-----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, ByrGkdojTcU9sTlsx/3vyDXGUCkPiiJgbNfvcwbsCnAI+CG6e2t4qWVw6rHy6SL4 2B+7RALqvN7cyU7wYawtYw== 0000889812-99-002131.txt : 20030213 0000889812-99-002131.hdr.sgml : 20030213 19990714153417 ACCESSION NUMBER: 0000889812-99-002131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCLAIM ENTERTAINMENT INC CENTRAL INDEX KEY: 0000804888 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 382698904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16986 FILM NUMBER: 99664221 BUSINESS ADDRESS: STREET 1: ONE ACCLAIM PLAZA CITY: GLEN COVE STATE: NY ZIP: 11542 BUSINESS PHONE: 5166565000 MAIL ADDRESS: STREET 1: OEN ACCLAIM PALZA CITY: GLEN COVEY STATE: NY ZIP: 11542 FORMER COMPANY: FORMER CONFORMED NAME: GAMMA CAPITAL CORP DATE OF NAME CHANGE: 19880608 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to_____ Commission file number 0-16986 ACCLAIM ENTERTAINMENT, INC. (Exact name of the registrant as specified in its charter) Delaware 38-2698904 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) One Acclaim Plaza, Glen Cove, New York 11542 (Address of principal executive offices) (516) 656-5000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As at July 6, 1999, approximately 54,580,000 shares of Common Stock of the Registrant were issued and outstanding. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in 000s, except per share data)
(Unaudited) May 31, August 31, 1999 1998 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $94,658 $47,273 Accounts receivable - net 24,353 39,177 Inventories 10,638 3,430 Prepaid expenses 13,840 16,571 ------ ------ TOTAL CURRENT ASSETS 143,489 106,451 ------- ------- OTHER ASSETS Fixed assets - net 30,798 29,294 Excess of cost over fair value of net assets acquired - net of accumulated amortization of $21,321 and $19,218, respectively 21,936 21,433 Other assets 1,964 3,229 ----- ----- TOTAL ASSETS $198,187 $160,407 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES Trade accounts payable $31,445 $24,218 Short-term borrowings -- 16 Accrued expenses 88,073 92,207 Income taxes payable 6,538 6,918 Current portion of long-term debt 724 724 Obligation under capital leases - current 747 1,468 --- ----- TOTAL CURRENT LIABILITIES 127,527 125,551 ------- ------- LONG-TERM LIABILITIES Long-term debt 51,138 51,931 Obligation under capital leases - noncurrent 828 1,110 Other long-term liabilities 2,108 3,588 ----- ----- TOTAL LIABILITIES 181,601 182,180 ------- ------- STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred stock, $0.01 par value; 1,000 shares authorized; none issued -- -- Common stock, $0.02 par value; 100,000 shares authorized; 54,971 and 52,634 shares issued, respectively 1,099 1,053 Additional paid in capital 203,444 189,645 Accumulated deficit (184,274) (209,180) Treasury stock, 537 and 523 shares, respectively (3,262) (3,103) Foreign currency translation adjustment (421) (188) ----- ----- TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 16,586 (21,773) ------ -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $198,187 $160,407 -------- -------- See notes to consolidated financial statements. 1 ACCLAIM ENTERTAINMENT, INC AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS (in 000s, except per share data) (Unaudited)
Three Months Ended Nine Months Ended May 31, May 31, 1999 1998 1999 1998 ---- ---- ---- ---- NET REVENUES $80,047 $73,154 $320,535 $234,774 COST OF REVENUES 36,778 31,369 155,508 108,597 ------ ------ ------- ------- GROSS PROFIT 43,269 41,785 165,027 126,177 ------ ------ ------- ------- OPERATING EXPENSES Marketing and sales 15,908 12,606 54,795 43,866 General and administrative 16,110 12,667 49,294 39,420 Research and development 11,810 10,407 34,544 28,024 Litigation settlement (1,753) --- (1,753) --- ------- ----- ------- ----- TOTAL OPERATING EXPENSES 42,075 35,680 136,880 111,310 ------ ------ ------- ------- EARNINGS FROM OPERATIONS 1,194 6,105 28,147 14,867 ----- ----- ------ ------ OTHER INCOME (EXPENSE) Interest income 1,103 550 2,904 1,617 Interest expense (1,396) (1,409) (4,245) (4,320) Other (expense) income (443) 438 (466) 417 ----- --- ----- --- EARNINGS BEFORE INCOME TAXES 458 5,684 26,340 12,581 --- ----- ------ ------ PROVISION FOR INCOME TAXES 359 5 1,434 126 --- - ----- --- NET EARNINGS BEFORE MINORITY INTEREST 99 5,679 24,906 12,455 -- ----- ------ ------ MINORITY INTEREST -- 10 -- -- ---- -- ----- ---- NET EARNINGS $99 $5,669 $24,906 $12,455 --- ------ ------- ------- BASIC EARNINGS PER SHARE $0.00 $0.11 $0.46 $0.25 ----- ----- ----- ----- DILUTED EARNINGS PER SHARE $0.00 $0.09 $0.40 $0.22 ----- ----- ----- -----
See notes to consolidated financial statements. 2 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY) (in 000s, except per share data)
Preferred Stock (1) Common Stock ------------------- ---------------- Issued Issued Additional ------ ------ Paid-In Deferred Shares Amount Shares Amount Capital Compensation ------ ------ ------ ------ ------- ------------ Balance August 31, 1996 ---- ---- 50,041 $1,001 $180,895 $(15,113) ------ ------ ------ ------ -------- --------- Net Loss ---- ---- ---- ---- ---- ---- Issuances and Cancellations of Warrants and Options ---- ---- ---- ---- 722 566 Deferred Compensation Expense ---- ---- ---- ---- ---- 6,134 Exercise of Stock Options ---- ---- 81 1 169 ---- Escrowed Shares Received ---- ---- ---- ---- ---- ---- Foreign Currency Translation Gain ---- ---- ---- ---- ---- ---- Unrealized Loss on Marketable Equity Securities ---- ---- ---- ---- ---- ---- ------ ------ ------ ------ -------- --------- Balance August 31, 1997 ---- ---- 50,122 1,002 181,786 (8,413) ------ ------ ------ ------ -------- --------- Net Earnings ---- ---- ---- ---- ---- ---- Issuance of Common Stock for Litigation Settlements ---- 1,274 26 6,868 ---- Issuances and Cancellations of Common Stock and Options ---- ---- 15 1 239 690 Deferred Compensation Expense ---- ---- ---- ---- ---- 4,190 Exercise of Stock Options ---- ---- 1,223 24 4,285 ---- Escrowed Shares Received ---- ---- ---- ---- ---- ---- Foreign Currency Translation Gain ---- ---- ---- ---- ---- ---- ------ ------ ------ ------ -------- --------- Balance August 31, 1998 ---- ---- 52,634 1,053 193,178 (3,533) ------ ------ ------ ------ -------- --------- Net Earnings ---- ---- ---- ---- ---- ---- Issuances of Common Stock ---- 206 4 1,792 ---- Issuance of Warrants for Litigation Settlements ---- ---- ---- ---- 1,700 ---- Subordinated Notes Conversion ---- ---- 48 1 249 ---- Cancellations of Options ---- ---- ---- ---- (405) 405 Issuance of Common Stock under Deferred Compensation Plan ---- ---- 300 6 2,488 (2,488) Deferred Compensation Expense ---- ---- ---- ---- ---- 2,890 Exercise of Stock Options and Warrants ---- ---- 1,779 35 6,573 ---- Escrowed Shares Received ---- ---- (69) (1) 1 ---- Issuance of Common Stock under Employee Stock Purchase Plan ---- ---- 73 1 594 ---- Foreign Currency Translation Loss ---- ---- ---- ---- ---- ---- ------ ------ ------ ------ -------- --------- Balance May 31, 1999 ---- ---- 54,971 $1,099 $206,170 $(2,726) ------ ------ ------ ------ -------- --------- Unrealized Foreign Gain (Loss) On Currency Marketable Accumulated Treasury Translation Equity Deficit Stock Adjustment Securities Total -------- ----- ---------- ---------- ----- Balance August 31, 1996 $(70,642) $(1,813) $(754) $15 $93,589 --------- -------- ------ --- ------- Net Loss (159,228) ---- ---- ---- (159,228) Issuances and Cancellations of Warrants and Options ---- ---- ---- ---- 1,288 Deferred Compensation Expense ---- ---- ---- ---- 6,134 Exercise of Stock Options ---- ---- ---- ---- 170 Escrowed Shares Received ---- (1,091) ---- ---- (1,091) Foreign Currency Translation Gain ---- ---- 107 ---- 107 Unrealized Loss on Marketable Equity Securities ---- ---- ---- (15) (15) --------- -------- ------ ----- ------- Balance August 31, 1997 (229,870) (2,904) (647) 0 (59,046) --------- -------- ------ ----- ------- Net Earnings 20,690 ---- ---- ---- 20,690 Issuance of Common Stock for Litigation Settlements ---- ---- ---- ---- 6,894 Issuances and Cancellations of Common Stock and Options ---- ---- ---- ---- 930 Deferred Compensation Expense ---- ---- ---- ---- 4,190 Exercise of Stock Options ---- ---- ---- ---- 4,309 Escrowed Shares Received ---- (199) ---- ---- (199) Foreign Currency Translation Gain ---- ---- 459 ---- 459 --------- -------- ------ ----- ------- Balance August 31, 1998 (209,180) (3,103) (188) 0 (21,773) --------- -------- ------ ----- ------- Net Earnings 24,906 ---- ---- ---- 24,906 Issuances of Common Stock ---- ---- ---- ---- 1,796 Issuance of Warrants for Litigation Settlements ---- ---- ---- ---- 1,700 Subordinated Notes Conversion ---- ---- ---- ---- 250 Cancellations of Options ---- ---- ---- ---- ---- Issuance of Common Stock under Deferred Compensation Plan ---- ---- ---- --- 6 Deferred Compensation Expense ---- ---- ---- ---- 2,890 Exercise of Stock Options and Warrants ---- ---- ---- ---- 6,608 Escrowed Shares Received ---- (159) ---- ---- (159) Issuance of Common Stock under Employee Stock Purchase Plan ---- ---- ---- ---- 595 Foreign Currency Translation Loss ---- ---- (233) ---- (233) --------- -------- ------ ------ ------- Balance May 31, 1999 $(184,274) $(3,262) $(421) $0 $16,586 --------- -------- ------ --- -------
