-----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, WNTFfEEghY3VyebvhYAhrRgbKV0KselWp1jVnKFmXLjNAUIVetHKAAy84qoqnI7B u32ipDCGmFtw36E/99SEBA== 0000889812-99-000207.txt : 19990127 0000889812-99-000207.hdr.sgml : 19990127 ACCESSION NUMBER: 0000889812-99-000207 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990126 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: S-3 SEC ACT: SEC FILE NUMBER: 333-71211 FILM NUMBER: 99513338 BUSINESS ADDRESS: STREET 1: ONE ACCLAIM PLAZA CITY: GLEN COVE STATE: NY ZIP: 11542 BUSINESS PHONE: 5166565000 MAIL ADDRESS: STREET 1: OEN ACCLAIM PALZA CITY: GLEN COVEY STATE: NY ZIP: 11542 FORMER COMPANY: FORMER CONFORMED NAME: GAMMA CAPITAL CORP DATE OF NAME CHANGE: 19880608 S-3 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on January 26, 1999 Registration No. 333-________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- FORM S-3 Registration Statement Under The Securities Act of 1933 --------------------------------- ACCLAIM ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) --------------------------------- Delaware 38-2698904 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) --------------------------------- One Acclaim Plaza Glen Cove, New York 11542 (516) 656-5000 (Address and telephone number of registrant's principal executive offices) --------------------------------- Gregory E. Fischbach Chief Executive Officer Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 (516) 656-5000 (Name, address and telephone number of agent for service) --------------------------------- Copy to: Eric M. Lerner, Esq. Rosenman & Colin LLP 575 Madison Avenue New York, New York 10022 Telephone: (212) 940-8800 --------------------------------- Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
Proposed maximum Proposed maximum Title of each class of Amount to be aggregate price per aggregate offering security to be registered registered(1) unit (1) price (1) Amount of registration fee Common Stock, par value $0.02 per share, underlying certain warrants............... 216,014 $10.03 $2,167,268 $603
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, solely for the purpose of determining the registration fee, based on the estimated pro forma value of the shares underlying the warrants including an estimated exercise price per share for the shares underlying the warrants determined in accordance with the Stipulation and Agreement of Compromise and Settlement, dated April 15, 1998, between Acclaim and the participants in such settlement. Pursuant to such agreement, the exercise price and the number of shares of Common Stock underlying the warrants to be issued by the Company cannot be calculated at this time and have been estimated. The Company will file a pre-effective amendment setting forth the actual number of shares of Common Stock underlying the warrants issued and the exercise price per share, and if the maximum dollar value being registered increases, an additional filing fee will be paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JANUARY 26, 1999 ACCLAIM ENTERTAINMENT, INC. 216,014 SHARES OF COMMON STOCK The Business Acclaim Entertainment, Inc. is a worldwide developer, publisher and mass marketer of interactive entertainment software for use with dedicated interactive entertainment hardware platforms and multimedia personal computer systems. We own and operate four software development studios located in the U.S. and the U.K., and publish and distribute our software directly in North America, the U.K., Germany, France and Australia. Common Stock The shares offered by this prospectus are issuable upon exercise of certain common stock purchase warrants we will issue in connection with the settlement of a previously pending class action lawsuit. The warrants will be issued by us without compliance with the registration and prospectus requirements of Section 5 of the Securities Act of 1933 in accordance with the exemption provided under Section 3(a)(10) thereof. The warrants will have an aggregate value of $750,000 computed in accordance with a formula agreed upon in connection with the settlement of the lawsuit. The common stock purchase warrants may be exercised at any time for a period of three years after the date this prospectus becomes effective (March ___, 1999). The warrants entitle the holder to purchase from us one share of our common stock for each warrant, at a purchase price calculated in accordance with the settlement agreement. The proceeds, if any, from the exercise of the warrants will be added to our working capital. This prospectus covers the offer and sale by Acclaim to the warrant holders of up to that number of shares of its common stock sufficient to permit the exercise in full of all outstanding warrants in accordance with the settlement agreement. See "Risk Factors" beginning on page 6 for a discussion of certain factors that you should consider before you invest in the common stock being sold with this prospectus. Our common stock is traded on The Nasdaq Stock Market National Market System under the symbol "AKLM." On January 25, 1999, the last reported sale price of the common stock was $10.50 per share. Acclaim intends to list the warrants on the "over-the-counter" market. The proposed trading symbol is _____. The offering is subject to withdrawal and cancellation at any time, without notice. Neither the Securities and Exchange Commission (SEC) nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. March ___, 1999 TABLE OF CONTENTS Page No. The Company 4 Risk Factors 6 Use of Proceeds 16 Determination of Offering Price 16 Plan of Distribution 16 Legal Proceedings 17 Legal Matters 17 Experts 17 ------------------------- DEFINED TERMS As used in this prospectus, (a) "Acclaim" or "we" means Acclaim Entertainment, Inc., (b) "Common Stock" means Acclaim's common stock, par value $0.02 per share, (c) "Warrants" mean the common stock purchase warrants to be issued by Acclaim in connection with the settlement of a class action lawsuit, and (d) "Stipulation" means that certain Stipulation and Agreement of Compromise and Settlement, dated April 15, 1998, between Acclaim and the participants in such settlement. ------------------------- Forward-Looking Statements Some of the statements contained in this prospectus discuss future expectations, contain projections of results of operations or financial condition or state other "forward-looking" information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements, including those risks and uncertainties discussed in the "Risk Factors" section of this prospectus. In light of the significant risks and uncertainties inherent in the forward-looking statements included in this prospectus, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Incorporation of Certain Documents by Reference The following documents filed by us with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are incorporated herein by reference: o Annual Report on Form 10-K for the fiscal year ended August 31, 1998 filed on November 6, 1998 (File No. 0-16986); o Quarterly Report on Form 10-Q for the period ended November 30, 1998 filed on January 14, 1999 (File No. 0-16986); and o The information in respect of the Common Stock under the caption "Description of Registrant's Securities to be Registered" contained in the Registration Statement on Form 8-A, filed on June 8, 1988 (File No. 0-16986), as amended by the Current Report on Form 8-K, filed on August 25, 1989 (File No. 33-9460-C), relating to the one-for-two reverse stock split effected by Acclaim. In addition, all documents filed by us with the SEC pursuant to Sections 13(a), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference into this prospectus. In addition, if we revise or update a document included in this prospectus or incorporate a document by reference into this prospectus, then the document contained herein (or incorporated by reference herein) shall be considered revised or updated upon our filing of such updated or revised document. We will provide, without charge, to each person, including any beneficial owner, to whom this prospectus is delivered, upon the written or oral request of such person, a copy of any and all of the documents incorporated herein by reference (other than exhibits to such documents unless such exhibits are specifically incorporated by reference herein). Requests for such documents should be directed to the Secretary of Acclaim Entertainment, Inc., One Acclaim Plaza, Glen Cove, New York 11542. Telephone requests for such copies should be directed to the Secretary at (516) 656-5000. 2 Where You Can Find More Information Acclaim has filed with the SEC a registration statement on Form S-3 under the Securities Act of 1933, as amended (the "Securities Act") covering the Common Stock underlying the Warrants to be issued in this offering. This prospectus does not contain all of the information included in the registration statement. Any statement made in this prospectus concerning the contents of any documents are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the registration statement. You should read the exhibit for a more complete understanding of the document or matter involved. Each statement regarding a document is qualified in its entirety by reference to the actual document. Acclaim is required to file periodic reports and other information with the SEC under the Exchange Act. You may read and copy the registration statement, including the attached exhibits, and any reports, statements or other information that we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Acclaim's SEC filings are also available to the public on the SEC Internet site (http://www.sec.gov). You should rely only on the information provided in this prospectus or that to which we have referred you. No person has been authorized to provide you with different information. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate as of any other date. 3 The Company Acclaim is a worldwide developer, publisher and mass marketer of interactive entertainment software for use with dedicated interactive entertainment hardware platforms ("Platforms") and multimedia personal computer systems (PCs). Acclaim owns and operates four software development studios located in the U.S. and the U.K., and publishes and distributes its software directly in North America, the U.K., Germany, France and Australia. Acclaim's operating strategy is to develop and maintain a core of key brands and franchises (e.g., Turok, NFL Quarterback Club and All Star Baseball) to support the various Platforms and PCs that dominate the interactive entertainment market at a given time or which it perceives as having the potential for achieving mass market acceptance. Acclaim emphasizes sports simulation and arcade-style software for Platforms, and fantasy/role-playing, real-time simulation, adventure and sports simulation software for PCs. Acclaim also engages, to a lesser extent, in the distribution of software developed by third-party software publishers and the development and publication of comic book magazines and strategy guides relating to its software. The software industry is driven by the size of the installed base of Platforms (such as those manufactured by Nintendo Co., Ltd. (Japan) (Nintendo Co., Ltd. and its subsidiary, Nintendo of America, Inc., are collectively referred to as "Nintendo"), Sony Corporation (Sony Corporation and its affiliate, Sony Computer Entertainment America, are collectively referred to as "Sony") and Sega Enterprises Ltd. ("Sega")), and PCs dedicated for home use. The industry is characterized by rapid technological change, as evidenced by the successive introductions of hardware systems from Nintendo, Sega and Sony (e.g., the 8-bit cartridge system from Nintendo in 1985; 16-bit cartridge systems from Sega in 1990 and Nintendo in 1991; 32-bit CD systems from Sega and Sony in 1995; the 64-bit cartridge system from Nintendo in 1996; and the introduction by Sega in November 1998 of Dreamcast, a new 64-bit CD system, in Japan). These successive introductions have resulted in Platform and related software product cycles. To date, no single Platform or system has achieved long-term dominance in the interactive entertainment market. Accordingly, Acclaim must continually anticipate and adapt its software to emerging Platforms. Based on information available in 1994 and based on its historical experience with respect to the transition from 8- to 16-bit Platforms, Acclaim believed that software sales for 16-bit Platforms would, although continuing to decrease overall, remain substantial through the 1996 holiday season. Accordingly, it anticipated that sales of its 32-bit and PC software in fiscal 1996 would grow as compared to fiscal 1995 but that the majority of its revenues in fiscal 1996 would still be derived from 16-bit software sales. However, the 16-bit software market matured much more rapidly than anticipated by Acclaim, its Christmas 1995 16-bit software sales were substantially lower than anticipated and, by April 1996, Acclaim derived minimal profits from software sales and made the decision to exit the 16-bit and portable software markets. In connection with the decision to exit the 16-bit and portable software markets in April 1996, Acclaim recorded a special cartridge video charge of approximately $48.9 million in the second quarter of fiscal 1996, consisting of provisions of approximately $28.8 million (reflected in net revenues), and approximately $20.1 million (reflected in cost of revenues) to adjust accounts receivable and inventories at February 29, 1996 to their estimated net realizable values. Acclaim recorded a loss from operations of $274.5 million and a net loss (on an after-tax basis) of $221.4 million for fiscal 1996. The net loss for the year reflected (1) write-offs of receivables, (2) the establishment of additional receivables and inventory reserves, (3) severance charges incurred in connection with a company downsizing, (4) the reduction of certain deferred costs, and (5) an operating 4 loss for the year resulting primarily from price protection and similar concessions granted to retailers at greater than anticipated levels in connection with its 16- and 32-bit software. Acclaim recorded a loss from operations of $150.9 million and a net loss (on an after-tax basis) of $159.2 million for fiscal 1997. The net loss for the year reflected, among other things, (1) a charge for certain claims and litigations for which the settlement obligation was probable and estimable of $23.6 million, (2) a write-down of goodwill of $25.2 million to reduce the carrying value of the goodwill associated with its subsidiary, Acclaim Comics, Inc., to its estimated undiscounted cash flows and (3) downsizing charges of $10 million. As a result of the acquisitions of the development studios in 1995 (two of which were completed in fiscal 1996), Acclaim's fixed costs relating to the development of software and its general and administrative expenses substantially increased in fiscal 1996. These expenses in the aggregate had a negative impact on Acclaim's liquidity and profitability in fiscal 1996 and fiscal 1997. The rapid technological advances in game systems have significantly changed the look and feel of software as well as the software development process. According to our estimates, the average development cost for a title for Platforms approximately three years ago was approximately $300,000 to $400,000, while the average development cost for a title for Platforms and PCs is currently between $1 million and $2 million. Approximately 75% of our gross revenues in the first quarter of fiscal 1999 was derived from software developed by our studios. The process of developing software is extremely complex and is expected to become more complex and expensive in the future as new platforms and technologies are introduced. Acclaim recorded earnings from operations of $24.7 million and net earnings (on an after-tax basis) of $20.7 million for fiscal 1998. The improved results for fiscal 1998 primarily resulted from