securities exchange; or any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
made therein not misleading, unless (x) such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to a Holder by or on behalf of such Holder expressly for
inclusion in any Registration Statement, preliminary prospectus or final
prospectus, or any amendment or supplement thereto, or in any application, as
the case may be, or (y) such loss, liability, charge, claim, damage or expense
arises out of a Holder's failure to comply with the terms and provisions of this
Agreement, or (ii) any breach of any representation, warranty, covenant or
agreement of a Holder contained in this Agreement. The foregoing agreement to
indemnify shall be in addition to any remedy a Holder may otherwise have,
including remedies arising under this Agreement.
If any action is brought against a Holder or any of its
officers, directors, partners, employees, agents or counsel, if any, or any
controlling persons of such person (an "indemnified party") in respect of which
indemnity may be sought against the Company pursuant to the foregoing paragraph,
such indemnified party or parties shall promptly notify the Company in writing
of the institution of such action (but the failure so to notify shall not
relieve the Company from any liability other than pursuant to this Section
2.3(b)) and the Company shall promptly assume the defense of such action,
including the employment of counsel (reasonably satisfactory to such indemnified
party or parties) provided that the indemnified party shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party or parties unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action or the Company shall not
have promptly employed counsel reasonably satisfactory to such indemnified party
or parties to have charge of the defense of such action or such indemnified
party or parties shall have reasonably concluded that there may be one or more
legal defenses available to it or them or to other indemnified parties which are
different from or additional to those available to the Company, in any of which
events such fees and expenses shall be borne by the Company and the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this Section 2.3 to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without its written consent. The Company shall not,
without the prior written consent of each indemnified party that is not released
as described in this sentence, settle or compromise any action,
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or permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto)
unless such settlement, compromise, consent or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Holders of the
commencement of any litigation or proceedings against the Company or any of it
officers or directors in connection with the sale of any Warrants or Common
Stock or any preliminary prospectus, prospectus, Registration Statement, or
amendment or supplement thereto, or any application relating to any sale of any
Warrants or Common Stock.
(c) The Holders agree to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall have signed any
Registration Statement covering the Warrants or the Common Stock held by the
Holders, each other person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act and its
or their respective counsel and Plaintiffs' Settlement Counsel (as that term is
defined in the Stipulation), to the same extent as the foregoing indemnity from
the Company to the Holders in Section 2.3(b) hereof but only with respect to
statements or omissions, if any, made in any Registration Statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holders by or on behalf of a Holder, expressly for inclusion in any such
Registration Statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto or in any application, as the case may be. If
any action shall be brought against the Company or any other person to be so
indemnified based on any such Registration Statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto or in any application,
and in respect of which indemnity may be sought against a Holder pursuant to
this Section 2.3(c) a Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
2.3(b).
(d) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 2.3(b)
or 2.3(c) (subject to the limitations thereof) but it is found in a final
judicial determination, not subject to further appeal, that such indemnification
may not be enforced in such case, even though this Agreement expressly provides
for indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act or otherwise, then
the Company (including for this purpose any contribution made by or on behalf of
any director of the Company, any officer of the Company who signed any such
Registration Statement, any controlling person of the Company, and its or their
respective counsel) as one entity, and the Holders (including for this purpose
any contribution by or on behalf of an indemnified party) as a second entity,
shall contribute to the losses, liabilities, claims, damages and expenses
whatsoever to which any of them
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may be subject, on the basis of relevant equitable considerations such as the
relative fault of the Holders and the Company in connection with the facts which
resulted in such losses, liabilities, claims, damages and expenses. The relative
fault, in the case of an untrue statement, alleged untrue statement, omission or
alleged omission shall be determined by, among other things, whether such
statement, alleged statement, omission or alleged omission relates to
information supplied by a Holder or the Company, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement, alleged statement, omission or alleged omission. Each Holder and
the Company agree that it would be unjust and inequitable if the respective
obligations of the Holders and the Company for contribution were determined by
pro rata or per capita allocation of the aggregate losses, liabilities, claims,
damages and expenses (even if the Holders and the other indemnified parties were
treated as one entity for such purpose) or by any other method of allocation
that does not reflect the equitable considerations referred to in this Section
2.3(d). No person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section 2.3(d) each person, if any, who controls a Holder within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
and each officer, director, partner, employee, agent and counsel of a Holder or
control person shall have the same rights to contribution as the Company or
control person and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed any such Registration
Statement, each director of the Company, and its or their respective counsel
shall have the same rights to contribution as the Company, subject in each case
to the provisions of this Section 2.3(d). Anything in this Section 2.3(d) to the
contrary notwithstanding, no party shall be liable for contribution with respect
to the settlement of any claim or action effected without its written consent.
This Section 2.3(d) is intended to supersede any right to contribution under the
Securities Act, the Exchange Act or otherwise.
(e) Notwithstanding the foregoing provisions of this Section
2.3, in the event the Stipulation and/or the Plan of Distribution shall be the
subject of appeal by members of the Settlement Class or other persons, the
Company may in its sole discretion, cease its efforts to file or to cause the
declaration of effectiveness of the Registration Statement and/or cause the
withdrawal of such Registration Statement. Upon resolution of such appeal, the
Company shall forthwith use its reasonable best efforts to file or cause the
declaration of effectiveness of the Registration Statement.