(1) The Company is authorized to issue 1,000 shares of preferred stock at a par value of $0.01 per share, none of which shares is presently issued and outstanding. See notes to consolidated financial statements. 3 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (in 000s, except per share data)
Nine Months Ended May 31, 1999 1998 ---- ---- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net Earnings $24,906 $12,455 ------- ------- Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization 8,571 10,109 Provision for returns and discounts 49,306 29,537 Deferred compensation expense 2,890 3,208 Non-cash royalty charges 1,363 2,108 Non-cash compensation expense 285 --- Non-cash litigation settlement (1,753) --- Other non-cash items 40 674 Change in assets and liabilities, net of effects of acquisition: Accounts receivable (32,258) (53,677) Inventories (7,283) (2,201) Prepaid expenses 1,627 3,668 Trade accounts payable 7,667 15,703 Accrued expenses (5,136) (13,308) Income taxes payable 52 274 Other long-term liabilities (1,480) 2,293 ------- ------- Total adjustments 23,891 (1,612) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $48,797 $10,843 ------- ------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Acquisition of subsidiary, net of cash acquired (421) --- Acquisition of fixed assets, excluding capital leases (6,857) (2,524) Disposal of fixed assets 119 123 Disposal of other assets 158 --- Acquisition of other assets (112) ------- ------- NET CASH (USED IN) INVESTING ACTIVITIES (7,113) (2,401) ------- -------
4 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued) (in 000s, except per share data)
Nine Months Ended May 31, 1999 1998 ---- ---- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Payment of mortgage $(543) $(821) Payment of short-term bank loans (16) (624) Exercise of stock options and warrants 6,608 3,170 Proceeds from Employee Stock Purchase Plan 310 --- Payment of obligation under capital leases (711) (871) Escrowed shares received (159) (199) Issuance of common stock 6 --- Miscellaneous financing activities --- 29 ----- -- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,495 684 ----- --- EFFECT OF EXCHANGE RATE CHANGES ON CASH 206 220 NET INCREASE IN CASH AND CASH EQUIVALENTS 47,385 9,346 ------ ----- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,273 26,254 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $94,658 $35,600 ------- ------- Supplemental schedule of noncash investing and financing activities: 1999 1998 ---- ---- Acquisition of equipment under capital leases $58 $125 Conversion of subordinated notes to common stock $250 --- Cash paid during the year for: Interest $6,610 $5,637 Income taxes $2,095 $(155) In fiscal 1999, the Company purchased certain assets and liabilities of a distributor in Australia. In connection with the acquisition, liabilities assumed were as follows: Fair value of assets acquired $1,186 Excess of cost over fair value of net assets acquired 2,607 Cash paid, net of cash acquired (580) Fair market value of common stock issued (1,796) ------ Liabilities assumed $1,417 ------
See notes to consolidated financial statements. 5 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in 000s, except per share data) 1. Interim Period Reporting - The data contained in these financial statements are unaudited and are subject to year-end adjustments; however, in the opinion of management, all known adjustments (which consist only of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods. 2. Accounts Receivable Accounts receivable are comprised of the following: May 31, August 31, 1999 1998 -------- ---------- Receivables assigned to factor $42,809 $79,338 Advances from factor 14,868 34,914 ------ ------ Due from factor 27,941 44,424 Unfactored accounts receivable 11,231 6,398 Foreign accounts receivable 25,511 22,201 Other receivables 1,498 3,414 Allowances for returns and discounts (41,828) (37,260) ------- ------- $24,353 $39,177 ------- ------- Pursuant to a factoring agreement, the Company's principal bank acts as its factor for the majority of its North American receivables, which are assigned on a pre-approved basis. At May 31, 1999, the factoring charge amounted to 0.25% of the receivables assigned. The Company's obligations to the bank are collateralized by all of the Company's and its North American subsidiaries' accounts receivable, inventories and equipment. The advances for factored receivables are made pursuant to a revolving credit and security agreement, which expires on January 31, 2000. Pursuant to the terms of the agreement, as amended, which can be canceled by either party upon 90-days notice prior to the end of the term, the Company is required to maintain specified levels of working capital and tangible net worth, among other covenants. As of May 31, 1999, the Company was in compliance with the covenants under its revolving credit facility. The Company draws down working capital advances and opens letters of credit (up to an aggregate maximum of $20 million) against the facility in amounts determined on a formula based on factored receivables, inventory and cost of imported goods under outstanding letters of credit. Interest is charged at the bank's prime lending rate plus one percent per annum (8.75% at May 31, 1999) on such advances. Pursuant to the terms of certain distribution, warehouse and credit and collection agreements, certain of the Company's accounts receivable are due from distributors. These receivables are not collateralized and as a result management continually monitors the financial condition of these distributors. No additional credit risk beyond amounts provided for collection losses is believed inherent in the Company's accounts receivable. At May 31, 1999 and August 31, 1998, the balance due from distributors was approximately 29% and 9%, respectively, of gross accounts receivable. 6 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in 000s, except per share data) 3. Long-Term Debt Long-term debt consists of the following: May 31, August 31, 1999 1998 ------- ---------- 10% Convertible Subordinated Notes due 2002 $49,750 $50,000 Mortgage note 2,112 2,655 ----- ----- 51,862 52,655 Less: current portion 724 724 --- --- $51,138 $51,931 ------- ------- The 10% Convertible Subordinated Notes due 2002 (the "Notes") are convertible into shares of common stock prior to maturity, unless previously redeemed, at a conversion price of $5.18 per share, subject to adjustment under certain conditions. The Notes are redeemable in whole or in part, at the option of the Company (subject to the rights of holders of senior indebtedness) at 104% of the principal balance at any time on or after March 1, 2000 through February 28, 2001 and at 102% of the principal balance thereafter to maturity. 4. Earnings Per Share Basic earnings per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings per share is computed based upon the weighted average number of common shares outstanding increased by dilutive common stock options and warrants and the effect of assuming the conversion of the outstanding Notes, if dilutive. The table below provides the components of the per share computations.