increased sales in the U.S. of its 64-bit and, to a lesser extent, 32-bit software. They also reflect significantly reduced operating expenses, resulting primarily from (1) a reduction in personnel, (2) the sale or discontinuance of certain non-profitable businesses, (3) the consolidation of certain of the development studio operations to reduce overhead expenses and (4) various other cost reductions. Acclaim recorded net earnings of $8.0 million and $10.3 million in the first quarter of fiscal 1998 and 1999, respectively. The fiscal 1999 period results primarily reflect increased sales in the United States of Acclaim's 32- and 64-bit software. Although revenues from the sale of N64 and PlayStation software are anticipated to continue to grow in the second quarter of fiscal 1999 and for fiscal 1999 as a whole, we do not anticipate that, for fiscal 1999 as a whole, we will achieve our fiscal 1998 growth rate. No assurance can be given as to the future growth of the installed base of 32- and 64-bit Platforms, the future growth of the software market therefor or of our results of operations and profitability in future periods. The results for the first quarter of fiscal 1998 and 1999 also reflect our significantly reduced operating expenses as compared to prior periods. See "Risk Factors." Acclaim's ability to generate sales growth and profitability will be materially dependent on (1) the growth of the software market for 32- and 64-bit Platforms and PCs and (2) the ability to identify, develop and publish "hit" software for Platforms with significant installed bases. A Delaware corporation, Acclaim was founded in 1987. Acclaim's principal executive offices are located at One Acclaim Plaza, Glen Cove, New York 11542, and its telephone number is (516) 656-5000. Its Internet site is: "http://www.acclaim.net." 5 RISK FACTORS Our future operating results depend upon many factors and are subject to various risks and uncertainties. Some of the risks and uncertainties which may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results are as follows: Recent Operating Results Our net revenues increased from $161.9 million in fiscal 1996 to $165.4 million in fiscal 1997 and to $326.6 million in fiscal 1998 and increased from $92.3 million for the quarter ended November 30, 1997 to $104.8 million for the quarter ended November 30, 1998. We incurred a net loss of $221.4 million in fiscal 1996, a net loss of $159.2 million in fiscal 1997 and net earnings of $20.7 million in fiscal 1998, and net earnings of $8.0 million and $10.3 million in the quarters ended November 30, 1997 and 1998, respectively. For the most part, the increase in revenues and earnings in fiscal 1998 and the fiscal 1999 period reflects increased sales in the U.S. of our software for Nintendo's N64 and Sony's PlayStation Platforms. Charges for litigation settlements and other claims of $23.6 million, a writedown of the goodwill associated with our subsidiary, Acclaim Comics, Inc., of $25.2 million and downsizing charges of $10 million are included in the loss for fiscal 1997. Special charges relating to our exit from the 16-bit and portable software business aggregating approximately $114 million are included in the loss for fiscal 1996. Our revenues and operating results in fiscal 1996 and 1997 were affected principally by the industry transition from 16-bit to 32- and 64-bit Platforms. We had anticipated that sales of software for the older Platforms would dominate Christmas 1995 sales and would be material in Christmas 1996. Therefore, we focused our development efforts on 16-bit software for fiscal 1996 and 1997. However, sales of 16-bit software decreased much more rapidly than we anticipated in calendar 1996, which resulted in reduced revenues and net losses in fiscal 1996 and 1997. In 1998, the interactive entertainment hardware market was characterized by the growth of the installed base of N64 and PlayStation units worldwide. This growth had a positive impact on our operating results for fiscal 1998 and in the first quarter of fiscal 1999. Although N64 and PlayStation have achieved significant market acceptance worldwide and we anticipate that the installed base of N64 and PlayStation units will continue to grow in the short term, we cannot assure investors that the installed base of either or both will grow at the present rate, if at all. Also, there is no assurance that revenues from sales of software for these Platforms will increase as the installed base increases. In fiscal 1997 and 1998, we took various actions to reduce our operating expenses. See "--Liquidity and Bank Relationships" below for a description of these actions. As a result, operating expenses in fiscal 1997 and 1998 were substantially lower than in prior comparable periods. Although we anticipate that operating expenses will increase in dollar terms in fiscal 1999, we intend to monitor our operating expenses closely and do not anticipate they will increase materially as a percentage of net revenues. However, we cannot assure stockholders that operating expenses will not increase as a percentage of net revenues in the remainder of fiscal 1999 and beyond. Any such increase could negatively impact our profits in fiscal 1999 and beyond. Liquidity and Bank Relationships We generally experienced negative cash flow from operations in fiscal 1996 and 1997 which, for the most part, was a result of net losses in these periods. We used net cash in operations of approximately $38.3 million in fiscal 1996 and approximately $29.2 million in fiscal 1997 and derived net cash from operations of approximately $23.3 million in fiscal 1998. We derived net cash from operations of 6 approximately $7.1 million and $11.4 million in the first quarter of fiscal 1998 and 1999, respectively. A tax refund of approximately $54.0 million had a positive impact on net cash from operating activities in fiscal 1997. We believe that the cash flows from operations in fiscal 1999 will be sufficient to cover our operating expenses and those current obligations that we must pay in the remainder of fiscal 1999. Our belief is based on the anticipated continued growth of the installed base of 32- and 64- bit Platforms, the anticipated success of our software for those Platforms and the resulting continued growth of our net revenues. However, we cannot assure investors that our operating expenses and current obligations will be significantly less than the cash flows available from operations in fiscal 1999 or in the future. Our long-term liquidity depends mainly on our publishing "hit" software for the dominant Platforms. In order to provide liquidity, in fiscal 1997 and 1998, we took a number of actions including (1) significantly reducing the number of our employees, (2) consolidating our development studio operations and (3) eliminating certain operations, such as the coin-operated video game subsidiary. In addition, in February 1997, we completed an offering of $50 million of 10% Convertible Subordinated Notes (the "Notes"). Of the net proceeds of the offering, we used approximately $16 million to retire a term loan from Midland Bank plc and $2 million to pay down a portion of a mortgage loan from Fleet Bank. In March 1997, we sold substantially all of the assets and certain liabilities of Acclaim Redemption Games, Inc. (formerly, Lazer-Tron Corporation) for $6 million in cash. Due to our financial performance in the first three quarters of fiscal 1998, we were unable to comply with financial covenants under our revolving credit facility with BNY Financial Corporation (BNY), our lead institutional lender. BNY waived the resulting defaults at the end of each of the first three quarters of fiscal 1998. We have negotiated new financial covenants as of and for the period ended August 31, 1998 and future periods. We were in compliance with the new financial covenants at November 30, 1998. Although we expect to continue to comply with these new covenants, we cannot make any guarantee of compliance. In addition, factors beyond our control may result in future covenant defaults or a payment default. We may not be able to obtain waivers of any future default(s). If such defaults occur and are not waived by the lender, the lender could accelerate the loan or exercise other remedies. Such actions would have a negative impact on our liquidity and operations. Substantial Leverage and Ability to Service Debt Our debt level could have important consequences to our stockholders because a portion of cash flow from operations must be set aside to pay down debt, including the outstanding Notes, and existing bank obligations. Therefore, these funds are not available for other purposes. Additionally, a high debt level limits our ability to obtain additional debt financing in the future, or to pursue possible expansion of our business or acquisitions. Also, high debt levels could limit our flexibility in reacting to changes in the interactive entertainment industry and economic conditions generally. These limitations make us more vulnerable to adverse economic conditions and restrict our ability to withstand competitive pressures or take advantage of business opportunities. Some of our competitors currently have a lower debt level, and are likely to have significantly greater operating and financing flexibility, than us. Based upon current levels of operations, we believe we can meet our interest obligations on the Notes, and interest and principal obligations under bank agreements, when due. However, if cash flow from operations is not enough to meet debt obligations when due, we may have to restructure our indebtedness. We cannot guarantee that we will be able to restructure or refinance our debt on satisfactory terms. In addition, restructuring or refinancing may not be permitted by the terms of the indenture governing the Notes (the "Indenture"), or existing indebtedness. We cannot assure stockholders that our operating cash flows will be sufficient to meet debt service requirements. Also, we cannot 7 guarantee stockholders that future operating cash flows will be sufficient to repay the Notes, or that we will be able to refinance the Notes or other indebtedness at maturity. See "--Prior Rights of Creditors" below. Prior Rights of Creditors We have outstanding long-term debt (including current portions) of $52.2 million at November 30, 1998. Certain of the indebtedness is secured by liens on substantially all of our assets. If we do not timely pay interest or principal on indebtedness when due, we will be in default under loan agreements and the Indenture. In addition, the Indenture provides that, upon the occurrence of certain events, we may be obligated to repurchase all or a portion of the outstanding Notes. If such a repurchase event occurs and we do not have, or are unable to obtain, sufficient financial resources to repurchase the Notes, we would be in default under the Indenture. In addition, the occurrence of certain repurchase events would constitute a default under some of our current loan agreements. Further, we depend on dividends and other advances and transfers of funds from our subsidiaries to meet some debt service obligations. State and foreign law regulate the payment of dividends by our subsidiaries, which is also subject to the terms of existing bank agreements and the Indenture. A significant portion of assets, operations, trade payables and other indebtedness is located at our subsidiaries. The creditors of the subsidiaries would generally recover from these assets on the obligations owed to them by the subsidiaries before any recovery by our creditors and before any assets are distributed to our stockholders. If we are unable to meet current bank obligations, a default would occur under existing bank agreements. Such default, if not waived, could result in acceleration of our obligations under the bank agreements. Moreover, default could result in a demand by the lenders for immediate repayment and would entitle any secured creditor in respect of such debt to proceed against the collateral securing the defaulted loan. Additionally, an event of default under the Indenture may result in actions by IBJ Schroder Bank & Trust Company, as trustee, on behalf of the holders of the Notes. In the event of such acceleration by creditors or action by the trustee, holders of indebtedness would be entitled to payment out of our assets. If we become insolvent, are liquidated or reorganized, it is possible that there would be insufficient assets remaining after payment to the creditors for any distribution to our stockholders. Industry Trends; Platform Transition; Technological Change The interactive entertainment industry is characterized by rapid technological change due in large part to: o the introduction of Platforms incorporating more advanced processors and operating systems; o the impact of technological changes embodied in PCs; o the development of electronic and wireless delivery systems; and the o entry and participation of new companies in the industry. These factors, among others, have resulted in Platform and software life cycles. No single Platform has achieved long-term dominance. Accordingly, we must continually anticipate and adapt our software to emerging Platforms and systems. The process of developing software is extremely complex and is expected to become more complex and expensive in the future as new platforms and technologies are introduced. 8 Development of software currently requires substantial investment in research and development in the areas of graphics, sound, digitized speech, music and video. We cannot guarantee that we will be successful in developing and marketing software for new platforms. Substantially all of our revenues in fiscal 1998 and the first quarter of fiscal 1999 were derived from the sale of software designed for N64, PlayStation and PCs. In the past, we expended significant development and marketing resources on product development for Platforms that have not achieved the results we anticipated. If we (1) do not develop software for Platforms that achieve significant market acceptance, (2) discontinue development of software for a Platform that has a longer than expected life cycle, (3) develop software for a Platform that does not achieve a significant installed base or (4) continue development of software for a Platform that has a shorter than expected life cycle, we may experience losses from operations. We cannot guarantee that we will be able to predict accurately such matters, and failure to do so would negatively affect us. Results of operations and cash flows were negatively affected during fiscal 1996 and 1997 by the significant decline in sales of 16-bit software and the transition to the new Platforms. Because (1) there were a significant number of titles competing for limited shelf space and (2) the new Platforms had not achieved market penetration similar to that of the 16-bit Platforms in prior years, the number of units of each title sold for the newer Platforms was significantly less than the number of units of a title generally sold in prior years for 16-bit Platforms. In fiscal 1998, the interactive entertainment hardware market was characterized by the worldwide growth of the installed base of N64 and PlayStation units and related software. Although we anticipate that the installed base of these Platforms will continue to grow in the short term and that the market for software for these Platforms will also continue to grow, we cannot guarantee that the hardware or software market will continue to grow at the current rate. Revenue and Earnings Fluctuations; Seasonality Historically, we have derived substantially all of our revenues from the publication and distribution of software for the then dominant Platforms. Revenues are subject to fluctuation during transition periods, as in fiscal 1996 and 1997, when new Platforms have been introduced but none has achieved mass-market penetration. In addition, the timing of release of new titles impacts earnings in any given period. Earnings also may be materially impacted by other factors including (1) the level and timing of market acceptance of titles, (2) increases or decreases in development and/or promotion expenses for new titles, and (3) the timing of orders from major customers. A significant portion of revenues in any quarter is generally derived from sales of new titles introduced in that quarter or in the immediately preceding quarter. If we are unable to begin volume shipments of a significant new title during the scheduled quarter, revenues and earnings will be negatively affected in that quarter. In addition, because a majority of the unit sales for a title typically occur in the first 90 to 120 days following the introduction of the title, earnings may increase significantly in a period in which a major title is introduced and may decline in the following period or in periods in which there are no major title introductions. Also, certain operating expenses are fixed and do not vary directly in relation to revenue. Consequently, if net revenue is below expectations, operating results are likely to be negatively affected. The interactive entertainment industry is highly seasonal. Typically, net revenues are highest during the last calendar quarter (which includes the holiday selling season), decline in the first calendar quarter, are lower in the second calendar quarter and increase in the third calendar quarter. The seasonal pattern is due primarily to the increased demand for software during the year-end holiday selling season. However, earnings vary significantly and are largely dependent on releases of major new titles and, 9 accordingly, may not necessarily reflect the seasonal patterns of the industry as a whole. We expect that operating results will continue to fluctuate significantly in the future. Dependence on Entertainment Platform Manufacturers; Need for License Renewals The following table shows the percent of gross revenues for fiscal 1996, 1997 and 1998 and for the quarters ended November 30, 1997 and 1998, respectively, derived from sales of software for the indicated Platforms:
