-----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, HbtaEGn/4k5jSPpv+WGtTsFCaparVB/DmO/2KBIgBw/T6btAblHUnYtkLfS5q5e3 kHCgUR7EVlo/qL7ufWv6gA== 0000889812-96-000362.txt : 19960423 0000889812-96-000362.hdr.sgml : 19960423 ACCESSION NUMBER: 0000889812-96-000362 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960422 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16986 FILM NUMBER: 96549197 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/A 1 AMENDED QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number 0-16986 ACCLAIM ENTERTAINMENT, INC. (Exact name of the registrant as specified in its charter) Delaware 38-2698904 (State or other jurisdiction (I.R.S. Employer of 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 January 12, 1996, approximately 49,950,000 shares of the common stock, par value $0.02 per share, of the registrant were outstanding. The registrant hereby amends the following items, financial statements, exhibits or other portions of its Quarterly Report on Form 10-Q for the fiscal year ended November 30, 1995 as set forth in the pages attached hereto: Item 1. Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 1. Financial Statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in 000s, except per share data) November 30, August 31, 1995 1995 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 29,534 $ 44,749 Marketable equity securities 26,869 26,503 Accounts receivable - net 161,924 179,311 Inventories 34,086 16,015 Prepaid expenses 42,523 41,083 Other current assets 18,887 18,825 -------- -------- TOTAL CURRENT ASSETS 313,823 326,486 -------- -------- OTHER ASSETS Fixed assets - net 38,551 33,970 Excess of cost over net assets acquired - net of accumulated amortization of $10,006 and $9,091, respectively 58,922 59,837 Other assets 24,878 33,186 -------- -------- TOTAL ASSETS $436,174 $453,479 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 36,440 $ 49,072 Short-term borrowings 2,559 4,233 Accrued expenses 43,245 47,017 Income taxes payable 864 180 Current portion of long-term debt 23,696 25,196 Obligation under capital leases - current 283 333 -------- -------- TOTAL CURRENT LIABILITIES 107,087 126,031 -------- -------- LONG-TERM LIABILITIES Obligation under capital leases - noncurrent 555 408 Other long-term liabilities 12 53 -------- -------- TOTAL LIABILITIES 107,654 126,492 -------- -------- MINORITY INTEREST 1,560 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 and 50,000 shares authorized, respectively; 49,850 and 46,281 shares issued and outstanding, respectively 997 926 Additional paid in capital 172,426 168,785 Retained earnings 151,321 153,141 Treasury stock (807) (807) Unrealized gain on available-for-sale securities 2,716 2,503 Foreign currency translation adjustment 307 811 -------- -------- TOTAL STOCKHOLDERS' EQUITY 326,960 325,359 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $436,174 $453,479 -------- -------- See note to consolidated financial statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS (in 000s, except per share data) Three Months Ended November 30, 1995 1994 ---- ---- NET REVENUES $134,447 $164,304 COST OF REVENUES 75,863 77,665 -------- -------- GROSS PROFIT 58,584 86,639 -------- -------- OPERATING EXPENSES Selling, advertising, general and administrative expenses 52,583 56,719 Operating interest 1,032 885 Depreciation and amortization 3,497 1,599 -------- -------- TOTAL OPERATING EXPENSES 57,112 59,203 -------- -------- EARNINGS FROM OPERATIONS 1,472 27,436 -------- -------- OTHER INCOME (EXPENSE) Interest income 831 434 Interest expense (592) (830) Other (expense) income (836) 226 -------- -------- EARNINGS BEFORE INCOME TAXES 875 27,266 PROVISION FOR INCOME TAXES 350 11,308 -------- -------- NET EARNINGS BEFORE MINORITY INTEREST 525 15,958 -------- -------- MINORITY INTEREST (70) --- -------- -------- NET EARNINGS $595 $15,958 -------- -------- NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $0.01 $0.34 -------- -------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 56,640 47,497 -------- -------- See note 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 Securities --- --- --- --- --- ------ ------ ------ ------ ------- Balance August 31, 1995 --- --- 46,281 926 168,785 ------ ------ ------ ------ ------- Net Earnings --- --- --- --- --- Exercise of Stock Options and Warrants --- --- 359 7 3,196 Pooling of Interests with Sculptured and Probe --- --- 3,210 64 (64) Tax Benefit from Exercise of Stock Options --- --- --- --- 509 Foreign Currency Translation Loss --- --- --- --- --- Unrealized Gain on Marketable Securities --- --- --- --- --- ------ ------ ------ ------ -------- Balance November 30, 1995 --- --- 49,850 $997 $172,426 ====== ====== ====== ====== ========
Unrealized Foreign Gain On Currency Retained Treasury Marketable Translation Earnings Stock 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 Securities --- --- $2,503 --- 2,503 -------- ------ --------- --------- ------- Balance August 31, 1995 153,141 (807) 2,503 811 325,359 -------- ------ --------- --------- ------- Net Earnings 595 --- --- --- 595 Exercise of Stock Options and Warrants --- --- --- --- 3,203 Pooling of Interests with Sculptured and Probe (2,415) --- --- --- (2,415) Tax Benefit from Exercise of Stock Options --- --- --- --- 509 Foreign Currency Translation Loss --- --- --- (504) (504) Unrealized Gain on Marketable Securities --- --- 213 --- 213 -------- ------ --------- --------- ------- Balance November 30, 1995 $151,321 $(807) $2,716 $307 $326,960 ======== ====== ========= ========= =======
