<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number 0-16986
ACCLAIM ENTERTAINMENT, INC.
(Exact name of the registrant as specified in its charter)
Delaware 38-2698904
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
One Acclaim Plaza, Glen Cove, New York 11542
(Address of principal executive offices)
(516) 656-5000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No /_/
As at April 7, 1999, approximately 54,000,000 shares of Common Stock of the
Registrant were issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
February 28, August 31,
1999 1998
------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 88,282 $ 47,273
Accounts receivable - net 23,595 39,177
Inventories 12,671 3,430
Prepaid expenses 11,149 16,571
--------- ---------
TOTAL CURRENT ASSETS 135,697 106,451
--------- ---------
OTHER ASSETS
Fixed assets - net 29,462 29,294
Excess of cost over fair value of net assets acquired
- net of accumulated amortization of $20,635 and
$19,218, respectively 22,623 21,433
Other assets 2,337 3,229
--------- ---------
TOTAL ASSETS $ 190,119 $ 160,407
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Trade accounts payable $ 24,789 $ 24,218
Short-term borrowings -- 16
Accrued expenses 89,233 92,207
Income taxes payable 6,313 6,918
Current portion of long-term debt 724 724
Obligation under capital leases - current 1,020 1,468
--------- ---------
TOTAL CURRENT LIABILITIES 122,079 125,551
--------- ---------
LONG-TERM LIABILITIES
Long-term debt 51,319 51,931
Obligation under capital leases - noncurrent 934 1,110
Other long-term liabilities 2,365 3,588
--------- ---------
TOTAL LIABILITIES 176,697 182,180
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $0.01 par value; 1,000 shares
authorized; none issued -- --
Common stock, $0.02 par value; 100,000 shares
authorized; 54,488 and 52,634 shares issued,
respectively 1,090 1,053
Additional paid in capital 200,481 189,645
Accumulated deficit (184,373) (209,180)
Treasury stock, 537 and 523 shares, respectively (3,262) (3,103)
Foreign currency translation adjustment (514) (188)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 13,422 (21,773)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $ 190,119 $ 160,407
--------- ---------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
ACCLAIM ENTERTAINMENT, INC
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in 000s, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 135,656 $ 69,343 $ 240,487 $ 161,620
COST OF REVENUES 68,230 33,227 118,730 77,228
--------- --------- --------- ---------
GROSS PROFIT 67,426 36,116 121,757 84,392
--------- --------- --------- ---------
OPERATING EXPENSES
Marketing and sales 21,368 14,162 38,887 31,260
General and administrative 18,254 12,672 33,184 26,753
Research and development 11,506 9,273 22,734 17,617
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 51,128 36,107 94,805 75,630
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS 16,298 9 26,952 8,762
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 1,005 607 1,800 1,068
Interest expense (1,441) (1,471) (2,849) (2,912)
Other expense (780) (365) (21) (21)
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES 15,082 (1,220) 25,882 6,897
PROVISION FOR INCOME TAXES 562 15 1,075 121
--------- --------- --------- ---------
NET EARNINGS (LOSS) BEFORE
MINORITY INTEREST 14,520 (1,235) 24,807 6,776
--------- --------- --------- ---------
MINORITY INTEREST -- (5) -- (10)
--------- --------- --------- ---------
NET EARNINGS (LOSS) $ 14,520 $ (1,230) $ 24,807 $ 6,786
--------- --------- --------- ---------
BASIC EARNINGS (LOSS) PER SHARE $ 0.27 $ (0.02) $ 0.46 $ 0.13
DILUTED EARNINGS (LOSS) PER SHARE $ 0.21 $ (0.02) $ 0.38 $ 0.13
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
(in 000s, except per share data)
Preferred Stock (1) Common
------------------- ---------
Issued Stock
------ -------
Issued (Accumulated
Additional Deficit)
Paid-In Deferred Retained
Shares Amount Shares Amount Capital Compensation Earnings
-------- -------- ------ ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance August 31, 1996 50,041 $1,001 $180,895 $(15,113) $(70,642)
-------- -------- ------ ------ -------- --------- ---------
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 ---- ----
---- ----
Escrowed Shares Received ---- ---- ----
---- ---- ---- ----
Foreign Currency Translation Gain ---- ---- ----
---- ---- ---- ----
Unrealized Loss on
Marketable Equity Securities ---- ---- ----
-------- -------- ------ ------ -------- --------- ---------
Balance August 31, 1997 50,122 1,002 181,786 (8,413) (229,870)
-------- -------- ------ ------ -------- --------- ---------
Net Earnings ---- ---- 20,690
---- ---- ---- ----
Issuance of Common Stock for
Litigation Settlements ---- 1,274 26 6,868 ---- ----
Issuances and Cancellations
of Common Stock and Options 15 1 239 690 ----
---- ----
Deferred Compensation Expense ---- 4,190 ----
---- ---- ---- ----
Exercise of Stock Options 1,223 24 4,285 ---- ----
---- ----
Escrowed Shares Received ---- ---- ----
---- ---- ---- ----
Foreign Currency Translation Gain ---- ---- ----
-------- -------- ------ ------ -------- --------- ---------
Balance August 31, 1998 52,634 1,053 193,178 (3,533) (209,180)
-------- -------- ------ ------ -------- --------- ---------
Net Earnings ---- ---- 24,807
---- ---- ---- ----
Issuances of Common Stock ---- 206 4 1,792 ---- ----
Issuance of Warrants for
Litigation Settlement ---- ---- --- --- 950 ---- ----
Subordinated Notes Conversion ---- ---- 48 1 249 ---- ----
Cancellations of Options ---- ---- (382) ----
---- ---- 382
Deferred Compensation Expense ---- 1,331 ----
---- ---- ---- ----
Exercise of Stock Options
and Warrants 1,596 32 5,919 ---- ----
---- ----
Escrowed Shares Received ---- ---- (69) (1) 1 ---- ----
Issuance of Common Stock under
Employee Stock Purchase Plan ---- ---- 73 1 594 ---- ----
Foreign Currency Translation Loss ---- ---- ----
-------- -------- ------ ------ -------- --------- ---------
Balance February 28, 1999 54,488 $1,090 $202,301 $(1,820) $(184,373)
-------- -------- ------ ------ -------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Foreign Gain (Loss) On
Currency Marketable
Treasury Translation Equity
Stock Adjustment Securities Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance August 31, 1996 $(1,813) $(754) $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
Escrowed Shares Received (1,091) ---- ---- (1,091)
Foreign Currency Translation Gain ---- 107 ---- 107
Unrealized Loss on
Marketable Equity Securities ---- ---- (15) (15)
-------- -------- -------- --------
Balance August 31, 1997 (2,904) (647) 0 (59,046)
-------- -------- -------- --------
Net Earnings ---- ---- ---- 20,690
Issuance of Common Stock for
Litigation Settlements ---- ---- ---- 6,894
Issuances and Cancellations
of Common Stock and Options ---- ---- ---- 930
Deferred Compensation Expense ---- ---- ---- 4,190
Exercise of Stock Options ---- ---- ---- 4,309
Escrowed Shares Received (199) ---- ---- (199)
Foreign Currency Translation Gain ---- 459 ---- 459
-------- -------- -------- --------
Balance August 31, 1998 (3,103) (188) 0 (21,773)
-------- -------- -------- --------
Net Earnings ---- ---- ---- 24,807
Issuances of Common Stock ---- ---- ---- 1,796
Issuance of Warrants for
Litigation Settlement ---- ---- ---- 950
Subordinated Notes Conversion ---- ---- ---- 250
Cancellations of Options ---- ---- ---- ----
Deferred Compensation Expense ---- ---- ---- 1,331
Exercise of Stock Options
and Warrants ---- ---- ---- 5,951
Escrowed Shares Received (159) ---- ---- (159)
Issuance of Common Stock under
Employee Stock Purchase Plan ---- ---- ---- 595
Foreign Currency Translation Loss ---- (326) ---- (326)
-------- -------- -------- --------
Balance February 28, 1999 $(3,262) $(514) $0 $13,422
-------- -------- -------- --------
</TABLE>
(1) The Company is authorized to issue 1,000 shares of preferred stock at a par
value of $0.01 per share, none of which shares is presently issued and
outstanding. See notes to consolidated financial statements.
