<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number 0-16986
ACCLAIM ENTERTAINMENT, INC.
---------------------------
(Exact Name of the Registrant as Specified in its Charter)
Delaware 38-2698904
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
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 July 14, 2000, approximately 56 million shares of common stock of the
Registrant were issued and outstanding.
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
May 31, August 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 29,046 $ 74,421
Accounts receivable - net 11,423 84,430
Inventories 11,006 15,565
Prepaid expenses 13,121 14,870
--------- ---------
TOTAL CURRENT ASSETS 64,596 189,286
========= =========
OTHER ASSETS
Fixed assets - net 45,806 32,694
Excess of cost over fair value of net assets acquired - net of
accumulated amortization of $23,706, and $22,058, respectively 19,315 21,199
Other assets 3,777 1,659
--------- ---------
TOTAL ASSETS $ 133,494 $ 244,838
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 24,752 $ 47,298
Accrued expenses 77,762 103,663
Income taxes payable 3,104 7,692
Current portion of long-term debt 724 724
Obligations under capital leases - current 323 518
--------- ---------
TOTAL CURRENT LIABILITIES 106,665 159,895
========= =========
LONG-TERM LIABILITIES
Long-term debt 56,231 50,957
Obligations under capital leases - noncurrent 711 775
Other long-term liabilities 1,357 1,852
--------- ---------
TOTAL LIABILITIES 164,964 213,479
========= =========
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $0.01 par value; 1,000 shares authorized;
none issued -- --
Common stock, $0.02 par value; 100,000 shares authorized;
56,544 and 56,033 shares issued, respectively 1,131 1,121
Additional paid in capital 213,333 207,273
Accumulated deficit (241,339) (173,122)
Treasury stock, 551 and 537 shares, respectively (3,338) (3,262)
Accumulated other comprehensive income (1,257) (651)
--------- ---------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (31,470) 31,359
========= =========
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY $ 133,494 $ 244,838
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in 000s, except per share data)
Three Months Ended Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
NET REVENUES $ 4,842 $ 80,047 $ 171,937 $ 320,535
COST OF REVENUES 11,383 36,778 85,504 155,508
-------- -------- --------- ---------
GROSS PROFIT (LOSS) (6,541) 43,269 86,433 165,027
-------- -------- --------- ---------
OPERATING EXPENSES
Marketing and sales 10,861 15,908 57,112 54,795
General and administrative 14,844 16,110 47,633 49,294
Research and development 16,535 11,810 45,680 34,544
Litigation settlement -- (1,753) -- (1,753)
-------- -------- --------- ---------
TOTAL OPERATING EXPENSES 42,240 42,075 150,425 136,880
-------- -------- --------- ---------
EARNINGS(LOSS) FROM OPERATIONS (48,781) 1,194 (63,992) 28,147
-------- -------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 948 1,103 3,041 2,904
Interest expense (1,297) (1,396) (3,906) (4,245)
Other income (expense) 83 (443) (1,410) (466)
-------- -------- --------- ---------
EARNINGS (LOSS)
BEFORE INCOME TAXES (49,047) 458 (66,267) 26,340
-------- -------- --------- ---------
PROVISION FOR INCOME TAXES 628 359 1,950 1,434
-------- -------- --------- ---------
NET EARNINGS (LOSS) (49,675) $ 99 (68,217) $ 24,906
======== ======== ========= =========
BASIC EARNINGS(LOSS) PER SHARE ($ 0.88) $ 0.00 ($ 1.21) $ 0.46
-------- -------- --------- ---------
DILUTED EARNINGS(LOSS) PER
SHARE ($ 0.88) $ 0.00 ($ 1.21) $ 0.40
-------- -------- --------- ---------
See notes to consolidated financial statements
2
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
(in 000s, except per share data)
<TABLE>
<CAPTION>
Preferred Stock (1) Common Stock
------------------- ----------------
Issued Issued
------ ------ Additional
Paid-In Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
------ ------ ------ ------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance August 31, 1998 ---- ---- 52,634 $ 1,053 $ 193,178 $ (3,533) $(209,180)
------ ------ ------ ------- --------- -------- ---------
Net Earnings ---- ---- ---- ---- ---- ---- 36,058
Issuances of Common Stock ---- ---- 206 4 1,792 ---- ----
Issuance of Warrants for
Litigation Settlements ---- ---- ---- ---- 1,700 ---- ----
Subordinated Notes Conversion ---- ---- 48 1 249 ---- ----
Cancellations of Options ---- ---- ---- ---- (552) 552 ----
Issuance of Common Stock for
Deferred Compensation ---- ---- 400 8 3,167 (3,169) ----
Deferred Compensation Expense ---- ---- ---- ---- ---- 3,497 ----
Exercise of Stock Options ---- ---- ---- ---- ---- ---- ----
and Warrants ---- ---- 2,631 52 9,085 ---- ----
Escrowed Shares Received ---- ---- (69) (1) 1 ---- ----
Issuance of Common Stock Under
Employee Stock Purchase Plan ---- ---- 183 4 1,306 ---- ----
Foreign Currency Translation Loss ---- ---- ---- ---- ---- ---- ----
------ ------ ------- ------- --------- -------- ---------
Balance August 31, 1999 ---- ---- 56,033 1,121 209,926 (2,653) (173,122)
------ ------ ------- ------- --------- -------- ---------
Net Loss ---- ---- ---- ---- ---- ---- (68,217)
Issuances and Escrowed Shares
Received ---- ---- (6) (1) (76) ---- ----
Cancellations of Options ---- ---- ---- ---- (54) 54 ----
Deferred Compensation Expense ---- ---- ---- ---- ---- 1,483 ----
Issuance of Warrants for
Litigation Settlement ---- ---- ---- ---- 2,550 ---- ----
Exercise of Stock Options
and Warrants ---- ---- 426 9 1,552 ---- ----
Issuance of Common Stock Under
Employee Stock Purchase Plan ---- ---- 91 2 551 ---- ----
Foreign Currency Translation Loss ---- ---- ---- ---- ---- ---- ----
------ ------ ------- ------- --------- -------- ---------
Balance May 31, 2000 ---- ---- 56,544 $1,131 $ 214,449 $(1,116) $(241,339)
------ ------ ------- ------- --------- -------- ---------
<CAPTION>
Accumulated
Other Comprehensive
Treasury Comprehensive -------------
Stock Income Total Income(Loss)
----- ------ ----- ------------
<S> <C> <C> <C> <C>
Balance August 31, 1998 $ (3,103) $ (188) $(21,773) ----
-------- -------- -------- ------
Net Earnings ---- ---- 36,058 36,058
Issuances of Common Stock ---- ---- 1,796 ----
Issuance of Warrants for
Litigation Settlements ---- ---- 1,700 ----
Subordinated Notes Conversion ---- ---- 250 ----
Cancellations of Options ---- ---- ---- 552
Issuance of Common Stock for
Deferred Compensation ---- ---- 6 ----
Deferred Compensation Expense ---- ---- 3,497 ----
Exercise of Stock Options ---- ---- ---- ----
and Warrants ---- ---- 9,137 ----
Escrowed Shares Received (159) ---- (159) ----
Issuance of Common Stock Under
Employee Stock Purchase Plan ---- ---- 1,310 ----
Foreign Currency Translation Loss ---- (463) (463) (463)
-------- -------- -------- ------
Balance August 31, 1999 (3,262) (651) 31,359 $35,595
-------- -------- -------- -------
Net Loss ---- ---- (68,217) (68,217)
Issuances and Escrowed Shares
Received (76) ---- (153) ----
Cancellations of Options ---- ---- ---- ----
Deferred Compensation Expense ---- ---- 1,483 ----
Issuance of Warrants for
Litigation Settlement ---- ---- 2,550 ----
Exercise of Stock Options
and Warrants ---- ---- 1,561 ----
Issuance of Common Stock Under
Employee Stock Purchase Plan ---- ---- 553 ----
Foreign Currency Translation Loss ---- (606) (606) (606)
-------- -------- -------- ------
Balance May 31, 2000 $ (3,338) $ (1,257) $(31,470) $(67,611)
-------- -------- -------- --------
</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.