Section 2.4 Procedure for Exercise of Warrants. (a) During the
period specified in and subject to the provisions and limitations set forth in
Section 2.2 hereof, Warrants may be exercised by surrendering the Warrant
Certificates representing such Warrants to the Warrant Agent at 938 Quail
Street, Suite 101, Lakewood, Colorado 80215 attention: Trust Department (the
"Principal Office") or at such other location as the Warrant Agent may specify
in writing to the Holders with the election to purchase form set forth on the
reverse side of the Warrant Certificate duly completed and
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executed, with Signature Guaranteed under certain circumstances as set forth in
the purchase form, accompanied by payment in full to the Warrant Agent for the
account of the Company of the Exercise Price in effect at the time of such
exercise, together with such taxes as are specified in Section 6.1 hereof, for
each share of Common Stock with respect to which such Warrants are being
exercised. Such Exercise Price and taxes shall be paid in full by certified or
official bank check, or by United States Postal Service money order, payable in
United States currency to the order of the Warrant Agent for the account of the
Company.
(b) In lieu of any cash payment to be made by a Holder of the Exercise
Price pursuant to the preceding paragraph, during the period specified in and
subject to the provisions and limitations set forth in Section 2.2 hereof, the
Holder may, at its option, exchange his Warrant, in whole or in part (a "Warrant
Exchange"), into the number of Warrant Shares determined in accordance with this
paragraph, by surrendering the Warrant to the Warrant Agent accompanied by a
notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the Common Stock issuable upon such Warrant Exchange
and, if applicable, a new warrant of like tenor evidencing the balance of the
Warrant Shares remaining subject to such Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, a Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number times the existing Exercise Price by (B) the then
Market Price of a share of Common Stock. As used in this Agreement, the term
"Market Price" shall mean the average closing price of the Company's Common
Stock on the Nasdaq National Market System, or, if the Company's Common Stock is
not so listed on the Nasdaq National Market, then on the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, during the twenty (20)
consecutive business days (as such term is used on the Nasdaq National Market
System or a domestic over-the-counter market, as the case may be) ending three
days prior to the date of the "Notice of Exchange" or if later the "Exchange
Date" (as such terms are defined in Section 2.4 hereof). Upon request of the
Warrant Agent, the Company shall provide to the Warrant Agent a written
presentation of the Market Price for the period requested by the Warrant Agent.
(c) The date on which a Warrant is exercised in accordance with this
Section 2.4 is sometimes referred to herein as the "Date of Exercise" of such
Warrant. In the event that a Blackout Period, as described in Section 2.2 hereof
is in effect, the Warrant Agent will notify the Holder, in accordance with
Section 6.15 hereof, that a Blackout Period is
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in effect and that the Warrants surrendered may not be exercised during the
Blackout Period. In this event, the date that the Company notifies the Warrant
Agent that the Blackout Period has ended will be the Date of Exercise unless the
Holder notifies the Warrant Agent, in writing, prior to the end of the Blackout
Period that he withdraws his surrender of the Warrant Certificates.
Section 2.5 Issuance of Warrant Shares. As soon as practicable
after the Date of Exercise of any Warrant, the Warrant Agent shall deposit the
proceeds received, if any, from the exercise of the Warrants, and promptly,
after clearance of checks received in payment of the Exercise Price pursuant to
such Warrants, shall issue a certificate or certificates for the number of full
Warrant Shares to which the Holder thereof is entitled, registered in accordance
with the instructions set forth in the election to purchase. The Company
covenants that the Warrant Shares which shall be issuable upon exercise of the
Warrants and payment, if any, of the Exercise Price in compliance with this
Agreement and the Warrant Certificate shall, pursuant to and in accordance with
the terms of this Agreement, be validly authorized and issued, fully paid and
nonassessable, and free from all taxes, liens and charges created by the Company
in respect of the issue thereof. Certificates representing such Warrant Shares
shall be delivered by the Warrant Agent in such names and denominations as are
required for delivery to, or in accordance with the instructions of, the
Holder. Each person in whose name any such certificate for Warrant Shares issued
shall for all purposes be deemed to have become the holder of record of the
Warrant Shares represented thereby on the Date of Exercise of the Warrants
resulting in the issuance of such Warrant Shares, irrespective of the date of
issuance or delivery of such certificate for Warrant Shares; provided, however,
that if, at the date of the surrender of such Warrants and payment of the
Exercise Price, the transfer books for the Warrant Shares purchasable upon the
exercise of such Warrants shall be closed, the certificates for the Warrant
Shares in respect of which such Warrants are then exercised shall be issuable as
of the date on which such books shall next be opened (whether before or after
the Exercise Deadline) and until such date the Warrant Agent shall be under no
duty to deliver any certificate for such Warrant Shares; provided, further, that
the transfer books of record, unless otherwise required by law, shall not be
closed at any one time for a period longer than twenty (20) days.
Section 2.6 Certificates for Unexercised Warrants. Subject to
Section 2.4(b) hereof, if less than all of the Warrants represented by a Warrant
Certificate are exercised, the Warrant Agent shall execute and mail, by
first-class mail, within thirty (30) days of the Date of Exercise, to the Holder
of such Warrant Certificate, or such other person as shall be designated in the
election to purchase, a new Warrant Certificate representing the number of
Warrants not exercised. In no event shall a fraction of a Warrant be exercised,
and the Warrant Agent shall distribute no Warrant Certificates representing
fractions of Warrants under this or any other Section of this Agreement.
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Section 2.7 Reservation of Shares. The Company shall at all
times reserve and keep available for issuance upon the exercise of Warrants a
number of its authorized but unissued shares or treasury shares, or both, of
Common Stock that will be sufficient to permit the exercise in full of all
outstanding Warrants. The transfer agent for the Company's Common Stock and
every subsequent transfer agent for the Company's capital stock issuable upon
the exercise of Warrants, will be irrevocably authorized and directed at all
times to reserve a number of authorized shares as shall be required for such
purpose. The Company will keep a copy of this Agreement on file with the
transfer agent for the Company's Common Stock and with every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of the Warrants. The Warrant Agent is hereby irrevocably authorized to
requisition from time to time from such transfer agent the stock certificates
required to honor outstanding Warrants upon exercise thereof in accordance with
the terms of this Agreement. The Company will supply such transfer agent with
duly executed stock certificates for such purposes and will provide or otherwise
make available any cash which may be payable as provided in Section 3.9 hereof.
