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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16986
ACCLAIM ENTERTAINMENT, INC.
(Exact name of the registrant as specified in its charter)
Delaware 38-2698904
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) identification No.)
One Acclaim Plaza, Glen Cove, New York 11542
(Address of principal executive offices)
(516) 656-5000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.02 par value
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ___
As at December 7, 1995, approximately 49,700,000 shares of Common Stock of the
Registrant were outstanding and the aggregate market value of voting common
stock held by non-affiliates was approximately $510,000,000.
The Registrant's Proxy Statement for its 1996 annual meeting of stockholders is
hereby incorporated by reference into Part III of this Form 10-K.
ACCLAIM ENTERTAINMENT, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED AUGUST 31, 1995
ITEMS IN FORM 10-K
Facing Page Page
----
PART I
Item 1. BUSINESS 1
Item 2. PROPERTIES 21
Item 3. LEGAL PROCEEDINGS 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 27
Item 6. SELECTED FINANCIAL DATA. 28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 67
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 68
Item 11. EXECUTIVE COMPENSATION 68
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 68
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 68
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 69
Signatures 74
PART I
Item 1. BUSINESS.
Introduction
Acclaim Entertainment, Inc. ("Acclaim"), together with its
subsidiaries (Acclaim and its subsidiaries are collectively
hereinafter referred to as the "Company"), is a mass market
entertainment company whose principal business to date has been as
a leading publisher of interactive entertainment software
("Software") for use with interactive entertainment hardware
platforms. The Company also engages in (i) the development and
publication of comic books, which commenced in July 1994 through
the acquisition of Acclaim Comics, Inc. ("Acclaim Comics"),
formerly Voyager Communications, Inc., (ii) the distribution of
Software for affiliated labels, which commenced in the first
quarter of fiscal 1995, (iii) the marketing of its motion capture
technology and studio services, which commenced in the first
quarter of fiscal 1995 and (iv) the distribution of coin-operated,
location-based ticket redemption games, which commenced in August
1995 through the acquisition of Lazer-Tron Corporation ("Lazer-
Tron"). The Company plans to engage in the distribution of coin-
operated video arcade games, commencing in the spring of 1996, and
the electronic distribution of interactive entertainment software
through the partnership (the "Joint Venture") established in
October 1994 between a subsidiary of Acclaim and a subsidiary of
Tele-Communications, Inc. ("TCI"), commencing not earlier than
fiscal 1997.
A Delaware corporation, Acclaim was founded in 1987 and has
foreign operations in Japan, Canada, France, Germany, Spain and
the United Kingdom.
To date, the Company's principal business has been as a
leading publisher of Software for dedicated interactive
entertainment hardware platforms. For information about the
Company's foreign and domestic operations and export sales, see
Note 20 of the Notes to Consolidated Financial Statements.
Business Strategy
The principal aspects of the Company's business strategy are
as follows:
Marketing
The Company's strategy is to use recognizable personalities
and icons, generally obtained through licenses from the owners of
these intellectual properties ("Properties") in the development
and marketing of its Software. By using such personalities and
icons, the Company is able to capitalize on the name recognition
of such properties in its marketing and distribution efforts. The
Company has to date obtained licenses from a variety of sources
for Properties such as The Simpsons (television); True Lies and
Batman Forever (motion pictures); NFL Quarterback Club and World
Wrestling Federation (sports); NBA Jam Tournament Edition (arcade
games); and Spiderman (comics).
The Company attempts to release Software simultaneously
across a series of hardware platforms. As the Company releases
families of titles for multiple platforms, it is able to take
advantage of cross-merchandising opportunities and benefit from
marketing economies of scale. Promotional activities can become
more efficiently focused on the particular intellectual property
theme available in several configurations for multiple hardware
systems. The Company supports its products with advertisements,
both on television and in print, promotions and public relations.
For its major multi-platform releases, the Company creates
marketing events through pre-release promotions and point-of-sale
materials. These events are similar to promotional concepts
utilized in the film and record industries.