3
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
Six Months Ended
February 28,
1999 1998
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net Earnings $ 24,807 $ 6,786
-------- --------
Adjustments to reconcile net earnings to
net cash (used in) provided by
operating activities:
Depreciation and amortization 5,636 6,824
Provision for returns and discounts 39,022 20,646
Minority interest in net earnings of
consolidated subsidiary -- (10)
Deferred compensation expense 1,331 2,236
Non-cash royalty charges 529 1,363
Non-cash compensation expense 285 --
Other non-cash items (50) 669
Change in assets and liabilities, net
of effects of acquisition:
Accounts receivable (20,426) (32,337)
Inventories (9,287) 1,708
Prepaid expenses 5,005 5,577
Trade accounts payable 802 8,712
Accrued expenses (6,236) (8,255)
Income taxes payable (220) 301
Other long-term liabilities (1,223) 2,903
-------- --------
Total adjustments 15,168 10,337
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 39,975 17,123
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Acquisition of subsidiary, net of cash
acquired (421) --
Acquisition of fixed assets, excluding
capital leases (3,621) (1,395)
Disposal of fixed assets 104 69
Disposal of other assets 42 --
Other investing activities -- 30
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (3,896) (1,296)
-------- --------
4
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
Six Months Ended
February 28,
1999 1998
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Payment of mortgage $ (362) $ (640)
Payment of short-term bank loans (16) (622)
Exercise of stock options and warrants 5,951 70
Proceeds from Employee Stock Purchase Plan 310 --
Payment of obligation under capital leases (512) (579)
Purchase of treasury stock -- (199)
Miscellaneous financing activities -- 27
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 5,371 (1,943)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (441) 279
NET INCREASE IN CASH AND CASH EQUIVALENTS 41,009 14,163
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,273 26,254
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 88,282 $ 40,417
-------- --------
Supplemental schedule of noncash investing and
financing activities:
1999 1998
-------- --------
Acquisition of equipment under capital leases $ 58 $ 16
Cash paid during the year for:
Interest $ 4,614 $ 3,729
Income taxes $ 1,200 $ (187)
In fiscal 1999, the Company purchased certain
assets and liabilities of a distributor in
Australia. In connection with the acquisition,
liabilities assumed were as follows:
Fair value of assets acquired $ 1,186
Excess of cost over fair value of net assets
acquired 2,607
Cash paid, net of cash acquired (580)
Fair market value of common stock issued (1,796)
--------
Liabilities assumed $ 1,417
--------
See notes to consolidated financial statements.
5
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
1. Interim Period Reporting - The data contained in these financial statements
are unaudited and are subject to year-end adjustments; however, in the opinion
of management, all known adjustments (which consist only of normal recurring
accruals) have been made to present fairly the consolidated operating results
for the unaudited periods.
2. Accounts Receivable
Accounts receivable are comprised of the following:
February 28, August 31,
1999 1998
-------- --------
Receivables assigned to factor $ 53,284 $ 79,338
Advances from factor 17,757 34,914
-------- --------
Due from factor 35,527 44,424
Unfactored accounts receivable 6,006 6,398
Foreign accounts receivable 25,924 22,201
Other receivables 1,965 3,414
Allowances for returns and discounts (45,827) (37,260)
-------- --------
$ 23,595 $ 39,177
-------- --------
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, 1999, 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 made pursuant to a revolving credit and security agreement,
which expires on January 31, 2000. Pursuant to the terms of the agreement, as
amended, 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, among other covenants. As of February 28, 1999,
the Company was in compliance with the covenants under its revolving credit
facility.
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 is charged at the
bank's prime lending rate plus one percent per annum (8.75% at February 28,
1999) on such advances.
Pursuant to the terms of certain distribution, warehouse and credit and
collection agreements, certain of the Company's foreign accounts receivable are
due from distributors. These receivables are not collateralized and as a result
management continually 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, 1999 and
August 31, 1998, the balance due from a distributor was approximately 28% and
24%, respectively, of foreign accounts receivable.
6
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
3. Long-Term Debt
Long-term debt consists of the following:
February 28, August 31,
1999 1998
------- -------
10% Convertible Subordinated Notes due 2002 $49,750 $50,000
Mortgage note 2,293 2,655
------- -------
52,043 52,655
Less: current portion 724 724
------- -------
$51,319 $51,931
------- -------
The 10% Convertible Subordinated Notes due 2002 (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 time on or after March 1, 2000 through February
28, 2001 and at 102% of the principal balance thereafter to maturity.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted average number
of common shares outstanding. Diluted earnings 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 Notes, if dilutive. The table below provides the components of
the per share computations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS Computation
Net earnings (loss) $ 14,520 $ (1,230) $ 24,807 $ 6,786
-------- -------- -------- --------
Weighted average common shares outstanding 54,160 50,729 53,527 50,556
Basic earnings per share $ 0.27 $ 0.02 $ 0.46 $ 0.13
Diluted EPS Computation
Net earnings (loss) $ 14,520 $ (1,230) $ 24,807 6,786
10% Convertible Subordinated Notes Interest Expense 1,244 -- 2,494 --
-------- -------- -------- --------
Adjusted Net Income (loss) $ 15,764 $ (1,230) $ 27,301 6,786
-------- -------- -------- --------
Weighted average common shares outstanding 54,160 50,729 53,527 50,556
Stock options and warrants 10,391 -- 9,431 3,244
10% Convertible Subordinated Notes 9,605 -- 9,605 --
-------- -------- -------- --------
Diluted common shares outstanding 74,156 50,729 72,563 53,800
-------- -------- -------- --------
Diluted earnings (loss) per share $ 0.21 $ (0.02) $ 0.38 $ 0.13
</TABLE>
5. Comprehensive Income
Effective September 1, 1998 the Company has adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" which requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in the financial statements. The
Company's total comprehensive earnings were as follows:
7
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
5. Comprehensive Income - (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 14,520 $ (1,230) $ 24,807 $ 6,786
Other comprehensive earnings (losses):
Foreign currency translation adjustments (75) (68) (326) 25
-------- -------- -------- --------
Comprehensive earnings (loss) $ 14,445 $ (1,298) $ 24,481 $ 6,811
-------- -------- -------- --------
</TABLE>
6. Acquisition
On November 12, 1998 the Company acquired substantially all of the assets
and liabilities of a distributor in Australia. The acquisition was accounted for
as a purchase. Accordingly, the operating results 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. The consideration was comprised of (i) $638 in cash, of which $479
was paid at closing, and (ii) 206 shares of the common stock of the Company with
a fair value of $1,796. In addition, the Company assumed $1,417 of liabilities.
The total cost of the acquisition was $3,851, of which $1,244 was allocated to
identified net tangible assets, primarily accounts receivable. The remaining
$2,607 represents the excess of the purchase price over the fair value of the
net assets acquired, which will be amortized on a straight-line basis over three
years. The operating results of the distributor are insignificant to those of
the Company.