All Warrant Certificates surrendered in the exercise of the rights thereby
evidenced shall be canceled by the Warrant Agent and retained by the Warrant
Agent pursuant to Section 5.2 hereof.
Section 2.8 Disposition of Proceeds. Upon the exercise of
any Warrant, the Warrant Agent shall promptly deposit all funds received by it
for the purchase of Warrant Shares into a non-interest-bearing escrow account as
directed in writing by the Company. All funds deposited in the escrow account
shall be disbursed on a weekly basis to the Company, or as otherwise requested
by the Company in writing. A detailed accounting statement relating to the
number of Warrants exercised, names of Holders of such exercised Warrants and
the net amount of funds remitted will be given to the Company with each such
disbursement.
ARTICLE III
ADJUSTMENTS AND NOTICE PROVISIONS
Section 3.1 Adjustment of Exercise Price. Subject to the
provisions of this Article III, the Exercise Price in effect from time to time
shall be subject to adjustment, as follows:
(a) In case the Company shall (i) declare a dividend payable
in stock or make some other distribution on the outstanding shares of
its Common Stock in shares of its Common Stock, (ii) subdivide or
reclassify the outstanding shares of its Common Stock into a greater
number of shares or (iii) combine or reclassify the outstanding shares
of its Common Stock into a smaller number of shares, the Exercise
Price, in effect immediately after the record date for such dividend or
distribution or the effective date of such division, reclassification
or combination
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shall be proportionately adjusted by multiplying the then Exercise
Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event
and the denominator of which shall be the number of shares of Common
Stock outstanding immediately after such event, and the product so
obtained shall thereafter be the Exercise Price then in effect. Such
adjustment shall be made successively whenever any event specified
above shall occur.
(b) All calculations under this Section 3.1 shall be made to
the nearest thousandth of a cent.
Section 3.2 No Adjustments to Exercise Price. No adjustment in
the Exercise Price in accordance with the provisions of paragraph (a) of Section
3.1 hereof need be made if such adjustment would amount to a change in such
Exercise Price of less than ten cents; provided, however, that the amount by
which any adjustment is not made by reason of the provision of this Section 3.2
shall be carried forward and taken into account at the time of any subsequent
adjustment in the Exercise Price.
Section 3.3 Adjustment to Number of Shares. Upon each
adjustment of the Exercise Price pursuant to Paragraph (a) of Section 3.1, each
Warrant shall thereupon evidence the right to purchase that number of shares of
Common Stock (calculated to the nearest hundredth of a share) obtained by
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment upon exercise of the Warrant by the Exercise Price in effect
immediately prior to such adjustment and dividing the product so obtained by the
Exercise Price in effect immediately after such adjustment.
Section 3.4 Reorganizations. In case of any capital
reorganization, consolidation or merger of the Company (other than in the cases
referred to in Section 3.1 hereof, and other than the consolidation or merger of
the Company with or into another corporation in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding shares of Common Stock or the conversion of such outstanding shares
of Common Stock into shares of other stock or other securities or property), or
the sale of all or substantially all of the Company's stock or property, (any of
the foregoing events hereinafter referred to as a "Reorganization"), all
outstanding Warrants which have not been exercised prior to or concurrently with
the closing of any such transaction will terminate immediately upon the closing.
Additionally, in the event of sale or conveyance or other transfer of all or
substantially all of the assets of the Company as a part of a plan for
liquidation of the Company, all rights to exercise any Warrant shall terminate
thirty (30) days after the Company gives written notice to each Holder that such
sale or conveyance or other transfer has been consummated in the manner
specified in section 6.15 hereof.
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Section 3.5 Exercise Price Not Less Than Par Value. In no
event shall the Exercise Price be adjusted below the par value per share of the
Common Stock.
Section 3.6 Notice of Certain Action. In the event the
Company shall:
(a) declare any dividend payable in stock to the holders of
its Common Stock or make any other distribution in property other than
cash to the holders of its Common Stock; or
(b) offer to the holders of its Common Stock as such rights to
subscribe for or purchase any shares of any class of stock or any other
rights or opinions; or
(c) effect any reclassification of its Common Stock (other
than a reclassification involving merely the subdivision or combination
of outstanding shares of Common Stock), Reorganization or the
liquidation, dissolution or winding up of the Company;
then, in each such case, the Company shall cause notice of such proposed action
to be mailed to the Warrant Agent. Such notice shall specify the date on which
the books of the Company shall close, or a record be taken, for determining
holders of Common Stock entitled to receive such stock dividend or other
distribution or such rights or options, or the date on which such
reclassification, Reorganization, liquidation, dissolution or winding up shall
take place or commence, as the case may be, and the date as of which it is
expected that holders shall be entitled to receive securities or other property
deliverable upon such action, if any such date has been fixed. The Company shall
also cause copies of such notice to be mailed to each Holder of a Warrant
Certificate in the manner specified in Section 6.15 hereof. Such notice shall be
mailed, in the case of any action covered by Subsection 3.6(a) or 3.6(b) above,
at least ten (10) days prior to the record date for determining holders of the
Common Stock for purposes of receiving such payment or offer, and in the case of
any action covered by Subsection 3.6(c) above, at least ten (10) days prior to
the earlier of the date upon which such action is to take place or any record
date to determine holders of Common Stock entitled to receive such securities or
other property.
