-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FJ8AHIkrGx7ZqnYfQG8RFIhzKPgdjjOSC4cn04lxQ8Ku83AVjGDXkFq3G+pY/3p/ EsJG6GosCWbXNb7KZF33EQ== 0000889812-00-000097.txt : 20000202 0000889812-00-000097.hdr.sgml : 20000202 ACCESSION NUMBER: 0000889812-00-000097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCLAIM ENTERTAINMENT INC CENTRAL INDEX KEY: 0000804888 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 382698904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16986 FILM NUMBER: 507703 BUSINESS ADDRESS: STREET 1: ONE ACCLAIM PLAZA CITY: GLEN COVE STATE: NY ZIP: 11542 BUSINESS PHONE: 5166565000 MAIL ADDRESS: STREET 1: OEN ACCLAIM PALZA CITY: GLEN COVEY STATE: NY ZIP: 11542 FORMER COMPANY: FORMER CONFORMED NAME: GAMMA CAPITAL CORP DATE OF NAME CHANGE: 19880608 10-Q 1 QUARTERLY REPORT ================================================================================ 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 November 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to_____ Commission file number 0-16986 ACCLAIM ENTERTAINMENT, INC. ---------------------------------------------------------- (Exact Name of the Registrant as Specified in its Charter) Delaware 38-2698904 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) No.) One Acclaim Plaza, Glen Cove, New York 11542 -------------------------------------------- (Address of principal executive offices) (516) 656-5000 -------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As at January 13, 2000, approximately 55,870,000 shares of Common Stock of the Registrant were issued and outstanding. ================================================================================ PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in 000s, except per share data)
(Unaudited) November 30, August 31, 1999 1999 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 78,434 $ 74,421 Accounts receivable - net 82,904 84,430 Inventories 11,208 15,565 Prepaid expenses 13,038 14,870 --------- --------- TOTAL CURRENT ASSETS 185,584 189,286 --------- --------- OTHER ASSETS Fixed assets - net 35,258 32,694 Excess of cost over fair value of net assets acquired - net of accumulated amortization of $22,797 and $22,058, respectively 20,460 21,199 Other assets 1,287 1,659 --------- --------- TOTAL ASSETS $ 242,589 $ 244,838 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 44,493 $ 47,298 Accrued expenses 102,110 103,663 Income taxes payable 8,863 7,692 Current portion of long-term debt 724 724 Obligations under capital leases - current 422 518 --------- --------- TOTAL CURRENT LIABILITIES 156,612 159,895 --------- --------- LONG-TERM LIABILITIES Long-term debt 50,776 50,957 Obligations under capital leases - noncurrent 874 775 Other long-term liabilities 1,358 1,852 --------- --------- TOTAL LIABILITIES 209,620 213,479 --------- --------- STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value; 1,000 shares authorized; none issued -- -- Common stock, $0.02 par value; 100,000 shares authorized; 56,293 and 56,033 shares issued, respectively 1,126 1,121 Additional paid in capital 208,826 207,273 Accumulated deficit (172,688) (173,122) Treasury stock, 537 shares (3,262) (3,262) Accumulated other comprehensive income (1,033) (651) --------- --------- TOTAL STOCKHOLDERS' EQUITY 32,969 31,359 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 242,589 $ 244,838 --------- ---------
See notes to consolidated financial statements. 1 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS (in 000s, except per share data)
(Unaudited) Three Months Ended November 30, 1999 1998 ---- ---- NET REVENUES $ 101,153 $ 104,831 COST OF REVENUES 40,016 50,500 --------- --------- GROSS PROFIT 61,137 54,331 --------- --------- OPERATING EXPENSES Marketing and sales 26,087 17,519 General and administrative 16,888 14,930 Research and development 15,079 11,228 --------- --------- TOTAL OPERATING EXPENSES 58,054 43,677 --------- --------- EARNINGS FROM OPERATIONS 3,083 10,654 --------- --------- OTHER INCOME (EXPENSE) Interest income 1,024 795 Interest expense (1,312) (1,407) Other (expense) income (581) 758 --------- --------- EARNINGS BEFORE INCOME TAXES 2,214 10,800 --------- --------- PROVISION FOR INCOME TAXES 1,780 513 --------- --------- NET EARNINGS $ 434 $ 10,287 --------- --------- BASIC EARNINGS PER SHARE $ 0.01 $ 0.19 --------- --------- DILUTED EARNINGS PER SHARE $ 0.01 $ 0.16 --------- ---------
See notes to consolidated financial statements. 2 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY) (in 000s, except per share data)