7. Revenue Recognition
The Company adopted Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", effective for transactions entered into commencing September 1,
1998. 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 did not have a significant impact on the Company's results of
operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following is intended to update the information contained in the
Company's Annual Report on Form 10-K for the year ended August 31, 1998 and
presumes that readers have access to, and will have read, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in such Form 10-K.
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. When used in this
report, the words "believe," "anticipate," "think," "intend," "plan," "will
be" and similar expressions identify such forward-looking statements. Such
statements regarding future events and/or the future financial performance of
the Company are subject to certain risks and uncertainties, including those
discussed in "Factors Affecting Future Performance" below at pages 17 to 24,
which could cause actual events or the actual future results of the Company
to differ materially from any forward-looking statement. In light of the
significant risks and uncertainties inherent in the forward-looking
statements included herein, the inclusion of such statements should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Overview
Acclaim Entertainment, Inc. ("Acclaim"), together with its subsidiaries
(Acclaim and its subsidiaries are collectively referred to as the "Company"),
is a worldwide 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 ("PC"s). The Company owns and operates four
Software development studios (the "Studios"), located in the United States
and the United Kingdom, and publishes and distributes its Software directly
in North America, the United Kingdom, Germany, France and Australia. The
Company's operating strategy is to develop and maintain a core of key brands
and franchises (e.g., Turok, NFL Quarterback Club and All Star Baseball) to
support the various Entertainment Platforms and PCs that dominate the
interactive entertainment market at a given time or which the Company
perceives as having the potential for achieving mass market acceptance. The
Company emphasizes sports simulation and arcade-style Software for
Entertainment Platforms, and fantasy/role-playing, real-time simulation,
adventure and sports simulation Software for PCs.
The Company also engages, to a lesser extent, in the distribution of
Software developed by third-party Software publishers ("Affiliated Labels")
and the development and publication of (1) strategy guides relating to the
Company's Software and (2) comic book magazines.
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. and its subsidiary, Nintendo
of America, Inc., are collectively referred to as "Nintendo"), Sony
Corporation (Sony Corporation and its affiliate, Sony Computer Entertainment
America, are collectively referred to as "Sony") and Sega Enterprises Ltd.
("Sega")) and PCs dedicated for home use. 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. Accordingly, the Company
must continually anticipate and adapt its Software to emerging Entertainment
Platforms. 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 approximately three years ago
was between $300,000 to $400,000, while the average development cost for a
title for Entertainment Platforms and PCs is currently between $1 million and
$2 million. Approximately 92% and 85% of the Company's gross revenues in the
quarter and six months ended
9
<PAGE>
February 28, 1999, respectively, were derived from Software developed by the
Studios. The process of developing Software is extremely complex and is
expected to become more complex and expensive in the future as new platforms
and technologies are introduced. See "Factors Affecting Future Performance--
Increased Product Development Costs May Adversely Affect Profitability."
The Company's performance has historically been materially affected by
platform transitions and product cycles. As a result of the industry
transition to 32- and 64-bit Entertainment Platforms which commenced in 1995,
the Company's Software sales during fiscal 1996, 1997 and 1998 were
significantly lower than in fiscal 1994 and 1995. The Company's inability to
predict accurately the timing of such transition resulted in material losses
in fiscal 1996 and 1997. See "Factors Affecting Future Performance - Industry
Trends, Platform Transitions and Technological Change May Adversely Affect
the Company's Revenues and Profitability."
The Company's revenues in any period are generally driven by the titles
released by the Company in that period. In the past, the Company has
experienced delays in the introduction of new titles, which has had a
negative impact on its results of operations. If the Company does not
introduce titles in accordance with its operating plans for a period, its
results of operations and profitability in that period could be negatively
affected. See "Factors Affecting Future Performance--Revenues Are Dependent
on Timely Introduction of New Titles."
The Company recorded net earnings of $6.8 million and $24.8 million in the
first half of fiscal 1998 and 1999, respectively. The fiscal 1999 period
results primarily reflect increased sales in the United States of the
Company's Software for Nintendo's 64-bit N64 ("N64") and Sony's 32-bit
PlayStation ("PlayStation") consoles. No assurance can be given as to the
future growth of the installed base of 32- and 64-bit Entertainment Platforms,
the future growth of the Software market therefor, the timely introduction and
market acceptance of the Company's Software or of the Company's results of
operations and profitability in future periods. The results for the first half
of fiscal 1998 and 1999 also reflect the Company's significantly reduced
operating expenses as compared to prior periods.
The Company's ability to generate sales growth and profitability in the
short-term will be materially dependent on (i) the continued growth of the
Software market for 32- and 64-bit Entertainment Platforms and (ii) the
Company's ability to identify, develop and publish "hit" Software for the N64
and PlayStation platforms.
Results of Operations
The following table sets forth certain statements of consolidated
operations data as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic revenues 72.5% 58.1% 71.5% 58.6%
Foreign revenues 27.5 41.9 28.5 41.4
---- ---- ---- ----
Net revenues 100.0 100.0 100.0 100.0
Cost of revenues 50.3 47.9 49.4 47.8
---- ---- ---- ----
Gross profit 49.7 52.1 50.6 52.2
Marketing and sales 15.8 20.4 16.2 19.3
General and administrative 13.5 18.3 13.8 16.6
Research and development 8.5 13.4 9.5 10.9
--- ---- --- ----
Total operating expenses 37.7 52.1 39.4 46.8
Earnings from operations 12.0 0.0 11.2 5.4
Other expense, net (0.9) (1.8) (0.4) (1.2)
Earnings (loss) before income taxes 11.1 (1.8) 10.8 4.3
Net earnings (loss) 10.7 (1.8) 10.3 4.2
</TABLE>
10
<PAGE>
Net Revenues
The Company's gross revenues were derived from the following product
categories:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
1999* 1998* 1999* 1998*
----- ----- ----- -----
<S> <C> <C> <C> <C>
64-bit Software 79.0% 60.0% 70.0% 67.0%
32-bit Software 9.0% 26.0% 19.0% 20.0%
PC Software 6.0% 8.0% 6.0% 8.0%
Portable Software 5.0% 5.0% 4.0% 3.0%
Other 1.0% 1.0% 1.0% 2.0%
</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 were able to present such information as a percentage of net
revenues.
The increase in the Company's net revenues from $69.3 million for the
quarter ended February 28, 1998 to $135.7 million for the quarter ended
February 28, 1999 was predominantly due to increased unit sales in the United
States of the Company's 64-bit Software. The increase in the Company's net
revenues from $161.6 million for the six months ended February 28, 1998 to
$240.5 million for the six months ended February 28, 1999 was predominantly
due to increased unit sales in the United States of the Company's 64- and
32-bit Software. The increase in sales in the first half of fiscal 1999 was
primarily due to the continued increase in the installed base of N64 and
PlayStation consoles worldwide and the quality and market acceptance of the
Company's titles for those Entertainment Platforms.
The Company anticipates that titles currently scheduled for introduction
in the third and fourth quarter of fiscal 1999 will be shipped as announced;
however, no assurance can be given that these titles will be released in
accordance with such announcements. Assuming timely shipment of the Company's
titles, the Company's revenues from the sale of N64 and PlayStation Software
are anticipated to grow in the second half of fiscal 1999 and for fiscal 1999
as a whole as compared to the related prior year periods; however, the
Company does not anticipate that, for fiscal 1999 as a whole, it will achieve
its fiscal 1998 growth rate of 97%. If the Company does not release new titles
as planned in the third or fourth quarter of fiscal 1999, the Company's net
revenues could be materially negatively impacted and the Company could incur
losses from operations.