(2) Amounts for the nine months ended May 31, 2000 are unaudited.
See notes to consolidated financial statements.
3
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings (loss) ($68,217) $ 24,906
-------- --------
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 9,692 8,571
Provision for returns and discounts 59,743 49,306
Deferred compensation expense 1,483 2,890
Non-cash royalty charges 951 1,363
Non-cash compensation expense 145 285
Non-cash litigation settlement -- (1,753)
Other non-cash items (324) 40
Change in assets and liabilities, net of effects of acquisition:
Accounts receivable 11,363 (32,258)
Inventories 4,297 (7,283)
Prepaid expenses 876 1,627
Trade accounts payable (21,678) 7,667
Accrued expenses (29,565) (5,136)
Income taxes payable (694) 52
Other long-term liabilities 5,679 (1,480)
-------- --------
Total adjustments 41,968 23,891
-------- --------
NET CASH(USED IN) PROVIDED BY OPERATING ACTIVITIES $(26,249) $ 48,797
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Acquisition of subsidiary, net of cash acquired -- (421)
Acquisition of fixed assets, excluding capital leases (21,480) (6,857)
Proceeds from disposals of fixed assets 606 119
Acquisition of other assets (16) (112)
Disposal of other assets 521 158
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (20,369) (7,113)
-------- --------
</TABLE>
4
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Payment of mortgage $ (543) $ (543)
Payment of short-term bank loans -- (16)
Exercise of stock options and warrants 1,561 6,608
Proceeds from Employee Stock Purchase Plan 408 310
Payment of obligations under capital leases (418) (711)
Issuance of common stock -- 6
Other (77) (159)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 931 5,495
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 312 206
-------- --------
NET INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS (45,375) 47,385
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,421 47,273
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,046 $ 94,658
======== ========
Supplemental schedule of noncash investing and financing activities:
2000 1999
---- ----
Acquisition of equipment under capital leases $ 250 $ 58
Conversion of subordinated notes to common stock -- $ 250
Cash paid during the period for:
Interest $ 7,002 $ 6,610
Income taxes $ 2,429 $ 2,095
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
--------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
1. Interim Period Reporting
The data contained in the May 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:
May 31, August 31,
2000 1999
---- ----
Receivables assigned to factor $ 24,325 $ 98,470
Advances from factor 12,938 26,410
------ ------
Due from factor 11,387 72,060
Unfactored accounts receivable 17,699 10,599
Foreign accounts receivable 9,020 37,461
Other receivables 2,880 3,924
Allowances for returns and discounts (29,563) (39,614)
-------- --------
Net accounts receivable $ 11,423 $ 84,430
======== ========
Pursuant to a factoring agreement, the principal lending institution of
Acclaim Entertainment, Inc., (together with its subsidiaries, collectively, the
"Company"), acts as its factor for the majority of its North American
receivables, which are assigned on a pre-approved basis. At May 31, 2000, the
factoring charge amounted to 0.25% of the receivables assigned. The Company's
obligations to the lending institution, GMAC, 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 August 31, 2003 but
automatically renews for additional one-year periods, unless terminated upon
90-days' notice by either party. GMAC has advanced additional interim funding
above the standard loan agreement formula. The excess borrowing is at GMAC's
discretion, and the Company is obligated to repay the entire amount of such
excess borrowing, and thereafter remain within the current borrowing formula, by
November 30, 2000, or at any earlier time if demanded by GMAC.
Pursuant to the terms of the agreement, the Company is required to
maintain specified levels of working capital and tangible net worth, among other
covenants. As of May 31, 2000, the Company was not in compliance with certain of
the financial covenants under its revolving credit facility. The Company has
received waivers regarding this non-compliance from GMAC.
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 lending institution's prime lending rate plus one percent per annum (10%
at May 31, 2000) on such advances.
6
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
Subject to GMAC and certain of the Company's subsidiaries executing
definitive documentation, certain of the Company's European subsidiaries have
reached an agreement in principle to amend their current receivable facility
under which GMAC will provide account receivables financing of up to the lesser
of $18 million and 70% of eligible receivables related to the Company's
international operations. The proposed interest rate is 2% above LIBOR. This
amended credit facility (to be secured by the factored accounts receivables and
the assets of such subsidiaries) would have an initial term of three years
automatically renewing for additional one-year periods thereafter, unless
terminated upon 90-days, prior notice by either party.
Pursuant to the terms of certain distribution, warehouse and credit and
collection agreements, certain of the Company's 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 May 31, 2000 and
August 31, 1999, the balance due from distributors was approximately 22% and
17%, respectively, of gross accounts receivable. At May 31, 2000 and August 31,
1999, included in receivables assigned to factor is a balance due from one
domestic retail customer of approximately 16% and 15%, respectively, of gross
accounts receivable.
3. Liquidity
The Company's significant loss from operations for the nine months ended
May 31, 2000 and working capital and stockholders' deficiencies at May 31, 2000
could impact the Company's ability to meet its obligations as they become due.
Short-term liquidity has been addressed by the Company receiving additional
borrowings under its revolving credit and security agreement with its principal
domestic leading institution on a short-term basis. To enhance its long-term
liquidity, the Company has implemented an expense reduction initiative.
Achieving sufficient liquidity through fiscal 2001 is particularly dependent on
the Company achieving its projected sales forecasts in the period, which
requires the Company to meet its product release schedule. If the Company, for
its key titles, does not substantially achieve the overall projected revenue
levels for the period as reflected in its plans, the Company either will require
alternative financing in order to fund its operations or will need to effect
further significant expense reductions, including, without limitation, the sale
or consolidation of certain operations, staff reductions and the delay,
cancellation or reduction of product development and marketing programs. Certain
of such measures may require third party consents or approvals, including the
Company's primary lenders, and there can be no such assurance that such consents
or approvals can be obtained. In addition, if GMAC demands early repayment of
the additional interim borrowing, the Company would not have available funds to
make such repayment, which might result in the lender declaring a default under
the loan agreement.
4. Long Term Debt
Long-term debt consists of the following:
May 31, August 31,
2000 1999
---- ----
10% Convertible Subordinated Notes due 2002 $ 49,750 $ 49,750
Mortgage notes 7,205 1,931
-------- --------
56,955 51,681
Less: current portion 724 724
-------- --------
$ 56,231 $ 50,957
======== ========
7
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
The Company's 10% convertible subordinated notes due 2002 are
convertible into shares of common stock of the Company 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 through February 28,
2001, at 102% of the principal balance through February 28, 2002, and at 100% of
the principal balance at maturity (March 1, 2002) in each case together with
accrued interest.
Pursuant to a $5 million seven-year term secured credit facility, in
March 2000 GMAC provided the Company with mortgage financing relating to its
purchase of a building in the United Kingdom. Interest is charged on this
facility at a rate of 2% above LIBOR.
