-----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, TGPUSAz/L26IPRwYdJEnzVQO86dUeb0PS4DRXY1C3w2cRjLyl9ivpJj1Y5EEbzIW CnsFnLCYzkmwpcVBw4qk1Q== 0000889812-96-000352.txt : 19960417 0000889812-96-000352.hdr.sgml : 19960417 ACCESSION NUMBER: 0000889812-96-000352 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960416 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-16986 FILM NUMBER: 96547679 BUSINESS ADDRESS: STREET 1: 71 AUDREY AVE CITY: OYSTER BAY STATE: NY ZIP: 11771 BUSINESS PHONE: 5169222400 MAIL ADDRESS: STREET 1: 71 AUDREY AVE CITY: OYSTER BAY STATE: NY ZIP: 11771 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 February 29, 1996 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 incorporation or organization) Identification No.) One Acclaim Plaza, Glen Cove, New York 11542 (Address of principal executive offices) (516) 656-5000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ As at April 12, 1996 approximately 49,950,000 shares of Common Stock of the registrant were outstanding. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in 000s, except per share data) February 29, August 31, 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $32,072 $44,749 Marketable equity securities 14,822 26,503 Accounts receivable - net 91,773 179,311 Inventories 18,902 16,015 Prepaid expenses 41,912 41,083 Other current assets 49,611 18,825 ------ ------ TOTAL CURRENT ASSETS 249,092 326,486 ------- ------- OTHER ASSETS Fixed assets - net 38,570 33,970 Excess of cost over net assets acquired - net of accumulated amortization of $10,921 and $9,091, respectively 58,007 59,837 Other assets 27,404 33,186 ------ ------ TOTAL ASSETS $373,073 $453,479 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $36,362 $49,072 Short-term borrowings 2,217 4,233 Accrued expenses 35,103 47,017 Income taxes payable 2,217 180 Current portion of long-term debt 6,196 25,196 Obligation under capital leases - current 314 333 --- --- TOTAL CURRENT LIABILITIES 82,409 126,031 ------ ------- LONG-TERM LIABILITIES Obligation under capital leases - noncurrent 505 408 Other long-term liabilities 16,349 53 --- -- TOTAL LIABILITIES 99,263 126,492 ------ ------- MINORITY INTEREST 1,356 1,628 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value; 1,000 shares authorized; None issued ---- ---- Common stock, $0.02 par value; 100,000 shares authorized; 49,934 and 46,281 shares issued and outstanding, respectively 1,003 926 Additional paid in capital 176,280 168,785 Retained earnings 95,550 153,141 Treasury stock (1,626) (807) Foreign currency translation adjustment (842) 811 Unrealized gain on marketable equity securities 2,089 2,503 ----- ----- TOTAL STOCKHOLDERS' EQUITY 272,454 325,359 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $373,073 $453,479 -------- -------- See notes to consolidated financial statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS (in 000s, except per share data)
Three Months Ended Six Months Ended February 29, February 28, February 29 February 28, 1996 1995 1996 1995 ---- ---- ---- ---- NET REVENUES $46,759 $161,273 $181,206 $325,577 COST OF REVENUES 34,438 73,456 110,302 151,121 ------ ------ ------- ------- GROSS PROFIT 12,321 87,817 70,904 174,456 ------ ------ ------ ------- OPERATING EXPENSES Special cartridge video charge 51,168 ----- 51,168 ----- Selling, advertising, general and administrative expenses 43,293 61,781 95,877 118,499 Operating interest 2,073 1,027 3,105 1,912 Depreciation and amortization 3,699 2,013 7,195 3,613 ----- ----- ----- ----- TOTAL OPERATING EXPENSES 100,233 64,821 157,345 124,024 ------- ------ ------- ------- (LOSS) EARNINGS FROM OPERATIONS (87,912) 22,996 (86,441) 50,432 -------- ------ -------- ------ OTHER INCOME (EXPENSE) Interest income 1,147 398 1,978 832 Interest expense (525) (919) (1,117) (1,749) Other (expense) income 4,511 1,158 3,677 1,383 ----- ----- ----- ----- (LOSS) EARNINGS BEFORE INCOME TAXES (82,779) 23,633 (81,903) 50,898 (BENEFIT) PROVISION FOR INCOME TAXES (26,805) 9,780 (26,455) 21,085 ------- ----- ------- ------ NET (LOSS) EARNINGS BEFORE MINORITY INTEREST (55,974) 13,853 (55,448) 29,813 MINORITY INTEREST (203) ----- (272) ----- ----- ----- ----- ----- NET (LOSS) EARNINGS $(55,771) $13,853 $(55,176) $29,813 --------- ------- -------- ------- NET (LOSS) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $(1.12) $0.28 $(1.12) $0.61 ------- ----- ------ ----- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 49,915 48,742 49,070 48,742 ------ ------ ------ ------
See notes to consolidated financial statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (in 000s, except per share data)
Preferred Stock (1) Common Stock ------------------------------ ---------------------------- Issued Issued Additional Paid-In Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- Balance August 31, 1993 ---- ---- 37,259 $745 $38,377 ------- ------- ------ ------ -------- Net Earnings ---- ---- ---- ---- ---- Issuances ---- ---- 971 19 14,981 Exercise of Stock Options ---- ---- 1,118 23 7,435 Tax Benefit from Exercise of Stock Options ---- ---- ---- ---- 8,453 Foreign Currency Translation Gain ---- ---- ---- ---- ---- ------- ------- ------ ------ -------- Balance August 31, 1994 ---- ---- 39,348 787 69,246 ------- ------- ------ ------ -------- Net Earnings ---- ---- ---- ---- ---- Issuances ---- ---- 5,182 104 83,659 Exercise of Stock Options ---- ---- 628 13 4,170 Pooling of Interests with Lazer-Tron ---- ---- 1,123 22 10,609 Tax Benefit from Exercise of Stock Options ---- ---- ---- ---- 1,101 Foreign Currency Translation Gain ---- ---- ---- ---- ---- Unrealized Gain on Marketable Equity Securities ---- ---- ---- ---- ---- ------- ------- ------ ------ -------- Balance August 31, 1995 ---- ---- 46,281 926 168,785 ------- ------- ------ ------ -------- Net Loss ---- ---- ---- ---- ---- Issuances of Common Stock and Options ---- ---- 193 4 2,634 Exercise of Stock Options and Warrants ---- ---- 445 9 3,452 Pooling of Interests with Sculptured and Probe ---- ---- 3,015 64 (64) Tax Benefit from Exercise of Stock Options ---- ---- ---- ---- 1,473 Purchase of Treasury Stock ---- ---- ---- ---- ---- Foreign Currency Translation Loss ---- ---- ---- ---- ---- Unrealized Gain on Marketable Equity Securities ---- ---- ---- ---- ---- ------- ------- ------ ------ -------- Balance February 29, 1996 ---- ---- 49,934 $1,003 $176,280 ------- ------- ------ ------ --------
Unrealized Foreign Gain On Currency Retained Treasury Marketable Translation Earnings Stock Equity Securities Adjustment Total -------- ----- ----------------- ---------- ----- Balance August 31, 1993 $61,516 $(807) ---- $(2,964) $96,867 ------- ------- ------ ----- -------- Net Earnings 45,055 ---- ---- ---- 45,055 Issuances ---- ---- ---- ---- 15,000 Exercise of Stock Options ---- ---- ---- ---- 7,458 Tax Benefit from Exercise of Stock Options ---- ---- ---- ---- 8,453 Foreign Currency Translation Gain ---- ---- ---- 2,410 2,410 ------- ------- ------ ----- -------- Balance August 31, 1994 106,571 (807) ---- (554) 175,243 ------- ------- ------ ----- -------- Net Earnings 44,770 ---- ---- ---- 44,770 Issuances ---- ---- ---- ---- 83,763 Exercise of Stock Options ---- ---- ---- ---- 4,183 Pooling of Interests with Lazer-Tron 1,800 ---- ---- ---- 12,431 Tax Benefit from Exercise of Stock Options ---- ---- ---- ---- 1,101 Foreign Currency Translation Gain ---- ---- ---- 1,365 1,365 Unrealized Gain on Marketable Equity Securities ---- ---- $2,503 ---- 2,503 ------- ------- ------ ----- -------- Balance August 31, 1995 153,141 (807) 2,503 811 325,359 ------- ------- ------ ----- -------- Net Loss (55,176) ---- ---- ---- (55,176) Issuances of Common Stock and Options ---- ---- ---- ---- 2,638 Exercise of Stock Options and Warrants ---- ---- ---- ---- 3,461 Pooling of Interests with Sculptured and Probe (2,415) ---- ---- ---- (2,415) Tax Benefit from Exercise of Stock Options ---- ---- ---- ---- 1,473 Purchase of Treasury Stock ---- (819) ---- ---- (819) Foreign Currency Translation Loss ---- ---- ---- (1,653) (1,653) Unrealized Gain on Marketable Equity Securities ---- ---- (414) ---- (414) ------- ------- ------ ----- -------- Balance February 29, 1996 $95,550 $(1,626) $2,089 $(842) $272,454 ------- ------- ------ ----- --------
(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. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (in 000s, except per share data)
Six Months Ended February 29 February 28, 1996 1995 ---- ---- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Cash received from customers $338,409 $359,733 Cash paid to suppliers and employees (357,189) (334,044) Interest received 1,978 832 Interest paid (4,222) (3,661) Income taxes (paid) (262) (14,630) ------- ------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (21,286) 8,230 ------- ------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Sale of marketable equity securities $14,643 12,694 Acquisition of subsidiaries, net 7,161 1,742 Acquisition of fixed assets, excluding capital leases (8,653) (18,860) Acquisition of other assets (1,395) 2,431 Other investing activities 161 265 ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 11,917 (1,728) ------- ------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Proceeds from short-term borrowings 1,453 6,193 Repayment of short-term borrowings (3,798) (3,025) Payment of mortgage --- (1,342) Issuance of common stock 4 1,088 Exercise of stock options 3,461 1,002 Payment of obligation under capital leases (110) (153) Payment of long-term debt (3,056) --- Other financing activities 128 --- Common stock purchased for treasury (819) --- ------- ------- NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (2,737) 3,763 ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (571) 1,258 ------- ------- NET (DECREASE) INCREASE IN CASH (12,677) 11,523 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,749 34,676 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $32,072 $46,199 ------- -------
ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued) (in 000s, except per share data)
Six Months Ended February 29, February 28, 1996 1995 ---- ---- RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net (Loss) Earnings $(55,176) $29,813 -------- ------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 7,195 3,613 Other non-cash charges 170 7 Gain on sale of marketable equity securities (3,690) (1,107) Increase (Decrease) in provision for returns and discounts 106,166 (6,455) Deferred income taxes (13,217) 2,117 Minority interest in net earnings of consolidated subsidiary (272) --- Change in asses and liabilities: (Increase) Decrease in accounts receivable (10,200) 33,275 (Increase) in inventories (2,441) (6,998) Decrease (Increase) in prepaid expenses 241 (10,500) (Increase) in other current assets (302) (88) (Decrease) in trade accounts payable (12,793) (42,667) (Decrease) Increase in accrued expenses (23,469) 2,883 (Decrease) Increase in income taxes payable (13,498) 4,337 -------- ------- Total adjustments 33,890 (21,583) -------- ------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(21,286) $8,230 -------- -------
Supplemental schedule of noncash investing and financing activities: In fiscal 1995, the Company purchased all of the capital stock of Iguana Entertainment, Inc. for $5,513, net of cash received. In connection with the acquisition, liabilities assumed were as follows: Fair value of assets acquired $5,525 Cash paid for the capital stock (5,515) ------- Liabilities assumed $10 ------- In fiscal 1995, the Company issued 4,349 shares of its common stock, valued at $71,472, in exchange for 3,403 shares of Tele-Communications, Inc. Class A common stock. See notes to consolidated financial statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Consolidated earnings for the three and six months ended February 28, 1995 were restated to reflect the acquisition of Lazer-Tron Corporation on August 30, 1995, which was accounted for as a pooling of interest. 2. Special Cartridge Video Charge - The Company recorded a charge of approximately $51.2 million for the quarter ended February 29, 1996 consisting of provisions of $28.9 million, $20.1 million and $2.2 million, respectively, to adjust accounts receivable, inventories and prepaid royalties at February 29, 1996 to their estimated net realizable values. The charge results from the accelerated decline in the portable and 16-bit cartridge market and management's decision not to continue to support its products in that market. 3. Acquisitions - On October 9, 1995, the Company acquired Sculptured Software, Inc. ("Sculptured") and on October 16, 1995, the Company acquired Probe Entertainment Limited ("Probe"). Sculptured and Probe are developers of interactive video games. Both acquisitions were accounted for as poolings of interests and were effected through the exchange of 2,745 shares of common stock of the Company for all the issued and outstanding shares of Sculptured and Probe. The Company's financial statements for the six months ended February 29, 1996 include the results of Sculptured and Probe. Prior period financial statements were not restated as these acquisitions did not have a material effect upon the Company's previously reported net income, revenues, assets, stockholders' equity or earnings per share. 4. Accounts Receivable - Accounts receivable are comprised of the following:
February 29, 1996 August 31, 1995 ----------------- --------------- Receivables assigned to factor $111,521 $155,782 Less advances from factor 41,034 37,082 ------- -------- Due from factor 70,487 118,700 Unfactored accounts receivable 40,835 33,093 Accounts receivable - foreign 20,726 41,743 Other receivables 10,064 5,410 Allowances for returns and discounts (50,339) (19,635) ------- -------- $91,773 $179,311 ------- --------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Acclaim Entertainment, Inc. ("Acclaim"), together with its subsidiaries (Acclaim and its subsidiaries are collectively hereinafter referred to as the "Company"), is a mass market entertainment company whose principal business is as a leading publisher of interactive entertainment software ("Software") for use with interactive entertainment hardware platforms ("Entertainment Platforms"). The Company also engages in (i) the development and publication of comic books, which commenced in July 1994 through the acquisition of Acclaim Comics, Inc. ("Acclaim Comics"), formerly Voyager Communications, Inc.; (ii) the distribution of Software for affiliated labels, which commenced in the first quarter of fiscal 1995; (iii) the marketing of its motion capture technology and studio services, which commenced in the first quarter of fiscal 1995 and (iv) the distribution of coin-operated, location-based ticket redemption games, which commenced in August 1995 through the acquisition of Lazer-Tron Corporation ("Lazer-Tron"). The Company plans to engage in the distribution of coin-operated video arcade games, commencing in the third quarter of 1996, and the electronic distribution of Software through the partnership (the "Joint Venture") established in October 1994 between a subsidiary of Acclaim and a subsidiary of Tele-Communications, Inc. ("TCI"), commencing not earlier than during fiscal 1997. The interactive entertainment industry is characterized by rapid technological change, resulting in hardware platform and related Software product cycles. No single hardware platform or system has achieved long-term dominance. The Company's strategy is to develop and/or publish Software for the hardware platforms that currently dominate the market and to develop Software for the hardware platforms that the Company perceives as having the potential to achieve mass market acceptance, rather than to be the first Software publisher for an emerging hardware platform. However, in order to promote its strategic relationships, the Company may from time to time publish Software for a hardware platform before it attains mass market appeal. No assurance can be given that the Company will correctly identify the systems with mass market potential or be successful in publishing Software for such platforms and systems. The Company's revenues have traditionally been derived from sales of Software for the then dominant platforms. Accordingly, the Company's revenues are subject to fluctuation and have been and, in the future, could be materially adversely affected during transition periods when new hardware platforms have been introduced but none has achieved mass market acceptance or become dominant. From inception through fiscal 1991, substantially all of the Company's revenues were derived from sales of Software for the 8-bit Nintendo Entertainment System ("NES"). Although the Company commenced the publication of Software for Game Boy, the portable system marketed by Nintendo Co., Ltd. (Japan) (Nintendo and its subsidiary, Nintendo of America, Inc., are collectively hereinafter referred to as "Nintendo"), in fiscal 1990, for the Super Nintendo Entertainment System ("SNES") in fiscal 1991 and for Genesis and Game Gear, the 16-bit dedicated and portable hardware systems, respectively, marketed by Sega Enterprises Ltd. ("Sega") in fiscal 1992, the Company did not derive significant revenues from the sale of portable or 16-bit Software until fiscal 1992. In 1993, Sega introduced the Sega CD, a compact disk player which consisted of an attachment for its 16-bit Genesis system. Additional compact disk ("CD") platforms, including personal computer systems for which Software products are published, are currently marketed by Philips, Commodore, Apple, IBM, IBM-compatible manufacturers and The 3DO Company ("3DO"). Atari launched Jaguar, its 64-bit cartridge-based system, in November 1993 and Sega launched 32X, its 32-bit cartridge-based attachment for its 16-bit Genesis system, in November 1994. Although the Company developed and sold Software for Sega's CD system during fiscal 1994 and 1995 and for Sega's 32X system during fiscal 1995, it did not derive significant revenues therefrom. Sega and Sony Corporation ("Sony") launched 32-bit CD-based systems in Japan in November 1994. Sega shipped limited quantities of its Saturn system in the United States commencing in May 1995 and Sony released its PlayStation system in the United States in September 1995. In fiscal 1995, the Company commenced the development and sale of Software for Sega's Saturn and for Sony's PlayStation. Nintendo has announced plans to release Ultra 64, its new 64-bit ROM cartridge-based system, in Japan in the summer of 1996 and Matsushita has announced plans to release M2, the 64-bit CD-based hardware system licensed by it from 3DO by the end of 1996. The Company believes that sales of new 16-bit hardware systems peaked in calendar 1993 and that 16-bit Software sales peaked in calendar 1994 (the year following the peak year for hardware sales), have decreased substantially since that time and will continue to do so. The interactive entertainment industry is currently undergoing, and management anticipates that in both the short- and long-term future it will continue to undergo, significant changes due, in large part, to (i) the introduction of the next generation of Entertainment Platforms incorporating 32- and 64-bit processors, (ii) the success of personal computer/compact disk/multimedia hardware systems ("Multimedia/PC Systems"), (iii) the development of remote and electronic delivery systems and (iv) the entry and participation of new companies in the industry. The next generation hardware platforms are equipped with CD and, to a lesser extent, read only memory ("ROM") cartridges and/or other technologies as the dominant software storage device. In the late 1980's and early 1990's, management believed that the floppy and personal computer market was characterized by (i) numerous hardware and software incompatibilities; (ii) high price points for Multimedia /PC Systems; (iii) a large number of Software titles and (iv) consumer demographics that were different from those of the Company's core customers. Accordingly, the Company participated in this category through distribution agreements which, in the opinion of management, provided the greatest return on the investment of time and effort needed to service a fragmented market. However, based on management's belief that, by 1995, this category had sufficient mass market penetration to warrant publishing Software directly and due to technological advancements incorporated in the newer Multimedia/PC Systems and the higher gross margins realized by publishers of Software for this category, the Company commenced marketing Software for Multimedia/PC Systems in fiscal 1995 and has expanded and intends to continue to expand the number of Software titles for Multimedia/PC Systems marketed by it in fiscal 1996. The Company believes that hardware incorporating 32- and 64-bit processors, including Multimedia/PC Systems, will become the dominant hardware platforms in the interactive entertainment industry over the next few years. The Company believes that Sega's Saturn and Sony's PlayStation have both achieved commercial success in Japan and, based on sales information, that the limited quantities of the PlayStation shipped to date have achieved high retail sell-through in the United States. However, there can be no assurance that either of these platforms or any of the other newly introduced or announced platforms will achieve commercial success similar to that of the SNES or Genesis systems or the timing and impact of such success, if achieved, on the industry. Retail sales of the Company's cartridge Software during the second fiscal quarter generally fell short of the Company's expectations. Additionally, sales of the Company's Software continued to be adversely impacted during the quarter and six months ended February 29, 1996 due to the continuing decline of the market for Software for 16-bit Entertainment Platforms and the related transition to Multimedia/PC Systems and the next generation of Entertainment Platforms. Management believes that the market for Software for 16-bit Entertainment Platforms supported fewer front-line (full-priced) titles during the period. The Company did not release as many "hit" Software products during the quarter (and six months) ended February 29, 1996 as it had in comparable periods in the past. In addition, the Company offered concessions (such as returns and allowances) to its retailers at higher than anticipated levels in order to manage 16-bit Software inventory levels. As a result of the foregoing, the Company's revenues for the quarter ended February 29, 1996 were materially lower than the comparable period in fiscal 1995 and the Company incurred a net loss from operations (excluding the special cartridge video charge discussed below) of $36.7 million, a net loss from operations (including the special cartridge video charge) of $87.9 million and a net loss (on an after-tax basis) of $55.8 million for the quarter ended February 29, 1996. In connection with its review of the Company's results of operations for the quarter ended February 29, 1996, management noted, among other things, that the 16-bit and portable Software markets not only supported fewer front-line (full-priced) titles but that such titles sold through a substantially lower number of units at retail than in prior periods; that non-"hit" 16-bit titles were marketed at mid- or budget prices by many of the Company's competitors during the quarter; that retail sales of front-line 16-bit Software declined by approximately 40% (in dollars and units) on an industry-wide basis in the first two months of calendar 1996 and are anticipated to continue to decline; that retail sales of budget-priced 16-bit Software titles increased by approximately 25% (in dollars) and 20% (in units) on an industry-wide basis in the first two months of calendar 1996 and are anticipated to continue to increase; that budget prices for 16-bit and portable Software titles are lower as compared to prior periods; that sales of mid- and budget-priced 16-bit and portable cartridge Software currently represent approximately 65% of the retail market on an industry-wide basis; and that Software for Multimedia/PC Systems and the next generation of Entertainment Platforms retails for $15 to $20 less than full priced 16-bit Software and management believes that consumers perceive they are obtaining greater value for lower prices. Management concluded that the life cycle of 16-bit Software product has shortened and that the life-cycle of the 16-bit and portable cartridge Entertainment Platforms is shortening and declining faster than, for example, the 8-bit Entertainment Platform. Management also noted that two front-line titles released by the Company in the second quarter of fiscal 1996 (Revolution X and College Slam), which management had anticipated to perform well at retail (based on the Company's historical experience with comparable titles), did not perform as anticipated. Management believes that the deterioration of the 16-bit and portable hardware market will accelerate through the remainder of calendar 1996, with the result that the saleable value of Software product inventories for the 16-bit and portable Entertainment Platforms will be eroded and the timely and full collection of receivables relating thereto will be compromised as retailers monitor inventory sell-through during the industry transition (which has already impacted the Company's results for the first six months of fiscal 1996). See "-- Results of Operations." As the market continues to deteriorate, prices of 16-bit and portable Software titles continue to fall and management believes that the cost of supporting that market would continue to rise and the Company's net revenues and income therefrom would continue to be materially adversely impacted. Accordingly, management decided to discontinue support for the 16-bit and portable cartridge markets and the Company recorded a special charge of $51.2 million in the second quarter of fiscal 1996 consisting of write-offs and allowances to adjust accounts receivable, inventories and prepaid royalties to their estimated net realizable values. Management believes that, by exiting the 16-bit and portable cartridge markets and focusing the Company's resources on the next generation Entertainment Platforms and Multimedia/PC Systems, the Company's results of operations and profitability will be positively impacted in the future. However, due to, among other things, the industry transition and related factors, there can be no assurance of the Company's results of operations and profitability in future periods. As a result of the Company's acquisitions of three software development companies in 1995 (two of which acquisitions were completed in the fiscal quarter ended November 30, 1995), the Company's fixed costs relating to the development of Software were higher during the first two quarters of fiscal 1996 and will continue to be higher in fiscal 1996 as compared to prior periods. However, these costs will be offset, in part, by reduced royalties payable to developers, a variable cost which was included in selling, advertising, general and administrative expenses in prior periods. The Company has also incurred and expects to continue to incur increased research and development as well as general and administrative expenses in connection with the start-up of its coin-operated video arcade operations. If the Company is not successful in generating revenues from these new businesses, its profitability will be adversely affected. The release of individual "hit" Software products or families of products can significantly affect revenues. Historically, "hit" products or families of products (such as The Simpsons and WWF families of titles) have accounted for significant portions of the Company's gross revenues during particular periods. In the quarter ended February 28, 1995, the NBA Jam Tournament Edition family of titles accounted for a significant portion of the Company's gross revenues and in the six months ended February 28, 1995, each of the Mortal Kombat II and NBA Jam Tournament Edition family of titles accounted for a significant portion of the Company's gross revenues. No single family of titles accounted for a significant portion of the Company's gross revenues during the quarter and six months ended February 29, 1996. The timing of the release of Software products can cause quarterly revenue and earnings fluctuations. A significant portion of the Company's revenues in any quarter are generally derived from Software products or families of products first shipped in that quarter. Product development schedules are difficult to predict due, in large part, to the difficulty of scheduling accurately the creative process and, with respect to Software for new hardware platforms, the use of new development tools and the learning process associated with development for new technologies, including the Company's own motion capture and related technologies. Software products for the more sophisticated Entertainment Platforms and Multimedia/PC Systems frequently include more original, creative content and are more complex to develop and, accordingly, cause additional development and scheduling risk. As a result, the Company's quarterly results of operations are difficult to predict and the failure to meet product development schedules or even minor delays in product deliveries could cause a shortfall in shipments in any given quarter, which could cause the Company's results of operations and net income for such quarter to fall significantly below anticipated levels. The Company's ability to generate sales growth and profitability in the long-term future will be dependent in large part on (i) the Company's ability to identify, develop and publish "hit" Software titles for the hardware platforms that are established in the mass market, (ii) the growth of the interactive entertainment Software market for the next generation Entertainment Platforms and Multimedia/PC Systems and (iii) the Company's ability to develop and generate revenues from its other entertainment operations. Results of Operations The following table sets forth certain statements of consolidated earnings data as a percentage of net revenues for the periods indicated:
Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, 1996 1995 1996 1995 ---- ---- ---- ---- Domestic revenues 60.6% 81.5% 67.0% 75.7% Foreign revenues 39.4 18.5 33.0 24.3 ---- ---- ---- ---- Net revenues 100.0 100.0 100.0 100.0 Cost of revenues 73.6 45.5 60.9 46.4 ---- ---- ---- ---- Gross profit 26.4 54.5 39.1 53.6 Special cartridge video charge 109.4 --- 28.2 --- Selling, advertising, general and administrative expenses 92.6 38.3 52.9 36.4 Operating interest 4.4 0.6 1.7 0.6 Depreciation and amortization 7.9 1.3 4.0 1.1 --- --- --- --- Total operating expenses 214.3 40.2 86.8 38.1 (Loss) earnings from operations (188.0) 14.3 (47.7) 15.5 (Loss) earnings before income taxes (177.0) 14.7 (45.2) 15.6 Net (loss) earnings (119.3) 8.6 (30.4) 9.2
Net Revenues The decrease in the Company's net revenues from $161.3 million for the quarter ended February 28, 1995 to $46.8 million for the quarter ended February 29, 1996 and from $325.6 million for the six months ended February 28, 1995 to $181.2 million for the six months ended February 29, 1996 was predominantly due to reduced unit sales of 16-bit Software, increased returns and allowances relating primarily to 16-bit Software and a reduction in average prices for sales of 16-bit Software. To date, the Company has not generated material revenues from any of its operations other than Software publishing and no assurance can be given that the Company will be able to generate such revenues in the future. The Company is substantially dependent on Sony, Sega and Nintendo as the sole manufacturers of the hardware platforms marketed by them and as the sole licensors of the proprietary information and technology needed to develop Software for those platforms. See "Other Information." For the quarters ended February 28, 1995 and February 29, 1996, the Company derived 47% and 25% of its gross revenues, respectively, from sales of Nintendo-compatible Software and 46% and 41% of its gross revenues, respectively, from sales of Sega-compatible Software. In addition, during the quarter ended February 29, 1996, the Company derived 18% of its gross revenues from sales of Software for the Sony PlayStation. The Company anticipates that the proportion of its revenues derived from Nintendo-compatible Software will continue to decline during the remainder of fiscal 1996. The Company's gross revenues were derived from the following product categories:
Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, 1996 1995 1996 1995 ---- ---- ---- ---- Portable Software 7.0% 8.0% 9.0% 10.0% 16-Bit Software 45.0 81.0 56.0 81.0 Multimedia/PC and next generation Software 46.0 7.0 32.0 6.0 Other 2.0 4.0 3.0 3.0
Gross Profit Gross profit fluctuates as a result of six factors: (i) the level of returns and allowances; (ii) the average unit price obtained for sales of the Company's 16-bit Software; (iii) the level of manufacture by the Company of its Software; (iv) the percentage of CD Software sales; (v) the percentage of foreign sales and (vi) the percentage of foreign sales to third party distributors. The Company's gross profit is adversely impacted by increases in returns and allowances to retailers and reduced average unit prices obtained for sales of its 16-bit Software. The Company arranges for the manufacture of its Sega Software under a license granted by Sega. See "Other Information." The Company believes that it has improved cash flows and better control over the flow of its inventory as a result of the decreased lead time resulting from its ability to manufacture Software. The cost of Software manufactured by the Company, together with the royalties payable to Sega for such manufacturing, is lower than the cost of the Company's Software products when manufactured by Sega. The royalty payable to Sega for Software manufactured by the Company is included as an operating expense, rather than as part of cost of revenues, and increased levels of manufacturing by the Company result in higher gross profit as a percentage of net revenues. The Company's margins on sales of CD Software are higher than those on cartridge Software as a result of significantly lower product costs. As the percentage of sales of the Company's CD Software increases, the Company expects that its gross margin will also increase (subject to the other variables listed above). The Company's margins on foreign cartridge Software sales are typically lower than those on domestic sales due to higher prices charged by hardware licensers for Software distributed by the Company outside North America. The Company's margins on foreign cartridge Software sales to third party distributors are approximately one-third lower than those on sales that the Company makes directly to foreign retailers. Management anticipates that the Company's future gross profit will be affected by (i) the Company's product mix (i.e. the percentage of CD Software sales and sales related to the Company's new businesses) and (ii) the percentage of returns, price protection and other similar concessions in respect of the Company's Software sales. The Company's gross margins on coin-operated video arcade games are anticipated to be substantially lower than on its CD Software. Although gross margins on sales of CD Software are, and are anticipated to continue to be, higher than those on sales of cartridge Software, management believes that it will be required to effect stock-balancing programs for its personal computer CD Software products to allow for their historically higher rate of return. As the percentage of sales of personal computer CD Software products increases, management anticipates that its reserves for such returns will increase, thereby offsetting a portion of the higher gross margins generated from CD Software sales. Gross profit decreased from $87.8 million (55% of net revenues) for the quarter ended February 28, 1995 to $12.3 million (26% of net revenues) for the quarter ended February 29, 1996 and from $174.5 million (54% of net revenues) for the six months ended February 28, 1995 to $70.9 million (39% of net revenues) for the six months ended February 29, 1996. The decrease is primarily attributable to lower sales volume, lower average prices of 16-bit Software and higher returns and discounts offset, in part, by higher gross profit from sales of the Company's Software for Multimedia/PC Systems. The Company purchases substantially all of its products at prices payable in United States dollars. Appreciation of the yen could result in increased prices charged by Sony, Sega or Nintendo to the Company (although, to date, none of them has effected such a price increase), which the Company may not be able to pass on to its customers and which could adversely affect its results of operations. Cartridge Market Exit Charge A special cartridge video charge of $51.2 million was recorded for the quarter ended February 29, 1996, consisting of provisions of $28.9 million, $20.1 million and $2.2 million, respectively, to adjust accounts receivable, inventories and prepaid royalties at February 29, 1996 to their estimated net realizable values in conjunction with management's decision to exit the portable and 16-bit cartridge market. See " -- Overview." As part of its 16-bit and portable cartridge market exit strategy, the Company may release up to three new 16-bit Software titles currently in development and one additional 16-bit Software title in Europe. The Company intends to continue to sell its existing 16-bit and portable cartridge Software inventory and may, if requested by a retailer, produce additional units of the particular title(s) so requested on a special order basis. As the Company implements its exit strategy, the sale of 16-bit and portable Software may have an adverse effect on the Company's gross margin percentages in future periods. There can be no assurance that the Company will not record additional charges in future periods relating to its exit from the portable and 16-bit cartridge market. Operating Expenses Selling, advertising, general and administrative expenses decreased from $61.8 million (38% of net revenues) for the quarter ended February 28, 1995 to $43.3 million (93% of net revenues) for the quarter ended February 29, 1996 and from $118.5 million (36% of net revenues) for the six months ended February 28, 1995 to $95.9 million (53% of net revenues) for the six months ended February 29, 1996. The dollar decrease is primarily attributable to lower variable costs incurred by the Company (due to lower net revenues) which were offset, in part, by increased product development expenses attributable to the acquisition of two Software development companies in the first quarter of fiscal 1996. The percentage increase is primarily attributable to the increased returns and allowances discussed above. Operating interest expense increased from $1.0 million (0.6% of net revenues) for the quarter ended February 28, 1995 to $2.1 million (4% of net revenues) for the quarter ended February 29, 1996 and from $1.9 million (0.6% of net revenues) for the six months ended February 28, 1995 to $3.1 million (2% of net revenues) for the six months ended February 29, 1996. The increase is primarily attributable to higher outstanding balances under the Company's principal credit facility during the quarter and six months ended February 29, 1996. Depreciation and amortization increased from $2.0 million (1% of net revenues) for the quarter ended February 28, 1995 to $3.7 million (8% of net revenues) for the quarter ended February 29, 1996 and from $3.6 million (1% of net revenues) for the six months ended February 29, 1995 to $7.2 million (4% of net revenues) for the six months ended February 29, 1996. The increase is primarily attributable to increased depreciation relating to the acquisition of the Company's new corporate headquarters and increased amortization of the excess of costs over net assets acquired relating to the acquisition of Iguana Entertainment, Inc. The Company's ability to control its fixed operating expenses will have a direct impact on the Company's earnings during the near-term future (until the transition to the next generation Entertainment Platforms and Multimedia/PC Systems is complete). Seasonality The Company's business is seasonal, with higher revenues and operating income typically occurring during its first, second and fourth fiscal quarters (which correspond to the Christmas and post-Christmas selling season). The timing of the delivery of Software titles and the releases of new products cause significant fluctuations in the Company's quarterly revenues and earnings. Liquidity and Capital Resources The Company's primary source of liquidity during the quarter and six months ended February 28, 1995 and February 29, 1996 was cash flows from operations and, to a lesser extent, from the sale during the quarters ended February 28, 1995 and February 29, 1996 of a portion of the shares of TCI's Class A common stock received in exchange for shares of the Company's common stock. The Company generally purchases inventory, other than inventory manufactured domestically, by opening letters of credit when placing the purchase order. At February 28, 1995 and February 29, 1996, amounts outstanding under letters of credit were approximately $14.6 million and $2.8 million, respectively. The Company has a revolving credit and security agreement with its principal domestic bank in the amount of $70 million, which agreement expires on January 31, 1997. The Company draws down working capital advances and opens letters of credit against the facility in amounts determined on a formula based on factored receivables and inventory, which advances are secured by the Company's assets. This bank also acts as the Company's factor for the majority of its North American receivables, which are assigned on a nonrecourse, pre-approved basis. The factoring charge is 0.25% of the receivables assigned and the interest on advances is at the bank's prime rate minus one half percent. The Company received a waiver with respect to its failure to meet, at February 29, 1996, two financial covenants made under the agreement. At February 29, 1996, the Company had approximately $30 million available under such facility. The Company currently has a $30 million trade finance facility with another bank. The Company's Asian and European subsidiaries currently have independent facilities totaling approximately $20 million and $25 million, respectively, with various banks. In connection with its acquisition by the Company, Acclaim Comics entered into a credit agreement with Midland Bank plc ("Midland") for a loan (the "Loan") of $40 million. In connection with the establishment of the Joint Venture and the related stock swap with TCI, the Company reached an agreement with Midland pursuant to which it repaid $15 million of the Loan and the remaining $25 million principal amount of the Loan is being amortized over a four and one-half year period terminating in July 1999. The Loan, which is a direct obligation of Acclaim Comics, bears interest, at the borrower's option, at either (I) the higher of the federal funds rate plus one-half of one percent and the lender's prime rate, in each case, plus 125 basis points, or (ii) the London interbank offered rate plus 250 basis points, and is secured by a first priority lien on substantially all of the assets of Acclaim Comics. The Loan is also guaranteed by Acclaim and certain of its subsidiaries and is secured by a first priority lien on all of the issued and outstanding shares of Acclaim Comics and by a third priority lien on substantially all of the assets of the Company. The credit agreement and related documents establishing and securing the Loan, as well as the guarantees delivered by Acclaim and its subsidiaries, contain customary financial, affirmative and negative covenants, including mandatory prepayments from excess cash flow of Acclaim Comics and from the proceeds of asset sales or sales of equity by the Company and restrictions on the declaration or payment of dividends by Acclaim Comics and the Company. In April 1996, the Company completed a mortgage financing related to its corporate headquarters with Natwest Bank USA in the principal amount of approximately $7 million. The Company is in breach of one financial covenant made in connection with such financing. The lender has advised the Company that it will grant a waiver with respect to such covenant. If the waiver is not received, the Company would be required to repay the amount of the loan in full. Management believes that cash flow from operations and the Company's borrowing facilities will be adequate to provide for the Company's liquidity and capital needs for the foreseeable future. The Company is party to class action litigations relating to its press release announcing revised earnings and income for fiscal 1995. See "Legal Proceedings." The Company is also party to a class action litigation relating to the nonrenewal of the Company's license agreement with WMS Industries, Inc. 