Fiscal Year ended August 31, Quarter ended November 30, -------------------------------- -------------------------- Title 1996 1997 1998 1997 1998 - ----- ---- ---- ---- ---- ---- Nintendo-compatible 29% 41% 60% 75% 62% Sega-compatible 36% 12% 1% * * Sony-compatible 19% 28% 30% 15% 31%
- --------------------- * represents less than 1% We are substantially dependent on the entertainment platform manufacturers as the sole manufacturers of the Platforms marketed by them, as the sole licensors of the proprietary information and technology needed to develop software for those Platforms and, in the case of Nintendo and Sony, as the sole manufacturers of the software developed by us for the compatible Platform. The entertainment platform manufacturers have in the past and may in the future limit the number of titles we can release in any year, which may limit any future growth in sales. In the past, we have been able to renew and/or negotiate extensions of our software license agreements with the entertainment platform developers. However, we cannot assure stockholders that, at the end of their current terms, we will be able to obtain extensions or that we will be successful in negotiating definitive license agreements with developers of new Platforms. If we cannot obtain licenses from developers of new Platforms or if our existing license agreements are terminated, our financial position and results of operations will be materially adversely affected. In addition, the termination of any one of the license agreements or other arrangements could negatively affect our financial position and results of operations. In addition to licensing arrangements, we depend on the entertainment platform manufacturers for the protection of the intellectual property rights to their respective Platforms and technology and their ability to discourage unauthorized persons from producing software for the Platforms developed by each of them. We also rely upon the entertainment platform manufacturers for the manufacture of certain cartridge and CD-based read-only memory (ROM) software. Reliance on New Titles; Product Delays Our ability to maintain favorable relations with retailers and to receive the maximum advantage from advertising expenditures depends on our ability to provide retailers with a timely and continuous flow of product. The life cycle of a title generally ranges from less than three months to upwards of 12 10 months, with the majority of sales occurring in the first 90 to 120 days after release. We actively market our current releases while simultaneously supporting our back catalogue with pricing and sales incentives. We are constantly required to develop, introduce and sell new titles in order to generate revenue and/or to replace declining revenues from previously released titles. In addition, it is difficult to predict consumer preferences for titles, and few titles achieve sustained market acceptance. We cannot assure stockholders that our new titles will be released in a timely fashion, will achieve any significant degree of market acceptance, or that such acceptance will be sustained for any meaningful period. Competition for retail shelf space, consumer preferences and other factors could result in the shortening of the life cycle for older titles and increase the importance of our ability to release titles on a timely basis. The timely shipment of a title depends on various factors, including quality assurance testing by us and the manufacturers. We generally submit new titles to the entertainment platform manufacturers and other intellectual property licensors for approval prior to development and/or manufacture. Since we are required to engage Nintendo or Sony, as the case may be, to manufacture titles developed by us for the Platforms marketed by them, our ability to control our supply of Nintendo or Sony titles and the timing of their delivery is limited. If the title is rejected by the manufacturer as a result of bugs in software or if there is a substantial delay in the approval of a product by an entertainment platform manufacturer or licensor, our financial condition and results of operations could be negatively impacted. In the past, we have experienced significant delays in the introduction of certain new titles and such delays may occur in the future. Moreover, it is likely that in the future certain new titles will not be released in accordance with our internal development schedule or the expectations of public market analysts and investors. A significant delay in the introduction of, or the presence of a defect in, one or more new titles could negatively affect the ultimate success of our titles. If we do not develop, introduce and sell new competitive titles on a timely basis, results of operations and profitability will be negatively affected. Reliance on "Hit" Titles The market for software is "hits" driven. Therefore, our future success depends on developing and marketing "hit" titles for Platforms with significant installed bases. Sales of our top four titles accounted for approximately 53% of gross revenues for fiscal 1998 and sales of our top title accounted for approximately 33% of gross revenues for fiscal 1997. Sales of our top three titles accounted for approximately 69% of gross revenues for the first quarter of fiscal 1999 and sales of our top three titles accounted for approximately 71% of gross revenues for the first quarter of fiscal 1998. We cannot assure stockholders that we will be able to publish "hit" titles in the future. If we do not publish "hit" titles in the future, our financial condition, results of operations and profitability could be negatively affected, as they were in fiscal 1996 and 1997. Inventory Management; Risk of Product Returns Generally, we are not contractually obligated to accept returns, except for defective product. However, we may permit customers to return or exchange product and may provide price protection or other concessions on products unsold by the customer. Accordingly, management must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Also, management must make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting periods. Among the more significant of such estimates are allowances for estimated returns, price concessions and other discounts. At the time of shipment, we establish reserves in respect of such estimates taking into account the potential for product returns and other discounts based on historical 11 return rates, seasonality, level of retail inventories, market acceptance of products in retail inventories and other factors. In fiscal 1996, price allowances, returns and exchanges were significantly higher than reserves. This shortfall had a negative impact on results of operations and liquidity in fiscal 1996. We believe that, at November 30, 1998, we have established adequate reserves for future price protection, returns, exchanges and other concessions. However, we cannot guarantee the adequacy of our reserves. If the reserves are exceeded, our financial condition and results of operations will be negatively impacted. In addition, we offer stock-balancing programs for our PC software. We have established reserves for such programs, which have not been material to date. Future stock-balancing programs may become material and/or exceed reserves for such programs. If so exceeded, results of operations and financial condition could be negatively impacted. Increased Product Development Costs As a result of the calendar 1995 acquisitions of the development studios, beginning in fiscal 1996, our fixed software development and overhead costs were significantly higher as compared to historical levels. These costs negatively impacted results of operations and profitability in fiscal 1996 and 1997. In fiscal 1998, we consolidated our development studio operations to reduce overhead expenses. Due to our planned release of a higher number of software titles and increasing software development costs, we anticipate that our future research and development expenses will continue to increase as a percentage of net revenues as compared to fiscal 1998. Competition The market for software is highly competitive. Only a small percentage of titles introduced in the software market achieve any degree of sustained market acceptance. Competition is based primarily upon: o quality of titles; o the publisher's access to retail shelf space; o product features; o the success of the Platform for which the software is written; o price of titles; o the number of titles available for the Platform for which the software is written; and o marketing support. We compete with a variety of companies that offer products that compete directly with one or more of our titles. Typically, the chief competitor on a Platform is the developer of that Platform, to whom we pay royalties and, in some cases, manufacturing charges. Accordingly, the developers have a price, marketing and distribution advantage with respect to software marketed by them. This advantage is particularly important in a mature or declining market which supports fewer full-priced titles and is characterized by customers who make purchasing decisions on titles based primarily on price, unlike developing markets with limited titles, when price has been a less important factor in software sales. Our competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than us, such as Nintendo, Sega and Sony. Our competitors also include a number of independent software publishers licensed by the hardware developers. Additionally, the entry and participation of new companies, including diversified entertainment companies, in markets in which we compete may adversely impact our performance in these markets. 12 The availability of significant financial resources has become a major competitive factor in the software industry, primarily as a result of the costs associated with developing and marketing software. As competition increases, significant price competition and reduced profit margins may result. In addition, competition from new technologies may reduce demand in markets in which we have traditionally competed. Prolonged price competition or reduced demand as a result of competing technologies would negatively impact our business. We may not be able to compete successfully. Intellectual Property Licenses and Proprietary Rights Some of our software embodies trademarks, tradenames, logos or copyrights licensed to us by third parties (such as the NBA, the NFL or their respective players' associations), the loss of which could prevent the release of a title or limit its economic success. License agreements generally extend for a term of two to three years and are terminable in the event of our material breach (including our failure to pay amounts due to the licensor in a timely manner) or our bankruptcy or insolvency and certain other events. Since competition is intense, we may not be successful in the future in acquiring intellectual property rights with significant commercial value. In addition, we cannot assure stockholders that these licenses will be available on reasonable terms or at all. In order to protect our titles and proprietary rights, we rely mainly on a combination of: o copyrights; o trade secret laws; o patent and trademark laws; o nondisclosure agreements; and o other copy protection methods. It is our policy that all employees and third-party developers sign nondisclosure agreements. These measures may not be sufficient to protect our intellectual property rights against infringement. Additionally, we have "shrinkwrap" license agreements with the end users of our PC titles, but rely on the copyright laws to prevent unauthorized distribution of other software. Existing copyright laws afford only limited protection. Notwithstanding our rights to our software, it may be possible for third parties to copy illegally our titles or to reverse engineer or otherwise obtain and use our proprietary information. Illegal copying occurs within the software industry, and if a significant amount of illegal copying of our published titles or titles distributed by us occurs, our business could be adversely impacted. Policing illegal use of our titles is difficult, and software piracy is expected to persist. Further, the laws of certain countries in which our titles are distributed do not protect us and our intellectual property rights to the same extent as the laws of the U.S. We believe that our titles, trademarks and other proprietary rights do not infringe on the proprietary rights of others. However, as the number of titles in the industry increases, we believe that claims and lawsuits with respect to software infringement will also increase. From time to time, third parties have asserted that features or content of certain of our titles may infringe upon intellectual property rights of such parties. We have asserted that third parties have likewise infringed our proprietary rights. Some of these claims have resulted in litigation by and against us. To date, no such claims have had a negative effect on our ability to develop, market or sell our titles. Existing or future infringement claims by or against us may result in costly litigation or require us to license the intellectual property rights of third parties. The owners of intellectual property licensed by us generally reserve the right to protect such intellectual property against infringement. 