Preferred Stock (1) Common Stock ------------------- ------------ Issued Issued ------ ------ Additional Paid-In Deferred Accumulated Shares Amount Shares Amount Capital Compensation Deficit ------ ------ ------ ------ ------- ------------ ------- Balance August 31, 1997 -- -- 50,122 $1,002 $181,786 $(8,413) $(229,870) ------ ------ ------ ------ -------- ------- --------- Net Earnings -- -- -- -- -- -- 20,690 Issuance of Common Stock for Litigation Settlements -- -- 1,274 26 6,868 -- -- Issuances and Cancellations of Common Stock and Options -- -- 15 1 239 690 -- Deferred Compensation Expense -- -- -- 4,190 -- Exercise of Stock Options -- -- 1,223 24 4,285 -- -- Escrowed Shares Received -- -- -- -- -- -- -- Foreign Currency Translation Gain -- -- -- -- -- -- -- ------ ------ ------ ------ -------- -------- --------- Balance August 31, 1998 -- -- 52,634 1,053 193,178 (3,533) (209,180) ------ ------ ------ ------ -------- -------- --------- Net Earnings -- -- -- -- -- -- 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 Earnings -- -- -- -- -- -- 434 Cancellations of Options -- -- -- -- (8) 8 -- Deferred Compensation Expense -- -- -- -- -- 608 -- Exercise of Stock Options and Warrants -- -- 260 5 945 -- -- Foreign Currency Translation Loss -- -- -- -- -- -- ------ ------ ------ ------ -------- -------- --------- Balance November 30, 1999 -- -- 56,293 $1,126 $210,863 $(2,037) $(172,688) ====== ====== ====== ====== ======== ======= =========
Accumulated Other Treasury Comprehensive Comprehensive Stock Income Total Income(Loss) ----- ------ ----- ------------ Balance August 31, 1997 $(2,904) $ (647) $(59,046) ------- ------- -------- Net Earnings -- -- 20,690 $20,690 Issuance of Common Stock for Litigation Settlements -- -- 6,894 Issuances and Cancellations of Common Stock and Options -- -- 930 Deferred Compensation Expense -- -- 4,190 Exercise of Stock Options -- -- 4,309 Escrowed Shares Received (199) -- (199) Foreign Currency Translation Gain -- 459 459 459 ------- ------- -------- ------- Balance August 31, 1998 (3,103) (188) (21,773) $21,149 ------- ------- -------- ------- 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 -- -- -- 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 Earnings -- -- 434 $ 434 Cancellations of Options -- -- -- Deferred Compensation Expense -- -- 608 Exercise of Stock Options and Warrants -- -- 950 Foreign Currency Translation Loss -- (382) (382) (382) ------- ------- -------- ------- Balance November 30, 1999 $(3,262) $(1,033) $ 32,969 $ 52 ======= ======= ======== =======
(1) The Company is authorized to issue 1,000 shares of preferred stock at a par value of $0.01 per share, none of which shares is presently issued and outstanding. See notes to consolidated financial statements. 3 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (in 000s, except per share data)
(Unaudited) Three Months Ended November 30, 1999 1998 ---- ---- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net Earnings $ 434 $ 10,287 -------- -------- Adjustments to reconcile net earnings to net cash provided by (used in)operating activities: Depreciation and amortization 3,248 2,763 Provision for returns and discounts 25,300 16,730 Deferred compensation expense 608 630 Non-cash royalty charges 388 136 Other non-cash items 10 (22) Change in assets and liabilities, net of effects of acquisition: Accounts receivable (21,955) (29,356) Inventories 4,205 (4,048) Prepaid expenses 1,283 5,205 Trade accounts payable (2,512) 9,637 Accrued expenses (4,469) 335 Income taxes payable 1,684 (188) Other long-term liabilities (494) (681) -------- -------- Total adjustments 7,296 1,141 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,730 11,428 -------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Acquisition of subsidiary, net of cash acquired -- (421) Acquisition of fixed assets, excluding capital leases (4,605) (1,868) Disposal of fixed assets 33 56 Acquisition of other assets (5) -- Disposal of other assets -- 43 -------- -------- NET CASH (USED IN) INVESTING ACTIVITIES $ (4,577) $ (2,190) -------- --------
4 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued) (in 000s, except per share data)
(Unaudited) Three Months Ended November 30, 1999 1998 ---- ---- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Payment of mortgage $ (181) $ (181) Payment of short-term bank loans -- (16) Exercise of stock options and warrants 950 2,659 Payment of obligations under capital leases (135) (343) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 634 2,119 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 226 (607) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,013 10,750 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,421 47,273 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 78,434 $ 58,023 -------- -------- Supplemental schedule of noncash investing and financing activities:
1999 1998 ---- ---- Acquisition of equipment under capital leases $ 193 $ 58 Cash paid during the year for: Interest $ 2,164 $ 2,414 -------- -------- Income taxes $ 651 $ 624 -------- -------- In fiscal 1999, the Company purchased certain assets and liabilities of a distributor in Australia. In connection with the acquisition, liabilities assumed were as follows: Fair value of assets acquired $ 1,186 Excess of cost over fair value of net assets acquired 2,607 Cash paid, net of cash acquired (580) Fair market value of common stock issued $ (1,796) -------- Liabilities assumed $ 1,417 --------
See notes to consolidated financial statements. 5 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in 000s, except per share data) 1. Interim Period Reporting - The data contained in these financial statements are unaudited and are subject to year-end adjustments; however, in the opinion of management, all known adjustments (which consist only of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods. 2. Accounts Receivable Accounts receivable are comprised of the following: November 30, August 31, 1999 1999 ---- ---- Receivables assigned to factor $ 104,465 $ 98,470 Advances from factor 30,384 26,410 --------- --------- Due from factor 74,081 72,060 Unfactored accounts receivable 16,427 10,599 Foreign accounts receivable 39,040 37,461 Other receivables 8,469 3,924 Allowances for returns and discounts (55,113) (39,614) --------- --------- $ 82,904 $ 84,430 --------- --------- Pursuant to a factoring agreement, the Company's principal lending institution acts as its factor for the majority of its North American receivables, which are assigned on a pre-approved basis. At November 30, 1999, the factoring charge amounted to 0.25% of the receivables assigned. The Company's obligations to the lending institution 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 automatically renews for a one-year term on January 31, 2000, on substantially the same terms. Pursuant to the terms of the agreement which can be canceled by either party upon 90-days' notice, the Company is required to maintain specified level s of working capital and tangible net worth, among other covenants. As of November 30, 1999, the Company was in compliance with the covenants under its revolving credit facility. The Company draws down working capital advances and opens letters of credit (up to an aggregate maximum of $20 million) against the facility in amounts determined on a formula based on factored receivables, inventory and cost of imported goods under outstanding letters of credit. Interest is charged at the lending institution's prime lending rate plus one percent per annum (9.5% at November 30, 1999) on such advances. 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 November 30, 1999 and August 31, 1999, the balance due from distributors was approximately 14% and 17%, respectively, of gross accounts receivable. At November 30, 1999 and August 31, 1999, included in receivables assigned to factor is a balance due from one domestic retail customer of approximately 20% and 15%, respectively, of gross accounts receivable. 6 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in 000s, except per share data) 3. Long-Term Debt Long-term debt consists of the following: November 30, August 31, 1999 1999 ------------ ---------- 10% Convertible Subordinated Notes due 2002 $49,750 $49,750 Mortgage note 1,750 1,931 ------- ------- 51,500 51,681 Less: current portion 724 724 ------- ------- $50,776 $50,957 ------- ------- The 10% Convertible Subordinated Notes due 2002 (the "Notes") are convertible into shares of common stock prior to maturity, unless previously redeemed, at a conversion price of $5.18 per share, subject to adjustment under certain conditions. The Notes are redeemable in whole or in part, at the option of the Company (subject to the rights of holders of senior indebtedness) at 104% of the principal balance at any time on or after March 1, 2000 through February 28, 2001 and at 102% of the principal balance thereafter to maturity. 4. Earnings Per Share Basic earnings per share is computed based upon the weighted average number of shares of 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.