Distribution and Operations
The Company believes that the most efficient way to
distribute products is by tailoring the distribution method to
each geographic market and, where appropriate, the Company
distributes directly through a subsidiary in order to maximize
revenues. Independent representatives are used in the United
States to reach over 18,000 store locations. These independent
representatives are supervised by regional sales managers employed
by the Company. This results in lower fixed costs to the Company
than could be achieved with direct sales. The Company also
distributes Software products directly to retail utilizing
independent sales representatives in Austria, Belgium, France,
Germany, Ireland, Luxembourg, the Netherlands, Spain, Switzerland
and the United Kingdom. For sales in the other European markets,
the Company uses national distributors. The Company also sells
and distributes Software directly in Japan and Canada. The
Company's Software is available in over 50 countries.
The Company's comic books are distributed through independent
distributors to the comic book direct market, which consists of
comic book specialty stores and mail order comic book dealers, in
the United States. Lazer-Tron's arcade games are distributed
through independent regional distributors both in the United
States and abroad and directly to two major customers in the
United States.
Historically, the Company sought to manage its operations to
achieve a relatively low fixed-cost structure and to provide
maximum operational flexibility. The Company's strategic
alliances with independent development teams for Software
products, its use of subcontractors to manufacture its Software
products, its royalty based compensation of comic book artists and
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its use of independent sales representatives contributed to
increasing the Company's variable costs and minimizing its fixed
overhead. Similarly, the Company utilized the services of outside
warehouse and distribution facilities on a territory by territory
basis. However, as the Company has enjoyed continued growth, it
has become more cost efficient and strategically advantageous for
the Company, to a greater extent, to perform some of these
functions itself. Accordingly, in 1995, the Company expanded its
in-house Software development capabilities through the
acquisitions of Iguana Entertainment, Inc. ("Iguana") in January
1995 and Sculptured Software, Inc. ("Sculptured") and Probe
Entertainment Limited ("Probe") in October 1995. As a result of
these acquisitions, the number of the Company's full time
employees has increased to approximately 800, of which
approximately 420 work in product development and research and
development. As the Company continues to grow, it may become cost
efficient for the Company to perform additional functions itself.
In June 1993, the Company launched Acclaim Distribution, Inc.
("ADI"), a wholly-owned subsidiary, to handle distribution of its
labels as well as affiliated labels. In fiscal 1995, the Company
commenced shipping products for Digital Pictures, Inc. ("Digital
Pictures"), Marvel Entertainment Group ("Marvel"), Sound Source
Interactive, Inc. ("Sound Source"), Sunsoft Corporation
("Sunsoft") and Interplay Productions Inc. ("Interplay").
Products
The Company attempts to produce families of high quality
products and address a wide range of interactive entertainment
categories, such as puzzle, sports, action/adventure and fantasy,
based on the Company's Properties. The Company intends to
continue its strategy for maximizing the revenue generated from
each of its Properties by publishing Software titles for use on
multiple hardware platforms and creating successive Software
products using the same Properties in order to form the basis for
families of products which can capitalize upon the exposure and
name recognition associated with the Properties. For example, the
Company has released at least one product each year based on World
Wrestling Federation ("WWF") characters since 1988 resulting in a
total of 21 products to date. A similar strategy has been
utilized with The Simpsons and NBA Properties.
Product Development
The Company directs the conceptualization and development of
Software in a manner similar to the studio approach common in
other areas of the entertainment industry. Treatments and
storyboards are created internally for each Software title by the
Company's Creative and Product Development department and the
Company relies upon programming groups selected for each project
to develop each Software title. Once the specifications for a
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Software title are agreed upon, the Company's production teams
closely coordinate development with the Software programming
groups. In addition to the external programming groups used by
the Company, commencing in the second quarter of 1995, the
Company's Creative and Product Development department has worked
with the Company's own production teams from inception to
completion of the development of the Company's Software. With the
acquisition of Iguana, Sculptured and Probe, the Company
anticipates that, commencing in fiscal 1996, the majority of its
Software will be developed internally.