Three Months Ended Nine Months Ended May 31, May 31, 1999 1998 1999 1998 ---- ---- ---- ---- Basic EPS Computation Net earnings $99 $5,669 $24,906 $12,455 --- ------ ------- ------- Weighted average common shares outstanding 54,826 51,225 53,965 50,785 Basic earnings per share $0.00 $0.11 $0.46 $0.25 Diluted EPS Computation Net earnings $99 $5,669 $24,906 $12,455 10% Convertible Subordinated Notes Interest Expense --- --- 3,738 --- ----- ------ ----- ------ Adjusted Net Income $99 $5,669 $28,644 12,455 --- ------ ------- ------ Weighted average common shares outstanding 54,826 51,225 53,965 50,785 Stock options and warrants 7,878 8,950 8,913 5,115 10% Convertible Subordinated Notes --- --- 9,604 --- ------ ------ ------ ------ Diluted common shares outstanding 62,704 60,175 72,482 55,900 ------ ------ ------ ------ Diluted earnings per share $0.00 $0.09 $0.40 $0.22
5. Comprehensive Income Effective September 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" which requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in the financial statements. The Company's total comprehensive earnings were as follows: 7 ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in 000s, except per share data) 5. Comprehensive Income - (Continued)
Three Months Ended Nine Months Ended May 31, May 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net earnings $99 $5,669 $24,906 $12,455 Other comprehensive earnings (losses): Foreign currency translation adjustments 93 85 (233) 110 -- -- ---- --- Comprehensive earnings $192 $5,754 $24,673 $12,565 ---- ------ ------- -------
6. Acquisition On November 12, 1998 the Company acquired substantially all of the assets and liabilities of a distributor in Australia. The acquisition was accounted for as a purchase. Accordingly, the operating results are included in the Statements of Consolidated Earnings from the acquisition date. The acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The consideration was comprised of (i) $638 in cash, of which $479 was paid at closing, and (ii) 206 shares of the common stock of the Company with a fair value of $1,796. In addition, the Company assumed $1,417 of liabilities. The total cost of the acquisition was $3,851, of which $1,244 was allocated to identified net tangible assets, primarily accounts receivable. The remaining $2,607 represents the excess of the purchase price over the fair value of the net assets acquired, which is being amortized on a straight-line basis over three years. The operating results of the distributor are insignificant to those of the Company. 7. Revenue Recognition The Company adopted Statement of Position ("SOP") 97-2, "Software Revenue Recognition", effective for transactions entered into commencing September 1, 1998. SOP 97-2 indicates that revenue for noncustomized software should be recognized when persuasive evidence of an arrangement exists, the software has been delivered, the Company's selling price is fixed or determinable and collectibility of the resulting receivable is probable. The implementation of SOP 97-2 did not have a significant impact on the Company's results of operations. 8. Deferred Compensation In connection with an employment agreement, in March 1999 the Company awarded a non-board member employee 300,000 shares of its common stock. The shares are allocated to the employee ratably over the three year term of the agreement through December 31, 2000, subject to his continued employment. The fair value of the common stock at issuance of $2,488 was recorded as deferred compensation with the portion relating to services through May 31, 1999, amounting to $1,175, recorded as compensation expense in the third quarter of fiscal 1999. 9. Litigation Settlement In the third quarter of fiscal 1999, the Company recorded a litigation settlement gain of $1,753. The gain resulted from the reduction of a previously recorded contractual obligation due to the occurrence of various events identified in the settlement agreement, including the market value of the Company's common stock increasing to a specified value. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the year ended August 31, 1998 and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words "believe," "anticipate," "think," "intend," "plan," "will be" and similar expressions identify such forward-looking statements. Such statements regarding future events and/or the future financial performance of the Company are subject to certain risks and uncertainties, including those discussed in "Factors Affecting Future Performance" below at pages 17 to 24, which could cause actual events or the actual future results of the Company to differ materially from any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Overview Acclaim Entertainment, Inc. ("Acclaim"), together with its subsidiaries (Acclaim and its subsidiaries are collectively referred to as the "Company"), is a worldwide developer, publisher and mass marketer of interactive entertainment software ("Software") for use with dedicated interactive entertainment hardware platforms ("Entertainment Platforms") and multimedia personal computer systems ("PC"s). The Company owns and operates six Software development studios (the "Studios"), located in the United States and the United Kingdom, and publishes and distributes its Software directly in North America, the United Kingdom, Germany, France, Spain and Australia. The Company'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 Entertainment Platforms and PCs that dominate the interactive entertainment market at a given time or which the Company perceives as having the potential for achieving mass market acceptance. The Company emphasizes sports simulation and arcade-style Software for Entertainment Platforms, and fantasy/role-playing, real-time simulation, adventure and sports simulation Software for PCs. The Company also engages, to a lesser extent, in the distribution of Software developed by third-party Software publishers ("Affiliated Labels") and the development and publication of (1) strategy guides relating to the Company's Software and (2) comic book magazines. The Company believes the Software industry is driven by the size of the installed base of Entertainment 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, resulting in Entertainment Platform and related Software product cycles. No single Entertainment Platform or system has achieved long-term dominance in the interactive entertainment market. Accordingly, the Company must continually anticipate and adapt its Software to emerging Entertainment Platforms. 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 Company estimates, the average development cost for a title for Entertainment Platforms and PCs is currently between $1 million and $3 million. Approximately 66% and 79% of the Company's gross revenues in the quarter and nine months ended May 31, 1999, respectively, were derived from Software developed by the Studios. The process of developing Software is extremely complex and is 9 expected to become more complex and expensive in the future as new platforms and technologies are introduced. See "Factors Affecting Future Performance - Increased Product Development Costs May Adversely Affect Profitability." The Company's performance has historically been materially affected by platform transitions and product cycles. As a result of the industry transition to 32- and 64-bit Entertainment Platforms which commenced in 1995, the Company's Software sales during fiscal 1996, 1997 and 1998 were significantly lower than in fiscal 1994 and 1995. The Company's inability to predict accurately the timing of such transition resulted in material losses in fiscal 1996 and 1997. The Company believes its results in those years were also adversely impacted by the fact that the Company had not yet received a significant portion of the benefits of implementing its brand strategy and its internal development strategy through its owned Studios and that the Studios had not yet developed the game engines (which are capable of being used in multiple titles) to support the strategy. See "Factors Affecting Future Performance - Industry Trends, Platform Transitions and Technological Change May Adversely Affect the Company's Revenues and Profitability." The Company's revenues in any period are generally driven by the titles released by the Company in that period. In the past, the Company has experienced delays in the introduction of new titles, which has had a negative impact on its results of operations. If the Company does not introduce titles in accordance with its operating plans for a period, its results of operations and profitability in that period could be negatively affected. See "Factors Affecting Future Performance - Revenues Are Dependent on Timely Introduction of New Titles." The Company recorded net earnings of $5.7 million and $0.1 million in the three months ended May 31, 1998 and 1999, respectively, and $12.5 million and $24.9 million in the nine months ended May 31, 1998 and 1999, respectively. The decrease in net earnings for the 1999 quarter reflects relatively higher operating expenses and lower gross margins as a percentage of revenues. The 1999 nine-month results primarily reflect increased sales in the United States of the Company's Software for Nintendo's 64-bit N64 ("N64") and Sony's 32-bit PlayStation ("PlayStation") consoles. No assurance can be given as to the future growth of the installed base of 32- and 64-bit and other new emerging Entertainment Platforms, the future growth of the Software market therefor, the timely introduction and market acceptance of the Company's Software or of the Company's results of operations and profitability in future periods. The results for the nine months ended May 31, 1998 and 1999 also reflect the Company's significantly reduced operating expenses as compared to prior periods. The Company's ability to generate sales growth and profitability in the short term will be materially dependent on (i) the continued growth of the Software market for 32- and 64-bit and other new emerging Entertainment Platforms and (ii) the Company's ability to identify, develop and publish "hit" Software for the N64 and PlayStation platforms. Results of Operations The following table sets forth certain statements of consolidated earnings data as a percentage of net revenues for the periods indicated:
Three Months Ended Nine Months Ended May 31, May 31, 1999 1998 1999 1998 ---- ---- ---- ---- Domestic revenues 58.7% 58.0% 68.3% 57.0% Foreign revenues 41.3 42.0 31.7 43.0 ---- ---- --- ---- Net revenues 100.0 100.0 100.0 100.0 Cost of revenues 45.9 42.9 48.5 46.3 ---- ---- ---- ---- Gross profit 54.1 57.1 51.5 53.7 Marketing and sales 19.9 17.2 17.1 18.7 General and administrative 20.1 17.3 15.4 16.8
10
Three Months Ended Nine Months Ended May 31, May 31, 1999 1998 1999 1998 ---- ---- ---- ---- Research and development 14.8 14.2 10.8 11.9 Litigation settlement (2.2) 0.0 (0.5) 0.0 ----- --- ----- --- Total operating expenses 52.6 48.8 42.7 47.4 Earnings from operations 1.5 8.3 8.8 6.3 Other expense, net (0.9) (0.6) (0.6) (1.0) ----- ----- ----- ----- Earnings before income taxes 0.6 7.8 8.2 5.4 Net earnings 0.1 7.8 7.7 5.3
Net Revenues The Company's gross revenues were derived from the following product categories:
Three Months Ended Nine Months Ended May 31, May 31, 1999* 1998* 1999* 1998* ----- ----- ----- ----- 64-bit Software 39.0% 50.0% 63.0% 62.0% 32-bit Software 32.0% 30.0% 22.0% 23.0% PC Software 18.0% 18.0% 9.0% 11.0% Portable Software 11.0% 2.0% 6.0% 3.0% Other 0.0% 0.0% 0.0% 1.0%
- --------------- *The numbers in this chart do not give effect to sales credits and allowances granted by the Company in the periods covered since the Company does not track such credits and allowances by product category. Accordingly, the numbers presented may vary materially from those that would be disclosed if the Company were able to present such information as a percentage of net revenues. The increase in the Company's net revenues from $73.2 million for the quarter ended May 31, 1998 to $80.0 million for the quarter ended May 31, 1999 was predominantly due to increased revenues from sales of the Company's portable and 32-bit Software, offset by reduced revenues from sales of the Company's 64-bit Software. The increase in the Company's net revenues from $234.8 million for the nine months ended May 31, 1998 to $320.5 million for the nine months ended May 31, 1999 was predominantly due to increased unit sales in the United States of the Company's 64-bit Software and, to a lesser extent, the Company's 32-bit and portable Software. The increase in sales in the first nine months of fiscal 1999 was primarily due to the continued increase in the installed base of N64 and PlayStation consoles worldwide and the quality and market acceptance of the Company's titles for those Entertainment Platforms. The Company anticipates that titles currently scheduled for introduction in the fourth quarter of fiscal 1999 will be shipped as announced; however, no assurance can be given that these titles will be released in accordance with such announcements. Assuming timely shipment of the Company's titles, the Company's revenues from the sale of N64 and PlayStation Software are anticipated to grow in the last quarter of fiscal 1999 and for fiscal 1999 as a whole as compared to the related prior periods; however, the Company does not anticipate that, for fiscal 1999 as a whole, it will achieve its fiscal 1998 growth rate of 97%. If the Company does not release new titles as planned in the fourth quarter of fiscal 1999, the Company's net revenues would be materially negatively impacted and the Company could incur losses from operations. The Company anticipates that its mix of domestic and foreign net revenues will continue to be affected by the content of titles released by the Company to the extent such titles are geared towards the domestic market. To date, the Company has not generated material revenues from any of its operations other than Software publishing and no assurance can be given that the Company will be able to generate such revenues in the future. 11 A significant portion of the Company's revenues in any quarter are generally derived from Software first released in that quarter or in the immediately preceding quarter. See "Factors Affecting Future Performance Revenues Are Dependent on Timely Introduction of New Titles" and "- The Company's Future Success is Dependent on Its Ability to Release "Hit" Titles." In the quarter ended May 31, 1998, Forsaken (for multiple platforms) and All-Star Baseball 99 (for the N64) accounted for approximately 46% and 18%, respectively, of the Company's gross revenues. In the quarter ended May 31, 1999, All-Star Baseball 2000 (for multiple platforms), WWF Warzone (for multiple platforms) and South Park (for multiple platforms) accounted for approximately 21%, 18% and 16%, respectively, of the Company's gross revenues. For the nine months ended May 31, 1998, NFL Quarterback Club 98 (for the N64), Extreme G (for N64) and Forsaken (for multiple platforms) accounted for approximately 18%, 15% and 14%, respectively, of the Company's gross revenues. For the nine months ended May 31, 1999, Turok 2: Seeds of Evil (for multiple platforms), WWF War Zone (for multiple platforms) and South Park (for multiple platforms) accounted for approximately 23%, 17% and 13%, respectively, of the Company's gross revenues. The Company is substantially dependent on the Entertainment Platform developers as the sole developers of the Entertainment Platforms marketed by them, as the sole licensors of the proprietary information and technology needed to develop Software for those Entertainment Platforms and, in the case of Nintendo and Sony, as the sole manufacturers of Software for the Entertainment Platforms marketed by them. For the quarters ended May 31, 1998 and 1999, the Company derived 52% and 50% of its gross revenues, respectively, from sales of Nintendo-compatible Software and 30% and 32% of its gross revenues, respectively, from sales of Software for PlayStation. For the nine months ended May 31, 1998 and 1999, the Company derived 65% and 68% of its gross revenues, respectively, from sales of Nintendo-compatible Software and 23% and 22% of its gross revenues, respectively, from sales of Software for PlayStation. In prior periods, the Company had also derived substantial portions of its gross revenues from sales of Software for platforms marketed by Sega. Such revenues have not been material in recent periods. The Company has a license to develop, and plans to release, titles for Sega's Dreamcast platform (expected to be introduced in the United States in September 1999), commencing with one title currently planned to be released in the fourth quarter of fiscal 1999. See "Factors Affecting Future Performance - If the Company Is Unable to Obtain or Renew Licenses from Hardware Developers, It Will Not Be Able to Release Software for Game Consoles." Gross Profit Gross profit is primarily impacted by the percentage of sales of CD Software for PCs and Playstation as compared to the percentage of sales of cartridges for the N64. Gross profit may also be impacted from time to time by the percentage of foreign sales,the percentage of foreign sales to third-party distributors, and the level of returns, price protection and concessions to retailers and distributors. The Company's margins on sales of CD Software (currently, PlayStation and PCs) are higher than those on cartridge Software (currently, N64) as a result of significantly lower CD Software product costs. The Company's future titles planned to be released for Sega's Dreamcast platform will generate higher gross profit than titles released in cartridge format. The Company's margins on foreign Software sales to third-party distributors are approximately one-third lower than those on sales that the Company makes directly to foreign retailers. Gross profit increased from $41.8 million (57% of net revenues) for the quarter ended May 31, 1998 to $43.3 million (54% of net revenues) for the quarter ended May 31, 1999 and from $126.2 million (54% of net revenues) for the nine months ended May 31, 1998 to $165.0 million (51% of net revenues) for the nine months ended May 31, 1999. The dollar increase for the three and nine months ended May 31, 1999 is predominantly due to increased sales volume and forgiveness of a royalty obligation of approximately $2 million in the three months ended May 31, 1999. The percentage decrease is primarily due to (1) the Company's product mix and (2) higher levels (as a percentage of net revenues) of returns, 12 price protection and concessions to retailers, in the quarter and nine months ended May 31, 1999, offset by the royalty obligation forgiveness described above. Operating Expenses In fiscal 1997, the Company effected a variety of cost reduction measures to reduce its operating expenses. The Company realized the benefits of such measures in the fourth quarter of fiscal 1997 and thereafter in the form of reduced operating expenses as compared to prior periods. In addition, in fiscal 1998, the Company consolidated or eliminated certain operations. Marketing and sales expenses increased from $12.6 million (17% of net revenues) for the quarter ended May 31, 1998 to $15.9 million (20% of net revenues) for the quarter ended May 31, 1999 and from $43.9 million (19% of net revenues) for the nine months ended May 31, 1998 to $54.8 million (17% of net revenues) for the nine months ended May 31, 1999. The dollar increase for the three and nine month periods ended May 31, 1999 is primarily attributable to increased selling expenses and, for the nine month period, increased advertising expenses. The percentage increase for the three month period ended May 31, 1999 is primarily attributable to increased variable selling expenses. General and administrative expenses increased from $12.7 million (17% of net revenues) for the quarter ended May 31, 1998 to $16.1 million (20% of net revenues) for the quarter ended May 31, 1999 and from $39.4 million (17% of net revenues) for the nine months ended May 31, 1998 to $49.3 million (15% of net revenues) for the nine months ended May 31, 1999. The dollar increase for the three and nine month periods ended May 31, 1999 and the percentage increase for the three months ended May 31, 1999 is primarily attributable