Section 3.7 Notice of Adjustments. Whenever any adjustment is
made pursuant to this Article III, the Company shall cause notice of such
adjustment to be mailed to the Warrant Agent within fifteen (15) days
thereafter, such notice to include in reasonable detail (i) the events
precipitating the adjustment, (ii) the computation of any adjustments and (iii)
the Exercise Price, the number of shares or the securities or other property
purchasable upon exercise of each Warrant after giving effect to such
adjustment. The Warrant Agent shall be entitled to rely on such notice and any
adjustment therein contained and shall not be deemed to have knowledge of any
such adjustment unless and until it shall have received such notice. The Warrant
Agent shall
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within fifteen (15) days after receipt of such notice from the Company cause a
similar notice to be mailed to each Holder.
Section 3.8 Warrant Certificate Amendments. Irrespective of
any adjustments pursuant to this Article III, Warrant Certificates theretofore
or thereafter issued need not be amended or replaced, but certificates
thereafter issued shall bear an appropriate legend or other notice of any
adjustments.
Section 3.9 Fractional Shares. The Company shall not be
required upon the exercise of any Warrant to issue fractional shares of Common
Stock which may result from adjustments in accordance with this Article III to
the Exercise Price or number of shares of Common Stock purchasable under each
Warrant. If more than one Warrant is exercised at one time by the same Holder,
the number of full shares of Common Stock which shall be deliverable shall be
computed based on the number of shares deliverable in exchange for the aggregate
number of Warrants exercised. With respect to any final fraction of a share
called for upon the exercise of any Warrant or Warrants, the Company, at its
option, shall either (i) issue a full share of Common Stock to the Holder in
respect of such fraction or (ii) pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the market value of a share
of Common Stock, as determined by the Warrant Agent on the basis of the market
price per share of Common Stock on the business day next preceding the date of
such exercise. For the purposes of this Section 3.9, the market price per share
of Common Stock for such day shall mean (i) the average of the high and low bid
and ask prices of the Common Stock on the Nasdaq National Market System for such
day; or (ii) if the Common Stock is not then traded on such exchange, then the
last known price paid per share by a purchaser of such stock in an arm's-length
transaction.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS
OF HOLDERS OF WARRANT CERTIFICATES
Section 4.1 Rights of Warrant Holders. No Warrant Certificate
shall entitle the registered holder thereof, as such, to any of the rights of a
stockholder of the Company, including, without limitation, the right to vote, to
receive dividends and other distributions, to receive any notice of, or to
attend, meetings of stockholders or any other proceedings of the Company.
Section 4.2 Lost, Stolen, Mutilated or Destroyed Warrant
Certificates. If any Warrant Certificate shall be mutilated, apparently lost,
stolen or destroyed, the Company in its discretion may direct the Warrant Agent
to execute and deliver, in exchange and substitution for and upon cancellation
of a mutilated Warrant Certificate,
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or in lieu of or in substitution for an apparently lost, stolen or destroyed
Warrant Certificate, a new Warrant Certificate for the number of Warrants
represented by the Warrant Certificate so mutilated, apparently lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Warrant Certificate, and of the ownership thereof, and indemnity, if
requested, all satisfactory to the Company and the Warrant Agent. Applicants for
such substitute Warrant Certificates shall also comply with such other
reasonable regulations and pay such other reasonable charges incidental thereto
as the Company or Warrant Agent may prescribe. Any such new Warrant Certificate
shall constitute an original contractual obligation of the Company, whether or
not the allegedly mutilated, lost or stolen or destroyed Warrant Certificate
shall be at any time enforceable by anyone.
ARTICLE V
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
Section 5.1 Split Up, Combination, Exchange and Transfer of
Warrant Certificates. Prior to the Exercise Deadline, Warrant Certificates,
subject to the provisions of Section 5.2, may be split-up, combined or exchanged
for other Warrant Certificates representing a like aggregate number of Warrants
or may be transferred in whole or in part. Any Holder desiring to split-up,
combine or exchange a Warrant Certificate or Warrant Certificates shall make
such request in writing delivered to the Warrant Agent at its Principal Office
and shall surrender the Warrant Certificate or Warrant Certificates so to be
split-up, combined or exchanged at said office. Subject to any applicable laws,
rules or regulations restricting transferability, any restriction on
transferability that may appear on a Warrant Certificate in accordance with the
terms hereof, or any "stop-transfer" instructions the Company may give to the
Warrant Agent to implement any such restriction (which instructions the Company
is expressly authorized to give), transfer of outstanding Warrant Certificates
may be effected by the Warrant Agent from time to time upon the books of the
Company to be maintained by the Warrant Agent for that purpose, upon a surrender
of the Warrant Certificate to the Warrant Agent at its Principal Office, with
the assignment form set forth in the Warrant Certificate duly executed and with
Signature Guaranteed. Upon any such surrender for split-up, combination,
exchange or transfer, the Warrant Agent shall execute and deliver to the person
entitled thereto a Warrant Certificate or Warrant Certificates, as the case may
be, as so requested. The Warrant Agent shall not be required to effect any
split-up, combination, exchange or transfer which will result in the issuance of
a Warrant Certificate evidencing a fraction of a Warrant. The Warrant Agent may
require the holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any split-up, combination,
exchange or transfer of Warrant Certificates prior to the issuance of any new
Warrant Certificate.