The Company's domestic sales in the three and six months ended February
28, 1999 comprised a higher percentage of total net revenues as compared to
the three and six months ended February 28, 1998 primarily because the titles
published by the Company in the 1999 period were aimed at, and achieved
greater popularity in, the domestic market (e.g., WWF War Zone and NFL
Quarterback Club 99). The Company anticipates that its mix of domestic and
foreign net revenues will continue to be affected by the content of titles
released by the Company.
To date, the Company has not generated material revenues from any of its
operations other than Software publishing and no assurance can be given that
the Company will be able to generate such revenues in the future.
A significant portion of the Company's revenues in any quarter are
generally derived from Software first released in that quarter or in the
immediately preceding quarter. See "Factors Affecting Future Performance--
Revenues Are Dependent on Timely Introduction of New Titles" and "--The
Company's Future Success is Dependent on Its Ability to Release "Hit" Titles."
11
<PAGE>
In the quarter ended February 28, 1998, NHL Breakaway 98 (for multiple
platforms), NFL Quarterback Club 98 (for N64), Turok: Dinosaur Hunter (for
multiple platforms) and Riven (for PlayStation) accounted for approximately
25%, 20%, 13% and 10%, respectively, of the Company's gross revenues. In the
quarter ended February 28, 1999, Turok 2: Seeds of Evil (for multiple
platforms) and South Park (for N64) accounted for approximately 50% and 22%,
respectively, of the Company's gross revenues. For the six months ended
February 28, 1998, NFL Quarterback Club 98 (for multiple platforms), Extreme
G (for N64), NHL Breakaway 98 (for multiple platforms) and Turok: Dinosaur
Hunter (for multiple platforms) accounted for approximately 26%, 21%, 12% and
10%, respectively, of the Company's gross revenues. For the six months ended
February 28, 1999, Turok 2: Seeds of Evil (for multiple platforms), WWF War
Zone (for multiple platforms), South Park (for N64) and NFL Quarterback Club
99 (for N64) accounted for approximately 28%, 17%, 13% and 11%, respectively,
of the Company's gross revenues.
The Company is substantially dependent on the Entertainment Platform
developers as the sole developers of the Entertainment Platforms marketed by
them, as the sole licensors of the proprietary information and technology
needed to develop Software for those Entertainment Platforms and, in the case
of Nintendo and Sony, as the sole manufacturers of Software for the
Entertainment Platforms marketed by them. For the quarters ended February 28,
1998 and 1999, the Company derived 65% and 84% of its gross revenues,
respectively, from sales of Nintendo-compatible Software and 26% and 9% of
its gross revenues, respectively, from sales of Software for PlayStation. For
the six months ended February 28, 1998 and 1999, the Company derived 71% and
74% of its gross revenues, respectively, from sales of Nintendo-compatible
Software and 20% and 19% of its gross revenues, respectively, from sales of
Software for PlayStation. In prior periods, the Company has also derived
substantial portions of its gross revenues from sales of Software for
platforms marketed by Sega. Such revenues have not been material in recent
periods. Although the Company does not plan to release any titles for Sega's
32-bit platform in fiscal 1999, it may release titles for other Entertainment
Platforms introduced by Sega in future periods. See "Factors Affecting Future
Performance--If the Company Is Unable to Obtain or Renew Licenses from
Hardware Developers, It Will Not Be Able to Release Software for Game
Consoles."
Gross Profit
Gross profit fluctuates primarily as a result of five factors: (i) the
level of returns, price protection and concessions; (ii) the number of "hit"
products and average unit selling prices; (iii) the percentage of sales of CD
Software; (iv) the percentage of foreign sales; and (v) the percentage of
foreign sales to third-party distributors. All royalties payable to
developers of Entertainment Platforms are included in cost of revenues.
The Company's gross profit is adversely impacted by increases in the level
of returns, price protection and concessions to retailers, which reduces the
average unit price obtained for its Software sales. Similarly, lack of "hit"
titles or a low number of "hit" titles, resulting in lower average unit sales
prices, adversely impacts the Company's gross profits.
The Company's margins on sales of CD Software (currently, PlayStation and
PCs) are higher than those on cartridge Software (currently, N64) as a result
of significantly lower CD Software product costs.
The Company's margins on foreign Software sales are typically lower than
those on domestic sales due to higher prices charged by developers of
Entertainment Platforms for Software distributed by the Company outside North
America and, in certain circumstances, lower selling prices. 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 $36.1 million (52% of net revenues) for the
quarter ended February 28, 1998 to $67.4 million (50% of net revenues) for
the quarter ended February 28, 1999 and from $84.4 million (52% of net
revenues) for the six months ended February 28, 1998 to $121.8 million (51%
of net revenues) for the six months ended February 28, 1999. The dollar
increase is predominantly due to
12
<PAGE>
increased sales volume. The percentage decrease is primarily due to (1) the
higher percentage of revenues derived from N64 Software and (2) higher levels
(as a percentage of net revenues) of returns, price protection and
concessions to retailers, in the quarter and six months ended February 28,
1999.
Management anticipates that the Company's future gross profit will be
affected principally by (i) the percentage of returns, price protection and
concessions in respect of the Company's Software sales and (ii) the Company's
product mix (i.e., the percentage of CD Software verses the percentage of
cartridge Software).
The Company purchases substantially all of its products at prices payable
in United States dollars. Appreciation of the yen could result in increased
prices charged by developers of Entertainment Platforms to the Company
(although, to date, none of them has effected such a price increase), which
the Company may not be able to pass on to its customers and which could
adversely affect its results of operations.
Operating Expenses
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 thereafter in the form of
reduced operating expenses as compared to prior periods. In addition, in
fiscal 1998, the Company consolidated or eliminated certain operations.
Marketing and sales expenses increased from $14.2 million (20% of net
revenues) for the quarter ended February 28, 1998 to $21.4 million (16% of
net revenues) for the quarter ended February 28, 1999 and from $31.3 million
(19% of net revenues) for the six months ended February 28, 1998 to $38.9
million (16% of net revenues) for the six months ended February 28, 1999. The
dollar increase is primarily attributable to increased selling and
advertising expenses.
General and administrative expenses increased from $12.7 million (18% of
net revenues) for the quarter ended February 28, 1998 to $18.3 million (13%
of net revenues) for the quarter ended February 28, 1999 and from $26.8
million (17% of net revenues) for the six months ended February 28, 1998 to
$33.2 million (14% of net revenues) for the six months ended February 28,
1999. The dollar increase is primarily attributable to increased variable
expenses.
Research and development expenses increased from $9.3 million (13% of net
revenues) for the quarter ended February 28, 1998 to $11.5 million (8% of net
revenues) for the quarter ended February 28, 1999 and from $17.6 million (11%
of net revenues) for the six months ended February 28, 1998 to $22.7 million
(9% of net revenues) for the six months ended February 28, 1999. The dollar
increase is primarily attributable to increased personnel costs at the
Studios.
The percentage decrease in marketing and sales, general and
administrative, and research and development expenses in the three and six
months ended February 28, 1999 is primarily attributable to increased sales
volume and the Company's cost reduction measures. Due to the Company's
planned release of a higher number of titles and increasing Software
development costs, the Company anticipates that its future research and
development expenses will continue to increase. See "Factors Affecting Future
Performance--Increased Product Development Costs May Adversely Affect
Profitability."