(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 note to consolidated financial statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (in 000s, except per share data) Three Months Ended November 30, --------------------- 1995 1994 ---- ---- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Cash received from customers $163,468 $180,165 Cash paid to suppliers and employees (178,742) (180,048) Interest received 831 434 Interest paid (1,624) (1,715) Income taxes (paid) refunded 375 (2,166) -------- -------- NET CASH (USED IN) OPERATING ACTIVITIES (15,692) (3,330) -------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Acquisition of subsidiaries, net 7,161 7,255 Sale of marketable equity securities ---- 305 Acquisition of fixed assets, excluding capital leases (5,373) (4,215) Disposal of fixed assets 59 263 Acquisition of other assets (674) (4,686) -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,173 (1,078) -------- -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Proceeds from short-term borrowings 128 3,749 Repayment of short-term borrowings (2,153) (1,295) Payment of mortgage ---- (22) Exercise of stock options and warrants 3,202 582 Payment of obligation under capital leases (53) (62) Issuance of common stock ---- 871 Payment of long-term debt (1,539) ---- -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (415) 3,823 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (281) 496 -------- -------- NET (DECREASE) IN CASH (15,215) (89) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,749 34,676 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,534 $ 34,587 -------- -------- ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued) (in 000s, except per share data) Three Months Ended November 30, ------------------- 1995 1994 -------- ------- RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net Earnings $ 595 $15,958 -------- ------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 3,497 1,599 Increase (Decrease) in allowance for returns and discounts 2,895 (1,507) Deferred income taxes (151) 783 Loss on investment in marketable equity securities ---- 154 Minority interest in net earnings of consolidated subsidiary (70) ---- Other non-cash charges 669 ---- Change in assets and liabilities: Decrease in accounts receivable 22,132 9,044 (Increase) in inventories (18,104) (1,449) (Increase) in prepaid expenses (3,237) (6,278) (Increase) Decrease in other current assets (276) 859 (Increase) in advance payment to suppliers ---- (160) (Decrease) in trade accounts payable (13,420) (31,225) (Decrease) Increase in accrued expenses (10,948) 1,391 Increase in income taxes payable 726 7,501 -------- ------- Total adjustments (16,287) (19,288) -------- ------- NET CASH (USED IN) OPERATING ACTIVITIES $(15,692) $(3,330) ======== ======= 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 $9,179 Cash paid for the capital stock (5,513) ------ Liabilities assumed $3,666 ------ 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 note to consolidated financial statements. ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTE TO CONSOLIDATED FINANCIAL STATEMENTS 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 of the unaudited periods. Consolidated earnings for the three months ended November 30, 1994 were restated to reflect the acquisition of Lazer-Tron Corporation on August 30, 1995, which was accounted for as a pooling of interests. 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 to date has been as a leading publisher of interactive entertainment software ("Software") for use with interactive entertainment hardware 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 spring 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 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 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. 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 new hardware platforms are equipped with read-only memory ("ROM") cartridges, compact disk ("CD") and/or other technologies as the dominant software storage device. 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(Trademark) system in the United States in September 1995. In fiscal 1995, the Company commenced the development and sale of Software for Sega's Saturn system and for Sony's PlayStation(Trademark). Nintendo has announced plans to release Ultra 64, its new 64-bit ROM cartridge-based system, in Japan in the spring of 1996 and Matsushita has announced plans to release M2, the 64-bit CD-based hardware system licensed by it from The 3DO Company ("3DO") by the end of 1996. In 1993, Sega introduced the Sega CD, a CD player which consists of an attachment for its 16-bit Genesis system. Additional CD platforms, including personal computer systems for which Software products are published, are currently marketed by Philips, Commodore, Apple, IBM, IBM-compatible manufacturers and 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. 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. The Company believes that sales of new 16-bit hardware systems peaked in calendar 1993, have decreased substantially since that time and will continue to do so, and that 16-bit Software sales peaked in calendar 1994 (the year following the peak year for hardware sales). 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(Trademark) have both achieved commercial success in Japan and, based on preliminary sales information, that the limited quantities of the PlayStation(Trademark) 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. 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. 