5. Earnings Per Share
Basic earnings per share is computed based upon the weighted average
number of shares of the Company's common stock outstanding. Diluted earnings per
share is computed based upon the weighted average number of shares of common
stock 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 Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS Computation
Net earnings(loss) ($49,675) $ 99 ($68,217) $24,906
-------- ------- -------- -------
Weighted average
common shares outstanding 56,520 54,826 56,347 53,965
Basic earnings(loss) per share ($ 0.88) $ 0.00 ($ 1.21) $ 0.46
-------- ------- -------- -------
Diluted EPS Computation
Net earnings(loss) ($49,675) $ 99 ($68,217) $24,906
10% Convertible Subordinated
Notes interest expense ----- ----- ---- 3,738
-------- ------- -------- -------
Adjusted net earnings (loss) ($49,675) $ 99 ($68,217) $28,644
-------- ------- -------- -------
Weighted average
common shares outstanding 56,520 54,826 56,347 53,965
Stock options and warrants ----- 7,878 ---- 8,913
10% convertible subordinated notes ----- ----- ----- 9,604
-------- ------- -------- -------
Diluted common shares outstanding 56,520 62,704 56,347 72,482
-------- ------- -------- -------
Diluted earnings(loss) per share ($ 0.88) $ 0.00 ($ 1.21) $ 0.40
</TABLE>
The assumed conversion of the outstanding notes was excluded from fiscal 2000
diluted earnings per share calculations since they were anti-dilutive.
8
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data)
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) up to 206 shares of the
Company's common stock 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. Segment Information
In August 1999, the Company adopted SFAS No.131, "Disclosures about
Segments of an Enterprise and Related Information", which supercedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise". The Company's
chief operating decision-maker is the Company's Chief Executive Officer. The
Company has three reportable segments: North America, Europe, and Pacific Rim,
which are organized, managed and analyzed geographically and operate in one
industry segment: the development, marketing and distribution of entertainment
software. Information about the Company's operations for the quarter and nine
months ended May 31, 2000 and May 31, 1999 is presented below:
<TABLE>
<CAPTION>
North Pacific
America Europe Rim Eliminations Total
--------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Three Months Ended May 31, 2000
Net revenues from external
customers 3,500 291 1,051 -- 4,842
Intersegment sales -- 211 -- (211) --
-------- ------- ------ ------ --------
Total net revenues 3,500 502 1,051 (211) 4,842
Interest income 889 51 8 -- 948
Interest expense 2,352 11 1 -- 2,364
Depreciation and amortization 2,317 646 205 -- 3,168
Segment operating profit (loss) (36,281) (11,648) (852) -- (48,781)
Three Months Ended May 31, 1999
Net revenues from external
customers 46,987 29,356 3,704 -- 80,047
Intersegment sales 77 373 28 (478) --
-------- ------- ------ ------ --------
Total net revenues 47,064 29,729 3,792 (478) 80,047
</TABLE>
9
<PAGE>
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000s, except per share data
<TABLE>
<CAPTION>
North Pacific
America Europe Rim Eliminations Total
--------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Interest income 1,073 21 9 -- 1,103
Interest expense 1,971 26 -- -- 1,997
Depreciation and amortization 2,308 380 247 -- 2,935
Segment operating profit (loss) 1,983 (689) (100) -- 1,194
Nine Months Ended May 31, 2000
Net revenues from external
customers 109,609 53,273 9,055 -- 171,937
Intersegment sales 134 1,698 34 (1,866) --
-------- ------- ------ ------ --------
Total net revenues 109,743 54,471 9,089 (1,866) 171,937
Interest income 2,891 125 25 -- 3,041
Interest expense 6,955 44 3 -- 7,002
Depreciation and amortization 7,466 1,509 717 -- 9,692
Identifiable assets 137,004 (5,975) 2,465 -- 133,494
Segment operating profit (loss) (41,531) (22,629) 168 -- (63,992)
Nine Months Ended May 31, 1999
Net revenues from external
customers 219,009 92,608 8,918 -- 320,535
Intersegment sales 370 2,333 44 (2,747) --
-------- ------- ------ ------ --------
Total net revenues 219,379 54,971 8,962 (2,747) 320,535
Interest income 2,824 68 12 -- 2,904
Interest expense 6,469 141 -- -- 6,610
Depreciation and amortization 6,838 1,156 577 -- 8,571
Identifiable assets 155,412 36,337 6,438 -- 198,187
Segment operating profit (loss) 36,335 (8,013) (175) -- 28,147
</TABLE>
8. Litigation Settlement
In fiscal 1999, the Company had a litigation settlement gain of $1,753.
The gain resulted from the reduction of a previously recorded contractual
obligation due to the occurrence of various events identified in the settlement
agreement, including an increase in the market value of the Company's common
stock to a value specified in the settlement agreement.
10
<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, 1999 and
presumes that readers have access to, and will have read, "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," "expect,"
"project," "will be" and similar expressions identify such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions. Such statements regarding future events and/or the future
financial performance of the Company are subject to certain risks and
uncertainties, such as delays in the completion or release of products, the
possible lack of consumer appeal and acceptance of products released by the
Company, fluctuations in demand, that competitive conditions within the
Company's markets will change materially or adversely, that the Company's
forecasts will accurately anticipate market demand, and the risks discussed in
"Factors Affecting Future Performance", which could cause actual events or the
actual future results of the Company to differ materially from any
forward-looking statement. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, the business and operations of the
Company are subject to substantial risks that increase the uncertainty inherent
in the forward-looking statements. In light of the significant risks and
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such statements should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Overview
The Company develops, publishes, markets and distributes video and
computer games for use with game consoles, both dedicated and portable, and PCs
on a worldwide basis. The Company owns and operates five software development
studios located in the U.S. and the U.K. where it develops its own software, and
a motion capture studio in the U.S. From time to time, the Company hires
independent developers to create software for it. The Company publishes, or
releases to the public under its brand names, software developed by it as well
as by third-party developers. The Company distributes its software directly in
North America, the U.K., Germany, France, Spain and Australia. The Company also
distributes software developed and published by third parties and develops and
publishes (1) strategy guides relating to the Company's software and (2) comic
book magazines.
The video and computer games industry is characterized by rapid
technological changes, which have resulted in successive introductions of
increasingly advanced game consoles and PCs. As a result of the rapid
technological shifts, no single game console or PC system has achieved long-term
dominance in the video and computer games market. Therefore, the Company must
continually anticipate game console cycles and its research and development
group must develop programming tools and engines necessary for the development
of software for emerging hardware systems.
The Company's revenues have traditionally been derived from sales of
software for the then popular game consoles. Accordingly, the Company's
performance has been, and is expected in the future
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to be, materially adversely affected by platform transitions. As a result of the
industry transition to 32-bit and 64-bit game consoles 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. The video and computer games industry is currently
experiencing another platform transition from 32-bit and 64-bit to 128-bit game
consoles and related software and online gaming. The Company believes that sales
of new 32-bit and 64-bit hardware systems have peaked and will continue to
decrease substantially in future periods. This transition has resulted in
increased competition, fewer hit titles capable of achieving significant sales
levels and increased price weakness for other non-hit titles. This has resulted
in industry-wide software pricing weakness which impacted the Company's first
nine months of fiscal 2000, will adversely impact the Company for the balance of
the fiscal year and is anticipated to adversely impact the Company in fiscal
2001, as the market moves from the current hardware systems to the next
generation systems that will be launched by Sony in fiscal 2001, and Nintendo
and Microsoft in fiscal 2002. The Company will release fewer titles for
Nintendo's N64 in fiscal 2000 than it did in fiscal 1999 and does not anticipate
releasing new N64 titles in fiscal 2001, as the Company shifts its resources to
the development of new technologies and titles for the next generation systems.