Although the Company anticipates that its aggregate operating expenses
will increase in dollars in fiscal 1999, it does not anticipate that such
expenses will increase as a percentage of net revenues.
Interest income increased in the three and six months ended February 28,
1999 as compared to the three and six months ended February 28, 1998 due to
higher cash balances available for investment.
As of August 31, 1998, the Company had a U.S. tax net operating loss
carryforward of approximately $110 million. In the first half of fiscal 1998
and 1999, the Company utilized a portion of its net operating
13
<PAGE>
loss carryforwards. The provision for income taxes of $1.1 million for the
first six months of fiscal 1999 primarily relates to state and foreign 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 holiday selling season). However, the
timing of the delivery of Software titles and the releases of new products
cause material fluctuations in the Company's quarterly revenues and earnings,
which may cause the Company's results to vary from the seasonal patterns of
the industry as a whole. See "Factors Affecting Future Performance--Revenues
Vary Due to the Seasonal Nature of Video and PC Game Software Purchases."
Liquidity and Capital Resources
The Company derived net cash from operating activities of approximately
$17.1 million and $40.0 million during the six months ended February 28, 1998
and 1999, respectively. The increase in net cash from operating activities in
the first half of fiscal 1999 is primarily attributable to increased
profitable operations.
The Company used net cash in investing activities of approximately $1.3
million and $3.9 million during the six months ended February 28, 1998 and
1999, respectively. The increase in net cash used in investing activities in
the first half of fiscal 1999 is primarily attributable to the acquisition of
fixed assets and of certain assets of a distributor located in Australia. See
Note 6 of Notes to Consolidated Financial Statements.
The Company used net cash in financing activities of approximately $1.9
million during the six months ended February 28, 1998 and derived net cash
from financing activities of approximately $5.4 million during the six months
ended February 28, 1999. The increase in net cash provided by financing
activities in the first half of fiscal 1999 as compared to the first half of
fiscal 1998 is primarily attributable to the proceeds of $6.0 million from
the exercise of outstanding stock options and warrants, and lower required
payments in respect of outstanding debt obligations during the 1999 period.
The Company generally purchases its inventory of Nintendo Software by
opening letters of credit when placing the purchase order. At February 28,
1999, the amount outstanding under letters of credit was approximately $3.8
million. Other than such letters of credit, the Company does not currently
have any material operating or capital expenditure commitments.
The Company has a revolving credit and security agreement with BNY, its
principal domestic bank, which agreement expires on January 31, 2000. The
credit agreement may be automatically renewed for another year by its terms,
unless terminated upon 90 days' prior notice by either party. The Company
draws down working capital advances and opens letters of credit against the
facility in amounts determined on a formula based on factored receivables and
inventory, which advances are secured by the Company's assets. 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, 1999, the
factoring charge was 0.25% of the receivables assigned and the interest on
advances was at BNY's prime rate plus one percent. See Note 2 of Notes to
Consolidated Financial Statements.
The Company also has a financing arrangement relating to the mortgage on
its corporate headquarters. At February 28, 1999, the outstanding principal
balance of the loan was $2.3 million.
Management believes, based on the currently anticipated growth of the
installed base of 32- and 64-bit Entertainment Platforms and the cost
reduction measures effected by the Company, that the Company's cash and cash
equivalents at February 28, 1999 and cash flows from operations in fiscal
1999 will be sufficient to cover its operating expenses and such current
obligations as are required to be paid in fiscal 1999. However, no assurance
can be given as to the sufficiency of such cash flows in
14
<PAGE>
fiscal 1999 and 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 10% Convertible Subordinated
Notes due 2002 (the "Notes"), and sold substantially all of the assets of
Acclaim Redemption Games, Inc., formerly Lazer-Tron Corporation. The
Company's future liquidity will be materially dependent on its ability to
develop and market Software that achieves widespread market acceptance for
use with the Entertainment Platforms 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 or that such
Software will achieve widespread market acceptance. See "Factors Affecting
Future Performance--If Cash Flows from Operations Are Not Sufficient to Meet
the Company's Needs, It May be Forced to Sell Assets, Refinance Debt or
Downsize Operations."
In conjunction with then pending class action and other litigations and
claims for which the settlement obligation was then probable and estimable,
the Company recorded a charge of $23.6 million during the year ended August
31, 1997. During fiscal 1998, the Company settled substantially all such
litigations and claims for amounts approximating the accrued liabilities.
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, financial
condition and results of operations.
Year 2000 Issue
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs
may be unable to distinguish properly between the year 1900 and the year
2000. In fiscal 1997, the Company commenced a Year 2000 date conversion
project to address necessary code changes, testing and implementation in
respect of its internal computer systems. Project completion is planned for
the late summer of calendar 1999. To date, the cost of this project has not
been material to the Company's results of operations or liquidity and the
Company does not anticipate that the cost of completing the project will be
material to its results of operations or liquidity in fiscal 1999. The
Company anticipates that its Year 2000 date conversion project as it relates
to the Company's internal systems will be completed on a timely basis. The
Company's Software for N64, PlayStation and PCs is Year 2000 compliant. The
Company is currently seeking information regarding Year 2000 compliance from
vendors, customers, manufacturers, outside developers, and financial
institutions associated with the Company. Project completion for this phase
is planned for the late summer of calendar 1999. However, given the reliance
on third-party information as it relates to their compliance programs and the
difficulty of determining potential errors on the part of external service
suppliers, no assurance can be given that the Company's information systems
or operations will not be affected by mistakes, if any, of third parties or
third-party failures to complete the Year 2000 project on a timely basis.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted or that any such failure to
convert by another company would not have a material adverse effect on the
Company's systems.
The cost of the Company's Year 2000 project and the date on which the
Company believes it will complete the necessary modifications are based on
the Company's estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of resources, third-party
modification plans and other factors. The Company presently believes that the
Year 2000 issue will not pose significant operational problems for its
internal information systems and products. However, if the anticipated
modifications and conversions are not completed on a timely basis, or if the
systems of other companies on which the Company's systems and operations rely
are not converted on a timely basis, the Year 2000 issue could have a
material adverse effect on the Company's results of operations.
The Company does not currently have any contingency plans in place to
address the failure of timely conversion of its and/or third-party systems in
respect of the Year 2000 issue. Any failure of the
15
<PAGE>
Company to address any unforeseen Year 2000 issues could materially adversely
affect the Company's results of operations.
Euro Conversion
The January 1, 1999 adoption of the Euro has created a single-currency
market in much of Europe. For a transition period from January 1, 1999 to
June 30, 2002, the existing local currencies will remain legal tender as
denominations of the Euro. The Company does not anticipate that its operating
systems will be materially adversely affected by the conversion to the Euro.
The Company has analyzed the impact of conversion to the Euro on its existing
systems and is implementing modifications to its current systems to implement
Euro invoicing for transactions. The Company anticipates that the cost of
such modifications will not have a material adverse effect on its results of
operations or liquidity in fiscal 1999. However, due to numerous
uncertainties, the Company cannot reasonably estimate the effect that the
conversion to the Euro will have on its pricing or market strategies, and the
impact, if any, that such conversion will have on its financial condition or
results of operations.
New Accounting Pronouncement
The Company will implement the provisions of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in fiscal 2000. The Company is presently assessing the impact,
if any, of this standard on its consolidated financial statements.