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 intends to expand the number of Software titles for Multimedia/PC Systems marketed by it in fiscal 1996. Based on the decline of the 16-bit hardware market and the related slow-down in retail sell-through of 16-bit Software published by the Company as well as on an industry-wide basis, management believes that, in order to reduce inventory levels, certain retailers have reduced purchases of the Company's 16-bit Software as compared to prior fiscal quarters and that these and other retailers will continue to reduce purchases of the Company's 16-bit Software over the next several fiscal quarters. Management believes that such reduction in retail purchasing has resulted in a decline in the Company's revenues as discussed below. The slow-down in retail sell-through of 16-bit Software has caused and could continue to cause increased retail inventories which, in turn, caused and could continue to cause the Company to liquidate excess inventory levels at retail by offering price protection and other concessions to its customers in future periods. As the transition to the next generation of Entertainment Platforms continues and as new Entertainment Platforms and Multimedia/PC Systems achieve market acceptance, management believes that the risk of returns of the Company's 16-bit Software titles has increased and will continue to increase. No assurance can be given that future price protection, returns and other similar concessions will not exceed the Company's reserves for such concessions and, if so exceeded, the Company's results of operations and financial condition will be materially adversely affected. In addition, the Company has incurred and expects to continue to incur higher marketing expenses, which higher expenses are anticipated to affect adversely the Company's profitability. 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 in the first quarter of fiscal 1996 and will continue to be higher in fiscal 1996 as compared to prior periods. However, this increase in research and development expenses 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. In addition, to the extent the Company incurs development costs related to a particular Software title in any period in which that Software title is not shipped, the Company's general and administrative expenses in such period will be materially higher as compared to its historical rate and the Company's profitability will be materially adversely affected. 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 have accounted for significant portions of the Company's gross revenues during particular periods. In the quarter ended November 30, 1994, the Mortal Kombat II family of titles accounted for a significant portion of gross revenues and each of the WWF Raw and Maximum Carnage families of titles accounted for a material portion of the Company's revenues. In the quarter ended November 30, 1995, WWF Arcade and Quarterback Club '96 accounted for a material portion of the Company's gross revenues. 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. As the industry trend toward more sophisticated Entertainment Platforms and Multimedia/PC Systems continues, the related Software products 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 (such as, for example, the 32-bit software versions of Quarterback Club '96 which management had anticipated shipping, but which were not actually shipped, in the first quarter of fiscal 1996), which could cause the results of operations and net income for such quarter to fall significantly below anticipated levels. Retail sales for pre-Christmas and Christmas 1995 generally fell short of the Company's expectations. Additionally, sales of the Company's Software continued to be adversely impacted during the quarter ended November 30, 1995 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 "hit" and higher-priced titles during the period. The Company did not release as many "hit" Software products during the quarter ended November 30, 1995 as it had in comparable periods in the past. In addition, the Company was forced to offer concessions (such as returns and allowances) to its retailers in order to manage inventory levels. As a result of the foregoing, the Company's revenues in the first quarter of fiscal 1996 were materially lower than the comparable quarter in fiscal 1995 which, in turn, adversely affected the Company's profitability. Management anticipates that its revenues and profitability during the second quarter of fiscal 1996 will be materially lower than the comparable period in fiscal 1995 and that the Company's results of operations and profitability during fiscal 1996 will be lower than in fiscal 1995. The Company's ability to generate sales growth and increase 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 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 November 30, 1995 1994 ---- ---- Domestic revenues 69.3% 70.0% Foreign revenues 30.7 30.0 ----- ----- Net revenues 100.0 100.0 Cost of revenues 56.4 47.3 ----- ----- Gross profit 43.6 52.7 Selling, advertising, general and administrative expenses 39.1 34.5 Operating interest 0.8 0.5 Depreciation and amortization 2.6 1.0 ----- ----- Total operating expenses 42.5 36.0 Earnings from operations 1.1 16.7 Earnings before income taxes 0.7 16.6 Net earnings 0.4 9.7 ===== ===== Net Revenues The decrease in the Company's net revenues from $164.3 million for the quarter ended November 30, 1994 to $134.4 million for the quarter ended November 30, 1995 was predominantly due to reduced unit sales of 16-bit Software and also increased returns and allowances attributable to lower than anticipated retail sales during the pre-Christmas season. 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 November 30, 1994 and 1995, the Company derived 51% and 43% of its gross revenues, respectively, from sales of Nintendo-compatible Software and 47% and 37% of its gross revenues, respectively, from sales of Sega-compatible Software. In addition, during the quarter ended November 30, 1995, the Company derived 9.5% of its gross revenues from sales of Software for the Sony PlayStation(Trademark). The Company's gross revenues were derived from the following product categories: Three Months Ended November 30, 1995 1994 ---- ---- Portable Software 10.0% 12.0% 16-Bit Software 64.0 81.0 CD console and PC Software 23.0 3.0 Other 3.0 4.0 Gross Profit Gross profit fluctuates as a result of five factors: (i) the level of returns and allowances; (ii) the level of manufacture by the Company of its Sega Software; (iii) the percentage of CD Software sales; (iv) the percentage of foreign sales; and (v) 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. 