to a higher level of expenses in all categories and compensation expense of approximately $1.8 million recorded in the third quarter of fiscal 1999 relating to a deferred compensation agreement with a non-board member employee. Research and development expenses increased from $10.4 million (14% of net revenues) for the quarter ended May 31, 1998 to $11.8 million (15% of net revenues) for the quarter ended May 31, 1999 and from $28.0 million (12% of net revenues) for the nine months ended May 31, 1998 to $34.5 million (11% of net revenues) for the nine months ended May 31, 1999. The dollar increase for the three and nine month periods ended May 31, 1999 and the percentage increase for the three months ended May 31, 1999 is primarily attributable to the implementation of the Company's strategy to establish its own brands, increase the number of internally developed titles, the increased expense of developing game engines and tools for the next generation Entertainment Platforms for Nintendo, Sony and Sega, and increased personnel costs at the Studios. The percentage decrease in marketing and sales, general and administrative, and research and development expenses for the nine months ended May 31, 1999 is primarily attributable to increased sales volume. Due to the Company's planned release of a higher number of titles and increasing Software development costs, the Company anticipates that its future research and development expenses will continue to increase. See "Factors Affecting Future Performance - Increased Product Development Costs May Adversely Affect Profitability." In the third quarter of fiscal 1999, the Company had a litigation settlement gain of $1.8 million. Due to the occurrence of various events identified in the related settlement agreement, including the increase in the market value of Acclaim's common stock to a value specified in the settlement agreement, the Company's previously recorded contractual obligation was reduced, which resulted in the gain for the quarter ended May 31, 1999. Although the Company anticipates that its aggregate operating expenses will increase in dollars in fiscal 1999, it does not anticipate that such expenses will increase as a percentage of net revenues. Interest income increased in the three and nine months ended May 31, 1999 as compared to the three and nine months ended May 31, 1998 due to higher cash balances available for investment. 13 As of August 31, 1998, the Company had a U.S. tax net operating loss carryforward of approximately $110 million. In the first nine months of fiscal 1998 and 1999, the Company utilized a portion of its net operating loss carryforwards. The provision for income taxes of $1.4 million for the first nine months of fiscal 1999 primarily relates to state and foreign taxes. Seasonality The Company's business is seasonal, with higher revenues and operating income typically occurring during its first, second and fourth fiscal quarters (which correspond to the holiday selling season). However, the timing of the delivery of Software titles and the releases of new products cause material fluctuations in the Company's quarterly revenues and earnings, which may cause the Company's results to vary from the seasonal patterns of the industry as a whole. See "Factors Affecting Future Performance - Revenues Vary Due to the Seasonal Nature of Video and PC Game Software Purchases." Liquidity and Capital Resources The Company derived net cash from operating activities of approximately $10.8 million and $48.8 million during the nine months ended May 31, 1998 and 1999, respectively. The increase in net cash from operating activities in the first nine months of fiscal 1999 is primarily attributable to increased profitable operations. The Company used net cash in investing activities of approximately $2.4 million and $7.1 million during the nine months ended May 31, 1998 and 1999, respectively. The increase in net cash used in investing activities in the first nine months of fiscal 1999 is primarily attributable to the acquisition of fixed assets. The Company derived net cash from financing activities of approximately $0.7 million and $5.5 million during the nine months ended May 31, 1998 and 1999, respectively. The increase in net cash provided by financing activities in the first nine months of fiscal 1999 as compared to the first nine months of fiscal 1998 is primarily attributable to the proceeds of $6.6 million from the exercise of outstanding stock options and warrants, and lower required payments in respect of outstanding debt obligations during the 1999 period. The Company generally purchases its inventory of Nintendo Software by opening letters of credit when placing the purchase order. At May 31, 1999, the amount outstanding under letters of credit was approximately $5.9 million. Other than such letters of credit, the Company does not currently have any material operating or capital expenditure commitments. The Company has a revolving credit and security agreement with BNY Financial Corporation ("BNY"), its principal domestic bank, which agreement expires on January 31, 2000. The credit agreement may be automatically renewed for another year by its terms, unless terminated upon 90 days' prior notice by either party. The Company draws down working capital advances and opens letters of credit against the facility in amounts determined on a formula based on factored receivables and inventory, which advances are secured by the Company's assets. BNY also acts as the Company's factor for the majority of its North American receivables, which are assigned on a pre-approved basis. At May 31, 1999, the factoring charge was 0.25% of the receivables assigned and the interest on advances was at BNY's prime rate plus one percent. See Note 2 of Notes to Consolidated Financial Statements. The Company also has a financing arrangement relating to the mortgage on its corporate headquarters. At May 31, 1999, the outstanding principal balance of the loan was $2.1 million. Management believes, based on the currently anticipated growth of the installed base of 32- and 64-bit or other new emerging Entertainment Platforms, that the Company's cash and cash equivalents at May 31, 1999 and projected cash flows from operations in the remainder of fiscal 1999 will be sufficient to cover its operating expenses and such current obligations as are required to be paid in fiscal 1999. 14 However, no assurance can be given as to the sufficiency of such cash flows in fiscal 1999 and beyond. To provide for its short- and long-term liquidity needs, in fiscal 1997 and 1998, the Company significantly reduced the number of its employees, consolidated or eliminated certain operations, raised $47.4 million of net proceeds from the issuance of 10% Convertible Subordinated Notes due 2002 (the "Notes"), and sold substantially all of the assets of Acclaim Redemption Games, Inc., formerly Lazer-Tron Corporation. The Company's future liquidity will be materially dependent on its ability to develop and market Software that achieves widespread market acceptance for use with the Entertainment Platforms that dominate the market. There can be no assurance that the Company will be able to publish Software for Entertainment Platforms with significant installed bases or that such Software will achieve widespread market acceptance. See "Factors Affecting Future Performance - If Cash Flows from Operations Are Not Sufficient to Meet the Company's Needs, It May be Forced to Sell Assets, Refinance Debt or Downsize Operations." In conjunction with then pending class action and other litigations and claims for which the settlement obligation was then probable and estimable, the Company recorded a charge of $23.6 million during the year ended August 31, 1997. During fiscal 1998, the Company settled substantially all such litigations and claims for amounts approximating the accrued liabilities. The Company is also party to various litigations arising in the course of its business, the resolution of none of which, the Company believes, will have a material adverse effect on the Company's liquidity, financial condition and results of operations. 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, the Company commenced a Year 2000 date conversion project to address necessary code changes, testing and implementation in respect of its internal computer systems. Project completion is planned for the late summer of calendar 1999. To date, the cost of this project has not been material to the Company's results of operations or liquidity and the Company does not anticipate that the cost of completing the project will be material to its results of operations or liquidity in fiscal 1999. The Company anticipates that its Year 2000 date conversion project as it relates to the Company's internal systems will be completed on a timely basis. The Company's Software for N64, PlayStation and PCs is Year 2000 compliant. The Company is currently seeking information regarding Year 2000 compliance from vendors, customers, manufacturers, outside developers, and financial institutions associated with the Company. Project completion for this phase is planned for the late summer 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, no assurance can be given that the Company's 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 the Company's systems rely will be timely converted or that any such failure to convert by another company would not have a material adverse effect on the Company's systems. The cost of the Company's Year 2000 project and the date on which the Company believes it will complete the necessary modifications are based on the Company's estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of resources, third-party modification plans and other factors. The Company presently believes that the Year 2000 issue will not pose significant operational problems for its 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 the Company's systems and operations rely are not converted on a timely basis, the Year 2000 issue could have a material adverse effect on the Company's results of operations. The Company does not currently have any contingency plans in place to address the failure of timely conversion of its and/or third-party systems in respect of the Year 2000 issue. Any failure of the 15 Company to address any unforeseen Year 2000 issues could materially adversely affect the Company's 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. The Company does not anticipate that its operating systems will be materially adversely affected by the conversion to the Euro. The Company has analyzed the impact of conversion to the Euro on its existing systems and is implementing modifications to its current systems to implement Euro invoicing for transactions. The Company anticipates that the cost of such modifications will not have a material adverse effect on its results of operations or liquidity in fiscal 1999. However, due to numerous uncertainties, the Company cannot reasonably estimate the effect that the conversion to the Euro will have on its pricing or market strategies, and the impact, if any, that such conversion will have on its financial condition or results of operations. New Accounting Pronouncement The Company will implement the provisions of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," in fiscal 2000. The Company is presently assessing the impact, if any, of this standard on its consolidated financial statements. 