16
<PAGE>
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's future operating results depend upon many factors and are
subject to various risks and uncertainties. The known material risks and
uncertainties which may cause the Company's operating results to vary from
anticipated results or which may negatively affect its operating results and
profitability are as follows:
If N64 and PlayStation Game Console and Software Sales Do Not Continue to
Grow, The Company's Revenues May Not Grow
In calendar 1998, the worldwide installed base of N64 and PlayStation game
console units increased substantially and achieved significant market
acceptance worldwide. The Company's software sales are dependent on the
popularity of these game consoles and the size of their installed base. The
Company anticipates that the installed base of N64 and PlayStation units will
continue to grow in the short term. However, Acclaim cannot assure investors
that the installed base of these game consoles will grow at the present rate,
if at all. Also, Acclaim cannot give any assurance that its revenues from
software for these game consoles will increase as their installed base
increases.
Industry Trends, Platform Transitions and Technological Change May Adversely
Affect The Company's Revenues and Profitability
The life cycle of existing game consoles and the market acceptance and
popularity of new game consoles significantly affects the success of the
Company's products. The Company cannot guarantee that it will be able to
predict accurately the life cycle or popularity of each game console. If the
Company:
o does not develop software for game consoles that achieve significant
market acceptance;
o discontinues development of software for a game
console that has a longer than expected life cycle;
o develops software for a game console that does not achieve a significant
installed base; or
o continues development of software for a game console that has a shorter
than expected life cycle,
it may experience losses from operations, as it did in fiscal 1996 and 1997.
In addition, the cyclical nature of the video and PC games industry
requires the Company continually to adapt its software development efforts to
emerging hardware systems. The Company cannot guarantee that it will be
successful in developing and publishing software for new hardware systems.
Revenues Are Dependent on Timely Introduction of New Titles
The life cycle of a new title generally ranges from less than three months
to upwards of 12 months, with the majority of sales occurring in the first 30
to 120 days after release. Therefore, the Company is constantly required to
introduce new titles in order to generate revenues and/or to replace
declining revenues from older titles. In the past, the Company has
experienced delays in the introduction of new titles, which has had a
negative impact on its results of operations. If the Company does not
introduce titles in accordance with its operating plans for a period, its
results of operations and profitability in that period could be negatively
affected.
The timely shipment of a new title depends on various factors including:
o bug testing;
o approval by hardware licensors;
o approval by third-party licensors; and
o in the case of Nintendo and Sony products, timely manufacture of the
Company's titles.
17
<PAGE>
It is likely that some of the Company's titles will not be released in
accordance with the Company's operating plans. A significant delay in the
introduction of one or more new titles could negatively affect sales and
have a negative impact on the Company's financial condition and results of
operations.
The Company cannot assure stockholders that its new titles will be
released in a timely fashion. Factors such as competition for retail shelf
space, consumer preferences and seasonality could result in the shortening of
the life cycle for older titles and increase the importance of the Company's
ability to release new titles on a timely basis.
The Company's Future Success Is Dependent on Its Ability to Release "Hit"
Titles
The market for software is "hits" driven. Therefore, the Company's future
success depends on developing, publishing and distributing "hit" titles for
game consoles with significant installed bases. If the Company does not
publish "hit" titles in the future, its financial condition, results of
operations and profitability could be negatively affected, as they were in
fiscal 1996 and 1997. However, it is difficult to predict consumer
preferences for titles, and few titles achieve sustained market acceptance.
Sales of the Company's then top four titles accounted for approximately 69%
of gross revenues for the first six months of each of fiscal 1998 and 1999.
The Company cannot assure stockholders that it will be able to publish "hit"
titles in the future.
If Product Returns, Price Protection and Concessions Exceed Reserves, the
Company May Incur Losses
The Company is not contractually obligated to accept returns except for
defective product. However, the Company may permit customers to return or
exchange products and may provide price protection or concessions on products
unsold by the customer. If the Company's reserves for returns, exchanges,
price protection and concessions are exceeded, its financial condition and
results of operations will be negatively impacted, as they were in fiscal
1996.
Management makes significant estimates and assumptions regarding
allowances for estimated product returns, price protection and concessions in
preparing the Company's financial statements. The Company establishes
reserves taking into account the potential for product returns, price
protection and concessions based primarily on:
o market acceptance of products in retail inventories;
o level of retail inventories;
o seasonality;
o and historical return rates.
The Company believes that, at February 28, 1999, its reserves for future
returns, exchanges, price protection and concessions are adequate. However,
the Company cannot guarantee the adequacy of its current or future reserves.
If the Company Is Unable to Obtain or Renew Licenses from Hardware Developers,
It Will Not be Able to Release Software for Game Consoles
The Company is substantially dependent on each hardware developer:
o as the sole licensor of the specifications needed to develop software
for its game consoles;
o in the case of Nintendo and Sony, as the sole manufacturer of the
software developed by the Company for its game consoles;
o to protect the intellectual property rights to its game consoles and
technology; and
o to discourage unauthorized persons from producing software for its game
consoles.
Substantially all of the Company's revenues have historically been derived
from sales of software for game consoles. In the first six months of fiscal
1998 and 1999, the Company derived:
18
<PAGE>
o approximately 70% and 74%, respectively, of gross revenues from the sale
of Nintendo-compatible software;
o approximately 20% and 19%, respectively, of gross revenues from the sale
of Sony PlayStation software; and
o approximately 8% and 6%, respectively, of gross revenues from the
sale of PC software.
If the Company cannot obtain licenses to develop software from developers
of new game consoles or if any of its existing license agreements are
terminated, the Company will not be able to release software for game
consoles, which would have a negative impact on its results of operations and
profitability. The Company cannot assure stockholders that, at the end of
their current terms, it will be able to obtain extensions or that it will be
successful in negotiating definitive license agreements with developers of
new game consoles.
The Company's revenue growth may also be dependent on the hardware
developers. In the past, some of the Company's license agreements have
limited the number of titles it could release in a given period. This
limitation restricted the Company's sales growth, revenues and profitability.
If new license agreements contain similar limitations, the Company's revenues
and profitability will be negatively impacted.
Increased Product Development Costs May Adversely Affect Profitability
The Company's research and development expenses increased from $9.3
million (13% of net revenues) for the quarter ended February 28, 1998 to
$11.5 million (8% of net revenues) for the quarter ended February 28, 1999
and from $17.6 million (11% of net revenues) for the six months ended
February 28, 1998 to $22.7 million (9% of net revenues) for the six months
ended February 28, 1999. The Company anticipates that its future research and
development expenses will continue to increase. This increase is due to the
planned release of a higher number of titles and increasing software
development costs. If these expenses are not carefully monitored and capped,
the Company's profitability will be negatively impacted.
Inability to Procure Commercially Valuable Intellectual Property
Licenses May Prevent Product Releases or Result in Reduced Product Sales
The Company's titles often embody trademarks, tradenames, logos or
copyrights licensed to it by third parties, such as the NBA, the NFL or their
respective players' associations. The Company may not be successful in
acquiring or renewing licenses to property rights with significant commercial
value. The loss of one or more of these licenses could prevent the Company's
release of a title or limit its economic success. In addition, the Company
cannot assure stockholders that these licenses will be available on
reasonable terms or at all.
License agreements relating to these rights generally extend for a term of
two to three years. The agreements are terminable upon the occurrence of a
number of factors, including:
o the Company's material breach of the agreement;
o the Company's failure to pay amounts due to the licensor in a timely
manner; or
o the Company's bankruptcy or insolvency.
If The Company Does Not Compete Successfully, Demand for Its Products
May be Reduced
The video and PC games market is highly competitive. Only a small
percentage of titles introduced in the market achieve any degree of sustained
market acceptance. If the Company's titles are not successful, its operations
and profitability will be negatively impacted. The Company cannot guarantee
that its titles will compete successfully.