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 margins will also increase (subject to the other variables listed above). The Company's margins on foreign sales are typically lower than those on domestic sales due to the higher prices charged by hardware licensors for Software distributed by the Company outside North America. The Company's margins on foreign 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 and cartridge 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 cartridge and 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. Additionally, returns and other similar concessions to retailers in respect of 16-bit Software sales in fiscal 1996 are expected to have a material adverse effect on the Company's gross margins in future periods. Gross profit decreased from $86.6 million (53% of net revenues) for the quarter ended November 30, 1994 to $58.6 million (44% of net revenues) for the quarter ended November 30, 1995. The dollar decrease is primarily attributable to lower sales volume and higher returns and discounts. The percentage decrease is primarily attributable to increased returns and allowances relating to the Company's Software 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 either Nintendo or Sega to the Company (although, to date, neither Nintendo nor Sega has effected such a price increase), which the Company may not be able to pass on to its customers and which could adversely affect its results of operations. Operating Expenses Selling, advertising, general and administrative expenses decreased from $56.7 million (35% of net revenues) for the quarter ended November 30, 1994 to $52.6 million (39% of net revenues) for the quarter ended November 30, 1995. The dollar decrease is 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 during the quarter ended November 30, 1995. The percentage increase is primarily attributable to reduced sales volume and the increased returns and allowances discussed above. Operating interest expense increased from $0.9 million (0.5% of net revenues) for the quarter ended November 30, 1994 to $1.0 million (0.8% of net revenues) for the quarter ended November 30, 1995. The increase is primarily attributable to higher outstanding balances under the Company's principal credit facility. Depreciation and amortization increased from $1.6 million (1% of net revenues) for the quarter ended November 30, 1994 to $3.5 million (3% of net revenues) for the quarter ended November 30, 1995. The increase in the quarter ended November 30, 1995 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. 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 quarters ended November 30, 1994 and 1995 was cash flows from operations. The Company used net cash from operations of approximately $3.3 million in the quarter ended November 30, 1994 and used net cash from operations of approximately $15.7 million during the quarter ended November 30, 1995. The decrease in net cash from operations for the quarter ended November 30, 1995 is primarily attributable to lower cash received from customers due, in large part, to the increased returns and allowances discussed above. The Company generally purchases its inventory of Nintendo and Sega (to the extent not manufactured by the Company) Software by opening letters of credit when placing the purchase order. At November 30, 1994 and 1995, amounts outstanding under letters of credit were approximately $23 million and $7 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, 1996. The credit agreement will be automatically renewed for another year by its terms, unless terminated upon 90 days' prior notice by either party. The Company has not given nor has it received any such notice of termination. 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 of one percent. At November 30, 1995, the facility was fully utilized. The Company currently has a $30 million trade finance facility with another bank. The Company's Asian and European subsidiaries currently have independent facilities totalling 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. The Company received a waiver, until April 15, 1996 with respect to its failure to meet, at November 30, 1995, two financial covenants made in connection with the Loan, which are required to be met on a quarterly basis. The lender has advised the Company that it intends to amend the financial covenants so that the Company will be in compliance in future periods. However, since the covenants have not yet been amended, the Company has reclassified the outstanding balance of the Loan as a current liability. If the covenants are not amended on or prior to April 14, 1996 (the date on which the Company is required to certify to the lender its compliance with the financial covenants as of February 29, 1996), the Company fails to meet the current covenants as of February 29, 1996 and the lender does not otherwise waive compliance by the Company with such covenants, the Company would be required to repay the Loan in full on April 14, 1996. 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") and to the nonrenewal of the Company's license agreement with WMS Industries Inc. The Company is also party to various litigations arising in the course of its business, the resolution of none of which, the Company believes, will have a material adverse effect on the Company's liquidity or financial position. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment on Form 10-Q/A to its Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. ACCLAIM ENTERTAINMENT, INC. Date: April 18, 1996 By /s/ Anthony R. Williams ------------------------------- Name: Anthony R. Williams Title: Executive Vice President -----END PRIVACY-ENHANCED MESSAGE-----