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<PAGE>
Section 5.2 Cancellation of Warrant Certificates. Any Warrant
Certificate surrendered upon the exercise of Warrants or for split-up,
combination, exchange or transfer, or purchased or otherwise acquired by the
Company, shall be canceled and shall not be reissued by the Company; and, except
as provided in Section 2.6 in case of the exercise of less than all of the
Warrants evidenced by a Warrant Certificate or in Section 5.1 in case of a
split-up, combination, exchange or transfer, no Warrant Certificate shall be
issued hereunder in lieu of such canceled Warrant Certificates. Any Warrant
Certificate so canceled shall be held by the Warrant Agent (unless otherwise
directed by the Company) and destroyed not earlier than seven (7) years after
such cancellation. The Warrant Agent shall furnish to the Company written
confirmation of the destruction of the Warrant Certificates so canceled.
ARTICLE VI
PROVISIONS CONCERNING THE
AGENT AND OTHER MATTERS
Section 6.1 Payment of Taxes and Charges. The Company will
from time to time promptly pay to the Warrant Agent, or make provisions
satisfactory to the Warrant Agent for the payment of, all taxes and charges that
may be imposed by the United States or any state upon the Company or the Warrant
Agent in connection with the issuance or delivery of any Warrant Shares, but any
transfer taxes in connection with the issuance of Warrant Certificates or
certificates for Warrant Shares in any name other than that of the Holder of the
Warrant Certificates surrendered shall be paid by such Holder; and, in such
case, the Company shall not be required to issue or deliver any Warrant
Certificate or certificate for Warrant Shares until such taxes shall have been
paid or it has been established to the Company's satisfaction that no tax is
due.
Section 6.2 Resignation or Removal of Warrant Agent. The
Warrant Agent may resign its duties and be discharged from all further duties
and liabilities hereunder after giving at least thirty (30) days' notice in
writing to the Company, except that such shorter notice may be given as the
Company shall, in writing, accept as sufficient. Upon comparable notice to the
Warrant Agent, the Company may remove the Warrant Agent; provided, however, that
in such event the Company shall appoint a new Warrant Agent, as hereinafter
provided, and the removal of the Warrant Agent shall not be effective until a
new Warrant Agent has been appointed and has accepted such appointment. If the
office of Warrant Agent becomes vacant by resignation or incapacity to act or
otherwise, the Company shall appoint in writing a new Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent or by the Holder of any Warrant
Certificate, then the Holder of any Warrant Certificate may apply to any court
of competent jurisdiction for the appointment of a new Warrant Agent. Any new
Warrant Agent, whether appointed
16
<PAGE>
by the Company or by such a court, shall be a bank which is a member of the
Federal Reserve System. Any new Warrant Agent appointed hereunder shall execute,
acknowledge and deliver to the former Warrant Agent last in office, and to the
Company, an instrument accepting such appointment under substantially the same
terms and conditions as are contained herein, and thereupon such new Warrant
Agent without any further act or deed shall become vested with the rights,
powers, duties and responsibilities of the Warrant Agent and the former Warrant
Agent shall cease to be the Warrant Agent; but if for any reason it becomes
necessary or expedient to have the former Warrant Agent execute and deliver any
further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the former Warrant Agent.
Section 6.3 Notice of Appointment. Not later than the
effective date of the appointment of a new Warrant Agent the Company shall cause
notice thereof to be mailed to the former Warrant Agent and the transfer agent
for the Company's Common Stock, and shall forthwith cause a copy of such notice
to be mailed to each Holder of a Warrant Certificate. Failure to mail such
notice, or any defect contained therein, shall not affect the legality or
validity of the appointment of the successor Warrant Agent.
Section 6.4 Merger of Warrant Agent. Any company into which
the Warrant Agent may be merged or with which it may be consolidated or any
company resulting from any merger or consolidation to which the Warrant Agent
shall be a party, or any company to which the Warrant Agent may transfer its
stockholder services business, shall be the successor Warrant Agent under this
Agreement without further act, provided that such company would be eligible for
appointment as a successor Warrant Agent under the provisions of Section 6.2
hereof. Any such successor Warrant Agent may adopt the prior countersignature of
any predecessor Warrant Agent and distribute Warrant Certificates countersigned
but not distributed by such predecessor Warrant Agent, or may countersign the
Warrant Certificates in its own name.
Section 6.5 Company Responsibilities. The Company agrees that
it shall (i) pay the Warrant Agent the agreed upon remuneration for its services
as Warrant Agent hereunder and will reimburse the Warrant Agent upon demand for
all expenses, advances, and expenditures that the Warrant Agent may reasonably
incur in the execution of its duties hereunder (including reasonable fees and
expenses of its counsel); (ii) provide the Warrant Agent, upon request, with
sufficient funds to pay any cash due pursuant to Section 3.9 upon exercise of
Warrants; and (iii) perform, execute, acknowledge and deliver or cause to be
performed, executed, acknowledged and delivered all further and other acts,
instruments and assurances as may reasonably be required by the Warrant Agent
for the carrying out or performing by the Warrant Agent of the provisions of
this Agreement.
Section 6.6 Purchase of Warrants by the Company. The Company
shall
17
<PAGE>
have the right, except as limited by law, other agreement or herein, to purchase
or otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
Section 6.7 Certification for the Benefit of Warrant Agent.
Whenever in the performance of its duties under this Agreement the Warrant Agent
shall deem it necessary or desirable that any matter be proved or established or
that any instructions with respect to the performance of its duties hereunder be
given by the Company prior to taking or suffering any action hereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established, or such
instructions may be given, by a certificate or instrument signed by the Chairman
of the Board, the President, an Executive Vice President, the Secretary or the
Treasurer of the Company and delivered to the Warrant Agent. Such certificate or
instrument may be relied upon by the Warrant Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement; but in its
discretion the Warrant Agent may in lieu thereof accept other evidence of such
matter or may require such further or additional evidence as it may deem
reasonable.