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 results of operations, liquidity or financial condition. PART II OTHER INFORMATION Item 1. Legal Proceedings. In December 1995, the Company was sued in actions (the "Actions") entitled (i) Mohammed Ali Kahn v. Gregory E. Fischbach, James Scoroposki, Robert Holmes and Acclaim Entertainment, Inc. (CV 95 4983), (ii) Richard J. Wenski, individually and on behalf of all other persons similarly situated, v. Acclaim Entertainment, Inc., Gregory Fischbach, Robert Holmes and Anthony Williams (CV 95 4996), (iii) Yosef Stern v. Acclaim Entertainment, Inc.; Gregory E. Fischbach; James Scoroposki; Robert Holmes and Anthony Williams (CV 95 4990), (iv) Marc Jaffe, on behalf of himself and all others similarly situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach, James Scoroposki, Robert Holmes , and Anthony Williams (CV 95 4989), (v) Robert Bloom v. Acclaim Entertainment, Inc. and Robert Holmes (CV 95 4993), (vi) James Bencivenga, on behalf of himself and all others similarly situated, v. Gregory E. Fischbach, James Scoroposki, Robert Holmes, Anthony Williams and Acclaim Entertainment, Inc. (CV 95 4985), (vii) Henry Vredeveld, on behalf of himself and all others similarly situated, v. Anthony Williams, Acclaim Entertainment, Inc. (CV 95 4979), (viii) Michael Leitzes, individually and on behalf of all others similarly situated, v. Acclaim Entertainment, Inc., Robert Holmes and George Fischbach (CV 95 5004), (ix) Alan Yakuboff, on behalf of himself and all others similarly situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach, James Scoroposki and Anthony Williams (CV 95 5017), (x) Robert K. Williams III, individually and on behalf of all others similarly situated, v. Acclaim Entertainment, Inc.; Gregory E. Fischbach; James Scoroposki; Robert Holmes and Anthony Williams (CV 95 5107), (xi) Perkins Partnership Ltd. v. Acclaim Entertainment, Inc., Gregory E. Fischbach, Robert Holmes and Anthony Williams (CV 95 4998), (xii) Robert Bernard v. Acclaim Entertainment Inc., Gregory E. Fischbach, Robert Holmes and Anthony Williams (CV 95 5022), (xiii) Anne B. Caveliere and Sharon L. Robbins, on behalf of themselves and all others similarly situated, v. Acclaim Entertainment, Inc., Gregory Fischbach, and James Scoroposki (CV 95 5023), (xiv) Joan J. Gordon, on behalf of herself and all other persons similarly situated, v. Acclaim Entertainment, Inc., Gregory E. Fischback, James Scoroposki, Robert Holmes and Anthony Williams (CV 95 5047), (xv) George H. Gray, individually and on behalf of all others similarly situated v. Acclaim Entertainment, Inc., Robert Holmes and Anthony Williams (CV 95 5039), (xvi) Chad Chuang, Powen Su, Jason Hedeen, Eugene Breault, William McClurkin and William C. McClurkin, on behalf of themselves and all others similarly situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach, Robert Holmes and Anthony Williams (CV 95 5263) and (xvii) Robert Lott, on behalf of himself and all others similarly situated v. Anthony Williams and Acclaim Entertainment, Inc. (CV 95 5136), all in the United States District Court in the Eastern District of New York. The individual named defendants are directors and/or officers of the Company. The Company was also sued in an action (the "Campbell Action") entitled Adrienne Campbell, individually and on behalf of all others similarly situated, v. Acclaim Entertainment, Inc., Anthony R. Williams; James Scoroposki; and Robert Holmes (C 95-04395) filed in December 1995 in the United States District Court in the Northern District of California. The individual named defendants in this action are directors and/or executive officers of the Company. The plaintiffs in the Actions and in the Campbell Action, on behalf of a class of the Company's stockholders, claim unspecified damages arising from alleged violations of the anti-fraud provisions of the federal securities laws relating to, among other things, (i) the Company's October 17, 1995 announcement of its results of operations for the fiscal year ended August 31, 1995, which was subsequently revised by the Company's December 4, 1995 announcement reflecting a decision to defer $18 million of revenues and $10.5 million of net income previously reported for the fiscal year ended August 31, 1995 and (ii) the alleged misleading nature of prior public disclosures and announcements made by the Company. In addition, in the Campbell Action, the plaintiffs also allege certain common law causes of action. Additional actions may be brought against the Company and its officers and directors arising from the matters described above. The Company has directors' and officers' liability insurance which may cover a portion of the liability asserted in the Actions and in the Campbell Action. The Company intends to defend the Actions and the Campbell Action vigorously. No assurance can be given that the resolution of the Actions and the Campbell Action and/or future actions will not have a material adverse effect on the Company's results of operations and liquidity for the quarter in which any such resolution occurs. On April 8, 1996, the Securities and Exchange Commission issued an order directing a private investigation relating to, among other things, the Company's earnings estimate for fiscal 1995. The Company intends fully to cooperate with the Commission in its investigation. In a derivative action entitled Eugene Block v. Gregory E. Fischbach, James Scoroposki, Robert Holmes, Bernard J. Fischbach, Michael Tannen, Robert H. Groman and James Scibelli and Acclaim Entertainment, Inc. (CV 95-036316) brought on behalf of the Company in December 1995 in the Supreme Court of the State of New York, County of Nassau, the plaintiff alleges that the individual named defendants, who are directors of the Company, caused the Company, among other things, to make false and misleading statements in its October 17, 1995 announcement discussed above, thereby subjecting the Company to shareholder lawsuits and thereby wasting Company assets and, accordingly, claims unspecified damages based on allegations of breaches of the duty of candor, waste of Company assets and mismanagement. The directors intend to defend this action vigorously. In December 1995, the former directors and/or officers of Lazer-Tron were sued in an action entitled Adrienne Campbell and Donna Sizemore, individually and on behalf of all others similarly situated v. Norman B. Petermeier; Matthew F. Kelly, Bryan M. Kelly; Morton Grosser; Bob K. Pryt; Roger V. Smith; and DOES I through 50, inclusive (Civil No. 760717-4) in the Superior Court of the State of California, County of Alameda. The plaintiffs, on behalf of a class of Lazer-Tron's stockholders, claim unspecified damages based on allegations that, as a result of the lack of due diligence by the named defendants in fully investigating the proposed acquisition by the Company of Lazer-Tron, the defendants breached their fiduciary duties to Lazer-Tron's stockholders. In connection with the acquisition of Lazer-Tron, Acclaim agreed to cause Lazer-Tron to honor, for at least six years, all rights of indemnification in favor of the former directors and officers contained in the articles of incorporation and by-laws of Lazer-Tron and in indemnification agreements between Lazer-Tron and such persons. Acclaim also agreed to cause Lazer-Tron to use its best efforts to maintain in effect directors' and officers' liability insurance covering the former directors and officers and, if Lazer-Tron is unable to maintain such insurance, has agreed to indemnify each of Lazer-Tron's former directors and officers for any and all losses which each may suffer on the same or similar terms and dollar limitations (not to exceed $1,000,000 in the aggregate) as the insurance in place prior to the acquisition by the Company of Lazer-Tron. At the present time, Lazer-Tron has directors' and officers' liability insurance which may cover a portion of the liability asserted in this action. Item 5. Other Information In April 1992, the Company entered into an agreement with Sega (the "Sega Agreement") and has certain other arrangements with Sega, pursuant to which the Company received the nonexclusive right to utilize the "Sega" name and its proprietary information and technology in order to develop and distribute Software titles for use with various Sega platforms. The Sega Agreement, as amended, expired on December 31, 1995. The Company is currently negotiating a new agreement with Sega. In the interim, the Company and Sega are continuing to operate in the ordinary course under the terms of the expired Sega Agreement and such arrangements. The Company believes that the terms of any such new agreement will not impose materially greater obligations on the Company than the Sega Agreement although there can be no assurance of that result. No assurance can be given that the Company will be successful in negotiating a new agreement. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 10.1* License Agreement, dated as of December 14, 1994, by and between Sony Computer Entertainment of America and the Company ------------ * Confidential treatment has been requested with respect to certain information contained in this exhibit. (b) Reports on Form 8-K None. 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: Robert Holmes April 15, 1996 ------------------- Robert Holmes, President and Chief Operating Officer By: Anthony Williams April 15, 1996 -------------------- Anthony Williams, Executive Vice President and Chief Financial and Accounting Officer EX-10.1 2 LICENSE AGREEMENT Confidential treatment has been requested for the redacted materials on pages 2-15, 17, E-2 and the last page. SONY PLAYSTATION(TM) LICENSE AGREEMENT THIS LICENSE AGREEMENT is entered into as of the 14th day of December, 1994, by and between SONY COMPUTER ENTERTAINMENT OF AMERICA, a division of Sony Electronic Publishing Company, with offices at 711 Fifth Avenue, New York, New York 10022 (hereinafter "Sony"), and Acclaim Entertainment, Inc., with offices at 71 Audrey Avenue, Oyster Bay, New York 11771 (hereinafter "Licensee"). WHEREAS, Sony and/or its affiliates have developed a CD-based interactive console for playing video games and for other entertainment purposes known as PlayStation(TM) (formerly known under the development code name "PS-X") (hereinafter referred to as the "Player") and also own or have the right to grant licenses to certain intellectual property rights used in connection with the Player. WHEREAS, Licensee desires to be granted a non-exclusive license to develop and distribute Licensed Products (as defined below) pursuant to the terms and conditions set forth in this Agreement. WHEREAS, Sony is willing, on the terms and subject to the conditions of this Agreement, to grant Licensee the desired non-exclusive license to develop and distribute Licensed Products, and desires to manufacture such Licensed Products for Licensee. NOW, THEREFORE, in consideration of the representations, warranties and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Licensee and Sony hereby agree as follows: 1. Definition of Terms. 1.1 "Executable Software" means Licensee's object code software which includes the Licensee Software and any software (whether in object code or source code form) provided by Sony which is intended to be combined with Licensee Software for execution on a Player and has the ability to communicate with the software resident in the Player. 1.2 "Intellectual Property Rights" means, by way of example but not by way of limitation, all current and future worldwide patents and other patent rights, copyrights, trademarks, service marks, trade names, mask work rights, trade secret rights, technical information, know-how, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the universe, including without limitation all applications and registrations with respect thereto, and all renewals and extensions thereof. 1.3 "Licensed Territory" means the countries listed in Exhibit A, as may be in effect from time to time. 1.4 "Licensed Products" shall mean the Executable Software embodied on CD-ROM media. 1.5 "Licensed Trademarks" means the trademarks, service marks and CONFIDENTIAL logos designated by Sony. Nothing contained in this Agreement shall in any way grant Licensee the right to use the trademark "Sony" in any manner as a trademark, trade name, service mark or logo other than as expressly permitted by Sony. Sony may amend such Licensed Trademarks upon reasonable written notice to Licensee. 1.6 "Licensee Software" means Licensee's application object code and data (including audio and video material) developed by Licensee in accordance with this Agreement, which, when linked to any software provided by Sony, create Executable Software. 1.7 "Packaging" means, with respect to each Licensed Product, the carton, containers, packaging and wrapping materials (but excluding instructional manuals, liners or other user information for such Licensed Product to be inserted in the jewel case). 1.8 "Sony Materials" means any data, object code, source code, documentation, and hardware provided or supplied to Licensee by Sony, including, without limitation, any portion or portions of the development tools. 