When the transition is complete the Company anticipates that the eventual
installed base of 128-bit systems combined with the potential for online gaming
will provide a larger market for its software. However, there can be no
assurance that newly-introduced (e.g., Sega's Dreamcast console), or announced
(e.g., Sony's PlayStation 2, Nintendo's Dolphin, and Microsoft's X-Box) 128-bit
game consoles and online gaming will achieve commercial success similar to that
of the 32-bit PlayStation or 64-bit N64 or the timing of such success, if
achieved. See "Liquidity and Capital Resources" below, and "Factors Affecting
Future Performance - Industry Trends, Platform Transitions and Technological
Change May Adversely Affect the Company's Revenues and Profitability."
The rapid technological advances in game consoles have significantly
changed the look and feel of software as well as the software development
process. Currently, the process of developing software is extremely complex and
the Company expects it to become more complex and expensive in the future with
the advent of the more powerful next generation hardware systems. According to
the Company's estimates, the average development time for a title is between 12
and 24 months and the average development cost for a title is between $1 and $3
million. Approximately 17% and 60% of the Company's respective gross revenues
in the third quarter and first nine months of fiscal 2000 was derived from
software developed by its studios. See "Factors Affecting Future Performance -
Increased Product Development Costs May Adversely Affect Profitability."
The Company's revenues in any period are generally driven by the titles
released by the Company in that period. In the past and in fiscal 2000, the
Company has experienced delays in the introduction of new titles, which has had
a negative impact on its results of operations. It is likely that some of the
Company's future titles will not be released in accordance with the Company's
operating plans for a period, in which event its results of operations and
profitability in that period would be negatively affected. See "Liquidity and
Capital Resources" below, and "Factors Affecting Future Performance - Revenues
Are Dependent on Timely Introduction of New Titles."
Retail sales of the Company's 32-bit and 64- bit software during the
third quarter of fiscal 2000 and nine months ended May 31, 2000 were
significantly below the Company's expectations due, in large part, to (1)
lower-than-expected sales of certain of the Company's products, (2) delays in
the introduction of new titles, (3) the decline of the market for N64 software
and the Company's prior emphasis on the N64 platform, and (4) the slowdown in
the rate of growth for the main 32-bit and 64-bit hardware systems. In addition,
the Company increased its sales allowances to address the effects on the Company
of increased competition and industry-wide weakness in cartridge-based software
sales and slower-than-expected sales of certain products. The decline in sales
was partially offset by revenues from software for the new Sega Dreamcast
128-bit platform.
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The Company recorded a net loss of approximately $49.7 million in the
third quarter of fiscal 2000, as compared to net earnings of $0.1 million in the
third quarter of fiscal 1999, and a net loss of $68.2 million for the nine
months ended May 31, 2000 as compared to net earnings of $24.9 million for the
nine months ended May 31, 1999. In addition to the factors discussed above,
which significantly impacted net revenues (approximately $80 million for the
third quarter of fiscal 1999 as compared to approximately $5 million for the
third quarter of fiscal 2000, and approximately $321 million for the first nine
months of fiscal 1999 as compared to approximately $172 million for the first
nine months of fiscal 2000), the Company's operating results for the first nine
months of fiscal 2000 were also negatively impacted by increased research and
development expenses and higher marketing expenses.
As the Company continues to manage through the current transition and
prepares to compete in the software market for next generation platforms, it
will be critical that the Company meet its product release schedule and sales
projections for the next four quarters in order to generate sufficient liquidity
to fund its operations. See "Liquidity and Capital Resources" below.
The Company's results of operations in the future will be dependent in
large part on (1) the timing and rate of growth of the software market for
128-bit and other emerging game consoles and online gaming and (2) the Company's
ability to identify, develop and timely publish, in accordance with its product
release schedule, software that performs well in the market place.
Results of Operations
The following table shows certain statements of consolidated operations
data as a percentage of net revenues for the periods indicated:
Three Months Ended Nine Months Ended
May 31,* May 31,*
2000 1999 2000 1999
---- ---- ---- ----
Domestic revenues 72.3% 58.7% 63.7% 68.3%
Foreign revenues 27.7 41.3 36.3 31.7
---- ---- ---- ----
Net revenues 100.0 100.0 100.0 100.0
Cost of revenues 235.1 45.9 49.7 48.5
----- ---- ---- ----
Gross profit (loss) (135.1) 54.1 50.3 51.5
Marketing and sales 224.3 19.9 33.2 17.1
General and administrative 306.6 20.1 27.7 15.4
Research and development 341.5 14.8 26.6 10.8
Litigation settlement ----- (2.2) ---- (0.5)
----- ----- ---- -----
Total operating expenses 872.4 52.6 87.5 42.7
Earnings (loss) from operations (1,007.5) 1.5 (37.2) 8.8
Other (expense) income, net (5.5) (0.9) (1.3) (0.6)
----- ----- ----- -----
Earnings (loss) before income taxes (1,013.0) 0.6 (38.5) 8.2
Net earnings(loss) (1,026.0) 0.1 (39.7) 7.7
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Net Revenues
The Company's gross revenues were derived from the following product
categories:
Three Months Ended Nine Months Ended
May 31,* May 31,*
2000* 1999* 2000* 1999*
----- ----- ----- -----
Portable software 29.2% 11.0% 7.9% 6.0%
32-bit software 15.8% 32.0% 32.6% 22.0%
64-bit software 34.3% 39.0% 31.7% 63.0%
128-bit software 9.5% 0.0% 20.0% 0.0%
Computer games software 6.1% 18.0% 6.4% 9.0%
Other 5.1% 0.0% 1.4% 0.0%
-------------------
* The numbers in this chart do not give effect to sales credits and
allowances granted by the Company 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 decrease in the Company's net revenues from approximately $80.0 million
for the quarter ended May 31, 1999 to approximately $4.8 million for the quarter
ended May 31, 2000 was predominantly due to delays in the introduction of new
titles and lower-than-anticipated sales of released products. In addition, net
revenues were further impacted by increased sales allowances for price
protection and concessions relating primarily to 32-bit and 64-bit software.
These decreases were partially offset by sales of the Company's
Dreamcast-related software which aggregated approximately 20% of gross revenues
for the nine months ended May 31, 2000.
The Company anticipates that titles currently scheduled for introduction in
the fourth quarter of fiscal 2000, including delayed third-quarter releases,
will be shipped as announced; however, no assurance can be given that these
titles will be released in accordance with the Company's current expectations.
The Company's fiscal 2000 revenues are anticipated to be lower than its fiscal
1999 revenues and the Company anticipates a net loss for fiscal 2000, as
previously disclosed. However, if the Company does not release and sell new
titles as planned in the fourth quarter of fiscal 2000 and in fiscal 2001, the
Company's net revenues would be further adversely impacted and the Company could
incur further losses from operations.
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
the extent such titles are geared towards the domestic market. Foreign net
revenues are anticipated to be 30% to 35% of total net revenues for fiscal 2000.
A significant portion of the Company's revenues in any quarter is 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."