13 International Sales International sales represented approximately 41% of net revenues in fiscal 1996, 50% of net revenues in fiscal 1997, 34% of net revenues in fiscal 1998 and 41% and 30% of net revenues in the first quarter of 1998 and 1999, respectively. We expect that international sales will continue to account for a significant portion of net revenues in future periods. International sales are subject to the following inherent risks: o unexpected changes in regulatory requirements; o tariffs and other economic barriers; o fluctuating exchange rates; o difficulties in staffing and managing foreign operations; and o the possibility of difficulty in accounts receivable collection. Because we believe that exposure to foreign currency losses is not currently material, we do not hedge against foreign currency risks. In some markets, localization of our titles is essential to achieve market penetration. As a result of the inherent risks, we may incur incremental costs and experience delays in localizing our titles. These risk factors or other factors could have a negative effect on future international sales and, consequently, on our business. Dependence on Key Personnel and Employees The software industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with technical, marketing, sales, product development and management skills. Successful operations depend on our ability to identify, hire and retain such personnel. We may not be able to attract and retain such personnel or may incur significant costs in order to do so. In particular, we are highly dependent upon the management services of Gregory Fischbach, Co-Chairman of the Board and Chief Executive Officer, and James Scoroposki, Co-Chairman of the Board and Senior Executive Vice President. The loss of the services of either of these two could have a negative impact on our business. Although we have employment agreements with Messrs. Fischbach and Scoroposki, they may leave or compete with us in the future. If we are unable to attract additional qualified employees or retain the services of key personnel, our business could be negatively impacted. Litigation In conjunction with then pending class actions and other litigations and claims for which the settlement obligation was then probable and estimable, we recorded a charge of $23.6 million during the year ended August 31, 1997. During fiscal 1998, we settled substantially all such litigations and claims for amounts approximating the accrued liabilities. We are also party to various litigations arising in the course of our business and certain other litigations. We may be required to record additional material charges in future periods in conjunction with litigations to which we are or become a party. If we have to record additional charges to earnings from an adverse result in such litigations or from settlements which exceed the related accrued liabilities, we may experience a negative effect on our financial condition and results of operations. For a discussion of the various claims and litigations to which we are currently a party, see "Legal Proceedings." 14 Anti-Takeover Provisions The Board of Directors has the authority (subject to certain limitations imposed by the Indenture) to issue shares of preferred stock and to determine their characteristics without stockholders' approval. If preferred stock is issued, the rights of common stockholders are subject to, and may be negatively affected by, the rights of preferred stockholders. If preferred stock is issued, it will provide flexibility in connection with possible acquisitions and other corporate actions; however, it could make it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which may make it more difficult or more expensive or discourage a tender offer, change in control or takeover attempt that is opposed by the Board. In addition, employment arrangements with certain members of management provide for severance payments upon termination of their employment if there is a change in control. Volatility of Stock Price There is a history of significant volatility in the market prices of companies engaged in the software industry, including Acclaim. The market price of our Common Stock is likely to continue to be highly volatile. The following factors may have a significant impact on the market price of the Common Stock: o timing and market acceptance of product introductions by us; o the introduction of products by our competitors; o loss of any key personnel; o variations in quarterly operating results; or o changes in market conditions in the software industry generally. In the past, we have experienced significant fluctuations in operating results and, if our future revenues or operating results or product releases do not meet expectations, the price of our Common Stock may be negatively affected. Year 2000 Issue Until recently, computer programs were generally written using two digits rather than four to define the applicable year. Accordingly, such programs may be unable to distinguish properly between the year 1900 and the year 2000. In fiscal 1997, we commenced a Year 2000 date conversion project to address necessary code changes, testing and implementation in respect of our internal computer systems. Project completion is planned for the middle of calendar 1999. We anticipate that our Year 2000 date conversion project as it relates to internal systems will be completed on a timely basis. Our software for N64, PlayStation and PCs is Year 2000 compliant. We are currently seeking information regarding Year 2000 compliance from vendors, customers, manufacturers, outside developers, and financial institutions associated with us. Project completion for this phase is planned for the middle of calendar 1999. However, given the reliance on third-party information as it relates to their compliance programs and the difficulty of determining potential errors on the part of external service suppliers, we cannot guarantee that our information systems or operations will not be affected by mistakes, if any, of third parties or third-party failures to complete the Year 2000 project on a timely basis. There can be no assurance that the systems of other companies on which our systems rely will be timely converted or that any such failure to convert by another company would not have a material adverse effect on our systems. The cost of the Year 2000 project and the date on which we believe we will complete the necessary modifications are based on our estimates which were derived utilizing numerous assumptions 15 of future events, including the continued availability of resources, third-party modification plans and other factors. We presently believe that the Year 2000 issue will not pose significant operational problems for our internal information systems and products. However, if the anticipated modifications and conversions are not completed on a timely basis, or if the systems of other companies on which our systems and operations rely are not converted on a timely basis, the Year 2000 issue could have a material adverse effect on results of operations. We do not currently have any contingency plans in place to address the failure of timely conversion of our and/or third-party systems in respect of the Year 2000 issue. Any failure by us to address any unforseen Year 2000 issues could materially adversely affect results of operations. Euro Conversion The January 1, 1999 adoption of the Euro has created a single-currency market in much of Europe. For a transition period from January 1, 1999 to June 30, 2002, the existing local currencies will remain legal tender as denominations of the Euro. Acclaim does not anticipate that its systems will be materially adversely affected by the conversion to the Euro. Acclaim has analyzed the impact of conversion to the Euro on its existing systems and is implementing modifications to its current systems to handle Euro invoicing for transactions. Acclaim anticipates that the cost of such modifications will not have a material adverse effect on its results of operations or liquidity in fiscal 1999. Due to numerous uncertainties, we cannot reasonably estimate the effect that the conversion to the Euro will have on our pricing or market strategies, and the impact, if any, that such conversion will have on our financial condition or results of operations. ------------------ Stockholders should not use historical trends or other factors affecting our operating results and financial condition to anticipate results or trends in future periods because of the risk factors disclosed above. Also, stockholders should not consider historic financial performance as a reliable indicator of future performance. USE OF PROCEEDS The proceeds, if any, from the exercise of the Warrants will be added to Acclaim's working capital. DETERMINATION OF OFFERING PRICE The aggregate value and the per share exercise price of the Warrants was determined by arms-length negotiations between Acclaim and counsel for the plaintiffs in the class action lawsuit. PLAN OF DISTRIBUTION The shares of Common Stock issuable upon the exercise of the Warrants will be offered solely by Acclaim; no underwriters are participating in this offering. The Warrants will be exercisable in accordance with a warrant agreement between Acclaim and American Securities Transfer & Trust, Inc. Acclaim will agree to indemnify the holders of the Warrants, their respective officers, directors, partners, employees, agents, counsel, Plaintiffs' Lead Counsel (as defined in the Stipulation) and each person, if any, who controls each holder of Warrants within the meaning of Section 15 of the Securities 16 Act or Section 20(a) of the Exchange Act against certain liabilities, including liabilities under the Securities Act. LEGAL PROCEEDINGS Acclaim, Iguana Entertainment, Inc. and Gregory E. Fischbach were sued in an action entitled Jeffery Spangenberg vs. Acclaim Entertainment, Inc., Iguana Entertainment, Inc., and Gregory Fischbach filed in August 1998 in the District Court of Travis County, Texas (Cause No. 98-09418). The plaintiff alleges that the defendants (i) breached their employment obligations to the plaintiff, (ii) breached a Texas statute covering wage payment obligations based on their alleged failure to pay bonuses to the plaintiff; and (iii) made fraudulent misrepresentations to the plaintiff in connection with the plaintiff's employment relationship with Acclaim, and accordingly, seeks unspecified damages. Acclaim intends to defend this action vigorously. The SEC has issued orders directing a private investigation relating to, among other things, Acclaim's earnings estimate for fiscal 1995 and its decision in the second quarter of fiscal 1996 to exit the 16-bit portable and cartridge markets. Acclaim has provided documents to the SEC, and the SEC has taken testimony from company representatives. Acclaim intends fully to cooperate with the SEC in its investigation. No assurance can be given as to whether such investigation will result in any litigation or, if so, as to the outcome of this matter. In conjunction with then pending class actions and other litigations and claims for which the settlement obligation was then probable and estimable, Acclaim recorded a charge of $23.6 million during the year ended August 31, 1997. During fiscal 1998, Acclaim settled substantially all of its outstanding litigations and claims for amounts approximating the accrued liabilities. Acclaim is also party to various litigations arising in the ordinary course of business, the resolution of none of which, Acclaim believes, will have a material adverse effect on its liquidity or results of operations. LEGAL MATTERS Certain legal matters in respect of the shares offered hereby will be passed upon for Acclaim by Rosenman & Colin LLP, 575 Madison Avenue, New York, New York 10022. EXPERTS The consolidated financial statements and schedule of Acclaim and its subsidiaries as of and for the years ended August 31, 1998 and 1997 and for each of the years in the three-year period ended August 31, 1998 have been incorporated by reference in this prospectus and in the registration statement of which it forms a part in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. 17 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The expenses of issuance and distribution of the shares of Common Stock underlying the Warrants are to be paid by the Registrant. The following itemized list is an estimate of the expenses: SEC registration fee................................ $ 603 Legal fees and expenses............................. 10,000 Accounting expenses................................. 10,000 Miscellaneous....................................... 4,397 ------- Total..................................... $25,000 Item 15. Indemnification of Directors and Officers The Certificate of Incorporation of the Registrant provides that any person may be indemnified against all expenses and liabilities to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "GCL"). Section 145 of the GCL, the law of the state in which the Registrant is incorporated, empowers a corporation, within certain limitations, to indemnify any person against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any suit or proceeding to which he is a party by reason of the fact that he is or was a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, as long as he acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation. With respect to any criminal proceeding, he must have had no reasonable cause to believe his conduct was unlawful. II-1 Item 16. Exhibits Exhibit Number Description - ------- ----------- 3.1 -- Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, filed on April 21, 1989, as amended (Registration No. 33-28274) (the "1989 S-1"). 3.2 -- Amendment to the Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the 1989 S-1). 3.3 -- Amendment to the Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 4(d) to the Registrant's Registration Statement on Form S-8, filed on May 19, 1995 (Registration No. 33-59483) (the "1995 S-8"). 3.4 -- Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 4(e) to the 1995 S-8). 4.1 -- Specimen form of the Registrant's common stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended August 31, 1989, as amended (File No. 0-16986). *4.2 -- Form of Warrant Agreement between the Registrant and American Securities Transfer & Trust, Inc., as warrant agent, relating to the Warrants. *4.3 -- Form of Warrant Certificate relating to the Warrants. *5 -- Opinion of Rosenman & Colin LLP *23.1 -- Consent of KPMG LLP *23.3 -- Consent of Rosenman & Colin LLP (included in Exhibit 5) *24.1 -- Power of Attorney (included on Signature Page) * Filed herewith. Item 17. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered II-2 herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Nassau and State of New York on January 26, 1999. ACCLAIM ENTERTAINMENT, INC. By /s/ ------------------------------------ Gregory E. Fischbach Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gregory E. Fischbach and James R. Scoroposki, and each or either of them, his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this registration statement, and to file the same, with all the exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Co-Chairman of the Board; Chief Executive January 26, 1999 - ---------------------------------------- Officer; President; Director Gregory E. Fischbach /s/ Co-Chairman of the Board; Senior Executive January 26, 1999 - ---------------------------------------- Vice President; Treasurer; Secretary; James R. Scoroposki Acting Chief Financial and Accounting Officer; Director /s/ Director January 26, 1999 - ---------------------------------------- Kenneth L. Coleman /s/ Director January 26, 1999 - ---------------------------------------- Bernard J. Fischbach /s/ Director January 26, 1999 - ---------------------------------------- Robert H. Groman /s/ Director January 26, 1999 - ---------------------------------------- James Scibelli /s/ Director January 26, 1999 - ---------------------------------------- Michael Tannen