Three Months Ended November 30, 1999 1998 ---- ---- Basic EPS Computation - --------------------- Net earnings $ 434 $ 10,287 -------- --------- Weighted average common shares outstanding 56,105 52,900 Basic earnings per share $ 0.01 $ 0.19 Diluted EPS Computation Net earnings $ 434 $ 10,287 10% Convertible Subordinated Notes interest expense -- 1,244 -------- --------- Adjusted net earnings $ 434 $ 11,531 -------- --------- Weighted average common shares outstanding 56,105 52,900 Stock options and warrants 6,666 8,470 10% convertible subordinated notes -- 9,605 -------- --------- Diluted common shares outstanding 62,771 70,975 -------- --------- Diluted earnings per share $ 0.01 $ 0.16
The assumed conversion of the outstanding Notes was excluded from fiscal 2000 diluted earnings per share calculations since they were anti-dilutive. 7 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in 000s, except per share data) 5. 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 Earnings from the acquisition date. The acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The consideration was comprised of (i) $638 in cash, of which $479 was paid at closing, and (ii) 206 shares of the common stock of the Company with a fair value of $1,796. In addition, the Company assumed $1,417 of liabilities. The total cost of the acquisition was $3,851, of which $1,244 was allocated to identified net tangible assets, primarily accounts receivable. The remaining $2,607 represents the excess of the purchase price over the fair value of the net assets acquired, which will be amortized on a straight-line basis over three years. The operating results of the distributor are insignificant to those of the Company. 6. Segment Information In August 1999, the Company adopted SFAS No.131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes 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 quarters ended November 30, 1999 and 1998 is presented below:
North Pacific America Europe Rim Eliminations Total ------- ------ --- ------------ ----- Quarter Ended November 30, 1999 Net revenues from external customers $ 64,099 $ 32,613 $ 4,441 -- $101,153 Intersegment sales 56 359 -- $ (415) -- -------- -------- -------- -------- -------- Total net revenues $ 64,155 $ 32,972 $ 4,441 $ (415) $101,153 Interest income 1,007 11 6 -- 1,024 Interest expense 2,153 11 -- -- 2,164 Depreciation and amortization 2,571 422 255 -- 3,248 Identifiable assets 202,223 33,763 6,603 -- 242,589 Segment operating profit (loss) 4,212 (1,867) 738 -- 3,083 Quarter Ended November 30, 1998 Net revenues from external customers $ 73,697 $ 30,008 $ 1,126 -- $104,831 Intersegment sales 46 213 -- $ (259) -- -------- -------- -------- -------- -------- Total net revenues $ 73,743 $ 30,221 $ 1,126 $ (259) $104,831 Interest income 786 9 -- -- 795 Interest expense 2,358 56 -- -- 2,414 Depreciation and amortization 2,290 394 79 -- 2,763 Identifiable assets 141,868 40,421 5,986 -- 188,275 Segment operating profit (loss) 13,782 (2,870) (258) -- 10,654
8 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, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words "believe," "anticipate," "think," "intend," "plan," "will be" and similar expressions identify such forward-looking statements. Such statements regarding future events and/or the future financial performance of the Company are subject to certain risks and uncertainties, including those discussed in "Factors Affecting Future Performance" below at pages 15 to 21, which could cause actual events or the actual future results of the Company to differ materially from any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Overview Acclaim 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, Acclaim hires independent developers to create software for it. Acclaim publishes, or releases to the public under its brand names, software developed by it as well as by third-party developers. Acclaim distributes its software directly in North America, the U.K., Germany, France, Spain and Australia. Acclaim 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, Acclaim 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 dominant game consoles. Accordingly, the Company's performance has been, and is expected in the future 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- 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 and related software have peaked and will decrease substantially in future periods. This transition has resulted in industry-wide sales volume and pricing weakness which impacted the Company's first quarter of fiscal 2000 and is anticipated to impact the Company for the balance of the fiscal year. 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 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) 9 or announced (e.g., Sony's PlayStation 2 and Nintendo's Dolphin) 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 "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 Acclaim expects it to become more complex and expensive in the future with the advent of the more powerful next generation hardware systems. According to Acclaim 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 68% of the Company's gross revenues in the first quarter of fiscal 2000 was derived from software developed by its studios. See "Factors Affecting Future Performance - Increased Product Development Costs May Adversely Affect Profitability." In the past and in the first quarter of 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 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 could be negatively affected. See "Factors Affecting Future Performance - Revenues Are Dependent on Timely Introduction of New Titles." Retail sales of the Company's 32- and 64- bit software during the first quarter of fiscal 2000 generally fell short of the Company's expectations due, in large part, to (1) the decline of the market for N64 software and lower-than-expected sales of certain of the Company's products and (2) delays in the introduction of new titles. In addition, the Company increased its sales allowances to address the effects on the Company of industry-wide weakness in cartridge-based hardware and software sales and slower-than-expected sales of certain products. As a result of the foregoing, the Company's allowances increased from 14% of gross revenues in the quarter ended November 30, 1998 to 20% of gross revenues in the quarter ended November 30, 1999. The Company recorded earnings of $0.4 million in the first quarter of fiscal 