In the quarter ended May 31, 2000, AllStar Baseball 2001 (for N64), ECW
Hardcore (for multiple platforms) and Supercross 2000 (for N64 and Game Boy
Color) accounted for approximately 28%, 11%, and 10%, respectively, of the
Company's gross revenues. In the quarter ended May 31, 1999, All-Star
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Baseball 2000 (for multiple platforms), WWF Warzone (for multiple platforms) and
South Park (for multiple platforms) accounted for approximately 21%, 18% and 16%
respectively, of the Company's gross revenues.
For the nine months ended May 31, 2000, ECW Hardcore, WWF Attitude (for
multiple platforms) and South Park Luv Shack (for multiple platforms) accounted
for approximately 11%, 14% and 9% respectively, of the Company's gross revenues.
For the nine months ended May 31, 1999, Turok 2: Seeds of Evil (for multiple
platforms), WWF War Zone (for multiple platforms) and South Park (for N64)
accounted for approximately 23%, 17%, and 13%, respectively, of the Company's
gross revenues.
The Company is substantially dependent on the hardware platform developers
as the sole developers of the platforms marketed by them, as the sole licensors
of the proprietary information and technology needed to develop software for
those hardware platforms and, in the case of Nintendo and Sony, as the sole
manufacturers of software for the hardware platforms marketed by them. For the
quarters ended May 31, 2000 and May 31, 1999, the Company derived 64% and 50% of
its gross revenues, respectively, from sales of Nintendo compatible software and
16% and 32% of its gross revenues, respectively, from sales of software for
PlayStation. For the nine months ended May 31, 2000 and 1999, the Company
derived 40% and 69% of its gross revenues, respectively, from sales of
Nintendo-compatible software and 33% and 22% of its gross revenues,
respectively, from sales of software for PlayStation. The Company has also
derived 10% and 20% of gross revenues from sales of software for the Sega
Dreamcast platform for the quarter and nine months ended May 31, 2000. Sales
from this platform were not significant in 1999.
Gross Profit
The Company's gross profit is primarily impacted by the percentage of sales
of CD software as compared to the percentage of sales of cartridge software.
Gross profit may also be significantly impacted from time to time (as it was in
the third quarter of fiscal 2000) by the expected level of returns and price
protection and concessions to retailers and distributors for which the Company
establishes allowances. The percentage of foreign sales and the percentage of
foreign sales to third-party distributors may also impact gross margins.
The Company's margins on sales of CD software (currently, PlayStation, PCs
and Dreamcast) are higher than those on cartridge software (currently, N64 and
Game Boy Color) as a result of significantly lower CD software product 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 decreased from $43.3 million (54% of net revenues) for the
quarter ended May 31, 1999 to ($6.5) million for the quarter ended May 31, 2000
and from $165.0 million (52% of net revenues) for the nine months ended May 31,
1999 to $86.4 million (50% of net revenues) for the nine months ended May 31,
2000. The dollar decrease is predominantly due to the decreased sales levels
from all platforms and the establishment of higher allowances for returns and
price concessions. The percentage decrease for the quarter and nine months ended
May 31, 2000 is attributable to the lower average net selling prices per unit
obtained during the platform transition period.
Management anticipates that the Company's future gross profit will be
affected principally by (1) the Company's product mix and (2) the levels of
product returns, price protection and concessions in respect of its software.
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<PAGE>
Operating Expenses
Marketing and sales expenses decreased from $15.9 million (20% of net
revenues) for the quarter ended May 31, 1999 to $10.9 million (224% of net
revenues) for the quarter ended May 31, 2000 and increased from $54.8 million
(17% of net revenues) for the nine months ended May 31, 1999 to $57.1 million
(33% of net revenues) for the nine months ended May 31, 2000. The nine-month
increase is primarily attributable to increased advertising expenses.
General and administrative expenses decreased from $16.1 million for the
quarter ended May 31, 1999 to $14.8 million for the quarter ended May 31, 2000
and from $49.3 million for the nine months ended May 31, 1999 to $47.6 million
for the nine months ended May 31, 2000. The decrease is primarily attributable
to decreased variable expenses related to lower revenues. In the third and
fourth quarters of fiscal 2000, the Company implemented an expense reduction
initiative, which is anticipated to reduce operating expenses commencing with
the fourth quarter of the current fiscal year. This plan focuses on reducing
fixed and variable expenses company wide, the elimination of certain titles
under development, staff reductions and reduced marketing expenses.
Research and development expenses increased from $11.8 million for the
quarter ended May 31, 1999 to $16.5 million for the quarter ended May 31, 2000
and from $34.5 million (11% of net revenues) for the nine months ended May 31,
1999 to $45.7 million (27% of net revenues) for the nine months ended May 31,
2000. The increase is primarily attributed to increased staffing levels due to
an increase in the number of titles in development and an increase in external
development costs as the Company shifted its internal development resources to
producing product for next generation systems which require longer development
while at the same time supporting the existing platforms through the use of
independent studios.
Interest income increased slightly in the nine months ended May 31, 2000 as
compared to the nine months ended May 31, 1999.
As of August 31, 1999, the Company had a U.S. tax net operating loss
carryforward of approximately $90 million. The provision for income taxes of
$2.0 million for the nine months of fiscal 2000 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 Computer Game Software Purchases."
Liquidity and Capital Resources
At May 31, 2000, the Company had negative working capital of approximately
$37.2 million. At May 31, 2000, the Company had cash and cash equivalents of
approximately $29.0 million and at June 30, 2000, $9.7 million.
The Company derived net cash from operating activities of approximately $49
million and used net cash of approximately $(26) million during the nine months
ended May 31, 1999 and May 31, 2000, respectively. The decrease in net cash from
operating activities in the first nine months of fiscal 2000 is primarily
attributable to losses from operations in fiscal 2000.
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<PAGE>
The Company used net cash in investing activities of approximately $(7)
million and $(20) million during the nine months ended May 31, 1999 and May 31,
2000, respectively. The increase in net cash used in investing activities in the
first nine months of fiscal 2000 is primarily attributable to increased capital
expenditures, including the acquisition of a new building in the United Kingdom.
The Company derived cash from financing activities of approximately $5
million and $1 million during the nine months ended May 31, 1999 and May 31,
2000, respectively. The decrease in net cash provided by financing activities
during the nine months ended May 31, 2000 is due to lower amounts of proceeds
from the exercise of stock options and warrants.
The Company generally purchases its inventory of Nintendo software by
opening letters of credit when placing the purchase order. At May 31, 2000, the
amount outstanding under letters of credit was approximately $1.7 million. Other
than such letters of credit and ordinary course minimum royalty obligations, the
Company does not currently have any material operating or capital expenditure
commitments.
The Company has a revolving credit and security agreement with GMAC, its
principal domestic lending institution since 1989. The credit agreement
expires August 31, 2003 but automatically renews for additional one year
periods, 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 substantially all of the Company's
assets. GMAC also acts as the Company's factor for the majority of its North
American receivables, which are assigned on a pre-approved basis. At May 31,
2000, the factoring charge was 0.25% of the receivables assigned and the
interest on advances was at GMAC's prime rate plus one percent. As of May 31,
2000, the Company was not in compliance with certain of the financial covenants
under its revolving credit facility. The Company has received waivers regarding
this non-compliance from the lending institution. See Note 2 of Notes to
Consolidated Financial Statements.
GMAC has advanced the Company additional interim funding above the standard
borrowing base under the loan agreement. Such additional interim funding must be
repaid when demanded by GMAC in its discretion and in any event must be repaid
by no later than November 30, 2000.