Competition is based primarily upon:
19
<PAGE>
o quality of titles;
o access to retail shelf space;
o product features;
o the success of the game console for which the title is written;
o price of titles;
o the number of titles then available; and
o marketing support.
The Company's chief competitors are the developers of game consoles, to
whom the Company pays royalties and/or manufacturing charges. The hardware
developers have a price, marketing and distribution advantage with respect to
software marketed by them. 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
developers.
As each hardware cycle matures, 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. If
there is prolonged price competition or reduced demand as a result of
competing technologies, the Company's operations and liquidity could be
negatively impacted.
Revenues Vary Due to the Seasonal Nature of Video and PC Game Software
Purchases
The video and PC games industry is highly seasonal. Typically, net
revenues are highest in the last calendar quarter, 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 selling season and the reduced
demand for software during the summer months. However, the Company's earnings
vary significantly and are materially affected by releases of "hit" titles
and, accordingly, may not necessarily reflect the seasonal patterns of the
industry as a whole. The Company expects that operating results will continue
to fluctuate significantly in the future. See "--Fluctuations in Quarterly
Operating Results Lead to Unpredictability of Revenues and Income" below.
Fluctuations in Quarterly Operating Results Lead to Unpredictability of
Revenues and Income
The timing of release of new titles can cause material quarterly revenues
and earnings fluctuations. A significant portion of revenues in any quarter
is often derived from sales of new titles introduced in that quarter or in
the immediately preceding quarter. If the Company is unable to begin volume
shipments of a significant new title during the scheduled quarter, its
revenues and earnings will be negatively affected in that quarter. In
addition, because a majority of the unit sales for a title typically occur in
the first 30 to 120 days following its introduction, earnings may increase
significantly in a period in which a major title is introduced and may
decline in the following period or in periods in which there are no major
title introductions.
Quarterly operating results also may be materially impacted by factors
including: (1) the level of market acceptance or demand for titles and (2)
the level of development and/or promotion expenses for a title. Consequently,
if net revenues in a period are below expectations, the Company's net income
and financial position in that period are likely to be affected negatively.
If Cash Flows from Operations Are Not Sufficient to Meet The Company's Needs,
It May be Forced to Sell Assets, Refinance Debt or Downsize Operations
The Company generally experienced negative cash flows from operations in
fiscal 1996 and 1997. As a result, in those years, the Company sold assets,
refinanced debt and downsized operations.
20
<PAGE>
Insufficient liquidity in the future may require the Company to take similar
actions. The Company believes that its cash flows from operations in fiscal
1999 will be sufficient to cover its operating expenses and the current
obligations it must pay in the remainder of fiscal 1999. This belief is
based on:
o the anticipated continued growth of the installed base of the current
32-bit and 64-bit game consoles,
o the anticipated continued growth of the 32-bit and 64-bit software
market,
o the anticipated success of the Company's 32-bit and 64-bit titles, and
o the resulting continued growth of the Company's net revenues.
See "--Industry Trends, Platform Transitions and Technological Change
may Adversely Affect The Company's Revenues and Profitability" above.
However, the Company cannot assure investors that its operating expenses and
current obligations will be significantly less than the cash flows available
from operations in fiscal 1999 or in the future.
High Debt Level May Restrict The Company's Flexibility in Operations and
Business Expansion
At February 28, 1999, the Company had total debt of approximately $52
million. The Company's debt level may limit its ability to obtain additional
debt financing in the future, or to pursue possible expansion of its business
or acquisitions. High debt levels could also limit the Company's flexibility
in reacting to changes in the video and PC games industry and general
economic conditions. These limitations make the Company more vulnerable to
adverse economic conditions and restrict its ability to withstand competitive
pressures or take advantage of business opportunities. Some of the Company's
competitors currently have a lower debt level than it, and are likely to have
significantly greater operating and financing flexibility.
Ability to Service Debt and Prior Rights of Creditors May Adversely Affect
Holders of Common Stock
The Company believes that its cash flows from operations in fiscal 1999
will be sufficient to make all interest and principal payments on a timely
basis. However, if the Company's cash flow from operations in fiscal 1999 or
beyond is insufficient to make interest and principal payments when due, the
Company may have to restructure its indebtedness. The Company cannot
guarantee that it will be able to restructure or refinance its debt on
satisfactory terms. In addition, restructuring or refinancing may not be
permitted by the terms of the Company's existing indebtedness. The Company
cannot assure investors that its future operating cash flows will be
sufficient to meet its debt service requirements or to repay its indebtedness
at maturity.
If Acclaim violates the financial or other covenants contained in its bank
agreements or in the indenture governing its outstanding convertible notes,
it will be in default under its loan agreements and/or the indenture. If a
default occurs and is not waived by the lender, the lender could seek
remedies against the Company, including:
o penalty rates of interest;
o immediate repayment of the debt; and/or
o the foreclosure on any assets securing the debt.
The Company expects to comply with its covenants but cannot guarantee that
it will be able to do so. In addition, factors beyond the Company's control
may result in future covenant defaults or a payment default. The Company may
not be able to obtain waivers of any future default. If the Company becomes
insolvent, is liquidated or reorganized, after payment to the creditors,
there may be insufficient assets remaining for a distribution to
stockholders.
In order to meet its debt service obligations, from time to time Acclaim
also depends on dividends, advances and transfers of funds from its
subsidiaries. State and foreign law regulate the payment of dividends by
these subsidiaries, which is also subject to the terms of existing bank
agreements and the indenture. A significant portion of the Company's assets,
operations, trade payables and indebtedness
21
<PAGE>
is located at these subsidiaries. The creditors of the subsidiaries would
generally recover from these assets on the obligations owed to them by the
subsidiaries before any recovery by Acclaim's creditors and before any
assets are distributed to stockholders.
Prevalence of Illegal Copying of Software Could Adversely Affect Sales
In order to protect its software and proprietary rights, the Company
relies mainly on a combination of:
o copyrights;
o trade secret laws;
o patent and trademark laws; and
o nondisclosure agreements.
However, existing U.S. and international laws afford only limited
protection. An unauthorized person may be able to copy the Company's software
or otherwise obtain and use its proprietary information. If a significant
amount of illegal copying of software published or distributed by the Company
occurs, its product sales could be adversely impacted. Policing illegal use
of software is extremely difficult, and software piracy is expected to
persist. In addition, the laws of some foreign countries in which the
Company's software is distributed do not protect the Company and its
intellectual property rights to the same extent as the laws of the U.S. The
Company cannot guarantee that its attempts to protect its proprietary rights
will be adequate.
Infringement Could Lead to Costly Litigation and/or the Need to Enter into
License Agreements, Which May Result in Increased Operating Expenses
Existing or future infringement claims by or against the Company may
result in costly litigation or require the Company to license the proprietary
rights of third parties, which could have a negative impact on the Company's
results of operations, liquidity and profitability.
The Company believes that its proprietary rights do not infringe on the
proprietary rights of others. However, as the number of titles in the
industry increases, the Company believes that claims and lawsuits with
respect to software infringement will also increase. From time to time, third
parties have asserted that some of the Company's titles infringed upon their
intellectual property rights. The Company has also asserted that third
parties have likewise infringed its proprietary rights. These infringement
claims have sometimes resulted in litigation by and against the Company. To
date, none of these claims has negatively impacted the Company's ability to
develop, publish or distribute its software. The Company cannot guarantee
that future infringement claims will not occur or that they will not
negatively impact its ability to develop, publish or distribute its software.