16 FACTORS AFFECTING FUTURE PERFORMANCE The Company's future operating results depend upon many factors and are subject to various risks and uncertainties. The known material risks and uncertainties which may cause the Company's operating results to vary from anticipated results or which may negatively affect its operating results and profitability are as follows: If N64 and PlayStation Game Console and Software Sales Do Not Continue to Grow, The Company's Revenues May Not Grow In calendar 1998 and the first half of calendar 1999, the worldwide installed base of N64 and PlayStation game console units increased substantially and achieved significant market acceptance worldwide. The Company's Software sales are dependent on the popularity of these game consoles and the size of their installed base. The Company anticipates that the installed base of N64 and PlayStation units will continue to grow in the short term. However, Acclaim cannot assure investors that the installed base of these game consoles will grow at the present rate, if at all. Also, Acclaim cannot give any assurance that its revenues from Software for these game consoles will increase as their installed base increases. Industry Trends, Platform Transitions and Technological Change May Adversely Affect The Company's Revenues and Profitability The life cycle of existing game consoles and the market acceptance and popularity of new game consoles significantly affects the success of the Company's products. The Company cannot guarantee that it will be able to predict accurately the life cycle or popularity of each game console. If the Company: o does not develop Software for game consoles that achieve significant market acceptance; o discontinues development of Software for a game console that has a longer than expected life cycle; o develops Software for a game console that does not achieve a significant installed base; or o continues development of Software for a game console that has a shorter than expected life cycle, it may experience losses from operations, as it did in fiscal 1996 and 1997. In addition, the cyclical nature of the video and PC games industry requires the Company continually to adapt its Software development efforts to emerging hardware systems. The Company cannot guarantee that it will be successful in developing and publishing Software for new hardware systems. Revenues Are Dependent on Timely Introduction of New Titles The life cycle of a new title generally ranges from less than three months to upwards of 12 months, with the majority of sales occurring in the first 30 to 120 days after release. Therefore, the Company is constantly required to introduce new titles in order to generate revenues and/or to replace declining revenues from older titles. In the past, the Company has experienced delays in the introduction of new titles, which has had a negative impact on its results of operations. If the Company does not introduce titles in accordance with its operating plans for a period, its results of operations and profitability in that period could be negatively affected. The timely shipment of a new title depends on various factors including: o bug testing; o approval by hardware licensors; o approval by third-party licensors; and o in the case of Nintendo and Sony products, timely manufacture of the Company's titles. 17 It is likely that some of the Company's titles will not be released in accordance with the Company's operating plans. A significant delay in the introduction of one or more new titles could negatively affect sales and have a negative impact on the Company's financial condition and results of operations. The Company cannot assure stockholders that its new titles will be released in a timely fashion. Factors such as competition for retail shelf space, consumer preferences and seasonality could result in the shortening of the life cycle for older titles and increase the importance of the Company's ability to release new titles on a timely basis. The Company's Future Success Is Dependent on Its Ability to Release "Hit" Titles The market for Software is "hits" driven. Therefore, the Company's future success depends on developing, publishing and distributing "hit" titles for game consoles with significant installed bases. If the Company does not publish "hit" titles in the future, its financial condition, results of operations and profitability could be negatively affected, as they were in fiscal 1996 and 1997. However, it is difficult to predict consumer preferences for titles, and few titles achieve sustained market acceptance. Sales of the Company's then top three titles accounted for approximately 47% and 53% of gross revenues for the first nine months of fiscal 1998 and 1999, respectively. The Company cannot assure stockholders that it will be able to publish "hit" titles in the future. If Product Returns, Price Protection and Concessions Exceed Reserves, the Company May Incur Losses The Company is not contractually obligated to accept returns except for defective product. However, the Company may permit customers to return or exchange products and may provide price protection or concessions on products unsold by the customer. If the Company's reserves for returns, exchanges, price protection and concessions are exceeded, its financial condition and results of operations will be negatively impacted, as they were in fiscal 1996. Management makes significant estimates and assumptions regarding allowances for estimated product returns, price protection and concessions in preparing the Company's financial statements. The Company establishes reserves taking into account the potential for product returns, price protection and concessions based primarily on: o market acceptance of products in retail inventories; o level of retail inventories; o seasonality; and o historical return rates. The Company believes that, at May 31, 1999, its reserves for future returns, exchanges, price protection and concessions are adequate. However, the Company cannot guarantee the adequacy of its current or future reserves. If the Company Is Unable to Obtain or Renew Licenses from Hardware Developers, It Will Not be Able to Release Software for Game Consoles The Company is substantially dependent on each hardware developer: o as the sole licensor of the specifications needed to develop Software for its game consoles; o in the case of Nintendo and Sony, as the sole manufacturer of the Software developed by the Company for its game consoles; o to protect the intellectual property rights to its game consoles and technology; and o to discourage unauthorized persons from producing Software for its game consoles. Substantially all of the Company's revenues have historically been derived from sales of Software for game consoles. In the first nine months of fiscal 1998 and 1999, the Company derived: 18 o approximately 65% and 68%, respectively, of gross revenues from the sale of Nintendo-compatible Software; o approximately 23% and 22%, respectively, of gross revenues from the sale of Sony PlayStation Software; and o approximately 11% and 9%, respectively, of gross revenues from the sale of PC Software. If the Company cannot obtain licenses to develop Software from developers of new game consoles or if any of its existing license agreements are terminated, the Company will not be able to release Software for game consoles, which would have a negative impact on its results of operations and profitability. The Company cannot assure stockholders that, at the end of their current terms, it will be able to obtain extensions or that it will be successful in negotiating definitive license agreements with developers of new game consoles. The Company's revenue growth may also be dependent on the hardware developers. In the past, some of the Company's license agreements have limited the number of titles it could release in a given period. This limitation restricted the Company's sales growth, revenues and profitability. If new license agreements contain similar limitations, the Company's revenues and profitability will be negatively impacted. Increased Product Development Costs May Adversely Affect Profitability The Company's research and development expenses increased from $10.4 million (14% of net revenues) for the quarter ended May 31, 1998 to $11.8 million (15% of net revenues) for the quarter ended May 31, 1999 and from $28.0 million (12% of net revenues) for the nine months ended May 31, 1998 to $34.5 million (11% of net revenues) for the nine months ended May 31, 1999. The Company anticipates that its future research and development expenses will continue to increase. This increase is due to the planned release of a higher number of titles and increasing Software development costs. If these expenses are not carefully monitored and capped, the Company's profitability will be negatively impacted. Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales The Company's titles often embody trademarks, tradenames, logos or copyrights licensed to it by third parties, such as the NBA, the NFL or their respective players' associations. The Company may not be successful in acquiring or renewing licenses to property rights with significant commercial value. The loss of one or more of these licenses could prevent the Company's release of a title or limit its economic success. In addition, the Company cannot assure stockholders that these licenses will be available on reasonable terms or at all. License agreements relating to these rights generally extend for a term of two to three years. The agreements are terminable upon the occurrence of a number of factors, including: o the Company's material breach of the agreement; o the Company's failure to pay amounts due to the licensor in a timely manner; or o the Company's bankruptcy or insolvency. If The Company Does Not Compete Successfully, Demand for Its Products May be Reduced The video and PC games market is highly competitive. Only a small percentage of titles introduced in the market achieve any degree of sustained market acceptance. If the Company's titles are not successful, its operations and profitability will be negatively impacted. The Company cannot guarantee that its titles will compete successfully. 19 Competition is based primarily upon: o quality of titles; o access to retail shelf space; o product features; o the success of the game console for which the title is written; price of titles; o the number of titles then available; and o marketing support. The Company's chief competitors are the developers of game consoles, to whom the Company pays royalties and/or manufacturing charges. The hardware developers have a price, marketing and distribution advantage with respect to Software marketed by them. The Company's competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than the Company, such as Nintendo, Sega and Sony. The Company's competitors also include a number of independent Software publishers licensed by the hardware developers. As each hardware cycle matures, significant price competition and reduced profit margins may result. In addition, competition from new technologies may reduce demand in markets in which the Company has traditionally competed. If there is prolonged price competition or reduced demand as a result of competing technologies, the Company's operations and liquidity could be negatively impacted. Revenues Vary Due to the Seasonal Nature of Video and PC Game Software Purchases The video and PC games industry is highly seasonal. Typically, net revenues are highest in the last calendar quarter, decline in the first calendar quarter, are lower in the second calendar quarter and increase in the third calendar quarter. The seasonal pattern is due primarily to the increased demand for Software during the year-end holiday selling season and the reduced demand for Software during the summer months. However, the Company's earnings vary significantly and are materially affected by releases of "hit" titles and, accordingly, may not necessarily reflect the seasonal patterns of the industry as a whole. The Company expects that operating results will continue to fluctuate significantly in the future. See "-- Fluctuations in Quarterly Operating Results Lead to Unpredictability of Revenues and Income" below. Fluctuations in Quarterly Operating Results Lead to Unpredictability of Revenues and Income The timing of release of new titles can cause material quarterly revenues and earnings fluctuations. A significant portion of revenues in any quarter is often derived from sales of new titles introduced in that quarter or in the immediately preceding quarter. If the Company is unable to begin volume shipments of a significant new title during the scheduled quarter, its revenues and earnings will be negatively affected in that quarter. In addition, because a majority of the unit sales for a title typically occur in the first 30 to 120 days following its introduction, earnings may increase significantly in a period in which a major title is introduced and may decline in the following period or in periods in which there are no major title introductions. Quarterly operating results also may be materially impacted by factors including: (1) the level of market acceptance or demand for titles and (2) the level of development and/or promotion expenses for a title. Consequently, if net revenues in a period are below expectations, the Company's net income and financial position in that period are likely to be affected negatively. If Cash Flows from Operations Are Not Sufficient to Meet The Company's Needs, It May be Forced to Sell Assets, Refinance Debt or Downsize Operations 20 The Company generally experienced negative cash flows from operations in fiscal 1996 and 1997. As a result, in those years, the Company sold assets, refinanced debt and downsized operations. Insufficient liquidity in the future may require the Company to take similar actions. The Company believes that its cash flows from operations in fiscal 1999 will be sufficient to cover its operating expenses and the current obligations it must pay in the remainder of fiscal 1999. This belief is based on: o the anticipated continued growth of the installed base of the current 32-bit and 64-bit game consoles, o the anticipated continued growth of the 32-bit and 64-bit Software market, o the anticipated success of the Company's 32-bit and 64-bit titles, and o the resulting continued growth of the Company's net revenues. See " -- Industry Trends, Platform Transitions and Technological Change may Adversely Affect The Company's Revenues and Profitability" above. However, the Company cannot assure investors that its operating expenses and current obligations will be significantly less than the cash flows available in fiscal 1999 or in the future. High Debt Level May Restrict The Company's Flexibility in Operations and Business Expansion At May 31, 1999, the Company had total debt of approximately $52 million. The Company's debt level may limit its ability to obtain additional debt financing in the future, or to pursue possible expansion of its business or acquisitions. High debt levels could also limit the Company's flexibility in reacting to changes in the video and PC games industry and general economic conditions. These limitations make the Company more vulnerable to adverse economic conditions and restrict its ability to withstand competitive pressures or take advantage of business opportunities. Some of the Company's competitors currently have a lower debt level than it, and are likely to have significantly greater operating and financing flexibility. Ability to Service Debt and Prior Rights of Creditors May Adversely Affect Holders of Common Stock The Company believes that its cash flows from operations in fiscal 1999 will be sufficient to make all interest and principal payments on a timely basis. However, if the Company's cash flow from operations in fiscal 1999 or beyond is insufficient to make interest and principal payments when due, the Company may have to restructure its indebtedness. The Company cannot guarantee that it will be able to restructure or refinance its debt on satisfactory terms. In addition, restructuring or refinancing may not be permitted by the terms of the Company's existing indebtedness. The Company cannot assure investors that its future operating cash flows will be sufficient to meet its debt service requirements or to repay its indebtedness at maturity. If Acclaim violates the financial or other covenants contained in its bank agreements or in the indenture governing the Notes, it will be in default under its loan agreements and/or the indenture. If a default occurs and is not waived by the lender, the lender could seek remedies against the Company, including: o penalty rates of interest; o immediate repayment of the debt; and/or o the foreclosure on any assets securing the debt. The Company expects to comply with its covenants but cannot guarantee that it will be able to do so. In addition, factors beyond the Company's control may result in future covenant defaults or a payment default. The Company may not be able to obtain waivers of any future default. If the Company becomes insolvent, is liquidated or reorganized, after payment to the creditors, there may be insufficient assets remaining for a distribution to stockholders. In order to meet its debt service obligations, from time to time Acclaim also depends on dividends, advances and transfers of funds from its subsidiaries. State and foreign law regulate the payment of 21 dividends by these subsidiaries, which is also subject to the terms of existing bank agreements and the indenture governing the Notes. A significant portion of the Company's assets, operations, trade payables and indebtedness is located at these subsidiaries. The creditors of the subsidiaries would generally recover from these assets on the obligations owed to them by the subsidiaries before any recovery by Acclaim's creditors and before any assets are distributed to stockholders. Prevalence of Illegal Copying of Software Could Adversely Affect Sales In order to protect its Software and proprietary rights, the Company relies mainly on a combination of: o copyrights; o trade secret laws; o patent and trademark laws; and o nondisclosure agreements. However, existing U.S. and international laws afford only limited protection. An unauthorized person may be able to copy the Company's Software or otherwise obtain and use its proprietary information. If a significant amount of illegal copying of Software published or distributed by the Company occurs, its product sales could be adversely impacted. Policing illegal use of software is extremely difficult, and software piracy is expected to persist. In addition, the laws of some foreign countries in which the Company's Software is distributed do not protect the Company and its intellectual property rights to the same extent as the laws of the U.S. The Company cannot guarantee that its attempts to protect its proprietary rights will be adequate. Infringement Could Lead to Costly Litigation and/or the Need to Enter into License