2. License Grant. Sony hereby grants to Licensee, and Licensee hereby accepts, for the term of this Agreement, within the Licensed Territory, under Sony's Intellectual Property Rights, including without limitation any relevant patents Sony owns or has acquired by license, a non-exclusive, nontrans- ferable license, without the right to sublicense (except as specifically provided herein): (i) to use the object code version of any software supplied by Sony that is intended to be combined with Licensee Software and executed on a Player internally as may reasonably be necessary to develop Licensed Products; (ii) to reproduce and distribute executable files for execution on a Player incorporating such software in accordance with the provisions of this License Agreement, including without limitation, Section 7; (iii) to market, distribute and sell such Licensed Products; (iv) to use the Licensed Trademarks in connection with the packaging, advertising and promotion of the Licensed Products; and (v) to sublicense to end users the right to use the Licensed Products for non-commercial purposes only and not for public performance. 3. Development Tools. After execution of this Agreement, Sony will provide to Licensee the hardware and software development tools which Sony deems to be necessary for development of the Executable Software pursuant to an agreement to be entered into separately between the parties hereto. 4. Limitations on Licenses; Reservation of Rights. 4.1 Reverse Engineering Prohibited. Licensee hereby agrees not to disassemble, peel semiconductor components, decompile, or otherwise reverse engineer or attempt to reverse engineer or derive source code from, all or any portion of the Sony Materials (whether or not all or any portion of the Sony Materials are integrated with the Licensee Software), or permit or CONFIDENTIAL encourage any third party to do so, or use or acquire any materials from any third party who, does so. Licensee shall not use, modify, reproduce, sublicense, distribute, create derivative works from, or otherwise provide to third parties, the Sony Materials, in whole or in part, other than as expressly permitted by this License Agreement. Licensee shall be required in all cases to pay royalties in accordance with Section 9 hereto to Sony on any of Licensee's products utilizing Sony Materials or which are in any way derived from the disassembly, decompilation, reverse engineering of, or use of source code derived from, the Sony Materials. 4.2 Reservation of Sony's Rights. The licenses granted in this License Agreement extend only to development of Licensed Products for use on the Player, in such format as may be designated by Sony. Without limiting the generality of the foregoing, Licensee shall not have the right to distribute or transmit the Executable Software or the Licensed Products (to the extent such Executable Software or the Licensed Products include Sony Materials) via electronic means or any other means now known or hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwave and/or radio waves, or over a network of interconnected computers or other devices. This License Agreement does not grant any right or license, under any Intellectual Property Rights of Sony or otherwise, except as expressly provided herein, and no other right or license is to be implied by or inferred from any provision of this License Agreement or the conduct of the parties hereunder. Licensee shall not make use of any of the Sony Materials and Player or any Intellectual Property Rights related to the Sony Materials and Player (or any portion thereof) except as authorized by and in compliance with the provisions of this License Agreement or as may be otherwise expressly authorized in writing by Sony. No right, license or privilege has been granted to Licensee hereunder concerning the development of any collateral product or other use or purpose of any kind whatsoever which displays or depicts any of the Licensed Trademarks. 4.3 Reservation of Licensee's Rights. Licensee retains all rights, title and interest in and to the Licensee Software, including without limitation, Licensee's Intellectual Property Rights therein, and nothing in this Agreement shall be construed to restrict the right of Licensee to develop products incorporating the Licensee Software (separate and apart from the Sony Materials) for any hardware platform or service other than the Player. 5. Quality Standards for the Licensed Products. 5.3 Approval of Packaging and Artwork. For each proposed Licensed Product, Licensee shall be responsible, at Licensee's expense, for developing all artwork and mechanicals ("Artwork") set forth on the Packaging, and all instructional manuals, liners and other user materials ("Inserts") inserted into the jewel box (Artwork and Inserts herein collectively referred to as "Printed Materials"). All Printed Materials shall comply with the requirements of the Sony Guidelines (hereinafter "Guidelines") to be provided to Licensee subsequent to the execution of this License Agreement, and as may be amended from time to time upon written notice by Sony. At the time prototype Executable Software for a proposed CONFIDENTIAL Licensed Product is submitted to Sony for inspection and evaluation, Licensee shall also deliver to Sony, for review and evaluation, the proposed final Printed Materials for such proposed Licensed Product, and a form of limited warranty for the proposed Licensed Product. Licensee agrees that the quality of such Printed Materials shall be of at least the same quality as that associated with . If any of the Printed Materials are disapproved because they do not comply with the foregoing, Sony shall specify the reasons for such disapproval and state what corrections are necessary, After making the necessary corrections to the disapproved Printed Materials, Licensee may submit new proposed Printed Materials for approval by Sony. Sony shall not unreasonably withhold its approval of the proposed Printed Materials submitted for review by Licensee in accordance with the terms of this Section. No approval by Sony of any element of the Printed Materials shall be deemed an approval of any other element of the Licensed Product, nor shall any such approval be deemed to constitute a waiver of any of Sony's rights under this Agreement. 5.4 Advertising Materials. Pre-production samples of the advertising, merchandising, promotional, and display materials of or concerning the Licensed Products (collectively referred to hereinafter as the "Advertising Materials") shall be submitted by Licensee to Sony, free of cost, for Sony's evaluation and approval as to style and usage of any of the Licensed Trademarks, and appropriate reference of the notices, prior to any actual production, use, or distribution of any such items by Licensee or in its behalf. No such proposed Advertising Materials shall be produced, used, or distributed directly or indirectly by Licensee without first obtaining the written approval of Sony. Subject in each instance to the prior written approval of Sony, Licensee may use such textual and/or pictorial advertising matter (if any) as may be created by Sony or in its behalf pertaining to the Sony Materials and/or to the Licensed Trademarks on such promotional and advertising materials as may, in Licensee's judgment, promote the sale of the Licensed Products within the Licensed Territory. Sony shall have the right to use the Licensed Products in any advertising or promotion for Player at Sony's expense, subject to Licensee's reasonable prior approval with respect to use of Licensee's trademarks and copyrighted materials contained in such advertisement or promotion. Sony shall confer with Licensee regarding the text of any such advertisement. If required by Sony and/or any governmental entity, Licensee shall include, at Licensee's cost and expense, the required consumer advisory rating code(s) on any and all marketing and advertising materials used in connection with the Licensed Product, which shall be procured in accordance with the provisions of Section 6 below. 5.5 Labeling Requirements. All Printed Materials for each unit of the Licensed Products shall have conspicuously, legibly and irremovably affixed thereto the notices specified in a template to be provided to Licensee subsequent to the execution of this License Agreement, which template may be amended from time to time by Sony during the term of this License Agreement. Licensee agrees that, if required by Sony or any governmental entity, it shall submit each Licensed Product to a consumer advisory ratings system designated by Sony and/or such governmental entity for the purpose of CONFIDENTIAL obtaining rating code(s) for each Licensed Product. Any and all costs and expenses incurred in connection with obtaining such rating code(s) shall be borne solely by Licensee. Any required consumer advisory rating code(s) procured hereby shall be displayed on the Licensed Product and the associated Printed Materials in accordance with the Guidelines, at Licensee's cost and expense. 7. Manufacture of the Licensed Products. 7.1 7.1.1 Sony shall provide to Licensee written specifications setting forth terms relating to the manufacturing of Licensed Products and their component parts ("Specifications") subsequent to execution of this Agreement, which may be amended from time to time upon reasonable written notice to Licensee. Sony shall have the right, but no obligation, to subcontract any phase of production of any or all of the Licensed Products or any part thereof. 7.1.2 Creation of Master CD-ROM. Following approval by Sony of each Licensed Product pursuant to Section 5.2, Licensee shall provide Sony with two (2) copies (in the form of CD write-once discs or such other form as may be requested by Sony in the Specifications) of the pre- production Executable Software for the original master CD-ROM (the "Master CD-ROM") from which all other copies of the Licensed Product are to be replicated. Licensee shall be responsible for the costs, as set forth in the Specifications, of creating such Master CD- ROM. In order to insure against loss or damage to the copies of the Executable Software furnished to Sony, Licensee will retain duplicates of all such Executable Software. Sony shall not be liable for loss of or damage to any copies of the Executable Software. 7.1.3 Delivery of Printed Materials. Licensee shall deliver the film for all Printed Materials to Sony or at Sony's option to Sony's designated manufacturing facility in accordance with the Specifications, at Licensee's sole risk and expense. In the event that Licensee elects to be responsible for manufacturing the Printed Materials, Licensee shall deliver such Printed Materials, in the minimum order quantities set forth in Section 7.2.2 below. 7.1.4 Manufacture of Units. Upon approval, pursuant to Section 5, of such pre-production samples of the Executable Software for the Master CD-ROM and the associated Artwork 7.2 Price, Payment and Terms. 7.2.1 Price. The applicable price for manufacture of any units of the Licensed Products ordered hereunder shall be determined by Sony and provided to Licensee in the Specifications prior to manufacture of the Licensed Products. CONFIDENTIAL Purchase price(s) shall be stated in United States dollars and are subject to change by Sony at any time upon reasonable written notice to Licensee; provided, however, the applicable price shall not be changed with respect to any units of the Licensed Products which are the subject of an effective purchase order but which have not yet been delivered by Sony at the designated F.O.B. point. Prices for the finished units of the Licensed Products are exclusive of any foreign or U.S. federal, state, or local sales or value-added tax, use, excise, customs duties or other similar taxes or duties, which Sony may be required to collect or pay as a consequence of the sale or delivery of any units of the Licensed Products to Licensee. Licensee shall be solely responsible for the payment or reimbursement of any such taxes, fees, and other such charges or assessments applicable to the sale and/or purchase of any finished units of any of the Licensed Products. 7.2.2 Orders. Such orders shall reference this Agreement, give Licensee authorization number, specify quantities by Licensed Product, state requested delivery date and all packaging information and be submitted on or with an order form to be provided in the Specifications. Licensee shall issue , for each of the Licensed Products approved by Sony pursuant to Section 5.1, a non-cancelable Purchase Order for at least one thousand (1,000) units of such Licensed Product. In the event that Sony manufactures the Printed Materials for the Licensee pursuant to Section 7.1.3 above, Licensee may, at Licensee's option, allow Sony to purchase an additional 20% of such Printed Materials at Licensee's expense in anticipation of reorders. Licensee agrees that such Printed Materials will be stored by Sony for a period of no more than ninety (90) days. Licensee may order additional units of any of such Licensed Products in the minimum reorder quantity of one thousand (1,000) units per order, provided that reorder quantities may be less than one thousand (1,000) units per order (but in no event less than one hundred (100) units per order), in Sony's sole discretion, in the event that either (i) Sony has additional quantities of Printed Materials in stock with respect to any such Licensed Product, or (ii) Licensee agrees to provide its own Printed Materials in accordance with Section 7.1.3 above. Licensee shall have no right to cancel or reschedule any Purchase Order (or any portion thereof) for any of the Licensed Products unless the parties shall first have reached mutual agreement as to Licensee's financial liability with respect to any desired cancellation or rescheduling of any such Purchase Order (or any portion thereof). 