EXHIBIT INDEX Exhibit Number Description - ------- ----------- 3.1 -- Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, filed on April 21, 1989, as amended (Registration No. 33-28274) (the "1989 S-1"). 3.2 -- Amendment to the Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the 1989 S-1). 3.3 -- Amendment to the Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 4(d) to the Registrant's Registration Statement on Form S-8, filed on May 19, 1995 (Registration No. 33-59483) (the "1995 S-8"). 3.4 -- Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 4(e) to the 1995 S-8). 4.1 -- Specimen form of the Registrant's common stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended August 31, 1989, as amended (File No. 0-16986). *4.2 -- Form of Warrant Agreement between the Registrant and American Securities Transfer & Trust, Inc., as warrant agent, relating to the Warrants. *4.3 -- Form of Warrant Certificate relating to the Warrants. *5 -- Opinion of Rosenman & Colin LLP *23.1 -- Consent of KPMG LLP *23.3 -- Consent of Rosenman & Colin LLP (included in Exhibit 5) *24.1 -- Power of Attorney (included on Signature Page) * Filed herewith. EX-4.2 2 FORM OF WARRANT AGREEMENT EXHIBIT 4.2 =============================================================================== ACCLAIM ENTERTAINMENT, INC. and American Securities Transfer & Trust, Inc. Warrant Agent WARRANT AGREEMENT Dated as of March 22, 1999 =============================================================================== WARRANT AGREEMENT WARRANT AGREEMENT dated as of March 22, 1999, between ACCLAIM ENTERTAINMENT, INC., a Delaware corporation (the "Company"), and American Securities Transfer & Trust, Inc. (the "Warrant Agent"). WHEREAS, the Company proposes to issue [ ] ([ ]) common stock purchase warrants (the "Warrants"), each to purchase one share of its common stock, par value $0.02 per share (the "Common Stock") (the shares of Common Stock issuable on exercise of the Warrants being referred to herein as the "Warrant Shares"), in connection with the settlement of a class action lawsuit (the "Action") previously pending against the Company and certain officers of the Company, in Federal District Court in the Eastern District of New York in accordance with a Stipulation and Agreement of Compromise and Settlement dated April 15, 1998 (the "Stipulation") between the Company and the participants in such settlement, following the Effective Date (as defined in the Stipulation) and following effectiveness of the registration statement referred in Section 2.3 hereof; WHEREAS, the Company proposes to issue certificates evidencing the Warrants (the "Warrant Certificates"); WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, division, transfer, exchange, redemption and surrender of the Warrants, the issuance of certificates representing the Warrants, the exercise of the warrants, and the rights of the registered holders thereof; WHEREAS, a registration statement covering the Warrant Shares is to be filed by the Company with the United States Securities and Exchange Commission (the "SEC") pursuant to Section 2.3 hereof. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the registered holders of the Warrants and the Warrants Agent, the parties hereto hereby agree as follows: Article I DISTRIBUTION OF WARRANT CERTIFICATES Section 1.1 Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act on behalf of the Company in accordance with the instructions hereinafter set forth, and the Warrant Agent hereby accepts such appointment. Section 1.2 Form of Warrant Certificates. The Warrant Certificates shall be issued in registered form only and, together with the forms of election to purchase Warrant Shares and of assignment to be printed on the reverse thereof, shall be substantially in the form of Exhibit A attached hereto and, in addition, may have such letters, numbers or other marks of identification or designation and such legends, summaries, or endorsements stamped, printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as, in any particular case, may be required in the opinion of counsel for the Company, to comply with any law or with any rule or regulation of any securities exchange, regulatory authority or agency, or to conform to customary usage. The Warrants Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrants Certificates) and shall be numbered serially with the letter "W". Section 1.3 Execution of Warrant Certificates. The Warrant Certificates shall be executed on behalf of the Company by its Chairman or President or any Executive Vice President and attested to by its Secretary or Assistant Secretary, either manually or by facsimile signature printed thereon. The Warrant Certificates shall be manually countersigned and (except as set forth in Sections 1.4 and 2.2 hereof) dated the date of countersignature by the Warrant Agent and shall not be valid for any purpose unless so countersigned and dated. In case any authorized officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company either before or after delivery thereof by the Company to the Warrant Agent, the signature of such person on such Warrant Certificates, nevertheless, shall be valid and such Warrant Certificates may be countersigned by the Warrant Agent, and issued and delivered to those persons entitled to receive the Warrants represented thereby with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. Section 1.4 Registration. Prior to the 10th business day following the Second Valuation Date (as defined in the Stipulation), the Company shall deliver to the Warrant Agent an adequate supply of Warrant Certificates executed on behalf of the Company as described in Section 1.3 hereof. These Warrant Certificates, shall initially be registered in the names of those persons who are finally entitled as Authorized Claimants (as defined in the Stipulation) to receive Warrant Certificates (the "Authorized Warrant Holders"). Each such Warrant Certificate shall have imprinted on its face the date of March 22, 1999 (the "Commencement Date"). On or prior to the 10th business day following the Second Valuation Date, the Warrant Agent shall have mailed or caused to have been mailed such Warrant Certificates to the Authorized Warrant Holders. The Warrant Agent shall maintain books for the transfer and registration of the Warrant Certificates in accordance with its regular practice. The Warrant Certificates shall be registered in a Warrant Register as they are issued. The Company and the Warrant Agent shall be entitled to treat the registered owner(s) of the Warrant Certificates (the "Holder(s)") as the owner(s) in fact thereof (notwithstanding any notation of ownership or other writing on the Warrant Certificates made by anyone other than the Company or the Warrant Agent), for the purpose of any exercise thereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Section 1.5 Transfer of Warrants. The Warrant Certificates shall be transferable only on the books of the Company maintained at the office of the Warrant Agent designated for such purpose upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to 2 transfer, which endorsement shall be guaranteed by a member firm of a national securities exchange, a commercial bank (not a savings bank or a savings and loan association) or trust company located in the United States or a member of the National Association of Securities Dealers, Inc. (hereafter, "Signatures Guaranteed"). In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and remain with the Warrant Agent. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with the Warrant Agent in its discretion. A reasonable service charge may be imposed by the Warrant Agent for any exercise of Warrants, which charge will be borne by the Company. The Warrant Agent may also impose a reasonable service charge for any exchange or registration of transfer of Warrant Certificates, which charge will be borne by the Holders. The Company may require payment by a Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Article II WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS Section 2.1 Exercise Price. Each Warrant Certificate shall, when signed and countersigned as provided in Section 1.3, entitle the Holder thereof to purchase from the Company one share of Common Stock for each Warrant evidenced thereby, at the purchase price of [______________ Dollars] ([$___________]) per share (the "Exercise Price"), calculated pursuant to the terms of Section II.D. of the Stipulation. Except as the context otherwise requires, the term "Exercise Price" as used in this Agreement shall mean the purchase price of one share of Common Stock, reflecting all appropriate adjustments made in accordance with the provisions of Article III hereof. Section 2.2 Exercisability of Warrants and Registration of Warrant Shares. (a) Each Warrant may be exercised at any time after (i) the Commencement Date provided that at such time the Warrant Shares have been effectively registered under the Securities Act of 1933, as amended (the "Securities Act") pursuant to a Registration Statement (as hereinafter defined) filed with and declared effective by the SEC, as provided in Section 2.3 hereof, and such other action as may be required by Federal or state law relating to the issuance or distribution of securities shall have been taken, until 5:00 p.m., New York City time, on the third anniversary of the Commencement Date (the "Exercise Deadline") unless extended as provided herein. If the Warrants are not exercisable on the Commencement Date by reason of any action required by Federal or state law, the Exercise Deadline shall be extended for such period of time as shall be necessary to permit the Warrants to be exercisable for a full three year period. After the Exercise Deadline, any unexercised Warrants will be void and all rights of Holders shall cease. Each Warrant Certificate shall have the Exercise Deadline imprinted on its face. Subject to Section 2.3 hereof, the Company shall use reasonable good faith efforts to keep available for delivery upon the exercise of Warrants a prospectus that meets the requirements of Section 10 of the Securities Act, until the earlier of the date by which all Warrants are exercised or the Exercise Deadline, unless the Company determines that, by virtue of an amendment of the 3 Securities Act or otherwise, the effectiveness of such registration or the delivery of such prospectus is not required at the time Warrant Shares are to be issued. (b) In the event that, in the reasonable good faith judgment of the Company, it is advisable to suspend use of the prospectus described in this Section 2.2, due to (i) any request by the SEC or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or related prospectus or for additional information; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation or threat of any proceedings for that purpose; (iii) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Common Stock for sale in any jurisdiction or the initiation or threat of any proceeding for such purpose; (iv) the existence of any fact or the happening of any event which makes any statement of a material fact in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue or which would require the making of any changes in the Registration Statement or prospectus in order that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) the Company's determination that a post-effective amendment to a Registration Statement would be appropriate, or (vi) pending material corporate developments or similar material events that have not yet been publicly disclosed and as to which the Company believes public disclosure will be prejudicial to the Company, the Company shall give written notice to the Warrant Agent to the effect of the foregoing and to the effect that the Warrants may not be exercised during such time period (the "Blackout Period"). In the event that a Holder seeks to exercise a Warrant during the Blackout Period, the Warrant Agent will notify the Holder, in accordance with Section 6.15 hereof, that a Blackout Period is in effect. In no event shall the Company call more than two (2) forty-five (45) day Blackout Periods in any calendar year, nor may it call a Blackout Period forty-five (45) days prior to the Exercise Deadline. If the Company exercises its right to call one or more Blackout Periods in accordance with this Section 2.2(b), the Exercise Deadline shall be extended for a period of time equal to the aggregate number of days in all such Blackout Periods so that the Warrants shall be exercisable for a full three year period. Section 2.3 Registration of Warrant Shares. (a) The Company has, as contemplated by Section IV.A. of the Stipulation, at the Company's sole cost and expense (other than the fees and disbursements of counsel for the Holders and the underwriting discounts, if any) prepared and filed with the SEC a registration statement on Form S-3 (the "Registration Statement"), to be declared effective by the SEC on March 22, 1999, registering the Warrant Shares and will use its best efforts through its officers, directors, auditors and counsel to cause such Registration Statement to remain effective until the earlier of the date referenced in the last sentence of Section 2.2(a) hereof. 4 (b) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Holders, its officers, directors, partners, employees, agents, counsel, Plaintiffs' Settlement Counsel (as that term is defined in the Stipulation) and each person, if any, who controls any such person within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage and expense whatsoever (which shall include, for all purposes of this Section 2.3, but not be limited to, attorneys' fees and any and all reasonable expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation) as and when incurred, arising out of, based upon or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Registration Statement, preliminary prospectus or final prospectus (as from time to time amended and supplemented) or any amendment or supplement thereto, relating to the sale of any of the Warrant Shares or (B) in any application or other document or communication (in this Section 2.3 collectively called an "application") executed by or on behalf of a Holder or based upon written information furnished by or on behalf of a Holder filed in any jurisdiction in order to register or qualify any of the Warrant Shares under the securities or blue sky laws thereof or filed with the SEC or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements made therein not misleading, unless (x) such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to a Holder by or on behalf of such Holder expressly for inclusion in any Registration Statement, preliminary prospectus or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be, it being acknowledged by the Company that the only such written information furnished consists of the names and/or descriptions of the Holders set forth under the heading "Selling Securityholders" in the Registration Statement and the information set forth under the heading "Plan of Distribution" in the Registration Statement (the "Holder Information"), or (y) such loss, liability, charge, claim, damage or expense arises out of a Holder's failure to comply with the terms and provisions of this Agreement, or (ii) any breach of any representation, warranty, covenant or agreement of a Holder contained in this Agreement. The foregoing agreement to indemnify shall be in addition to any remedy a Holder may otherwise have, including remedies arising under this Agreement. If any action is brought against a Holder or any of its officers, directors, partners, employees, agents or counsel, if any, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability other than pursuant to this Section 2.3(b)) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) provided that the indemnified party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses 5 available to it or them or to other indemnified parties which are different from or in addition to those available to the Company, in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this Section 2.3 to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. The Company shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto) unless such settlement, compromise, consent or termination includes an unconditional release of each indemnified party from all liability in respect of such action. The Company agrees to notify the Holders promptly of the commencement of any litigation or proceedings against the Company or any of it officers or directors in connection with the