2000, which were materially lower than earnings of $10.3 million in the first quarter of fiscal 1999. In addition to the factors discussed above, the Company's earnings for the first quarter of fiscal 2000 were negatively impacted by (1) increased operating expenses, primarily marketing expenses and research and development expenses, and (2) a payment of $5.7 million incurred in connection with the extension of the WWF license to November 1999. The Company's results of operations in the long-term future will be dependent in large part on (1) the 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 publish software that performs well in the market place. Results of Operations The following table shows certain statements of consolidated earnings data as a percentage of net revenues for the periods indicated: Three Months Ended November 30, 1999 1998 ---- ---- Domestic revenues 63.4% 70.3% Foreign revenues 36.6 29.7 ---- ---- Net revenues 100.0 100.0 Cost of revenues 39.6 48.2 ---- ---- Gross profit 60.4 51.8 ---- ---- Marketing and sales 25.8 16.7 10 General and administrative 16.7 14.3 Research and development 14.9 10.7 ---- ---- Total operating expenses 57.4 41.7 ---- ---- Earnings from operations 3.0 10.1 Other (expense) income, net (0.9) 0.2 Earnings before income taxes 2.2 10.3 Net earnings 0.4 9.8 Net Revenues The Company's gross revenues were derived from the following product categories: 1999* 1998* ----- ----- Portable software 4.0% 2.0% 32-bit software 38.0% 31.0% 64-bit software 28.0% 60.0% 128-bit software 23.0% --- Computer games software 5.0% 5.0% Other 2.0% 2.0% - ------------ * 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 $104.8 million for the quarter ended November 30, 1998 to $101.2 million for the quarter ended November 30, 1999 was predominantly due to reduced sales of 64-bit software and increased sales allowances for price protection and concessions relating primarily to 32-bit and 64-bit software. In addition, net revenues were further impacted by the delays in the introduction of new titles. These decreases were partially offset by sales of the Company's Dreamcast-related software which aggregated approximately 23% of gross revenues and an increase in gross revenues of the Company's 32-bit software. The Company anticipates that titles currently scheduled for introduction in the second quarter of fiscal 2000 will be shipped as announced; however, no assurance can be given that these titles will be released in accordance with such announcements. Assuming timely shipment of the Company's titles, the Company's fiscal 2000 revenues are anticipated to be lower than its fiscal 1999 revenues and net income for fiscal 2000 as a whole is anticipated to be materially lower than for fiscal 1999. However, if the Company does not release and sell new titles as planned in fiscal 2000, the Company's net revenues would be further impacted and the Company could incur 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 November 30, 1999, WWF Attitude (for multiple platforms), Turok Rage Wars (for multiple platforms) and South Park (for multiple platforms) accounted for approximately 25%, 14% and 13%, respectively, of the Company's gross revenues. In the quarter ended November 30, 1998, 11 WWF War Zone (for multiple platforms), NFL Quarterback Club '99 (for N64) and Extreme G2 (for N64) accounted for approximately 31%, 23% and 15%, 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 November 30, 1999 and 1998, the Company derived 32% and 62% of its gross revenues, respectively, from sales of Nintendo-compatible software, 38% and 31% of its gross revenues, respectively, from sales of software for PlayStation and approximately 23% and less than 1% of its gross revenues, respectively, from sales of Sega-compatible software. 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 impacted from time to time by the level of returns and price protection and concessions to retailers and distributors, the percentage of foreign sales and the percentage of foreign sales to third-party distributors. 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 increased from $54.3 million (52% of net revenues) for the quarter ended November 30, 1998 to $61.1 million (60% of net revenues) for the quarter ended November 30, 1999. The increase is attributable to a higher percentage of sales of CD software during the fiscal 2000 quarter. 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. Operating Expenses Marketing and sales expenses increased from $17.5 million (17% of net revenues) for the quarter ended November 30, 1998 to $26.1 million (26% of net revenues) for the quarter ended November 30, 1999. The increase is primarily attributable to (1) increased television advertising expenses and (2) a payment of $5.7 million incurred in connection with the extension of the WWF license to November 1999. General and administrative expenses increased from $14.9 million (14% of net revenues) for the quarter ended November 30, 1998 to $16.9 million (17% of net revenues) for the quarter ended November 30, 1999. The increase is primarily attributable to higher depreciation expense associated with fixed assets and additional staffing to support the Company's increased research and development initiatives related to the planned expansion of the release schedule for the current and future fiscal years. Research and development expenses increased from $11.2 million (11% of net revenues) for the quarter ended November 30, 1998 to $15.1 million (15% of net revenues) for the quarter ended November 30, 1999. The increase in fiscal 2000 is primarily attributable to the increase in the current fiscal year's planned release schedule to 55 titles from 35 titles in the prior year, the increased expense of developing game engines and programming tools for the next generation hardware platforms, and increased personnel costs at the studios. Due to the Company's planned release of a higher number of titles and increasing software development costs, the Company anticipates that its 12 future research and development expenses will continue to increase. The Company may have in development up to as many as 150 titles to support its planned release schedule over the next three years. See "Factors Affecting Future Performance - Increased Product Development Costs May Adversely Affect Profitability." The Company anticipates that its aggregate operating expenses in dollars and as a percentage of net revenues in fiscal 2000 will increase as compared