Technology
The engineering staff within the Company's Advanced
Technologies Group ("ATG") provides technical support and
programming tools to enhance game play and product quality. With
the advancement of CD-ROM technology, ATG's activities have
expanded to include the development of a new three-dimensional
animation creation process and designing tools for use in
programming Software for CD-ROM or cartridge-based platforms
utilizing 32- or 64-bit processors. In September 1994, the
Company completed the construction of its motion capture studio
for the application of its animation technology. In addition to
the use of this technology in its own Software, the Company
markets its motion capture technology and sells its studio
services for use in other entertainment media. The Company's
motion capture technology has been utilized by Warner Bros. for
the creation of certain special effects for the blockbuster film,
Batman Forever. See " -- Motion Capture Services." During
fiscal 1995, the Company also completed the construction of its
ultimate or "blue screen" studio.
Interactive Entertainment Software
Industry Overview
The interactive entertainment industry is characterized by
rapid technological change, resulting in hardware platform and
related Software product cycles. No single hardware platform or
system has achieved long-term dominance. Accordingly, the Company
focuses its efforts on the development of Software for the
hardware platforms and systems that dominate the interactive
entertainment market at a given time.
The home interactive entertainment industry experienced
success from 1977 to 1982 followed by precipitously declining
revenues and significant losses incurred by many companies engaged
in that industry. Beginning in 1985, when Nintendo Co., Ltd.
(Japan) (Nintendo Co., Ltd. and its subsidiary, Nintendo of
America, Inc., are collectively herein referred to as "Nintendo")
commenced marketing the 8-bit dedicated Nintendo Entertainment
4
System ("NES") in the United States, the interactive entertainment
industry started a new period of growth.
In 1989, Nintendo introduced its portable Game Boy system and
in 1991 Sega Enterprises Ltd. ("Sega") introduced its portable
Game Gear system. Although other manufacturers introduced
portable systems, the Game Boy and Game Gear systems dominated,
and continue to dominate, the portable market. In 1990, Sega
introduced the Sega Genesis ("Genesis"), which utilized a 16-bit
processor. In August 1991, Nintendo introduced its 16-bit
dedicated hardware system, the Super Nintendo Entertainment System
("SNES"). The 16-bit systems were more sophisticated than the 8-
bit systems, producing faster and more complex images with more
life-like animation and better sound effects. The industry
experienced rapid rates of growth commencing in 1992, fueled by
sales of the 16-bit dedicated hardware systems manufactured by
Nintendo and Sega. By 1993, the 16-bit dedicated platform had
replaced the 8-bit dedicated platform as the dominant hardware
platform. Sega's Genesis, which was the first 16-bit dedicated
hardware system to be introduced, originally dominated the 16-bit
dedicated platform market; later, Genesis and SNES together
dominated that market.
The interactive entertainment industry is currently
undergoing, and the Company anticipates that in both the short-
and long-term future it will continue to undergo, significant
changes due in large part to (i) the success of personal
computer/compact disk/multimedia hardware systems ("Multimedia/PC
Systems"), (ii) the introduction of the next generation of
interactive entertainment hardware platforms incorporating 32- and
64-bit processors, (iii) the development of remote and electronic
delivery systems and (iv) the entry and participation of new
companies in the industry. The new hardware platforms are
equipped to use read-only memory ("ROM") cartridges, compact disk
("CD"), flash memory and/or other technologies as the dominant
software storage device.
In 1993, Sega introduced the Sega CD, a CD player which
consists of an attachment for its 16-bit Genesis system.
Additional CD platforms, including personal computer systems for
which Software products are published, are currently marketed by
Philips, Commodore, Apple, IBM, IBM-compatible manufacturers and
The 3DO Company ("3DO"). Atari launched Jaguar, its 64-bit
cartridge-based system, in November 1993 and Sega launched 32X,
its 32-bit cartridge-based attachment for its 16-bit Genesis
system, in November 1994. Sega and Sony Corporation ("Sony")
launched 32-bit CD-based systems in Japan in November 1994. Sega
shipped limited quantities of its Saturn system in the United
States commencing in May 1995 and Sony released its
PlayStation(Trademark) system in the United States in September 1995.