Section 6.8 Liability of Warrant Agent. The Warrant Agent
shall be liable hereunder solely for its own negligence or willful misconduct.
The Warrant Agent shall act hereunder solely as an agent in a ministerial
capacity for the Company and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only. The Warrant Agent will not incur any
liability or responsibility to the Company or to any Holder of any Warrant
Certificate for any action taken, or any failure to take action, in reliance on
any paper, document or instrument reasonably believed by the Warrant Agent to be
genuine and to have been signed, sent or presented by the proper party or
parties. The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof by the
Company or in respect of the validity or execution of any Warrant Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Warrant Certificate or the Stipulation; nor shall it be responsible
for the making of any adjustment required under the provisions of Article III
hereof or responsible for the manner, method or amount of any such adjustment or
the facts that would require any such adjustment; nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or other securities
to be issued pursuant to this Agreement or any Warrant Certificate or as to
whether any shares of Common Stock or other securities will when issued be
validly authorized and issued and fully paid and nonassessable.
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<PAGE>
Section 6.9 Use of Attorneys, Agents and Employees. The
Warrant Agent may execute and exercise any of the rights or powers hereby vested
in it or perform any duty hereunder either itself or by or through its
attorneys, agents or employees.
Section 6.10 Indemnification. The Company agrees to indemnify
the Warrant Agent and save it harmless against any and all losses, expenses or
liabilities, including judgments, costs and reasonable counsel fees arising out
of or in connection with its acceptance of its position hereunder and in
carrying out the terms hereof, except as a result of the negligence or willful
misconduct of the Warrant Agent.
Section 6.11 Acceptance of Agency. The Warrant Agent hereby
accepts the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth.
Section 6.12 Instructions from the Company. The Warrant Agent
is hereby authorized and directed to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board, the
President, an Executive Vice President, the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer or
officers.
Section 6.13 Changes to Agreement. The Warrant Agent may,
without the consent or concurrence of any Holder, by supplemental agreement or
otherwise, join with the Company in making any changes or corrections in this
Agreement that shall in the judgment of the Company (i) be required to cure any
ambiguity or to correct any defective or inconsistent provision or clerical
omission or mistake or manifest error herein contained, (ii) add to the
covenants and agreements of the Company or the Warrant Agent in this Agreement
such further covenants and agreements thereafter to be observed, or (iii) result
in the surrender of any right or power reserved to or conferred upon the Company
or the Warrant Agent in this Agreement, but which changes or corrections do not
or will not adversely affect, alter or change the rights, privileges or
immunities of the Holders of Warrant Certificates. The Warrant Agent shall be
entitled to rely on such Company counsel's written advice. Otherwise the
Agreement may be amended by the written consent of the Company and the
affirmative vote or written consent of Holders holding not less than two-thirds
of the then outstanding Warrants.
Section 6.14 Assignment. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns.
Section 6.15 Notices. Any notice or demand required by this
Agreement
19
<PAGE>
to be given or made by the Warrant Agent or by the Holder to or on the Company
shall be sufficiently given or made if sent by first-class or registered mail,
postage prepaid, addressed (until another address is filed in writing by the
Company with the Warrant Agent) as follows:
Acclaim Entertainment, Inc.
One Acclaim Plaza
Glen Cove, New York 11542
Attention: Gregory E. Fischbach
Any notice or demand required by this Agreement, to be given or made by the
registered Holder of any Warrant Certificate or by the Company to or on the
Warrant Agent shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing with the Company by the Warrant Agent), as follows:
American Securities Transfer & Trust, Inc.
938 Quail Street
Suite 101
Lakewood, Colorado 80215
Attention: Trust Department (Acclaim Entertainment, Inc.)
Any notice or demand required by this Agreement to be given or made by the
Company or the Warrant Agent to or on the Holder of any Warrant Certificate
shall be sufficiently given or made, whether or not such Holder receives the
notice, if sent by first-class or registered mail, postage prepaid, addressed to
such Holder at his last address as shown on the books of the Company maintained
by the Warrant Agent.
Section 6.16 Defects in Notice. Failure to file any
certificate or notice or to mail any notice, or any defect in any certificate or
notice pursuant to this Agreement shall not affect in any way the rights of any
Holder or the legality or validity of any adjustment made pursuant to Section
3.1 hereof, or any transaction giving rise to any such adjustment, or the
legality or validity of any action taken or to be taken by the Company.
Section 6.17 Governing Law. The validity, interpretation and
performance of this Agreement, of each Warrant Certificate issued hereunder and
of the respective terms and provisions thereof shall be governed by the internal
laws of the State of Delaware, without reference to principles of conflict of
laws.
Section 6.18 Standing. Nothing in this Agreement expressed
and nothing that may be implied from any of the provisions hereof is intended,
or shall be construed, to confer upon, or give to, any person or corporation
other than the Company, the
20
<PAGE>
Warrant Agent, and the Holders any right, remedy or claim under or by reason of
this Agreement or of any covenant, condition, stipulation, promise or agreement
contained herein; and all covenants, conditions, stipulations, promises and
agreements contained in this Agreement shall be for the sole and exclusive
benefit of the Company and the Warrant Agent and their successors, and the
Holders.
Section 6.19 Headings. The descriptive headings of the
articles and sections of this Agreement are inserted for convenience only and
shall not control or affect the meaning or construction of any of the provisions
hereof.
Section 6.20 Counterparts. This Agreement may be executed in
any number of counterparts, each of which so executed shall be deemed to be an
original; but such counterparts shall together constitute but one and the same
instrument.