to fiscal 1999 primarily due to increased research and development expense related to the planned expansion of the release schedule for the current and future fiscal years. As of November 30, 1999, the Company had a U.S. tax net operating loss carryforward of approximately $90 million. During the quarter ended November 30, 1999, the Company utilized a portion of its net operating loss carryforwards. The provision for income taxes of $1.8 million primarily relates to foreign taxes and also includes federal alternative minimum and state 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 The Company derived net cash from operating activities of approximately $11.4 million and $7.7 million during the quarter ended November 30, 1998 and 1999, respectively. The decrease in net cash from operating activities in the first quarter of fiscal 2000 is primarily attributable to decreased earnings. The Company used net cash in investing activities of approximately $2.2 million and $4.6 million during the quarters ended November 30, 1998 and 1999, respectively. The increase in cash used in investing activities in the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999 is primarily attributable to the acquisition of fixed assets. The Company derived net cash from financing activities of approximately $2.1 million and $0.6 million during the quarters ended November 30, 1998 and 1999, respectively. The decrease in net cash derived from financing activities in the first quarter of fiscal 2000 is primarily attributable to the decrease in 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 November 30, 1999, the amount outstanding under letters of credit was approximately $18.0 million. Other than such letters of credit, the Company does not currently have any material operating or capital expenditure commitments. The Company has a revolving credit and security agreement with GMAC Commercial Credit LLC, its principal domestic lending institution, which agreement automatically renews for a one-year term on January 31, 2000, on substantially the same terms. The credit agreement automatically renews for another year by its terms, unless terminated upon 90 days' prior notice by either party. The Company draws down working capital advances and opens letters of credit against the facility in amounts determined on a formula based on factored receivables and inventory, which advances are secured by the Company's assets. 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 November 13 30, 1999, the factoring charge was 0.25% of the receivables assigned and the interest on advances was at GMAC's prime rate plus one percent. See Note 2 of Notes to Consolidated Financial Statements. The Company also has a financing arrangement relating to the mortgage on its corporate headquarters. At November 30, 1999, the outstanding principal balance of the loan was $1.8 million. Management believes that the Company's cash and cash equivalents at November 30, 1999 and projected cash flows from operations will be sufficient to cover its operating expenses and such current obligations as are required to be paid in fiscal 2000. However, no assurance can be given as to the sufficiency of such cash flows in fiscal 2001 and beyond. The Company's future liquidity will be materially dependent on its ability to develop and market software that achieves widespread market acceptance for use with the game consoles that dominate the market. There can be no assurance that the Company will be able to publish software for game consoles with significant installed bases or that such software will achieve widespread market acceptance. See "Factors Affecting Future Performance - If Cash Flows from Operations Are Not Sufficient to Meet the Company's Needs, It May be Forced to Sell Assets, Refinance Debt or Downsize Operations." 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. 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. 14 FACTORS AFFECTING FUTURE PERFORMANCE The Company's future operating results depend upon many factors and are subject to various risks and uncertainties. The known material risks and uncertainties which may cause the Company's operating results to vary from anticipated results or which may negatively affect its operating results and profitability are as follows: Revenues Are Dependent on Timely Introduction of New Titles The life cycle of a new title generally ranges from less than three months to upwards of 12 months, with the majority of sales occurring in the first 30 to 120 days after release. Therefore, the Company is constantly required to introduce new titles in order to generate revenues and/or to replace declining revenues from older titles. In the past and in the first quarter of fiscal 2000, the Company has experienced delays in the introduction of new titles, which has had a negative impact on its results of operations. If the Company does not introduce titles in accordance with its operating plans for a period, its results of operations and profitability in that period could be negatively affected. The timely shipment of a new title depends on various factors including: o 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 and results of operations, as was the case in the first quarter of fiscal 2000. 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 may experience losses from operations, as it did in fiscal 1996 and 1997, and/or lower-than-expected revenues, as was the case in the first quarter 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. Acclaim believes 15 that the market for N64 and PlayStation hardware and software has peaked. Sega has introduced a 128-bit game console, Dreamcast, and both Sony and Nintendo have announced plans to introduce 128-bit game consoles. No assurance can be given that these new game consoles or online gaming will achieve commercial success similar and/or installed base comparable to that of the 32-bit PlayStation or 64-bit N64 or the timing of such success. In addition, the Company cannot guarantee that it will be successful in developing and publishing software for 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 they were in fiscal 1996 and 1997. However, it is difficult to predict consumer preferences for titles, and few titles achieve sustained market acceptance. Sales of the Company's then top three titles accounted for approximately 69% of gross revenues in the first quarter of fiscal 1999 and for approximately 52% of gross revenues in the first quarter of fiscal 2000. 