sale of any Warrant Shares or any preliminary prospectus, final prospectus, Registration Statement, or amendment or supplement thereto, or any application relating to any sale of any Warrant Shares. (c) The Holders agree to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any Registration Statement covering the Warrant Shares held by the Holders, each other person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act and its or their respective counsel and Plaintiffs' Settlement Counsel (as that term is defined in the Stipulation), to the same extent as the foregoing indemnity from the Company to the Holders in Section 2.3(b) hereof but only with respect to statements or omissions, if any, made in any Registration Statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto or in any application, in reliance upon and in conformity with written information furnished to the Company with respect to the Holders by or on behalf of a Holder, expressly for inclusion in any such Registration Statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto or in any application, as the case may be, it being acknowledged by the Company that the only such furnished information consists of the Holder Information. If any action shall be brought against the Company or any other person to be so indemnified based on any such Registration Statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto or in any application, and in respect of which indemnity may be sought against a Holder pursuant to this Section 2.3(c) a Holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 2.3(b). (d) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 2.3(b) or 2.3(c) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Securities Act, the Exchange Act or otherwise, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such Registration Statement, any 6 controlling person of the Company, and its or their respective counsel) as one entity, and the Holders (including for this purpose any contribution by or on behalf of an indemnified party) as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Holders and the Company in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by a Holder or the Company, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. Each Holder and the Company agree that it would be unjust and inequitable if the respective obligations of the Holders and the Company for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses (even if the Holders and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 2.3(d). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 2.3(d), each person, if any, who controls a Holder within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent and counsel of a Holder or control person shall have the same rights to contribution as the Company or control person and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such Registration Statement, each director of the Company, and its or their respective counsel shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 2.3(d). Anything in this Section 2.3(d) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 2.3(d) is intended to supersede any right to contribution under the Securities Act, the Exchange Act or otherwise. (e) Notwithstanding the foregoing provisions of this Section 2.3, in the event the Stipulation shall be the subject of appeal by members of the Class (as defined in the Stipulation) or other persons, the Company may in its sole discretion, cease its efforts to file or to cause the declaration of effectiveness of the Registration Statement and/or cause the withdrawal of such Registration Statement. Upon resolution of such appeal, the Company shall forthwith use its best efforts to file or cause the declaration of effectiveness of the Registration Statement. Section 2.4 Procedure for Exercise of Warrants. (a) During the period specified in and subject to the provisions and limitations set forth in Section 2.2 hereof, Warrants may be exercised by surrendering the Warrant Certificates representing such Warrants to the Warrant Agent at 938 Quail Street, Suite 101, Lakewood, Colorado 80215, Attention: Trust Department (the "Principal Office") or at such other location as the Warrant Agent may specify in writing to the Holders with the election to purchase form set forth on the reverse side of the Warrant Certificate duly completed and executed, with Signature Guaranteed under certain circumstances as set forth in the purchase 7 form, accompanied by payment in full to the Warrant Agent for the account of the Company of the Exercise Price in effect at the time of such exercise, together with such taxes as are specified in Section 6.1 hereof, for each share of Common Stock with respect to which such Warrants are being exercised. Such Exercise Price and taxes shall be paid in full by certified or official bank check, or by United States Postal Service money order, payable in United States currency to the order of the Warrant Agent for the account of the Company. (b) In lieu of any cash payment to be made by a Holder of the Exercise Price pursuant to the preceding paragraph, during the period specified in and subject to the provisions and limitations set forth in Section 2.2 hereof, the Holder may, at its option, exchange his Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this paragraph, by surrendering the Warrant to the Warrant Agent accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Common Stock issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the Warrant Shares remaining subject to such Warrant, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Warrant Exchange, a Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number times the existing Exercise Price by (B) the then Market Price of a share of Common Stock. As used in this Agreement, the term "Market Price" shall mean the average closing price of the Company's Common Stock on the Nasdaq National Market System or the Nasdaq SmallCap Market, or, if the Company's Common Stock is not so listed on the Nasdaq National Market or the Nasdaq SmallCap Market, then the last quoted price, or if not so quoted, the average of the high bid and low asked price in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, for each of the days on which the Common Stock is actually traded, during the twenty (20) consecutive business days (as such term is used on the Nasdaq National Market System or a domestic over-the-counter market, as the case may be) ending three days prior to the date of the "Notice of Exchange" or if later the "Exchange Date" (as such terms are defined in Section 2.4 hereof). Upon request of the Warrant Agent, the Company shall provide to the Warrant Agent a written presentation of the Market Price for the period requested by the Warrant Agent. (c) The date on which a Warrant is exercised in accordance with this Section 2.4 is sometimes referred to herein as the "Date of Exercise" of such Warrant. In the event that a Blackout Period, as described in Section 2.2 hereof is in effect, the Warrant Agent will notify the Holder, in accordance with Section 6.15 hereof, that a Blackout Period is in effect and that the Warrants surrendered may not be exercised during the Blackout Period. In this event, the date that the Company notifies the Warrant Agent that the Blackout Period has ended will be the Date of Exercise unless the Holder notifies the Warrant Agent, in writing, prior to the end of the Blackout Period that he withdraws his surrender of the Warrant Certificates. 8 Section 2.5 Issuance of Warrant Shares. As soon as practicable after the Date of Exercise of any Warrant, the Warrant Agent shall deposit the proceeds received, if any, from the exercise of the Warrants, and promptly, after clearance of checks or receipt of good same day funds by Federal funds wire transfer, received in payment of the Exercise Price pursuant to such Warrants, shall issue a certificate or certificates for the number of full Warrant Shares to which the Holder thereof is entitled, registered in accordance with the instructions set forth in the election to purchase. The Company covenants that the Warrant Shares which shall be issuable upon exercise of the Warrants and payment, if any, of the Exercise Price in compliance with this Agreement and the Warrant Certificate shall, pursuant to and in accordance with the terms of this Agreement, be validly authorized and issued, fully paid and nonassessable, and free from all taxes, liens and charges created by the Company in respect of the issue thereof. Certificates representing such Warrant Shares shall be delivered by the Warrant Agent in such names and denominations as are required for delivery to, or in accordance with the instructions of, the Holder. Each person in whose name any such certificate for Warrant Shares issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby on the Date of Exercise of the Warrants resulting in the issuance of such Warrant Shares, irrespective of the date of issuance or delivery of such certificate for Warrant Shares; provided, however, that if, at the date of the surrender of such Warrants and payment of the Exercise Price, the transfer books for the Warrant Shares purchasable upon the exercise of such Warrants shall be closed, the certificates for the Warrant Shares in respect of which such Warrants are then exercised shall be issuable as of the date on which such books shall next be opened (whether before or after the Exercise Deadline) and until such date the Warrant Agent shall be under no duty to deliver any certificate for such Warrant Shares; provided, further, that the transfer books of record, unless otherwise required by law, shall not be closed at any one time for a period longer than twenty (20) days. Section 2.6 Certificates for Unexercised Warrants. Subject to Section 2.4(b) hereof, if less than all of the Warrants represented by a Warrant Certificate are exercised, the Warrant Agent shall execute and mail, by first-class mail, within ten (10) days of the Date of Exercise, to the Holder of such Warrant Certificate, or such other person as shall be designated in the election to purchase, a new Warrant Certificate representing the number of Warrants not exercised. In no event shall a fraction of a Warrant be exercised, and the Warrant Agent shall distribute no Warrant Certificates representing fractions of Warrants under this or any other Section of this Agreement. Section 2.7 Reservation of Shares. The Company shall at all times reserve and keep available for issuance upon the exercise of Warrants a number of its authorized but unissued shares or treasury shares, or both, of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants. The transfer agent for the Company's Common Stock and every subsequent transfer agent for the Company's capital stock issuable upon the exercise of Warrants, will be irrevocably authorized and directed at all times to reserve a number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the transfer agent for the Company's Common Stock and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such transfer agent the stock certificates required to honor outstanding Warrants upon exercise thereof in accordance with the terms of this Agreement. The Company 9 will supply such transfer agent with duly executed stock certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in Section 3.9 hereof. All Warrant Certificates surrendered in the exercise of the rights thereby evidenced shall be canceled by the Warrant Agent and retained by the Warrant Agent pursuant to Section 5.2 hereof. Section 2.8 Disposition of Proceeds. Upon the exercise of any Warrant, the Warrant Agent shall promptly deposit all funds received by it for the purchase of Warrant Shares into a non-interest-bearing escrow account as directed in writing by the Company. All funds deposited in the escrow account shall be disbursed on a weekly basis to the Company, or as otherwise requested by the Company in writing. A detailed accounting statement relating to the number of Warrants exercised, names of Holders of such exercised Warrants and the net amount of funds remitted will be given to the Company with each such disbursement. Article III ADJUSTMENTS AND NOTICE PROVISIONS Section 3.1 Adjustment of Exercise Price. Subject to the provisions of this Article III, the Exercise Price in effect from time to time shall be subject to adjustment, as follows: (a) In case the Company shall (i) declare a dividend payable in stock or make some other distribution on the outstanding shares of its Common Stock in shares of its Common Stock, (ii) subdivide or reclassify the outstanding shares of its Common Stock into a greater number of shares or (iii) combine or reclassify the outstanding shares of its Common Stock into a smaller number of shares, the Exercise Price, in effect immediately after the record date for such dividend or distribution or the effective date of such division, reclassification or combination shall be proportionately adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. Such adjustment shall be made successively whenever any event specified above shall occur. (b) All calculations under this Section 3.1 shall be made to the nearest thousandth of a cent. Section 3.2 No Adjustments to Exercise Price. No adjustment in the Exercise Price in accordance with the provisions of paragraph (a) of Section 3.1 hereof need be made if such adjustment would amount to a change in such Exercise Price of less than five (5) cents; provided, however, that the amount by which any adjustment is not made by reason of the provision of this Section 3.2 shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. Section 3.3 Adjustment to Number of Shares. Upon each adjustment of the Exercise Price pursuant to Paragraph (a) of Section 3.1, each Warrant shall thereupon evidence the right to purchase that number of shares of Common Stock (calculated to the nearest hundredth of a 10 share) obtained by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment upon exercise of the Warrant by the Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price in effect immediately after such adjustment. Section 3.4 Reorganizations. In case of any capital reorganization, consolidation or merger of the Company (other than in the cases referred to in Section 3.1 hereof, and other than the consolidation or merger of the Company with or into another corporation in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of such outstanding shares of Common Stock into shares of other stock or other securities or property), or the sale of all or substantially all of the Company's stock or property, (any of the foregoing events hereinafter referred to as a "Reorganization"), all outstanding Warrants which have not been exercised prior to or concurrently with the closing of any such transaction will terminate immediately upon the closing. Additionally, in the event of sale or conveyance or other transfer of all or substantially all of the assets of the Company as a part of a plan for liquidation of the Company, all rights to exercise any Warrant shall terminate thirty (30) days after the Company gives written notice to each Holder that such sale or conveyance or other transfer has been consummated in the manner specified in section 6.15 hereof. Section 3.5 Exercise Price Not Less Than Par Value. In no event shall the Exercise Price be adjusted below the par value per share of the Common Stock. Section 3.6 Notice of Certain Action. In the event the Company shall: (a) declare any dividend payable in stock to the holders of its Common Stock or make any other distribution in property other than cash to the holders of its Common Stock; or (b) offer to the holders of its Common Stock as such rights to subscribe for or purchase any shares of any class of stock or any other rights or opinions; or (c) effect any reclassification of its Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock), Reorganization or the liquidation, dissolution or winding up of the Company; then, in each such case, the Company shall cause notice of such proposed