7.2.3 Payment Terms. Orders will be invoiced upon shipment, and will include royalties payable pursuant to Section 9 hereto. Each invoice will be paid within thirty (30) days of the date of the invoice. No other deduction may be made from remittances unless an approved credit memo has been issued by Sony. No claim for credit due to shortage or breakage will be allowed unless it is made within seven (7) days from the date of receipt of shipment. Each shipment of Licensed Products to Licensee shall constitute a separate sale obligating Licensee to pay therefore, whether said shipment be whole or partial fulfillment of any order. All sums owed or otherwise payable under this Section 7 and under Section 9 hereto shall bear interest at the rate of one and one-half (1- CONFIDENTIAL 1/2%) percent per month, or such lower rate as may be the maximum rate permitted under applicable law, from the date upon which payment of the same shall first become due up to and including the date of payment thereof whether before or after judgment. Licensee shall be additionally liable for all of Sony's costs and expenses of collection, including, without limitation, reasonable fees for attorneys and court costs. Notwithstanding the foregoing, such specified rate of interest shall not excuse or be construed as a waiver of Licensee's obligation to timely provide any and all payments owed to Sony hereunder. 7.3 Delivery of Licensed Products. Delivery of Licensed Products shall be in accordance with the Specifications. Title, risk of loss, or damage in transit to any and all Licensed Products pursuant to Licensee's orders shall vest in Licensee immediately upon delivery to the carrier. 7.4 Technology Exchange and Quality Assurance. There will be no technology exchange between Sony and Licensee under this Agreement. All such physical master discs, stampers, etc. shall be and remain the sole property of Sony. 7.5 Inspection and Acceptance. Licensee may inspect and test any units of the Licensed Products at Licensee's receiving destination. Any finished units of the Licensed Products which fail to conform to the Specifications and/or any descriptions contained in this Agreement may be rejected by Licensee by providing written notice thereof within thirty (30) days of receipt of such units of the Licensed Products at Licensee's receiving destination. In such event, the provisions of regarding of the units shall apply with respect to any such rejected units of the Licensed Products. if Licensee fails to properly reject any units of the Licensed Products within such thirty (30) day period, such Licensed Product units shall be deemed accepted by Licensee and may not be subsequently rejected. 8. Marketing and Distribution. In accordance with the provisions of this License Agreement, Licensee shall, at no expense to Sony, diligently market, sell and distribute the Licensed Products, and shall use its reasonable best efforts to stimulate demand for such Licensed Products in the Licensed Territory and to supply any resulting demand . Licensee shall use its reasonable best efforts to protect the Licensed Products from and against illegal reproduction and/or copying by end users or by any other persons or entities. Such methods of protection may include, without limitation, markings or insignia providing identification of authenticity and packaging seals. Subject to availability, Licensee shall sell to Sony quantities of the Licensed Products at as low a price and on terms as favorable as Licensee sells similar quantities of the Licensed Products to the general trade; provided, however, Sony shall not directly or indirectly resell any such units of the Licensed Products within the Licensed Territory without Licensee's prior CONFIDENTIAL written consent. 9. Royalties. Licensee shall pay Sony a per unit royalty in United States dollars, as set forth on Exhibit B hereto, for each unit of the Licensed Products manufactured. Payment of such royalties shall be made to Sony for each unit and pursuant to the payment terms of Section 7.2.3 hereto. No costs incurred in the development, manufacture, marketing, sale, and/or distribution of the Licensed Products shall be deducted from any royalties payable to Sony hereunder Similarly, there shall be no deduction from the royalties otherwise owed to Sony hereunder as a result of any uncollectible accounts owed to Licensee, or for any credits, discounts, allowances or returns which Licensee may credit or otherwise grant to any third party customer of any units of the Licensed Products, or for any taxes, fees, assessments, or expenses of any kind which may be incurred by Licensee in connection with its sale and/or distribution of any units of the Licensed Products and/or arising with respect to the payment of royalties hereunder. In addition to the royalty payments provided to Sony hereunder, Licensee shall be solely responsible for and bear any cost relating to any withholding taxes and/or other such assessments which may be imposed by any governmental authority with respect to the royalties paid to Sony hereunder. Licensee shall provide Sony with official tax receipts or other such documentary evidence issued by the applicable tax authorities sufficient to substantiate that any such taxes and/or assessments have in fact been paid. 10. Representations and Warranties. 10.1 Representations and Warranties of Sony. Sony represents and warrants solely for the benefit of Licensee that: (i) Sony has the right, power and authority to enter into this License Agreement, to grant rights to Licensee and to fully perform its obligations hereunder 10.2 Representations and Warranties of Licensee. Licensee represents and warrants that: (i) there is no threatened or pending action, suit, claim or proceeding alleging that the use by Licensee of all or any part of the Licensee Software or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed Products infringes or otherwise violates any Intellectual Property Right or other right or interest of any kind whatsoever of any third party, or otherwise contesting any right, title or interest of Licensee in or to the Licensee Software or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed Products; (ii) Licensee has the right, power and authority to enter into this License Agreement and to fully perform its obligations hereunder; (iii) the making of this License Agreement by Licensee does not violate any separate agreement, rights or obligations existing between Licensee and any other person or entity, and, throughout the term of this License Agreement, Licensee shall not make any separate agreement with any person or entity that is inconsistent with any of the provisions of this License Agreement; (iv) Licensee shall not make any representation or give any warranty to any person CONFIDENTIAL or entity expressly or impliedly on Sony's behalf, or to the effect that the Licensed Products are connected in any way with Sony (other than that the Licensed Products have been developed, marketed, manufactured, sold, and/or distributed under license from Sony), (v) the Executable Software shall be distributed by Licensee solely in object code form; (vi) each of the Licensed Products shall be marketed, sold, and distributed in an ethical manner and in accordance with all applicable laws and regulations; and (vii) Licensee's policies and practices with respect to the marketing, sale, and/or distribution of the Licensed Products shall in no manner reflect adversely upon the name, reputation or goodwill of Sony. 11. Indemnities; Limited Liability. 11.1 Indemnification by Sony. Sony shall indemnify and hold Licensee harmless from and against any and all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim which result from or are in connection with a breach of any of the warranties provided by Sony herein; provided, however, that Licensee shall give prompt written notice to Sony of the assertion of any such claim, and provided, further, that Sony shall have the right to select counsel and control the defense and/or settlement thereof, subject to the right of Licensee to participate in any such action or proceeding at its own expense with counsel of its own choosing. Sony shall have the exclusive right, at its discretion, to commence and prosecute at its own expense any lawsuit or to take such other action with respect to such matters as shall be deemed appropriate by Sony. Licensee agrees to provide Sony, at no expense to Licensee, reasonable assistance and cooperation concerning any such matter; and Licensee shall not agree to the settlement of any such claim, action or proceeding without Sony's prior written consent. 11.2 Indemnification by Licensee. Licensee shall indemnify and hold Sony harmless from and against any and all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim, which result from or are in connection with (i) a breach of any of the representations or warranties provided by Licensee herein, including without limitation claims resulting from Licensee's failure to timely pay, any withholding taxes or other assessments as set forth in Section 9 hereto or any breach of Licensee's confidentiality obligations as set forth in Section 14 hereto; or (ii) any claim of infringement or alleged infringement of any third party's Intellectual Property Rights with respect to the Licensee Software; or (iii) any claims of or in connection with any bodily injury (including death) or property damage, by whomsoever such claim is made, arising out of, in whole or in part, the manufacture, sale, and/or use of any of the Licensed Products manufactured by Sony hereunder, unless due to the negligence of Sony in performing any of the specific duties and/or providing any of the specific manufacturing services required of it hereunder; provided, however, that Sony shall give prompt written notice to Licensee of the assertion of any such claim, and provided, further, that Licensee shall have the right to select counsel and control the defense and/or settlement thereof, subject to the right of Sony to participate in any such action or proceeding at its own CONFIDENTIAL expense with counsel of its own choosing. Licensee shall have the exclusive right, at its discretion, to commence and/or prosecute at its own expense any lawsuit or to take such other action with respect to such matter as shall be deemed appropriate by Licensee. Sony shall provide Licensee, at no expense to Sony, reasonable assistance and cooperation concerning any such matter. If Sony is joined as a party to any lawsuit initiated by or against Licensee, Licensee shall indemnify and hold Sony harmless from and against all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys and court costs, incurred in connection with any such lawsuit. Sony shall not agree to the settlement of any such claim, action or proceeding without Licensee's prior written consent. 11.3 Limitation of Liability; Licensee's Obligations. 11.3.3 Licensee's Obligations. If at any time or times subsequent to the approval of the Executable Software pursuant to Section 5.2, Sony identifies any bugs with respect to the Licensed Product or any bugs are brought to the attention of Sony, Licensee shall, at no cost to Sony, promptly correct any such bugs, to Sony's reasonable satisfaction. In the event any units of any of the Licensed Products create any risk of loss or damage to any property or injury to any person, Licensee shall immediately take effective steps, at Licensee's sole liability and expense, to recall and/or to remove such defective product units from any affected channels of distribution. Licensee shall provide all end-user support for the Licensed Products. 12. Copyright, Trademark and Trade Secret Rights. 12.1 Licensee Rights. The copyrights with respect to the Licensee Software (exclusive of the rights licensed from Sony hereunder) and any names or other designations used as titles for the Licensed Products are and shall be the exclusive property of Licensee or of any third party from which Licensee has been granted the license and related rights to develop and otherwise exploit any such Licensee Software or any such names or other designations. 12.2 Sony Rights. 12.2.1 Licensed Trademarks. The Licensed Trademarks and the goodwill associated therewith are and shall be the exclusive property of Sony. Nothing herein shall give Licensee any right, title or interest in or to any of the Licensed Trademarks, other than the non-exclusive license and privilege during the term hereof to display and use the Licensed Trademarks solely in accordance with the provisions of this License Agreement. Licensee shall not do or cause to be done any act or thing in any way impairing or tending to impair any of Sony's rights, title, or interests in or to any of the Licensed Trademarks, nor shall Licensee register any trademark in its own name or in the name of any other person or entity which is similar to or is likely to be confused with any of the Licensed Trademarks. 12.2.2 License of Sony Materials and Player. Subject to the rights granted by Sony to Licensee hereunder, all rights with respect to the CONFIDENTIAL Sony Materials and Player, including, without limitation, all of Sony's Intellectual Property Rights therein, are and shall be the exclusive property of Sony. Nothing herein shall give Licensee any right, title or interest in or to the Sony Materials or the Player (or any portion thereof), other than the non-exclusive license and privilege during the term hereof to use the Sony Materials and Player for the development of the Executable Software solely in accordance with the provisions of this License Agreement. Licensee shall not do or cause to be done any act or thing contesting or in any way impairing or tending to impair any of Sony's rights, title, and/or interests in or to the Sony Materials or the Player (or any portion thereof). 12.3 Effect of Termination. Upon the expiration or earlier termination of this License Agreement for any reason, Licensee shall immediately cease and desist from any further use of the Licensed Trademarks and Sony Materials licensed hereunder, subject to the provisions of Section 16.3, below. 13. Copyright, Trademark and Trade Secret Protection. In the event that either Licensee or Sony discovers or otherwise becomes aware that any of the Intellectual Property Rights of the other embodied in any of the Licensed Products have been or are being infringed upon by any third party, then the party with knowledge of such infringement or apparent infringement shall promptly notify the other party. 14. Confidentiality. 