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. 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 they were in fiscal 1996 and the first quarter of fiscal 2000. 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 November 30, 1999, 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 quarters ended November 30, 1999 and 1998, the Company derived: 16 o approximately 32% and 62%, respectively, of gross revenues from the sale of Nintendo-compatible software; o approximately 38% and 31%, respectively, of gross revenues from the sale of PlayStation software; and o approximately 23% and less than 1%, 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 game consoles, which would have a negative impact on its results of operations and profitability. The Company cannot assure stockholders that, at the end of their current terms, it will be able to obtain extensions or that it will be successful in negotiating definitive license agreements with developers of new game consoles. The Company's revenue growth may also be dependent on the hardware developers. In the past, some of the Company's license agreements have limited the number of titles it could release in a given period. This limitation restricted the Company's sales growth, revenues and profitability. If new license agreements contain similar limitations, the Company's revenues and profitability will be negatively impacted. Increased Product Development Costs May Adversely Affect Profitability The Company's research and development expenses increased from $11.2 million (approximately 11% of net revenues) for the quarter ended November 30, 1998 to $15.1 million (approximately 15% of net revenues) for the quarter ended November 30, 1999. The Company anticipates that its future research and development expenses will continue to increase due to the Company's planned release of a higher number of titles. If these expenses are not carefully monitored, the Company's profitability will be negatively impacted. Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales The Company's titles often embody trademarks, tradenames, logos or copyrights licensed to it by third parties, such as the NBA, the NFL or their respective players' associations, and South Park. 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 will not be renewed. Sales of titles using WWF properties aggregated 25% of gross revenues in the quarter ended November 30, 1999. 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. 17 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 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. In addition, competition from new technologies may reduce demand in markets in which the Company has traditionally competed. If there is prolonged price competition or reduced demand as a result of competing technologies, the Company's operations and liquidity could be negatively impacted. Revenues Vary Due to the Seasonal Nature of Video and 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, its revenues and earnings will be negatively affected in that quarter. In addition, because a majority of the unit sales for a title typically occur in the first 30 to 120 days following its introduction, earnings may increase significantly in a period in which a major title is introduced and may decline in the following period or in periods in which there are no major title introductions. Quarterly operating results also may be materially impacted by factors including (1) the level of market acceptance or demand for titles and (2) the level of development and/or promotion expenses for a title. Consequently, if net revenues in a period are below expectations, the Company's net income and financial position in that period are likely to be affected negatively, as occurred in the first quarter of fiscal 2000. 18 If Cash Flows from Operations Are Not Sufficient to Meet The Company's Needs, It May be Forced to Sell Assets, Refinance Debt or Downsize Operations The Company generally experienced negative cash flows from operations in fiscal 1996 and 1997. As a result, in those years, the Company sold assets, refinanced debt and downsized operations. Insufficient liquidity in the future may require the Company to take similar actions. The Company believes that its cash, cash equivalents and projected cash flows from operations in fiscal 2000 will be sufficient to cover its operating expenses and the current obligations it must pay in fiscal 2000. 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 The Company believes that its cash, cash equivalents 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, cash equivalents and projected cash flow from operations in fiscal 2000 or beyond is insufficient to make interest and principal payments when due, the Company may have to restructure its indebtedness. The Company cannot guarantee that it will be able to restructure or refinance its debt on satisfactory terms. In addition, restructuring or refinancing may not be permitted by the terms of the Company's existing indebtedness. The Company cannot assure investors that its future operating cash flows will be sufficient to meet its debt service requirements or to repay its indebtedness at maturity. If Acclaim violates the financial or other covenants contained in its bank agreements or in the indenture governing its outstanding convertible notes, it will be in default under its loan agreements and/or the indenture. If a default occurs and is not waived by the lender, the lender could seek remedies against the Company, including: o penalty rates of interest; o immediate repayment of the debt; and/or o the foreclosure on any assets securing the debt. The Company expects to comply with its covenants but cannot guarantee that it will be able to do so. In addition, factors beyond the Company's control may result in future covenant defaults or a payment default. The Company may not be able to obtain waivers of any future default. If the Company becomes insolvent, is liquidated or reorganized, after payment to the creditors, there may be insufficient assets remaining for a distribution to stockholders. In order to meet its debt service obligations, from time to time Acclaim also depends on dividends, advances and transfers of funds from its subsidiaries. State and foreign law regulate the payment of dividends by these subsidiaries, which is also subject to the terms of existing bank agreements and the indenture 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 Acclaim's creditors