action to be mailed to the Warrant Agent. Such notice shall specify the date on which the books of the Company shall close, or a record be taken, for determining holders of Common Stock entitled to receive such stock dividend or other distribution or such rights or options, or the date on which such reclassification, Reorganization, liquidation, dissolution or winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders shall be entitled to receive securities or other property deliverable upon such action, if any such date has been fixed. The Company shall also cause copies of such notice to be mailed to each Holder of a Warrant Certificate in the manner specified in Section 6.15 hereof. Such notice shall be mailed, in the case of any action covered by Subsection 3.6(a) or 3.6(b) above, at least twenty (20) days prior to the record date for determining holders of the Common Stock for purposes of receiving such payment or offer, and in the case of any action covered by Subsection 3.6(c) above, at least 11 twenty (20) days prior to the earlier of the date upon which such action is to take place or any record date to determine holders of Common Stock entitled to receive such securities or other property. Section 3.7 Notice of Adjustments. Whenever any adjustment is made pursuant to this Article III, the Company shall cause notice of such adjustment to be mailed to the Warrant Agent within ten (10) days thereafter, such notice to include in reasonable detail (i) the events precipitating the adjustment, (ii) the computation of any adjustments and (iii) the Exercise Price, the number of shares or the securities or other property purchasable upon exercise of each Warrant after giving effect to such adjustment. The Warrant Agent shall be entitled to rely on such notice and any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such notice. The Warrant Agent shall within ten (10) days after receipt of such notice from the Company cause a similar notice to be mailed to each Holder. Section 3.8 Warrant Certificate Amendments. Irrespective of any adjustments pursuant to this Article III, Warrant Certificates theretofore or thereafter issued need not be amended or replaced, but certificates thereafter issued shall bear an appropriate legend or other notice of any adjustments. Section 3.9 Fractional Shares. The Company shall not be required upon the exercise of any Warrant to issue fractional shares of Common Stock which may result from adjustments in accordance with this Article III to the Exercise Price or number of shares of Common Stock purchasable under each Warrant. If more than one Warrant is exercised at one time by the same Holder, the number of full shares of Common Stock which shall be deliverable shall be computed based on the number of shares deliverable in exchange for the aggregate number of Warrants exercised. With respect to any final fraction of a share called for upon the exercise of any Warrant or Warrants, the Company, at its option, shall either (i) issue a full share of Common Stock to the Holder in respect of such fraction or (ii) pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the market value of a share of Common Stock, as determined by the Warrant Agent on the basis of the market price per share of Common Stock on the business day next preceding the date of such exercise. For the purposes of this Section 3.9, the market price per share of Common Stock for such day shall mean (i) the average of the high and low bid and ask prices of the Common Stock on the Nasdaq National Market System for such day; or (ii) if the Common Stock is not then traded on such exchange, then the last known price paid per share by a purchaser of such stock in an arm's-length transaction. Article IV OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANT CERTIFICATES Section 4.1 Rights of Warrant Holders. No Warrant Certificate shall entitle the registered holder thereof, as such, to any of the rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, to 12 receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company. Section 4.2 Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If any Warrant Certificate shall be mutilated, apparently lost, stolen or destroyed, the Company in its discretion may direct the Warrant Agent to execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Warrant Certificate, or in lieu of or in substitution for an apparently lost, stolen or destroyed Warrant Certificate, a new Warrant Certificate for the number of Warrants represented by the Warrant Certificate so mutilated, apparently lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Warrant Certificate, and of the ownership thereof, and indemnity, if requested, all satisfactory to the Company and the Warrant Agent. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges incidental thereto as the Company or Warrant Agent may prescribe. Any such new Warrant Certificate shall constitute an original contractual obligation of the Company, whether or not the allegedly mutilated, lost or stolen or destroyed Warrant Certificate shall be at any time enforceable by anyone. Article V SPLIT UP, COMBINATION, EXCHANGE, TRANSFER AND CANCELLATION OF WARRANT CERTIFICATES Section 5.1 Split-Up, Combination, Exchange and Transfer of Warrant Certificates. Prior to the Exercise Deadline, Warrant Certificates, subject to the provisions of Section 5.2, may be split-up, combined or exchanged for other Warrant Certificates representing a like aggregate number of Warrants or may be transferred in whole or in part. Any Holder desiring to split-up, combine or exchange a Warrant Certificate or Warrant Certificates shall make such request in writing delivered to the Warrant Agent at its Principal Office and shall surrender the Warrant Certificate or Warrant Certificates so to be split-up, combined or exchanged at said office. Subject to any applicable laws, rules or regulations restricting transferability, any restriction on transferability that may appear on a Warrant Certificate in accordance with the terms hereof, or any "stop-transfer" instructions the Company may give to the Warrant Agent to implement any such restriction (which instructions the Company is expressly authorized to give), transfer of outstanding Warrant Certificates may be effected by the Warrant Agent from time to time upon the books of the Company to be maintained by the Warrant Agent for that purpose, upon a surrender of the Warrant Certificate to the Warrant Agent at its Principal Office, with the assignment form set forth in the Warrant Certificate duly executed and with Signature Guaranteed. Upon any such surrender for split-up, combination, exchange or transfer, the Warrant Agent shall execute and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested. The Warrant Agent shall not be required to effect any split-up, combination, exchange or transfer which will result in the issuance of a Warrant Certificate evidencing a fraction of a Warrant. The Warrant Agent may require the holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination, exchange or transfer of Warrant Certificates prior to the issuance of any new Warrant Certificate. 13 Section 5.2 Cancellation of Warrant Certificates. Any Warrant Certificate surrendered upon the exercise of Warrants or for split-up, combination, exchange or transfer, or purchased or otherwise acquired by the Company, shall be canceled and shall not be reissued by the Company; and, except as provided in Section 2.6 in case of the exercise of less than all of the Warrants evidenced by a Warrant Certificate or in Section 5.1 in case of a split-up, combination, exchange or transfer, no Warrant Certificate shall be issued hereunder in lieu of such canceled Warrant Certificates. Any Warrant Certificate so canceled shall be held by the Warrant Agent (unless otherwise directed by the Company) and destroyed not earlier than seven (7) years after such cancellation. The Warrant Agent shall furnish to the Company written confirmation of the destruction of the Warrant Certificates so canceled. Article VI PROVISIONS CONCERNING THE AGENT AND OTHER MATTERS Section 6.1 Payment of Taxes and Charges. The Company will from time to time promptly pay to the Warrant Agent, or make provisions satisfactory to the Warrant Agent for the payment of, all taxes and charges that may be imposed by the United States or any state upon the Company or the Warrant Agent in connection with the issuance or delivery of any Warrant Shares, but any transfer taxes in connection with the issuance of Warrant Certificates or certificates for Warrant Shares in any name other than that of the Holder of the Warrant Certificates surrendered shall be paid by such Holder; and, in such case, the Company shall not be required to issue or deliver any Warrant Certificate or certificate for Warrant Shares until such taxes shall have been paid or it has been established to the Company's satisfaction that no tax is due. Section 6.2 Resignation or Removal of Warrant Agent. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder after giving at least thirty (30) days' notice in writing to the Company, except that such shorter notice may be given as the Company shall, in writing, accept as sufficient. Upon comparable notice to the Warrant Agent, the Company may remove the Warrant Agent; provided, however, that in such event the Company shall appoint a new Warrant Agent, as hereinafter provided, and the removal of the Warrant Agent shall not be effective until a new Warrant Agent has been appointed and has accepted such appointment. If the office of Warrant Agent becomes vacant by resignation or incapacity to act or otherwise, the Company shall appoint in writing a new Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by the Holder of any Warrant Certificate, then the Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new Warrant Agent. Any new Warrant Agent, whether appointed by the Company or by such a court, shall be a bank which is a member of the Federal Reserve System. Any new Warrant Agent appointed hereunder shall execute, acknowledge and deliver to the former Warrant Agent last in office, and to the Company, an instrument accepting such appointment under substantially the same terms and conditions as are contained herein, and thereupon such new Warrant Agent without any further act or deed shall become vested with the rights, powers, duties and responsibilities of the Warrant Agent and the former Warrant Agent shall cease to be the Warrant Agent; but if for any 14 reason it becomes necessary or expedient to have the former Warrant Agent execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the former Warrant Agent. Section 6.3 Notice of Appointment. Not later than the effective date of the appointment of a new Warrant Agent the Company shall cause notice thereof to be mailed to the former Warrant Agent and the transfer agent for the Company's Common Stock, and shall forthwith cause a copy of such notice to be mailed to each Holder of a Warrant Certificate. Failure to mail such notice, or any defect contained therein, shall not affect the legality or validity of the appointment of the successor Warrant Agent. Section 6.4 Merger of Warrant Agent. Any company into which the Warrant Agent may be merged or with which it may be consolidated or any company resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any company to which the Warrant Agent may transfer its stockholder services business, shall be the successor Warrant Agent under this Agreement without further act, provided that such company would be eligible for appointment as a successor Warrant Agent under the provisions of Section 6.2 hereof. Any such successor Warrant Agent may adopt the prior countersignature of any predecessor Warrant Agent and distribute Warrant Certificates countersigned but not distributed by such predecessor Warrant Agent, or may countersign the Warrant Certificates in its own name. Section 6.5 Company Responsibilities. The Company agrees that it shall (i) pay the Warrant Agent the agreed upon remuneration for its services as Warrant Agent hereunder and will reimburse the Warrant Agent upon demand for all expenses, advances, and expenditures that the Warrant Agent may reasonably incur in the execution of its duties hereunder (including reasonable fees and expenses of its counsel); (ii) provide the Warrant Agent, upon request, with sufficient funds to pay any cash due pursuant to Section 3.9 upon exercise of Warrants; and (iii) perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Agreement. Section 6.6 Purchase of Warrants by the Company. The Company shall have the right, except as limited by law, other agreement or herein, to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as it may deem appropriate. Section 6.7 Certification for the Benefit of Warrant Agent. Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any matter be proved or established or that any instructions with respect to the performance of its duties hereunder be given by the Company prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established, or such instructions may be given, by a certificate or instrument signed by the Chairman of the Board, the President, an Executive Vice President, the Secretary or the Treasurer of the Company and delivered to the Warrant Agent. Such certificate or instrument may be relied upon by the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement; but in its 15 discretion the Warrant Agent may in lieu thereof accept other evidence of such matter or may require such further or additional evidence as it may deem reasonable. Section 6.8 Liability of Warrant Agent. The Warrant Agent shall be liable hereunder solely for its own negligence or willful misconduct. The Warrant Agent shall act hereunder solely as an agent in a ministerial capacity for the Company and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. The Warrant Agent will not incur any liability or responsibility to the Company or to any Holder of any Warrant Certificate for any action taken, or any failure to take action, in reliance on any paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof by the Company or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate or the Stipulation; nor shall it be responsible for the making of any adjustment required under the provisions of Article III hereof or responsible for the manner, method or amount of any such adjustment or the facts that would require any such adjustment; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock or other securities to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock or other securities will when issued be validly authorized and issued and fully paid and nonassessable. Section 6.9 Use of Attorneys, Agents and Employees. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees. Section 6.10 Indemnification. The Company agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses or liabilities, including judgments, costs and reasonable counsel fees arising out of or in connection with its acceptance of its position hereunder and in carrying out the terms hereof, except as a result of the negligence or willful misconduct of the Warrant Agent. Section 6.11 Acceptance of Agency. The Warrant Agent hereby accepts the agency established by this Agreement and agrees to perform the same upon the terms and conditions herein set forth. Section 6.12 Instructions from the Company. The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President, an Executive Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or officers. 