-----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, EST9hhOUd9uJP+h1WSz3lYbcttnE1W9+q2fe2d05+Vn41hmX+s9Ogm4tDNPZAtIg Q+JpG0TqfyQggifZFDKMRw== 0000889812-96-000905.txt : 19960719 0000889812-96-000905.hdr.sgml : 19960719 ACCESSION NUMBER: 0000889812-96-000905 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960718 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: 96596248 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 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. The registrant hereby amends the following items, financial statements, exhibits or other portions of its Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 1996 as set forth in the pages attached hereto: Item 1. Fiancial 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) 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 SPECIAL CARTRIDGE VIDEO CHARGE 51,168 ----- 51,168 ------ ------- ------ ------- ------- GROSS PROFIT (38,847) 87,817 19,736 174,456 ------- ------ ------- ------- OPERATING EXPENSES 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 49,065 64,821 106,177 124,024 ------- ------ ------- ------- (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 interests. Such acquisition did not have a material effect upon previously reported net income, revenues, assets, stockholders' equity or earnings per share of the consolidated entities. 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. 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 read-only memory ("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, 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. See "Cartridge Market Exit Charge". 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. Once the Company had made its decision to exit the 16-bit and portable cartridge category, the Company then had to estimate the price at which it could liquidate its existing cartridge Software inventory, which resulted in the inventory writeoffs for the quarter ended February 29, 1996. The only available channel to liquidate the Company's existing cartridge Software inventory was through its existing customers who had purchased, and were marketing, the same cartridge Software titles at prices higher than the Company's estimated liquidation value for such Software. In light of the foregoing and in order to preserve its retail relationships, the Company recognized that it would be required to provide those customers with allowances in respect of the cartridge Software inventory at retail. The Company estimated the anticipated cost of such allowances and recorded them as an adjustment to accounts receivable in the quarter ended February 29, 1996. See "--Cartridge Market Exit Charge." 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 Special cartridge video charge 109.4 --- 28.2 --- ---- ---- ---- ---- Gross profit (83.1) 54.5 10.9 53.6 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 104.9 40.2 58.6 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
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. Gross Profit Gross profit decreased from $87.8 million (55% of net revenues) for the quarter ended February 28, 1995 to a gross loss of $38.8 million ((83%) 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 $19.7 million (11% 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 and the special cartridge video charge described above. The percentage decreases for the three and six months ended February 29, 1996 as compared to the same periods ended February 29, 1995 were primarily attributable to the special cartridge video charge. See "Cartridge Market Exit Charge". Excluding the impact of the cartridge market exit charge, gross profit would have been $12.3 million for the three months ended February 29, 1996 and $70.9 million for the six months ended February 29, 1996. Excluding the impact of the cartridge market exit charge, 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 contracts for the manufacture of its Sega Software under an arrangement 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 licensors 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 rates of returns. 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. 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. 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 completed). 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. 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. SIGNATURE 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: July 18, 1996 BY /s/ Anthony R. Williams Name: Anthony R. Williams Title: Executive Vice President -----END PRIVACY-ENHANCED MESSAGE-----