Section 6.21 Conflict of Interest. The Warrant Agent and any
stockholder, director, officer or employee of the Warrant Agent may buy, sell or
deal in any of the Warrant Certificates or other securities of the Company or
become pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though the Warrant Agent were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
Section 6.22 Availability of the Agreement. The Warrant Agent
shall keep copies of this Agreement available for inspection by holders of
Warrants during normal business hours at its stock transfer department. Copies
of this Agreement may be obtained upon written request addressed to the Company
at the address set forth in Section 6.15.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, and their corporate seals affixed and attested,
all as of the day and year first above written.
ACCLAIM ENTERTAINMENT, INC.
By:
---------------------------------------
Title:
[Corporate Seal]
Attests:
- -----------------------
Title:
AMERICAN SECURITIES TRANSFER &
TRUST, INC.
By:
---------------------------------------
Title:
[Corporate Seal]
Attest:
- -----------------------
Title:
22
<PAGE>
[FORM OF WARRANT CERTIFICATE]
EXERCISABLE ON OR AFTER _______________, 1998
VOID AFTER 5:00 P.M., NEW YORK CITY TIME
ON ____________, 1999
W________________ ____________ Warrants
ACCLAIM ENTERTAINMENT, INC.
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED CUSIP __________
_______________________, or his, her or its registered assigns, is the
registered holder of the number of Warrants (the "Warrants") set forth above.
Each Warrant entitles the holder thereof to purchase from Acclaim Entertainment,
Inc., a corporation incorporated under the laws of the State of Delaware (the
"Company"), subject to the terms and conditions set forth hereinafter and in the
Warrant Agreement hereinafter referred to, one fully paid and nonassessable
share of Common Stock, $.02 par value per share, of the Company (the "Common
Stock"). The Warrants may be exercised at any time or from time to time on or
after __________, 1998 (the "Commencement Date") and must be exercised before
5:00 P.M., New York City time, on __________, 1999 (the "Exercise Deadline").
Upon the Exercise Deadline, all rights evidenced by the Warrants shall cease and
the Warrants shall become void, and the holders thereof shall have no rights
thereunder. Subject to the provisions of the Warrant Agreement, the holder of
each Warrant shall have the right to purchase from the Company until the
Exercise Deadline (and the Company shall issue and sell to such holder of a
Warrant) one fully paid and nonassessable share of Common Stock (a "Warrant
Share") at an exercise price (the "Exercise Price") of $12.00 upon surrender of
this Warrant Certificate to the Company at the office of the Warrant Agent (as
defined in the Warrant Agreement) designated by the Warrant Agent for such
purpose with the form of election to purchase appearing on this Warrant
Certificate duly completed and signed, together with (i) payment of the Exercise
Price in cash or certified or official bank check payable to the order of the
Warrant Agent or (ii), in lieu of any cash payment to be made pursuant to sub
paragraph (i) hereof, an election made by the holder of this Warrant Certificate
to exchange his Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this paragraph, by
surrendering this Warrant Certificate to the Warrant Agent stating such holder's
intent to effect such exchange, the number of Warrant Shares to be exchanged and
the date on which the Holder requests that such Warrant Exchange occur (the
"Notice of Exchange"). The Warrant Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Common Stock issuable upon such Warrant Exchange and, if applicable, a new
warrant of like tenor evidencing the balance of the Common Stock remaining
subject to such Warrant, shall be issued as of the Exchange Date and delivered
to the holder within seven (7) days following the Exchange Date. In connection
with any Warrant Exchange, a Warrant shall represent the right to subscribe for
and acquire the number of Warrant Shares (rounded to the next highest integer)
equal to (i) the number of Warrant Shares specified by the Holder in its Notice
of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to
the quotient obtained by dividing (A) the product of the Total Number times the
existing Exercise Price by (B) the then Market Price (as defined in the Warrant
Agreement) of a share of Common Stock.
The Exercise Price or number of Warrant Shares for which the Warrants
are exercisable are subject to change or adjustment upon the occurrence of
certain events set forth in the Warrant Agreement.
REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET
FORTH ON THE REVERSE SIDE HEREOF, AND SUCH FURTHER PROVISIONS SHALL FOR ALL
PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS
CERTIFICATE.
This Warrant shall be governed by and construed in accordance with the
laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed by its duly authorized officers.
Dated:___________________________ ACCLAIM ENTERTAINMENT, INC.
By:___________________________________
Its___________________________________
ATTEST:
By:________________________
Countersigned:
AMERICAN SECURITIES TRANSFER &
TRUST, INC., AS WARRANT AGENT
By: ____________________________
Its ____________________________
[Reverse Side]
<PAGE>
This Warrant Certificate is subject to all of the terms and conditions
of the Warrant Agreement, dated as of ________________, 1998 (the "Warrant
Agreement"), between the Company and the Warrant Agent, to all of which terms
and conditions the registered holder of the Warrant consents by acceptance
hereof. The Warrant Agreement is incorporated herein by reference and made a
part hereof and reference is made to the Warrant Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Warrant Agent, the Company and the registered holders of
Warrant Certificates. Copies of the Warrant Agreement are available for
inspection at the principal office of the Warrant Agent or may be obtained upon
written request addressed to the Warrant Agent at its principal stockholder
services office in 938 Quail Street, Suite 101, Lakewood, Colorado 80215 or may
be obtained upon written request addressed to the Company at One Acclaim Plaza,
Glen Cove, New York, 11542, Attn: Gregory E. Fischbach.
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractional shares, but shall make
adjustment therefor in cash on the basis of the current market value of any
fractional interest as provided in the Warrant Agreement.