Agreements, Which May Result in Increased Operating Expenses Existing or future infringement claims by or against the Company may result in costly litigation or require the Company to license the proprietary rights of third parties, which could have a negative impact on the Company's results of operations, liquidity and profitability. The Company believes that its proprietary rights do not infringe on the proprietary rights of others. However, as the number of titles in the industry increases, the Company believes that claims and lawsuits with respect to Software infringement will also increase. From time to time, third parties have asserted that some of the Company's titles infringed upon their intellectual property rights. The Company has also asserted that third parties have likewise infringed its proprietary rights. These infringement claims have sometimes resulted in litigation by and against the Company. To date, none of these claims has negatively impacted the Company's ability to develop, publish or distribute its Software. The Company cannot guarantee that future infringement claims will not occur or that they will not negatively impact its ability to develop, publish or distribute its Software. Factors Specific to International Sales May Result in Reduced Revenues and/or Increased Costs International sales have historically represented material portions of the Company's revenues and the Company expects that international sales will continue to account for a significant portion of its revenues in future periods. Sales in foreign countries may involve expenses incurred to customize titles to comply with local laws. In addition, titles that are successful in the domestic market may not be successful in foreign markets due to different consumer preferences. International sales are also subject to fluctuating exchange rates and may be affected by the recent adoption of a single currency in much of Europe. See " -- Pricing and Marketing Strategies in Europe May be Negatively Impacted by the Euro Conversion" below. These and other factors specific to international sales may result in reduced revenues and/or increased costs. Loss of Key Employees May Negatively Impact The Company's Success 22 The Company's success depends on its ability to identify, hire and retain skilled personnel. The Software industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with technical, marketing, sales, product development and management skills. The Company may not be able to attract and retain skilled personnel or may incur significant costs in order to do so. In particular, the Company is highly dependent upon the management services of Gregory Fischbach, co-chairman of the board and chief executive officer, and James Scoroposki, co-chairman of the board and senior executive vice president. If the Company were to lose either of their services, its business would be negatively impacted. Although the Company has employment agreements with Messrs. Fischbach and Scoroposki, they may leave or compete with the Company in the future. If the Company is unable to attract additional qualified employees or retain the services of key personnel, its business could be negatively impacted. Charter and Anti-Takeover Provisions Could Negatively Affect Rights of Holders of Common Stock The board of directors has the authority to issue shares of preferred stock and to determine their characteristics without stockholder approval. This authority is limited by the indenture governing the Notes. If the Company issues preferred stock, the rights of common stockholders may be negatively affected by the rights of preferred stockholders. Moreover, if the Company issues preferred stock, it could become more difficult for a third party to acquire a majority of the Company's outstanding voting stock. Acclaim is also subject to anti-takeover provisions of Delaware corporate law, which may impede a tender offer, change in control or takeover attempt that is opposed by the board. In addition, employment arrangements with some members of management provide for severance payments upon termination of their employment if there is a change in control. Stock Price Is Volatile and Stockholders May Not Be Able to Recoup Their Investment There is a history of significant volatility in the market prices of companies engaged in the Software industry, including Acclaim. Movements in the market price of Acclaim common stock from time to time have negatively affected stockholders' ability to recoup their investment in the stock. The price of Acclaim common stock is likely to continue to be highly volatile, and stockholders may not be able to recoup their investment. If the Company's future revenues, profitability or product releases do not meet expectations, the price of Acclaim common stock may be negatively affected. Year 2000 Compliance Is Not Assured Until recently, computer programs were generally written using two digits rather than four to define the applicable year. Accordingly, these programs may be unable to distinguish properly between the year 1900 and the year 2000. Failure to correct the Company's systems to become "Year 2000 compliant" may result in systems failures or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company cannot guarantee that its systems will be Year 2000 compliant in a timely manner. The Company's systems also rely on third-party systems, including those of its vendors, customers, manufacturers, outside developers, and financial institutions associated with the Company. The Company relies on third-party information about their compliance programs and the Company cannot determine potential errors on the part of external service suppliers. Accordingly, the Company cannot guarantee that its information systems or operations will not be affected by third-party mistakes or third-party failures to become Year 2000 compliant. The Company cannot guarantee that the third-party systems on which its systems rely will be timely converted or that any failure to convert by another company would not have a negative effect on the Company's systems. 23 The Company does not currently have any contingency plans in place to address the failure of timely conversion of its and/or third-party systems in respect of the Year 2000 issue. The Company's failure to address any unforeseen Year 2000 issues could negatively impact its results of operations. Pricing and Marketing Strategies in Europe May be Negatively Impacted by the Euro Conversion The January 1, 1999 adoption of the Euro has created a single-currency market in much of Europe. The Company does not anticipate that its operating systems will be negatively impacted by the conversion to the Euro. However, due to numerous uncertainties, the Company cannot reasonably estimate the effect that the conversion to the Euro will have on its pricing or marketing strategies. If the Company's pricing or marketing strategies are negatively impacted, the Euro conversion may have a negative impact on the Company's revenues. 24 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company and several other firms in the entertainment industry were sued in an action entitled James, et al. v. Meow Media, et al. filed in April 1999 in the U.S. District Court for the Western District of Kentucky, Paducah Division, Civil Action No. 5:99CV96-J. The plaintiffs allege that the defendants caused injury to the plaintiffs as a result of, in the case of the Company, its manufacture and/or supply of "violent" video games to Michael Carneal, then fourteen. The plaintiffs further allege that the defendants were negligent in such manufacture and/or supply thereby breaching a duty to Mr. Carneal and others, including the plaintiffs (the parents of the deceased individuals). Mr. Carneal killed three individuals and wounded five others during a shooting at the Heath High School in McCracken County, Kentucky. The plaintiffs seek damages in the amount of approximately $110,000,000. The Company intends to defend this action vigorously. The Company has entered into a joint defense agreement and is sharing defense costs with certain of the other defendants. The Company, Iguana Entertainment, Inc. a subsidiary of the Company, 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 the Company, and accordingly, seeks unspecified damages. The Company intends to defend this action vigorously. The Securities and Exchange Commission (the "Commission") has issued orders directing a private investigation relating to, among other things, the Company'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. The Company has provided documents to the Commission, and the Commission has taken testimony from Company representatives. The Company intends fully to cooperate with the Commission 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 action and other litigations and claims for which the settlement obligation was then probable and estimable, the Company recorded a charge of $23.6 million during the year ended August 31, 1997. During fiscal 1998, the Company settled substantially all of its outstanding litigations and claims for amounts approximating the accrued liabilities. The Company is also party to various litigations arising in the ordinary course of its business, the resolution of none of which, the Company believes, will have a material adverse effect on the Company's liquidity or results of operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None. None. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACCLAIM ENTERTAINMENT, INC. By: Gregory Fischbach July 14, 1999 ------------------------- Gregory Fischbach Co-Chairman of the Board; Chief Executive Officer; President; Director By: James Scoroposki July 14, 1999 ------------------------- James Scoroposki Co-Chairman of the Board; Executive Vice President; Treasurer; Secretary; Director; and Acting Chief Financial and Accounting Officer 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS AUG-31-1999 SEP-01-1998 MAY-31-1999 94,658 0 66,181 41,828 10,638 143,489 60,145 29,347 198,187 127,527 49,750 0 0 1,099 15,487 198,187 369,841 320,535 155,508 136,880 0 0 (4,245) 26,340 1,434 24,906 0 0 0 24,906 .46 .40
-----END PRIVACY-ENHANCED MESSAGE-----