16 Section 6.13 Changes to Agreement. The Warrant Agent may, without the consent or concurrence of any Holder, by supplemental agreement or otherwise, join with the Company in making any changes or corrections in this Agreement that shall in the judgment of the Company (i) be required to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, (ii) add to the covenants and agreements of the Company or the Warrant Agent in this Agreement such further covenants and agreements thereafter to be observed, or (iii) result in the surrender of any right or power reserved to or conferred upon the Company or the Warrant Agent in this Agreement, but which changes or corrections do not or will not adversely affect, alter or change the rights, privileges or immunities of the Holders of Warrant Certificates. The Warrant Agent shall be entitled to rely on such Company counsel's written advice. Otherwise the Agreement may be amended by the written consent of the Company and the affirmative vote or written consent of Holders holding not less than two-thirds of the then outstanding Warrants. Section 6.14 Assignment. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns. Section 6.15 Notices. Any notice or demand required by this Agreement to be given or made by the Warrant Agent or by the Holder to or on the Company shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: Acclaim Entertainment, Inc. One Acclaim Plaza Glen Cove, New York 11542 Attention: Secretary Any notice or demand required by this Agreement, to be given or made by the registered Holder of any Warrant Certificate or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing with the Company by the Warrant Agent), as follows: American Securities Transfer & Trust, Inc. 938 Quail Street Suite 101 Lakewood, Colorado 80215 Attention: Trust Department (Acclaim Entertainment, Inc.) Any notice or demand required by this Agreement to be given or made by the Company or the Warrant Agent to or on the Holder of any Warrant Certificate shall be sufficiently given or made, whether or not such Holder receives the notice, if sent by first-class or registered mail, postage prepaid, addressed to such Holder at his last address as shown on the books of the Company maintained by the Warrant Agent. Section 6.16 Defects in Notice. Failure to file any certificate or notice or to mail any notice, or any defect in any certificate or notice pursuant to this Agreement shall not affect in any 17 way the rights of any Holder or the legality or validity of any adjustment made pursuant to Section 3.1 hereof, or any transaction giving rise to any such adjustment, or the legality or validity of any action taken or to be taken by the Company. Section 6.17 Governing Law. The validity, interpretation and performance of this Agreement, of each Warrant Certificate issued hereunder and of the respective terms and provisions thereof shall be governed by the internal laws of the State of Delaware, without reference to principles of conflict of laws. Section 6.18 Standing. Nothing in this Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, the Warrant Agent, and the Holders any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement contained herein; and all covenants, conditions, stipulations, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of the Company and the Warrant Agent and their successors, and the Holders. Section 6.19 Headings. The descriptive headings of the articles and sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 6.20 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. Section 6.21 Conflict of Interest. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrant Certificates or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though the Warrant Agent were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. Section 6.22 Availability of the Agreement. The Warrant Agent shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours at its stock transfer department. Copies of this Agreement may be obtained upon written request addressed to the Company at the address set forth in Section 6.15. 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, and their corporate seals affixed and attested, all as of the day and year first above written. ACCLAIM ENTERTAINMENT, INC. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- [Corporate Seal] Attest: ------------------------------- Name: ------------------------------- Title: ------------------------------- AMERICAN SECURITIES TRANSFER & TRUST, INC. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- [Corporate Seal] Attest: ------------------------------- Name: ------------------------------- Title: ------------------------------- EX-4.3 3 FORM OF WARRANT CERTIFICATE EXHIBIT 4.3 [FORM OF WARRANT CERTIFICATE] EXERCISABLE ON OR AFTER MARCH 22, 1999 VOID AFTER 5:00 P.M., NEW YORK CITY TIME ON MARCH 21, 2002 W________________ ____________ Warrants ACCLAIM ENTERTAINMENT, INC. WARRANTS TO PURCHASE SHARES OF COMMON STOCK THIS CERTIFIES THAT, FOR VALUE RECEIVED CUSIP __________ _______________________, or his, her or its registered assigns, is the registered holder of the number of Warrants (the "Warrants") set forth above. Each Warrant entitles the holder thereof to purchase from Acclaim Entertainment, Inc., a corporation incorporated under the laws of the State of Delaware (the "Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agreement hereinafter referred to, one fully paid and nonassessable share of common stock, par value $0.02 per share, of the Company (the "Common Stock"). The Warrants may be exercised at any time or from time to time on or after March 22, 1999, (the "Commencement Date") and must be exercised before 5:00 P.M., New York City time, on March 21, 2002 (the "Exercise Deadline"). In accordance with the terms of the Warrant Agreement, the Exercise Deadline may be extended, in which event notice of such extension shall be provided. Upon the Exercise Deadline, all rights evidenced by the Warrants shall cease and the Warrants shall become void, and the holders thereof shall have no rights thereunder. Subject to the provisions of the Warrant Agreement, the holder of each Warrant shall have the right to purchase from the Company until the Exercise Deadline (and the Company shall issue and sell to such holder of a Warrant) one fully paid and nonassessable share of Common Stock (a "Warrant Share") at an exercise price per share (the "Exercise Price") of $_________ upon surrender of this Warrant Certificate to the Company at the office of the Warrant Agent (as defined in the Warrant Agreement) designated by the Warrant Agent for such purpose with the form of election to purchase appearing on this Warrant Certificate duly completed and signed, together with (i) payment of the Exercise Price in cash or certified or official bank check payable to the order of the Warrant Agent or (ii), in lieu of any cash payment to be made pursuant to sub paragraph (i) hereof, an election made by the holder of this Warrant Certificate to exchange his Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this paragraph, by surrendering this Warrant Certificate to the Warrant Agent stating such holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Common Stock issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the Common Stock remaining subject to such Warrant, shall be issued as of the Exchange Date and delivered to the holder within seven (7) days following the Exchange Date. In connection with any Warrant Exchange, a Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number times the existing Exercise Price by (B) the then Market Price (as defined in the Warrant Agreement) of a share of Common Stock. The Exercise Price or number of Warrant Shares for which the Warrants are exercisable are subject to change or adjustment upon the occurrence of certain events set forth in the Warrant Agreement. REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET FORTH ON THE REVERSE SIDE HEREOF, AND SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed by its duly authorized officers. ACCLAIM ENTERTAINMENT, INC. Dated: ------------------------ By: ------------------------------- Its: ------------------------------- ATTEST: By: ------------------------- Countersigned: AMERICAN SECURITIES TRANSFER & TRUST, INC., AS WARRANT AGENT By: ------------------------- Its: ------------------------- [Reverse Side] This Warrant Certificate is subject to all of the terms and conditions of the Warrant Agreement, dated as of the Commencement Date (the "Warrant Agreement") between the Company and the Warrant Agent and to all of the terms and conditions the registered holder of the Warrant consents by acceptance hereof. The Warrant Agreement is incorporated herein by reference and made a part hereof and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the registered holders of Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the principal office of the Warrant Agent or may be obtained upon written request addressed to the Warrant Agent at its principal stockholder services office in 938 Quail Street, Suite 101, Lakewood, Colorado 80215 or may be obtained upon written request addressed to the Company at One Acclaim Plaza, Glen Cove, New York, 11542, Attn: Secretary. The Company shall not be required upon the exercise of the Warrants evidenced by this Warrant Certificate to issue fractional shares, but shall make adjustment therefor in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. This Warrant Certificate may be exchanged or transferred, at the option of the holder, upon presentation and surrender hereof to the Warrant Agent, for other Warrant Certificates of different denominations, entitling the holder hereof to purchase in the aggregate the same number of Warrant Shares. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. The holder of this Warrant Certificate shall not, by virtue hereof, be entitled to any of the rights of a stockholder in the Company, either at law or in equity, including, without limitation, the right to vote, to receive dividends and other distributions, or to attend or receive any notice of meetings of stockholders or any other proceedings of the Company, and the rights of the holder are limited to those expressed in the Warrant Agreement. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Company's Common Stock are closed for any purpose, the Company shall not be required to make delivery of certificates for shares purchasable upon such transfer until the date of the reopening of said transfer books. Every holder of this Warrant Certificate, by accepting the same, consents and agrees with the Company, the Warrant Agent and with every other holder of a Warrant Certificate that: (a) this Warrant Certificate is transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in the Warrant Agreement and (b) the Company and the Warrant Agent may deem and treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof (notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. This Warrant Certificate shall not be valid or enforceable for any purpose until it shall have been countersigned by the Warrant Agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: UNIF GIFT MIN ACT = TEN COM = as tenants in common TEN ENT = as tenants by the entireties ____________ Custodian ___________ JT TEN = as joint tenants with right (Custodian) (Minor) of survivorship and not as tenants in common COM PROP = as community property under Uniform Gifts to Minors Act ___________________________________ (State)
Additional abbreviations may also be used though not in the above list. PURCHASE FORM Dated: ________________, ____ The undersigned hereby irrevocably exercises this Warrant to purchase __________ shares of Common Stock and herewith makes payment of $__________ in payment of the Exercise Price thereof on the terms and conditions specified in this Warrant Certificate, surrenders this Warrant Certificate and all right, title and interest herein to the Company and directs that the Warrant Shares deliverable upon the exercise of such Warrants be registered in the name and at the address specified below and delivered thereto. Name: -------------------------------------------------------------------------- (Please Print) Address: ----------------------------------------------------------------------- City, State and Zip Code: ------------------------------------------------------ Taxpayer Identification or Social Security Number: ----------------------------- Signature: --------------------------- If such number of Warrant Shares is less than the aggregate number of Warrant Shares purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the balance of such Warrant Shares to be registered in the name and at the address specified below and delivered thereto. Name: -------------------------------------------------------------------------- (Please Print) Address: ----------------------------------------------------------------------- City, State and Zip Code: ------------------------------------------------------ Taxpayer Identification or Social Security Number: ----------------------------- Signature: --------------------------- NOTE: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. If the certificate representing the Warrant Shares or any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which this Warrant Certificate is registered, the signature of the holder hereof must be guaranteed. Signature Guaranteed: --------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15 WARRANT ASSIGNMENT FORM FOR VALUE RECEIVED ___________________________________________ ______________________________ hereby sells, assigns and transfers to: Name: -------------------------------------------------------------------------- (Please Print) Address: ----------------------------------------------------------------------- City, State and Zip Code: ------------------------------------------------------ Taxpayer Identification or Social Security Number: ----------------------------- the right to purchase up to ___________________ Warrant Shares represented by this Warrant and does hereby irrevocably constitute and appoint _____________________________________ Attorney-in-fact to transfer said Warrant on the behalf of the Company, with full power of substitution in the premises. Dated: ------------------------------------------------------------------------- Signature of registered holder NOTE: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. Signatures Guaranteed: -------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15 EX-5 4 OPINION OF ROSENMAN & COLIN LLP EXHIBIT 5 Rosenman & Colin LLP 575 Madison Avenue New York, NY 10022 January 26, 1999 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have been requested by Acclaim Entertainment, Inc. ("Acclaim"), a Delaware corporation, to furnish our opinion in connection with Acclaim's registration statement on Form S-3 covering the offer and sale of shares (the "Shares") of Acclaim's common stock, par value $0.02 per share, underlying certain warrants to be issued by Acclaim pursuant to that certain Stipulation and Agreement of Compromise and Settlement, dated April 15, 1998, between Acclaim and the participants in such settlement (the "Warrants"). In connection with the foregoing, we have made such examination as we have deemed necessary for the purpose of rendering this opinion. Based upon such examination, it is our opinion that when (i) the Registration Statement has become effective under the Securities Act of 1933 and the warrant agreement relating to the Warrants (the "Warrant Agreement") has been duly executed and delivered and (ii) the Shares have been duly issued and paid for in accordance with the terms of the Warrant Agreement and as contemplated by the Registration Statement, the Shares will be validly issued, fully paid and non-assessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our name under the caption "Legal Matters" in the prospectus included in the Registration Statement. Very truly yours, ROSENMAN & COLIN LLP By /s/ --------------------- A Partner EX-23.1 5 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS Board of Directors of Acclaim Entertainment, Inc.: We consent to the use in this registration statement on Form S-3 of Acclaim Entertainment, Inc. of our report dated October 22, 1998, which report is included in Acclaim's Annual Report on Form 10-K, for August 31, 1998 and is incorporated by reference herein, and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP New York, New York January 25, 1999 -----END PRIVACY-ENHANCED MESSAGE-----