Subject to GMAC and certain of the Company's subsidiaries executing
definitive documentation, certain of the Company's European subsidiaries have
reached an agreement in principle to amend their current receivable facility
under which GMAC will provide account receivables financing of up to the lesser
of $18 million and 70% of eligible receivables related to the Company's
international operations. The proposed interest rate is 2% above LIBOR. This
amended credit facility would have term of three years automatically renewing
for additional one-year periods thereafter, unless terminated upon 90-days'
prior notice by either party. It would be secured by the factored receivables
and assets of such subsidiaries.
The Company also has a financing arrangement relating to the mortgage on
its corporate headquarters. At May 31, 2000, the outstanding principal balance
of the loan was $1.4 million.
Pursuant to a $5 million seven-year term secured credit facility, in March
2000 GMAC provided the Company with mortgage financing relating to its purchase
of a building in the United Kingdom. Interest is charged on this facility at a
rate of 2% above LIBOR.
The Company's significant loss from operations for the nine months ended
May 31, 2000 and working capital and stockholders' deficiencies at May 31, 2000
could impact the Company's ability to meet its obligations as they become due.
Short-term liquidity has been addressed by the Company receiving additional
borrowings under its revolving credit and security agreement with its principal
domestic leading institution on a short-term basis.
The Company believes that available cash resources, including the
additional interim funding by GMAC and the proposed revised international credit
facility, combined with the Company successfully meeting its planned product
release schedule and achieving its sales forecasts and targeted expense
reductions, will provide the Company with sufficient liquidity to meet its
projected cash and operating requirements through fiscal 2001.
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<PAGE>
The Company's analysis is predicated on achieving its sales forecast for
the next four quarters, which sales forecast is dependent on the timely release
of its scheduled titles. If the Company, for its key titles, does not
substantially achieve the overall projected revenue levels for the period as
reflected in its plans, the Company either will require alternative financing in
order to fund its operations or will need to effect further significant expense
reductions, including, without limitation, the sale or consolidation of certain
operations, staff reductions and the delay, cancellation or reduction of product
development and marketing programs. Certain of such measures may require third
party consents or approvals, including the Company's primary lenders, and there
can be no such assurance that such consents or approvals can be obtained. In
addition, if GMAC demands early repayment of the additional borrowing, the
Company would not have available funds to make such repayment, which might
result in the lender declaring a default under the loan agreement.
There can be no assurance the Company will achieve the product release
schedule, sales assumptions or anticipated expense reductions described above.
There can be no assurance that GMAC will not demand early repayment of the
additional interim funding or declare a default under the loan agreement, that
the Company will receive funding under the proposed revised international credit
facility, or that the Company will be able to arrange alternative financing on
satisfactory terms, if at all. In any such event, the Company's operations and
liquidity will be materially adversely affected.
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.
New Accounting Pronouncement
The Company will implement the provisions of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," in
fiscal 2001. The Company is presently assessing the impact, if any, of this
standard on its consolidated financial statements.
In March, 2000, FASB Interpretation No. 44 - Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25" (FIN 44) was issued. FIN 44 clarifies the application of APB No. 25
regarding (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 does not address
the application of the fair value method of Statement No. 123. This
interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date on July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. We
believe the adoption of FIN 44 will not have a significant effect on the
Company's financial statements.
Year 2000 Issue
To date, the Company has not encountered any significant effects of the
year 2000 issue either internally or with third parties. The Company cannot
guarantee that problems will not occur in the future or have not yet been
detected.
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Recent Events
Recently, the board of directors of the Company declared a dividend
distribution of one right for each outstanding share of the Company's common
stock to stockholders of record at the close of business on June 21, 2000. Each
right entitles the registered holder to purchase from the Company a unit
consisting of one one-thousandth (1/1,000) of a share of Series B junior
participating preferred stock, $0.01 par value, at a purchase price of $30 per
unit, subject to adjustment. The description and terms of the rights are set
forth in a rights agreement, dated as of June 5, 2000, between the Company and
Computershare Trust Co. (formerly known as American Securities Transfer and
Trust, Inc.), as Rights Agent.
Subject to certain exceptions specified in the rights agreement, the rights
will separate from the Company's common stock and a distribution date will occur
upon the earliest to occur of:
o the tenth business day following the date (referred to as a stock
acquisition date) of the first public announcement by the Company that
any person or group has become the beneficial owner of 10% or more of
the Company's common stock then outstanding (other than (1) the
Company, (2) any subsidiary of the Company, and any employee benefit
plan of the Company or any subsidiary, (3) persons who are eligible to
report their ownership on Schedule 13G and who beneficially own less
than 15% of the common stock and certain other persons or groups,
including Gregory Fischbach and related parties and James Scoroposki
and related parties (provided they beneficially own less than 20% of
the common stock));
o the tenth business day following the commencement of a tender or
exchange offer if, upon its consummation, the offeror would become the
beneficial owner of 10% or more of the Company's common stock then
outstanding; or
o a merger or other business combination transaction involving the
Company.
The rights are not exercisable until a distribution date (as described
above) and will expire at 5:00 P.M. (Delaware time) on June 7, 2010, unless
earlier redeemed, exchanged, extended or terminated by the Company. At no time
will the rights have any voting power.
At any time until ten business days following the stock acquisition date,
the cash, common stock or other consideration deemed appropriate by the board of
directors).
See "Factors Affecting Future Performance - Nasdaq Delisting and Liquidity
of Common Stock" for a discussion regarding the status of the proceeding to
delist the Company's securities from trading on the Nasdaq National Market and
the possible listing of its securities on the Nasdaq Small Cap Market.
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,
liquidity and profitability are as follows:
Liquidity and Cash Requirements and Dependence on Achieving Timely Product
Release and Sales Objectives
The Company's significant loss from operations for the nine months ended
May 31, 2000 and working capital and stockholders' deficiencies at May 31, 2000
could impact the Company's ability to meet its obligations as they become due.
Short-term liquidity has been addressed by the Company receiving additional
borrowings under its revolving credit and security agreement with its principal
domestic leading institution on a short-term basis.
The Company believes that available cash resources, including those under
the additional funding by GMAC and the proposed revised international credit
facility, combined with the Company successfully meeting
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<PAGE>
its planned product release schedule and achieving its sales forecasts and
targeted expense reductions, will provide the Company with sufficient liquidity
to meet its projected cash and operating requirements through fiscal 2001.
The Company's analysis is predicated on achieving its sales forecast for
the next four quarters, which sales forecast is dependent on the timely release
of its scheduled titles. If the Company, for its key titles, does not
substantially achieve the overall projected revenue levels for the period as
reflected in its plans, the Company either will require alternative financing in
order to fund its operations or will need to effect further significant expense
reductions, including, without limitation, the sale or consolidation of certain
operations, staff reductions and the delay, cancellation or reduction of product
development and marketing programs. Certain of such measures may require third
party consents or approvals, including the Company's primary lenders, and there
can be no such assurance that such consents or approvals can be obtained. In
addition, if GMAC demands early repayment of the additional interim borrowing,
the Company would not have available funds to make such repayment, which might
result in the lender declaring a default under the loan agreement.
There can be no assurance the Company will achieve the product release
schedule, sales assumptions or anticipated expense reductions described above.
There can be no assurance that GMAC will not demand early repayment of the
additional interim funding or declare a default under the loan agreement, that
the Company will receive funding under the proposed revised international credit
facility, or that the Company will be able to arrange alternative financing on
satisfactory terms, if at all. In any such event, the Company's operations and
liquidity will be materially adversely affected.