This Warrant Certificate may be exchanged or transferred, at the option
of the holder, upon presentation and surrender hereof to the Warrant Agent, for
other Warrant Certificates of different denominations, entitling the holder
hereof to purchase in the aggregate the same number of Warrant Shares. If the
Warrants evidenced by this Warrant Certificate shall be exercised in part, the
holder hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Certificates evidencing the number of Warrants not so exercised.
The holder of this Warrant Certificate shall not, by virtue hereof, be
entitled to any of the rights of a stockholder in the Company, either at law or
in equity, including, without limitation, the right to vote, to receive
dividends and other distributions, or to attend or receive any notice of
meetings of stockholders or any other proceedings of the Company, and the rights
of the holder are limited to those expressed in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock are
closed for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such transfer until the date of the
reopening of said transfer books.
Every holder of this Warrant Certificate, by accepting the same,
consents and agrees with the Company, the Warrant Agent and with every other
holder of a Warrant Certificate that:
(a) this Warrant Certificate is transferable on the registry
books of the Warrant Agent only upon the terms and conditions set forth
in the Warrant Agreement and
(b) the Company and the Warrant Agent may deem and treat the
person in whose name this Warrant Certificate is registered as the
absolute owner hereof (notwithstanding any notation of ownership or
other writing hereon made by anyone other than the Company or the
Warrant Agent) for all purposes whatever and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.
This Warrant Certificate shall not be valid or enforceable for any
purpose until it shall have been countersigned by the Warrant Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM = as tenants in common
TEN ENT = as tenants by the entireties
JT TEN = as joint tenants with right of survivorship
and not as tenants in common
COM PROP = as community property
UNIF GIFT MIN ACT = _______________ Custodian ______________
(Custodian) (Minor)
under Uniform Gifts to Minors Act
________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
PURCHASE FORM
Dated: ________________, 19___
The undersigned hereby irrevocably exercises this Warrant to purchase
__________ shares of Common Stock and herewith makes payment of $__________ in
payment of the Exercise Price thereof on the terms and conditions specified in
this Warrant Certificate, surrenders this Warrant Certificate and all right,
title and interest herein to the Company and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer Identification or Social Security Number:______________________________
Signature_________________________________
If such number of Warrant Shares is less than the aggregate number of Warrant
Shares purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the balance of such Warrant Shares to be registered in
the name and at the address specified below and delivered thereto.
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer Identification or Social Security Number:______________________________
Signature_________________________________
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever. If the certificate
representing the Warrant Shares or any Warrant Certificate representing
Warrants not exercised is to be registered in a name other than that in
which this Warrant Certificate is registered, the signature of the
holder hereof must be guaranteed.
Signature Guaranteed:
__________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15
<PAGE>
WARRANT ASSIGNMENT FORM
FOR VALUE RECEIVED _________________________________________________
hereby sells, assigns and transfers to:
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer Identification or Social Security Number:______________________________
the right to purchase up to _____________________ Warrant Shares represented by
this Warrant and does hereby irrevocably constitute and appoint
___________________________________________________________ Attorney-in-fact to
transfer said Warrant on the behalf of the Company, with full power of
substitution in the premises.
Dated:_______________________ ___________________________________________
Signature of registered holder
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signatures Guaranteed:
___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE>
FORM OF OPINION OF ROSENMAN & COLIN LLP EXHIBIT 5
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 10022
June , 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have been requested by Acclaim Entertainment, Inc. (the "Company"), a
Delaware corporation, to furnish our opinion in connection with the Company's
Registration Statement (the "Registration Statement") on Form[nb]S-1 covering
the issuance of an aggregate of 665,772 warrants (the "Warrants") by the
Company and the offer and sale of an aggregate of 1,265,772 shares (the
"Shares") of common stock, par value $0.02 per share, underlying certain
warrants.
In connection with the foregoing, we have made such examination as we have
deemed necessary for the purpose of rendering this opinion. Based upon such
examination, it is our opinion that (i) when the Registration Statement has
become effective under the Securities Act of 1933 and the warrant agreements
relating to the Warrants (the "Warrant Agreements") have been duly executed and
delivered, the Warrants have been duly executed and authenticated in accordance
with the Warrant Agreements and issued as contemplated by the Registration
Statement, the Warrants will constitute valid and legally binding obligations of
the Company, subject to bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting the
enforcement of creditors' rights and by the application of equitable principles,
whether in a suit at law or equity and (ii) when the Shares have been duly
issued and paid for in accordance with the terms of the Warrant Agreements and
the Spangenberg Warrants (as such term is defined in the Registration Statement)
and as contemplated in the Registration Statement, the Shares will be validly
issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our name under the caption "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
ROSENMAN & COLIN LLP
BY
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A Partner
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of Acclaim Entertainment, Inc.:
We consent to the use in this Registration Statement of Acclaim Entertainment,
Inc. of our report dated November 5, 1997, included herein, and to the reference
to our firm under the heading 'Experts' in the Prospectus.
Our report dated November 5, 1997 contains an explanatory paragraph that states
that the Company's significant losses from operations in fiscal 1997 and 1996
and its working capital and stockholders' deficiencies at August 31, 1997 raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty. The report also indicates that we
were unable to review the fiscal 1996 selected quarterly data in accordance with
professional standards.
KPMG PEAT MARWICK LLP
New York, New York
May 29, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Acclaim Entertainment,
Inc. of our report dated December 8, 1995, included in the Prospectus, which is
a part of such Registration Statement, and to the use of our name as it appears
under the caption 'Experts.'
Our report dated December 8, 1995 contains an emphasis paragraph as to
uncertainty relating to the eventual outcome of certain class action lawsuits.
The fiscal 1995 consolidated financial statements do not include any provision
for any liability that might result upon the resolution of these matters.
GRANT THORNTON LLP
New York, New York
May 29, 1998