and before any assets are distributed to stockholders. Prevalence of Illegal Copying of Software Could Adversely Affect Sales In order to protect its software and proprietary rights, the Company relies mainly on a combination of: 19 o copyrights; o trade secret laws; o patent and trademark laws; and o nondisclosure agreements. However, existing U.S. and international laws afford only limited protection. An unauthorized person may be able to copy the Company's software or otherwise obtain and use its proprietary information. If a significant amount of illegal copying of software published or distributed by the Company occurs, its product sales could be adversely impacted. Policing illegal use of software is extremely difficult, and software piracy is expected to persist. In addition, the laws of some foreign countries in which the Company's software is distributed do not protect the Company and its intellectual property rights to the same extent as the laws of the U.S. The Company cannot guarantee that its attempts to protect its proprietary rights will be adequate. Infringement Could Lead to Costly Litigation and/or the Need to Enter into License Agreements, Which May Result in Increased Operating Expenses Existing or future infringement claims by or against the Company may result in costly litigation or require the Company to license the proprietary rights of third parties, which could have a negative impact on the Company's results of operations, liquidity and profitability. The Company believes that its proprietary rights do not infringe on the proprietary rights of others. However, as the number of titles in the industry increases, the Company believes that claims and lawsuits with respect to software infringement will also increase. From time to time, third parties have asserted that some of the Company's titles infringed upon their intellectual property rights. The Company has also asserted that third parties have likewise infringed its proprietary rights. These infringement claims have sometimes resulted in litigation by and against the Company. To date, none of these claims has negatively impacted the Company's ability to develop, publish or distribute its software. The Company cannot guarantee that future infringement claims will not occur or that they will not negatively impact its ability to develop, publish or distribute its software. Factors Specific to International Sales May Result in Reduced Revenues and/or Increased Costs International sales have historically represented material portions of the Company's revenues and the Company expects that international sales will continue to account for a significant portion of its revenues in future periods. Sales in foreign countries may involve expenses incurred to customize titles to comply with local laws. In addition, titles that are successful in the domestic market may not be successful in foreign markets due to different consumer preferences. International sales are also subject to fluctuating exchange rates and may be affected by the recent adoption of a single currency in much of Europe. 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, they may leave or compete with the Company in the future. If the Company 20 is unable to attract additional qualified employees or retain the services of key personnel, its business could be negatively impacted. Charter and Anti-Takeover Provisions Could Negatively Affect Rights of Holders of Common Stock The board of directors has the authority to issue shares of preferred stock and to determine their characteristics without stockholder approval. This authority is limited by the indenture governing the convertible notes. If the Company issues preferred stock, the rights of common stockholders may be negatively affected by the rights of preferred stockholders. Moreover, if the Company issues preferred stock, it could become more difficult for a third party to acquire a majority of the Company's outstanding voting stock. Acclaim is also subject to anti-takeover provisions of Delaware corporate law, which may impede a tender offer, change in control or takeover attempt that is opposed by the board. In addition, employment arrangements with some members of management provide for severance payments upon termination of their employment if there is a change in control. Stock Price Is Volatile and Stockholders May Not Be Able to Recoup Their Investment There is a history of significant volatility in the market prices of companies engaged in the software industry, including Acclaim. Movements in the market price of Acclaim common stock from time to time have negatively affected stockholders' ability to recoup their investment in the stock. The price of Acclaim common stock is likely to continue to be highly volatile, and stockholders may not be able to recoup their investment. If Acclaim's future revenues, profitability or product releases do not meet expectations, the price of Acclaim 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 November 30, 1999 the Company's foreign currency translation adjustment is not material and, for the quarter ended November 30, 1999, 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. 21 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 allege 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 seek damages in the amount of approximately $110,000,000. The Company intends to defend this action vigorously. The Company has entered into a joint defense agreement and is 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 any individuals currently associated with the Company in connection with matters related to the Company's release. The Company has previously settled 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. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None. 22 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 Fischbach January 14, 2000 --------------------- Gregory Fischbach Co-Chairman of the Board; Chief Executive Officer; President; Director By: /s/ William G. Sorenson January 14, 2000 ----------------------- William G. Sorenson Executive Vice President and Chief Financial Officer (principal financial and accounting officer) 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS AUG-31-2000 SEP-01-1999 NOV-30-1999 78,434 0 138,017 55,113 11,208 185,584 68,442 33,184 242,589 156,612 49,750 0 0 1,126 31,843 242,589 126,453 101,153 40,016 58,054 0 0 1,312 2,214 1,780 434 0 0 0 434 0.01 0.01
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