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
Insufficient liquidity in fiscal 2001 may require the Company to sell
assets or consolidate operations, reduce staff, refinance debt and/or otherwise
restructure its operations. In the third and fourth quarters of fiscal 2000, the
Company implemented an expense reduction initiative, which is anticipated to
reduce operating expenses commencing with the fourth quarter of the current
fiscal year. This plan focuses on reducing fixed and variable expenses company
wide, the elimination of certain titles under development which are not expected
to achieve management's financial return parameters, staff reductions and
reduced marketing expenses. 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 in fiscal 2000 or thereafter.
Ability to Service Debt and Prior Rights of Creditors May Adversely Affect
Holders of Common Stock
With proceeds of the additional interim borrowing by GMAC and the proposed
revised international credit facility, the Company believes that its cash and
projected cash flows from operations in fiscal 2000 will be sufficient to make
all interest and principal payments on a timely basis. However, if the Company's
cash and projected cash flow from operations in fiscal 2001 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 the Company 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
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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.
As of May 31, 2000 the Company was not in compliance with certain of the
financial covenants contained in its bank agreements. The Company has received
waivers regarding this non-compliance from its lender.
The Company expects to comply with the other covenants in its bank
agreements and in the indenture 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 is likely to be
insufficient assets remaining for any distribution to stockholders.
In order to meet its debt service obligations, from time to time the
Company 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 governing its outstanding convertible notes. A significant portion
of the Company's assets, operations, trade payables and indebtedness 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 the Company's creditors and before any assets are distributed to
stockholders.
Revenues and Liquidity 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 and in fiscal 2000, the Company has
experienced delays in the introduction of new titles, which has had a negative
impact on its results of operations. The complexity of the next generation
systems has resulted in higher development expenses, longer development cycles,
and the need to carefully monitor and plan the product development process. If
the Company does not introduce titles in accordance with its operating plans for
a period, its results of operations, liquidity and profitability in that period
could be negatively affected.
The timely shipment of a new title depends on various factors including:
o the development process;
o bug testing;
o approval by hardware licensors; and
o approval by third-party licensors.
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, liquidity and results of
operations, as has been the case in the past and in fiscal 2000.
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The Company cannot assure stockholders that its new titles will be released
in a timely fashion. Factors such as competition for access to 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.
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 will experience losses from operations, as it did in fiscal 1996 and 1997 and
the first nine months of fiscal 2000.
In addition, the cyclical nature of the video and computer games industry
requires the Company continually to adapt its software development efforts to
emerging hardware systems. Sega has introduced Dreamcast, a 128-bit game
console, and both Sony and Nintendo have announced plans to introduce 128-bit
game consoles and Microsoft has announced plans to introduce its X-Box. No
assurance can be given that these new game consoles or online gaming will
achieve commercial success similar to and/or installed bases comparable to that
of the 32-bit PlayStation or 64-bit N64, or as to the timing of such success. In
addition, the Company cannot guarantee that it will be successful in developing
and publishing software for these new game consoles.
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 has occurred in the past. However,
it is difficult to predict consumer preferences for titles, and few titles
achieve sustained market acceptance. 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 Allowances, 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. As consumer pricing has become more competitive, the
Company is finding more frequently that it is necessary to offer price
reductions for products which have not yet sold through to the consumer or to
accept a higher level of returns or exchanges of product that are not selling at
retail, or both. If the Company's allowances for returns, exchanges and price
protection and concessions are exceeded, its financial condition and results of
operations will be negatively impacted, as has occurred in the past.
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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 allowances 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; and
o historical return and price concession rates.
The Company believes that, at May 31, 2000, its allowances for future
returns, exchanges and price protection and concessions are adequate. However,
the Company cannot guarantee the adequacy of its current or future allowances.
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 as the sole manufacturer (as to Nintendo and Sony software) 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 nine months of fiscal
1999 and 2000, the Company derived:
o approximately 69% and 40%, respectively, of gross revenues from the
sale of Nintendo-compatible software;
o approximately 22% and 33%, respectively, of gross revenues from the
sale of PlayStation software; and
o approximately 0% and 20%, respectively, of gross revenues from the sale
of Sega-compatible 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 those 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.
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Increased Product Development Costs May Adversely Affect Profitability
The Company's research and development expenses increased from $34.5
million (approximately 11% of net revenues) for the nine months ended May 31,
1999 to $45.7 million (approximately 27% of net revenues) for the nine months
ended May 31, 2000. The Company anticipates that its future research and
development expenses will decrease due to the Company's planned release of fewer
titles. The Company anticipates that its profitability will continue to be
impacted by the levels of research and development expenses relative to
revenues, and by fluctuations relating to development in anticipation of the
next generation platforms.
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, and Comedy Central. 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. For example, the
Company's license for the WWF properties expired in November 1999 and was not
renewed. Sales of titles using WWF properties aggregated 18% of gross revenues
in the nine months ended May 31, 1999 as compared to 14% for the same period
ended May 31, 2000. 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 the Company's:
o material breach of the agreement;
o failure to pay amounts due to the licensor in a timely manner; or
o bankruptcy or insolvency.
If The Company Does Not Compete Successfully, Demand for Its Products May be
Reduced
The video, computer and portable 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 in the interactive entertainment software industry is based
primarily upon:
o the quality of titles;
o reviews received for a title from independent reviewers who publish
reviews in magazines, websites, newspapers and other industry
publications;
o publisher's access to retail shelf space;
o the success of the game console for which the title is written;
o the price of each title;
o the number of titles then available for the system for which each title
is published; and
o the marketing campaign supporting a title at launch and through its
life.
The Company's chief competitors are the developers of game consoles, to
whom the Company pays royalties and/or manufacturing charges, as well as a
number of independent software publishers. The hardware developers have a price,
marketing and distribution advantage with respect to software
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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 and the Company anticipates this in fiscal 2000 and
fiscal 2001. In addition, competition from new technologies may reduce demand in
markets in which the Company has traditionally competed. As a result of
prolonged price competition and reduced demand as a result of competing
technologies, the Company's operations and liquidity have been, and in the
future could be, negatively impacted.
Revenues Vary Due to the Seasonal Nature of Video and Computer Games Software
Purchases
The video, computer and portable 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 as was the
case in the third quarter of fiscal 2000, 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, revenues and 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 operating results and
financial position in that period are likely to be affected negatively, as
occurred in the first nine months of fiscal 2000.
Nasdaq Delisting and Liquidity of Common Stock
In order to maintain the listing of the Company's common stock on the
Nasdaq National Market, the Company is required, among other things, to maintain
net tangible assets of at least $4 million. The Nasdaq Stock Market, Inc.
informed the Company that based upon a review of the Company's Quarterly Report
on Form 10-Q for the period ended February 29, 2000, the Company did not meet
the $4 million net tangible assets requirement for continued listing on the
Nasdaq National Market under Maintenance Standard 1, and that the Company's
securities would be delisted from quotation on the Nasdaq National Market
following further Nasdaq procedures. In addition, the Company is currently not
in compliance with the $5 minimum bid price for continued listing on the Nasdaq
National Market under Maintenance Standard 2.
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The Company appealed Nasdaq's decision and a final decision from the Nasdaq
Panel regarding continued listing of the Company's securities on the National
Market is expected before the end of fiscal 2000, based on the materials
delivered by the Company to Nasdaq. The Company's securities will continue to
trade on the National Market until the Panel renders its decision. If the
Panel's determination is unfavorable, the Company's common stock would be
removed from listing on the Nasdaq National Market and the Company will seek to
have its common stock listed for trading on the Nasdaq Small Cap Market.