Factors Specific to International Sales May Result in Reduced Revenues
and/or Increased Costs
International sales have historically represented material portions of the
Company's revenues and the Company expects that international sales will
continue to account for a significant portion of its revenues in future
periods. Sales in foreign countries may involve expenses incurred to
customize titles to comply with local laws. In addition, titles that are
successful in the domestic market may not be successful in foreign markets
due to different consumer preferences. International sales are also subject
to fluctuating exchange rates and may be affected by the recent adoption of a
single currency in much of Europe. See "--Pricing and Marketing Strategies
in Europe May be Negatively Impacted by the Euro Conversion" below. These and
other factors specific to international sales may result in reduced revenues
and/or increased costs.
Loss of Key Employees May Negatively Impact The Company's Success
The Company's success depends on its ability to identify, hire and retain
skilled personnel. The software 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.
22
<PAGE>
The Company may not be able to attract and retain skilled personnel or may
incur significant costs 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. If the Company were to lose either of their services, its
business would be negatively impacted. Although the Company has employment
agreements with Messrs. Fischbach and Scoroposki, they may leave or compete
with the Company in the future. If the Company is unable to attract
additional qualified employees or retain the services of key personnel, its
business could be negatively impacted.
Charter and Anti-Takeover Provisions Could Negatively Affect Rights of
Holders of Common Stock
The board of directors has the authority to issue shares of preferred
stock and to determine their characteristics without stockholder approval.
This authority is limited by the indenture governing the Company's
outstanding notes. If the Company issues preferred stock, the rights of
common stockholders may be negatively affected by the rights of preferred
stockholders. Moreover, if the Company issues preferred stock, it could
become more difficult for a third party to acquire a majority of the
Company's outstanding voting stock.
Acclaim is also subject to anti-takeover provisions of Delaware corporate
law, which may impede a tender offer, change in control or takeover attempt
that is opposed by the board. In addition, employment arrangements with some
members of management provide for severance payments upon termination of
their employment if there is a change in control.
Stock Price Is Volatile and Stockholders May Not Be Able to Recoup Their
Investment
There is a history of significant volatility in the market prices of
companies engaged in the software industry, including Acclaim. Movements in
the market price of Acclaim common stock from time to time have negatively
affected stockholders' ability to recoup their investment in the stock. The
price of Acclaim common stock is likely to continue to be highly volatile,
and stockholders may not be able to recoup their investment. If the Company's
future revenues, profitability or product releases do not meet expectations,
the price of Acclaim common stock may be negatively affected.
Year 2000 Compliance Is Not Assured
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, these programs
may be unable to distinguish properly between the year 1900 and the year
2000. Failure to correct the Company's systems to become "Year 2000
compliant" may result in systems failures or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company cannot guarantee that its systems will be Year 2000 compliant in
a timely manner.
The Company's systems also rely on third-party systems, including those of
its vendors, customers, manufacturers, outside developers, and financial
institutions associated with the Company. The Company relies on third-party
information about their compliance programs and the Company cannot determine
potential errors on the part of external service suppliers. Accordingly, the
Company cannot guarantee that its information systems or operations will not
be affected by third-party mistakes or third-party failures to become Year
2000 compliant. The Company cannot guarantee that the third-party systems on
which its systems rely will be timely converted or that any failure to
convert by another company would not have a negative effect on the Company's
systems.
The Company does not currently have any contingency plans in place to
address the failure of timely conversion of its and/or third-party systems in
respect of the Year 2000 issue. The Company's failure to address any
unforeseen Year 2000 issues could negatively impact its results of
operations.
23
<PAGE>
Pricing and Marketing Strategies in Europe May be Negatively Impacted by the
Euro Conversion
The January 1, 1999 adoption of the Euro has created a single-currency
market in much of Europe. The Company does not anticipate that its operating
systems will be negatively impacted by the conversion to the Euro. However,
due to numerous uncertainties, the Company cannot reasonably estimate the
effect that the conversion to the Euro will have on its pricing or marketing
strategies. If the Company's pricing or marketing strategies are negatively
impacted, the Euro conversion may have a negative impact on the Company's
revenues.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company, Iguana Entertainment, Inc. a subsidiary of the Company, and
Gregory E. Fischbach were sued in an action entitled Jeffery Spangenberg vs.
Acclaim Entertainment, Inc., Iguana Entertainment, Inc., and Gregory
Fischbach filed in August 1998 in the District Court of Travis County, Texas
(Cause No. 98-09418). The plaintiff alleges that the defendants (i) breached
their employment obligations to the plaintiff; (ii) breached a Texas statute
covering wage payment obligations based on their alleged failure to pay
bonuses to the plaintiff; and (iii) made fraudulent misrepresentations to the
plaintiff in connection with the plaintiff's employment relationship with the
Company, and accordingly, seeks unspecified damages. The Company intends to
defend this action vigorously.
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 such investigation will result in any litigation or, if so, as
to the outcome of this matter.
In conjunction with then pending class action and other litigations and
claims for which the settlement obligation was then probable and estimable,
the Company recorded a charge of $23.6 million during the year ended August
31, 1997. During fiscal 1998, the Company settled substantially all of its
outstanding litigations and claims for amounts approximating the accrued
liabilities.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 2, 1999, at the annual meeting of stockholders of the
Company, the stockholders (i) elected the following directors: Gregory E.
Fischbach (by a vote of 41,277,498 shares for and 1,061,876 shares withheld);
James Scoroposki (by a vote of 41,284,987 shares for and 1,054,387 shares
witheld); Kenneth L. Coleman (by a vote of 41,292,653 shares for and 1,046,721
shares withheld); Bernard J. Fischbach (by a vote of 41,277,937 shares for and
1,061,437 shares withheld); Robert H. Groman (by a vote of 41,285,651 shares
for and 1,053,723 shares withheld); James Scibelli (by a vote of 41,264,953
shares for and 1,074,421 shares withheld); and Michael Tannen (by a vote of
41,284,456 shares for and 1,054,918 shares withheld); and (ii) ratified the
appointment of KPMG LLP as independent auditors of the Company for the year
ending August 31, 1999 by a vote of 42,010,337 shares for, 303,020 shares
against, and abstentions with respect to 26,017 shares.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCLAIM ENTERTAINMENT, INC.
By: Gregory Fischbach April 7, 1999
----------------------------
Gregory Fischbach
Co-Chairman of the Board;
Chief Executive Officer;
President; Director
By: James Scoroposki April 7, 1999
----------------------------
James Scoroposki
Co-Chairman of the Board;
Executive Vice President;
Treasurer; Secretary;
Director; and Acting
Chief Financial and
Accounting Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements as of and for the period ended February 28, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 88,282
<SECURITIES> 0
<RECEIVABLES> 69,422
<ALLOWANCES> 45,827
<INVENTORY> 12,671
<CURRENT-ASSETS> 135,697
<PP&E> 57,821
<DEPRECIATION> 28,359
<TOTAL-ASSETS> 190,119
<CURRENT-LIABILITIES> 122,079
<BONDS> 49,750
0
0
<COMMON> 1,090
<OTHER-SE> 12,332
<TOTAL-LIABILITY-AND-EQUITY> 190,119
<SALES> 279,509
<TOTAL-REVENUES> 240,487
<CGS> 118,730
<TOTAL-COSTS> 94,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,849)
<INCOME-PRETAX> 25,882
<INCOME-TAX> 1,075
<INCOME-CONTINUING> 24,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,807
<EPS-PRIMARY> .46
<EPS-DILUTED> .38
</TABLE>