14.1 Nondisclosure Agreement. Licensee hereby acknowledges that the Nondisclosure Agreement dated between Sony and Licensee ("Nondisclosure Agreement") will remain in full force and effect with respect to the Confidential Information of Sony throughout the term of this Agreement. In the event of any conflict or inconsistency between the provisions of the Nondisclosure Agreement and the provisions of this Section 14, the provisions of the Nondisclosure Agreement shall control with respect to the Confidential Information of Sony. 14.2 Confidential Information. For the purposes of this License Agreement, "Confidential Information" of Sony means (i) the Sony Materials and information regarding Sony's finances, business, marketing and technical plans, (ii) all documentation and information relating to the foregoing (other than documentation and information expressly intended for use by and released to end users or the general public), and (iii) any and all other information, of whatever type and in whatever medium (including without limitation all data, ideas, discoveries, developments, know-how, trade secrets, inventions, creations and improvements), that is disclosed in writing or in any other form by Sony to Licensee. "Confidential Information" of Licensee shall mean (i) the Licensee Software as provided to Sony pursuant to this License Agreement, (iii) all documentation and information that is disclosed in writing or in any other form by Licensee to Sony if the information is designated as (or is provided under circumstances indicating the information is) confidential or proprietary. CONFIDENTIAL 14.3 Preservation of Confidentiality; Non-Disclosure. Each party ("receiving party") shall hold all Confidential Information of the other party ("disclosing party") in trust and in strict confidence for the sole benefit of the disclosing party and for the exercise of the limited rights expressly granted to the receiving party under this License Agreement. The receiving party shall take all steps necessary to preserve the confidentiality of the Confidential Information of the disclosing party, and to prevent it from falling into the public domain or into the possession of persons other than those persons to whom disclosure is authorized hereunder, including but not limited to those steps that the receiving party takes to protect the confidentiality of its own most highly confidential information. Except as may be expressly authorized by the disclosing party in writing, the receiving party shall not at any time, either before or after any termination of this License Agreement, directly or indirectly: (i) disclose any Confidential Information to any person other than an employee or subcontractor of the receiving party who needs to know or have access to such Confidential Information for the purposes of this License Agreement, and only to the extent necessary for such purposes (and with respect to any subcontractor, only in accordance with Section 17.5 below); (ii) except as otherwise provided in this License Agreement, duplicate the Confidential Information for any purpose whatsoever; (iii) use the Confidential Information for any reason or purpose other than as expressly permitted in this License Agreement; or (iv) remove any copyright notice, trademark notice and/or other proprietary legend set forth on or contained within any of the Confidential Information. 14.4 Obligations Upon Unauthorized Disclosure. 14.4.1 Notice to Disclosing Party. If at any time the receiving party becomes aware of any unauthorized duplication, access, use, possession or knowledge of any Confidential Information, the receiving party shall immediately notify the disclosing party. The receiving party shall provide any and all reasonable assistance to the disclosing party to protect the disclosing party's proprietary rights in any Confidential Information that the receiving party or its employees or permitted subcontractors may have directly or indirectly disclosed or made available and that may be duplicated, accessed, used, possessed or known in a manner or for a purpose not expressly authorized by this License Agreement including but not limited to enforcement of confidentiality agreements, commencement and prosecution in good faith (alone or with the disclosing party) of legal action, and reimbursement for all reasonable attorneys' fees (and all related costs), costs and expenses incurred by the disclosing party to protect its proprietary rights in the Confidential Information. The receiving party shall take all reasonable steps requested by the disclosing party to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of the Confidential Information. 14.4.2 Accounting, Etc. If violates or fails to comply with any of the terms or conditions of this Section 14 or Section 4 hereto, shall be entitled to an accounting and repayment of all forms of compensation, commissions, remuneration or benefits which directly or indirectly realizes as a result of or in connection with any such violation or failure to comply. Such remedy shall be in addition to and not in limitation of any injunctive relief or other CONFIDENTIAL remedies to which may be entitled under this Agreement or otherwise, at law or in equity. 14.5 Exceptions. The foregoing restrictions will not apply to information to the extent that the receiving party can demonstrate such information: (i) was known to the receiving party at the time of disclosure to the receiving party by the disclosing party as shown by the files of the receiving party in existence at the time of disclosure; (ii) becomes part of information in the public domain through no fault of the receiving party; (iii) has been rightfully received from a third party authorized by the disclosing party to make such disclosure without restriction; (iv) has been approved for release by prior written authorization of the disclosing party; or (v) has been disclosed by court order or as otherwise required by law (including without limitation to the extent that disclosure may be required under Federal or state securities laws), provided that the receiving party has notified the disclosing party promptly upon learning of the possibility of any such court order or legal requirement and has given the disclosing party a reasonable opportunity (and cooperated with the disclosing party) to contest or limit the scope of such required disclosure (including application for a protective order). Information shall not be deemed known to the receiving party or publicly known for purposes of the above exceptions (A) merely because it is embraced by more general information in the prior possession of the receiving party or others, or (B) merely because it is expressed in public material in general terms not specifically the same as Confidential Information. 14.6 Confidentiality of Agreement. Subject to Section 14.5 above, the terms and conditions of this License Agreement shall be treated as Confidential Information; provided that each party may disclose the terms and conditions of this License Agreement: (i) to legal counsel; (ii) in confidence, to accountants, banks and financing sources and their advisors; and (iii) in confidence, in connection with the enforcement of this License Agreement or rights under this License Agreement and (iv) without limiting the requirements set forth in clause (v) of Section 14.5 hereto, the parties agree that if either of them shall be required, in the opinion of counsel, to file publicly or otherwise disclose the terms of this License Agreement under applicable federal and/or state securities laws, such party shall request, and shall use its best efforts to obtain, confidential treatment for such sections of this Agreement as the non-filing party may designate after receiving the notice provided for in clause (v) of Section 14.5 hereof. Any failure to notify under clause (v) of Section 14.5 with respect to clause (iv) of this section shall be deemed a breach of a material obligation and be subject to termination pursuant to Sections 15.2 and 15.5 hereto. Both parties shall treat the fact that the parties have entered into this License Agreement as Confidential Information until the initial public announcement regarding this License Agreement is released by SEPC, at its sole discretion, announcing that Licensee has become a licensee under this License Agreement. Subsequent to such initial public announcement, both parties may issue press releases subject to the prior written approval of the other party, which shall not be unreasonably withheld. 15. Term and Termination. 15.1 Effective Date; Term. This License Agreement shall not be binding CONFIDENTIAL upon the parties until it has been signed by or on behalf of each party, in which event it shall be effective as of the date first written above (the "Effective Date"). Unless sooner terminated in accordance with the provisions hereof, the initial term of this License Agreement shall be for four (4) years from the Effective Date 15.2 Termination by Sony. Sony shall have the right to terminate this License Agreement immediately, by providing written notice of such election to Licensee, upon the occurrence of any of the following events or circumstances: (i) If Licensee breaches any of its material obligations provided for in this License Agreement and such breach is not corrected or cured within thirty (30) days after receipt of written notice of such breach; or (ii) Licensee's failure to pay, or a statement that it is unable to pay any amount due hereunder, or is unable to pay its debts generally as they shall become due; or (iii) Licensee's filing of an application for, or consenting to, or directing the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of all or substantially all of Licensee's property, whether tangible or intangible, wherever located; or (iv) The making by Licensee of a general assignment for the benefit of creditors; or (v) The commencing by Licensee or Licensee's intention to commence a voluntary case under any applicable bankruptcy laws (as now or hereafter may be in effect); or (vi) The adjudication that Licensee is a bankrupt or insolvent; or (vii) The filing by Licensee or the intent to file by Licensee of a petition seeking to take advantage of any other law providing for the relief of debtors; or (viii) Licensee's acquiescence to, intention to acquiesce to, or failure to have dismissed within ninety (90) days, any petition filed against it in any involuntary case under any such bankruptcy law. 15.3 Product-by-Product Termination by Sony. In addition to the events of termination described in Section 15.2, above, Sony, at its option, shall be entitled to terminate, on a product-by-product basis, the licenses and related rights herein granted to Licensee (a) in the event that Licensee fails to notify Sony promptly in writing of any material change to any of the elements approved in Section 5.1, above; (b) if Licensee fails to provide Sony in accordance with the provisions of Section 5.2, above, with the prototype Executable Software for any Licensed Product, in the format required by Sony, and which meets Sony's specifications; provided, however, Sony shall not be entitled to exercise such right of termination if Licensee's failure to provide such final Executable Software for any of the Licensed Products is directly caused by Sony's failure to timely comply with any of its material obligations expressly set forth herein. 15.4 No Refunds. In the event of the termination of this License Agreement in accordance with any of the provisions of Sections 15.2 or 15.3, above, no portion of any payments of any kind whatsoever previously provided to Sony hereunder shall be owed or be repayable to Licensee. 16. Effect of Expiration or Termination. 16.1 Inventory Statement. Within thirty (30) days of the date of expiration or the effective date of termination with respect to any or all Licensed Products, Licensee shall provide Sony with an itemized statement, certified to be accurate by an officer of Licensee, specifying the number of CONFIDENTIAL unsold units of the Licensed Products as to which such termination applies, on a title-by-title basis, which remain in its inventory and/or under its control at the time of expiration or the effective date of termination. Sony shall be entitled to conduct a physical inspection of Licensee's inventory and work in process during normal business hours in order to ascertain or verify such inventory and/or statement. 16.2 Reversion of Rights. If this License Agreement is terminated by Sony as a result of any breach or default by Licensee, the licenses and related rights herein granted to Licensee shall immediately revert to Sony, and Licensee shall cease and desist from any further use of the Sony Materials and any Intellectual Property Rights related to the Sony Materials, and, subject to the provisions of Section 16.3, below, Licensee shall have no further right to continue the development, marketing, sale, and/or distribution of any units of the Licensed Products, nor to continue to use the Licensed Trademarks. 16.3 Disposal of Unsold Units. Provided this License Agreement is not terminated due to a breach or default by Licensee, Licensee may, upon expiration or termination of this License Agreement, sell off existing inventories of Licensed Products, on a non-exclusive basis, for a period of days from the date of expiration or termination of this License Agreement, and provided such inventories have not been manufactured solely or principally for sale during such period. Subsequent to the expiration of such day period, or in the event this License Agreement is terminated as a result of any breach or default by Licensee, any and all units of the Licensed Products remaining in Licensee's inventory shall be destroyed by Licensee within five (5) working days of such expiration or termination. Within five (5) working days after such destruction, Licensee shall provide Sony with an itemized statement, certified to be accurate by an officer of Licensee, indicating the number of units of the Licensed Products which have been destroyed (on a title-by- title basis), the location and date of such destruction, and the disposition of the remains of such destroyed materials. 16.4 Return of Confidential Information. Upon the expiration or earlier termination of this License Agreement, Licensee and Sony shall immediately deliver to the other party, as the disclosing party all Confidential Information of the other party, including any and all copies thereof, which the other party previously furnished to it in furtherance of this License Agreement, including, without limitation, any such information, knowledge, or know-how of which either party, as the receiving party, was apprised and which was reduced to tangible or written form by such party or in its behalf at any time during the term of this License Agreement. 