Although the Company meets the current listing criteria for the Nasdaq Small Cap
Market, no assurance can be given as to the Company's ability to obtain listing
for the common stock on the Nasdaq Small Cap Market or as to the Company's
ongoing ability to meet the maintenance requirements thereof.
If the common stock were to be delisted from trading on the Nasdaq National
Market, in order to obtain relisting of its common stock on the Nasdaq National
Market, the Company must satisfy certain quantitative designation criteria,
which it does not currently meet. No assurance can be given that the Company
will meet such relisting criteria for the National Market in the near future.
If the Company's common stock were to be delisted from trading on the
Nasdaq National Market and were neither relisted thereon nor listed for trading
on the Nasdaq Small Cap Market, trading, if any, in the common stock may
continue to be conducted on the OTC Bulletin Board or in the non-Nasdaq
over-the-counter market. Delisting of the common stock would result in limited
release of the market price of the common stock and limited news coverage of the
Company and could restrict investors' interest in the common stock and
materially adversely affect the trading market and prices for the common stock
and the Company's ability to issue additional securities or to secure additional
financing. In addition, if the common stock were not listed and the trading
price of the common stock were less than $5 per share, the common stock could be
subject to Rule 15g-9 under the Securities Exchange Act of 1934 which, among
other things, requires that broker/dealers satisfy special sales practice
requirements, including making individualized written suitability determinations
and receiving a purchaser's written consent prior to any transaction. In such
case, the Company's common stock could also be deemed to be a "penny stock"
under the Securities Enforcement and Penny Stock Reform Act of 1990, which would
require additional disclosure in connection with trades in the common stock,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. Such requirements could severely limit the liquidity
of the common stock.
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.
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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. 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. 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 through August 2000, 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. In this
regard, the board of directors recently approved a stockholder rights plan which
is described in the Recent Events section of this Form 10-Q. If the Series B
junior participating preferred stock is issued, it would be more difficult for a
third party to acquire a majority of the Company's voting stock.
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In addition to the Series B preferred stock, the board of directors may
issue additional preferred stock and, if this is done, the rights of common
stockholders may be additionally negatively affected by the rights of those
preferred stockholders.
The Company 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 the Company. Movements in
the market price of the Company's common stock from time to time have negatively
affected stockholders' ability to recoup their investment in the stock. The
price of the Company's 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 the Company's common stock may be negatively affected.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any significant financial instruments for
trading or hedging purposes.
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. The results of operations of the Company's
subsidiaries, as reported in U.S. dollars, may be significantly affected by
fluctuations in the value of the local currencies in which the Company transacts
business. Such amount is recorded upon the translation of the foreign
subsidiaries' financial statements into U.S. dollars, and is dependent upon the
various foreign exchange rates and the magnitude of the foreign subsidiaries'
financial statements. At May 31, 2000, the Company's foreign currency
translation adjustment is not material and, for the nine months ended May 31,
2000, net foreign currency transaction losses were insignificant. In addition to
the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive.
The Company is not exposed to the material future earnings or cash flow
exposures from changes in interest rates on long-term obligations since the
majority of the Company's long-term obligations are at fixed rates.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCLAIM ENTERTAINMENT, INC.
By:/s/Gregory E. Fischbach July 17, 2000
-----------------------------
Gregory E. Fischbach
Co-Chairman of the Board;
Chief Executive Officer;
President; Director
By:/s/William G. Sorenson July 17, 2000
-----------------------------
William G. Sorenson
Executive Vice President and
Chief Executive Officer;
(principal financial and
accounting officer)
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and other participants in the entertainment industry were sued
in an action entitled James, et al. v. Meow Media, et al. filed in April 1999 in
the U.S. District Court for the Western District of Kentucky, Paducah Division,
Civil Action No. 5:99CV96-J. The plaintiffs alleged that the defendants caused
injury to the plaintiffs as a result of, in the case of the Company, its
manufacture and/or supply of "violent" video games to Michael Carneal, then
fourteen. The plaintiffs further allege that the defendants were negligent in
such manufacture and/or supply thereby breaching a duty to Mr. Carneal and
others, including the plaintiffs (the parents of the deceased individuals). Mr.
Carneal killed three individuals and wounded five others during a shooting at
the Heath High School in McCracken County, Kentucky. The plaintiffs sought
damages in the amount of approximately $110,000,000. The defendants' motion to
dismiss was granted. However, the period for the plaintiffs to file an appeal
has not lapsed. The Company has entered into a joint defense agreement and has
been sharing defense costs with certain of the other defendants.
The Company, Iguana Entertainment 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 (1) breached their employment obligations to the plaintiff, (2)
breached a Texas statute covering wage payment obligations based on their
alleged failure to pay bonuses to the plaintiff; and (3) 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 SEC issued orders in April 1996 directing a private investigation
relating to, among other things, the Company's October 1995 release of its
earnings estimate for fiscal 1995. The Company provided documents to the SEC,
and the SEC took testimony from Company representatives. The Company was advised
in January 2000 that the Staff of the SEC will recommend that the SEC authorize
an enforcement action against the Company but not against any individuals
currently associated with the Company in connection with matters related to the
Company's release. The Company has previously settled all private civil
litigations relating to the Company's October 1995 release, and the related
charges were recorded in fiscal 1997. No assurance can be given as to the
outcome of the SEC investigation.
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.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
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
No. 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 No. 33-59483)
3.4 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3 to the Company's Current Report on Form
8-K, filed on June 12, 2000 (File No. 0-16 986) (the "2000 8-K"))
4.1 Specimen form of the Company's common stock certificate
(incorporated by reference to Exhibit 4 to the Company's Annual
Report on Form 10-K for the year ended August 31, 1989, as
amended (File No. 0-16986))
4.2 Indenture dated as of February 26, 1997 between the Company and
IBJ Schroder Bank & Trust Company, as trustee (incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form
8-K, filed on March 14, 1997 (File No. 0-16986))
4.3 Rights Agreement dated as of June 5, 2000, between the Company
and American Securities Transfer & Trust, Inc. (incorporated by
reference to Exhibit 4 of the 2000 8-K)
+10.1 Employment Agreement dated as of September 1, 1994 between the
Company and Gregory E. Fischbach; and Amendment No. 1 dated as of
December 8, 1996 between the Company and Gregory E. 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 James Scoroposki; and 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 Service Agreement effective January 1, 1998 between Acclaim
Entertainment Limited and Rodney Cousens
+10.4 Employment Agreement dated as of August 13, 1999 between the
Company and William G. Sorenson
+10.5 Restricted Stock Agreement dated August 18, 1999 between the
Company and William G. Sorenson
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+10.6 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4(a) to the Company's Registration Statement on Form S-8
filed on May 4, 1998 (Registration No. 333-51967))
+10.7 1998 Stock Incentive Plan (incorporated by reference to the
Company's 1998 Proxy Statement relating to fiscal year ended
August 31, 1997)
10.8 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 ("BNY"), 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"))
10.9 Restated and Amended Factoring Agreement dated as of February 28,
1995 between the Company and 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)
10.10* 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))
27 Financial Data Schedule
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* Confidential treatment has been granted with respect to certain portions of
this exhibit, which have been omitted therefrom and have been separately
filed with the Commission.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on June 1, 2000 regarding Nasdaq's
potential delisting of the Company's securities from the Nasdaq National
Market.
Current Report on Form 8-K filed on June 12, 2000 regarding the Company's
adoption of a Stockholders' Rights Plan.
32