16.5 Renewal or Extension of License Agreement. Other than as set forth in Section 15.1 hereto, Sony shall be under no obligation to renew or extend this License Agreement notwithstanding any actions taken by either of the parties prior to the expiration of this License Agreement. Upon the expiration of this License Agreement neither party shall be liable to the other for any damages (whether direct, consequential, or incidental, and including, without limitation, any expenditures, loss of profits, or prospective profits) sustained or arising out of or alleged to have been sustained or to have arisen out of such expiration. However, the expiration CONFIDENTIAL of this License Agreement shall not excuse either party from its previous breach of any of the provisions of this License Agreement or from any obligations surviving the expiration of this License Agreement, and full legal and equitable remedies shall remain available for any breach or threatened breach of this License Agreement or any obligations arising therefrom. 16.6 Termination Without Prejudice. The expiration or termination of this License Agreement in accordance with the provisions of Section 15, above, shall be without prejudice to any rights or remedies which one party may otherwise have against the other party. 17. Miscellaneous Provisions. 17.1 Notices. All notices or other communications required or desired to be sent to either of the parties shall be in writing and shall be sent by registered or certified mail, postage prepaid, return receipt requested, or sent by recognized international courier service (e.g., Federal Express, DHL, etc.), telex, telegram or facsimile, with charges prepaid and subject to confirmation by letter sent via registered or certified mail, postage prepaid, return receipt requested. The address for all notices or other communications required to be sent to Sony or Licensee, respectively, shall be the mailing address stated in the preamble hereof, or such other address as may be provided by written notice from one party to the other on at least ten (10) days' prior written notice. In the case of Licensee, a copy of any such notice shall be sent to Fischbach, Perlstein & Yanny, 1925 Century Park East, Suite 1260, Los Angeles, CA 90067. Any such notice shall be effective upon the date of receipt. 17.2 Force Majeure. Neither Sony nor Licensee shall be liable for any loss or damage or be deemed to be in breach of this License Agreement if its failure to perform or failure to cure any of its obligations under this License Agreement results from any event or circumstance beyond its reasonable control, including, without limitation, any natural disaster, fire, flood, earthquake, or other Act of God; shortage of equipment, materials, supplies, or transportation facilities caused by such force majeure event; strike or other industrial dispute; war or rebellion; or compliance with any law, regulation, or order (whether valid or invalid) of any governmental body, other than an order, requirement, or instruction arising out of Licensee's violation of any applicable law or regulation; provided, however, that the party interfered with gives the other party written notice thereof promptly, and, in any event, within fifteen (15) working days of discovery of any such Force Majeure condition. If notice of the existence of any Force Majeure condition is provided within such period, the time for performance or cure shall be extended for a period equal to the duration of the Force Majeure event or circumstance described in such notice, except that any such cause shall not excuse the payment of any sums owed to Sony prior to, during, or after any such Force Majeure condition. 17.3 No Partnership or Joint Venture. The relationship between Sony and Licensee, respectively, is that of licensor and licensee. Both parties are independent contractors and are not the legal representative, agent, joint venturer, partner, or employee of the other party for any purpose whatsoever. Neither party has any right or authority to assume or create any CONFIDENTIAL obligations of any kind or to make any representation or warranty on behalf of the other party, whether express or implied, or to bind the other party in any respect whatsoever. 17.4 Assignment. Sony has entered into this License Agreement based upon the particular reputation, capabilities and experience of Licensee and its officers, directors and employees. Accordingly, Licensee may not assign this License Agreement or any of its rights hereunder, nor delegate or otherwise transfer any of its obligations hereunder, to any third party unless the prior written consent of Sony shall first be obtained. Any attempted or purported assignment, delegation or other such transfer without the required consent of Sony shall be void and a material breach of this License Agreement. Subject to the foregoing, this License Agreement shall inure to the benefit of the parties and their respective successors and permitted assigns. Sony shall have the right to assign any and all of its rights and obligations hereunder to any affiliate(s), including, without limitation, its obligations under Section 7 hereof. 17.5 Subcontractors. Licensee shall not sell, assign, delegate, subcontract, sublicense or otherwise transfer or encumber all or any portion of the licenses herein granted. Licensee shall have the right to employ suitable subcontractors for the purposes of assisting Licensee with the de- velopment of the Licensed Products, Licensee shall not disclose to any subcontractor any Confidential Information of Sony (as defined herein and in the Nondisclosure Agreement), including, without limitation, any Sony Materials, unless and until such subcontractor shall have signed either (i) a License Agreement and a Development Tool Agreement or (ii) a Licensed Developer Agreement, directly with Sony. Licensee shall remain fully liable for its compliance with all of the provisions of this License Agreement and for the compliance of any and all permitted subcontractors with the provisions of any agreements entered into by such subcontractors in accordance with this Section 17.5. Licensee shall cause its subcontractors to comply in all respects with the terms and conditions of this License Agreement, and hereby unconditionally guarantees all obligations of its subcontractors. 17.6 Compliance with Applicable Laws. The parties shall at all times comply with all applicable regulations and orders of their respective countries and all conventions and treaties to which their countries are a party or relating to or in any way affecting this License Agreement and the performance by the parties of this License Agreement. Each party, at its own expense, shall negotiate and obtain any approval, license or permit required in the performance of its obligations, and shall declare, record or take such steps to render this License Agreement binding, including, without limitation, the recording of this License Agreement with any appropriate governmental authorities (if required). 17.7 Governing Law; Consent to Jurisdiction. This License Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, excluding that body of law related to choice of laws, and of the United States of America. Any action or proceeding brought to enforce the terms of this License Agreement or to adjudicate any dispute arising hereunder shall be brought in the courts of the County of New York, State of CONFIDENTIAL New York (if under State law) or the Southern District of New York (if under Federal law). Each of the parties hereby submits itself to the exclusive jurisdiction and venue of such courts for purposes of any such action and agrees that, without limiting other types of service of process permitted by law, any service of process may be effected by registered or certified mail, postage prepaid, return receipt requested at the addresses stated in the preamble hereof. 17.8 Legal Costs and Expenses. In the event it is necessary for either party to retain the services of an attorney or attorneys to enforce the terms of this License Agreement or to file or defend any action arising out of this Agreement, then the prevailing party in any such action shall be entitled, in addition to any other rights and remedies available to it at law or in equity to recover from the other party its reasonable fees for attorneys and expert witnesses, plus such court costs and expenses as may be fixed by any court of competent jurisdiction. The term "prevailing party" for the purposes of this Section shall include a defendant who has by motion, judgment, verdict or dismissal by the court, successfully defended against any claim that has been asserted against it. 17.9 Remedies. Unless expressly set forth to the contrary, either party's election of any remedies provided for in this License Agreement shall not be exclusive of any other remedies available hereunder or otherwise at law or in equity, and all such remedies shall be deemed to be cumulative. Any breach of Sections 2, 4, 5, 6, 7.1.1, 12 and 14 of this Agreement would cause irreparable harm to Sony, the extent of which would be difficult to ascertain. Accordingly, Licensee agrees that, in addition to any other remedies to which Sony may be entitled, in the event of a breach by Licensee or any of its employees or permitted subcontractors of any such sections of this Agreement, Sony shall be entitled to the immediate issuance without bond of exparte injunctive relief enjoining any breach or threatened breach of any or all of such provisions. In addition, Licensee shall indemnify Sony for all losses, damages, liabilities, costs and expenses (including actual attorneys' fees and all related costs) which Sony may sustain or incur as a result of such breach. 17.10 Severability. In the event that any provision of this License Agreement (or portion thereof) is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or part thereof) shall be enforced to the extent possible consistent with the stated intention of the parties, or, if incapable of such enforcement, shall be deemed to be deleted from this License Agreement, while the remainder of this License Agreement shall continue in full force and remain in effect according to its stated terms and conditions. 17.11 Sections Surviving Expiration or Termination. The following sections shall survive the expiration or earlier termination of this License Agreement for any reason: 4, 7.2, 9, 10, 11, 12, 13, 14, 15.4, 16, 17.4, 17.5, 17.7, 17.8, 17.9, 17.10. 17.12 Waiver. No failure or delay by either party in exercising any right, power, or remedy under this License Agreement shall operate as a waiver of any such right, power, or remedy. No waiver of any provision of this License Agreement shall be effective unless in writing and signed by CONFIDENTIAL the party against whom such waiver is sought to be enforced. Any waiver by either party of any provision of this License Agreement shall not be construed as a waiver of any other provision of this License Agreement, nor shall such waiver operate as or be construed as a waiver of such provision respecting any future event or circumstance. 17.13 Modification. No modification of any provision of this License Agreement shall be effective unless in writing and signed by both of the parties. 17.14 Headings. The section headings used in this License Agreement are intended primarily for reference and shall not by themselves determine the construction or interpretation of this License Agreement or any portion hereof. 17.15 Integration. This License Agreement (together with the Exhibits attached hereto) constitutes the entire agreement between Sony and Licensee and supersedes all prior or contemporaneous agreements, proposals, understandings, and communications between Sony and Licensee, whether oral or written, with respect to the subject matter hereof; provided, however, that notwithstanding anything to the contrary in the foregoing, the Nondisclosure Agreement referred to in Section 14 hereto shall remain in full force and effect. 17.16 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original, and both of which together shall constitute one and the same instrument. 17.17 Construction. This License Agreement shall be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either of the parties. IN WITNESS WHEREOF, the parties have caused this License Agreement to be duly executed as of the day and year first written above. SONY COMPUTER ENTERTAINMENT OF AMERICA ACCLAIM ENTERTAINMENT, INC. By: /s/ James Whims By: /s/ Robert W. Holmes Title: SR. V.P. Title: President Date: 12/24/94 Date: 12/19/94 NOT AN AGREEMENT UNTIL EXECUTED BY BOTH PARTIES CONFIDENTIAL Exhibit A LICENSED TERRITORY 1. Licensed Territory: United States and Canada 2. Additional Provisions: (a) Distribution Channels. Licensee may, pursuant to the licenses granted in Section 2 above, distribute Licensee's Licensed Products throughout the Licensed Territory and may use such distribution channels as Licensee deems appropriate, including the use of third party distributors, resellers, dealers and sales representatives (collectively, "Distributors"). (b) Limitations on Distribution. Notwithstanding any other provisions in this License Agreement, Licensee shall not, directly or indirectly, solicit orders from and/or sell any units of the Licensed Products to any person or entity outside of the Licensed Territory, and Licensee further agrees that it shall not directly or indirectly solicit orders for and/or sell any units of the Licensed Products in any situation where Licensee reasonably should know that such Licensed Products will be exported or resold outside of the Licensed Territory. (c) Changes to Licensed Territory. The licenses granted in Section 2 of this License Agreement may only be exercised by Licensee in the Licensed Territory. Sony shall have the right to delete, and intends to delete any country or countries from the Licensed Territory if, in Sony's reasonable judgment, the laws or enforcement of such laws in such country or countries do not protect Sony's Intellectual Property Rights. In the event a country is deleted from the Licensed Territory, Sony shall deliver to Licensee a notice stating the number of days within which Licensee shall cease exercising such licenses in the deleted country or countries. Licensee agrees to cease exercising such licenses, directly or through subcontractors, in such deleted country or countries, by the end of the period stated in such notice. CONFIDENTIAL Exhibit B ROYALTIES A. Per Unit Royalty. The per unit royalty due under Section 9 of the Agreement with respect to each Licensed Product shall be , unless otherwise set forth below with respect to a Licensed Product: CONFIDENTIAL EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS AUG-31-1996 DEC-01-1995 FEB-29-1996 32,072 14,822 91,773 0 18,902 249,092 52,453 (13,883) 373,073 98,409 0 0 0 1,003 271,451 373,073 181,206 181,206 110,302 157,345 (4,538) 0 4,222 (81,903) (26,455) (55,448) 0 0 0 (55,176) 0.000 0.000
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