Nintendo has announced plans to release Ultra 64, its new 64-bit ROM
cartridge-based system, in Japan in the spring of 1996.
5
The Company believes that sales of new 16-bit hardware
systems peaked in calendar 1993, have decreased substantially
since that time and will continue to do so, and that 16-bit
Software sales peaked in calendar 1994 (the year following the
peak year for hardware sales).
The Company believes that hardware incorporating 32- and 64-
bit processors, including Multimedia/PC Systems, will become the
dominant hardware platforms in the interactive entertainment
industry over the next few years. The Company believes that
Sega's Saturn and Sony's PlayStation(Trademark) have both achieved
commercial success in Japan and, based on preliminary sales
information, that the limited quantities of the PlayStation(Trademark)
shipped to date have achieved high retail sell-through in the
United States. However, there can be no assurance that either of
these platforms or any of the other newly introduced or announced
platforms will achieve commercial success or the timing or impact
thereof on the industry.
The Company's strategy is to develop and/or publish Software
for the hardware platforms that currently dominate the market and
to develop Software for the hardware platforms that the Company
perceives as having the potential to achieve mass market
acceptance, rather than to be the first Software publisher for an
emerging hardware platform. However, in order to promote its
strategic relationships, the Company may from time to time publish
Software for a hardware platform before it attains mass market
appeal. No assurance can be given that the Company will correctly
identify the systems with mass market potential or be successful
in publishing Software for such platforms and systems.
The Company's revenues have traditionally been derived from
sales of Software for the then dominant platforms. From inception
through fiscal 1991, substantially all of the Company's revenues
were derived from sales of Software for the NES. Although the
Company commenced the publication of Software for Game Boy in
fiscal 1990, for the SNES in fiscal 1991 and for the Genesis and
Game Gear systems in fiscal 1992, the Company did not derive
significant revenues from the sale of portable or 16-bit Software
until fiscal 1992. The Company commenced the development and sale
of Software for the Sega CD System in fiscal 1994 and for Sega's
32X and Saturn systems and for Sony's CD-based PlayStation(Trademark)
in fiscal 1995. Most of the Company's revenues in fiscal 1994 were
derived from sales of Software for the 16-bit SNES and Genesis systems
and the majority of the Company's revenues in fiscal 1995 were derived
from sales of Software for the 16-bit platform. The market for
Software for dedicated 16-bit systems has declined substantially in
1995 and is expected to continue to decline. The Company anticipates
that it will derive a greater proportion of its revenues from sales of
Software for Multimedia/PC Systems and 32-bit systems in fiscal 1996
as compared to fiscal 1995. However, due to the uncertainty
associated with the transition to
6
Multimedia/PC Systems and the next generation of entertainment
hardware platforms, the sales growth of Software for these new
platforms will not offset the decline in sales of Software for the
16-bit entertainment hardware platforms in fiscal 1996 and no
assurance can be given that it will do so thereafter.
Accordingly, the Company anticipates that its results of
operations and profitability during the first two quarters of
fiscal 1996 will be materially lower than comparable periods in
fiscal 1995 and that the Company will record lower revenues in fiscal
1996 as compared to fiscal 1995.
In the late 1980's and early 1990's the Company believed that
the floppy and personal computer market was characterized by (i)
numerous hardware and software incompatibilities; (ii) high price
points for multimedia PC hardware; (iii) a large number of
software titles; and (iv) consumer demographics that were
different from those of the Company's core customers.
Accordingly, the Company participated in this category through
distribution agreements which, the Company believed, provided the
greatest return on the investment of time and effort needed to
service a fragmented market. However, based on the Company's
belief that, by 1995, this category now has sufficient mass market
penetration to warrant publishing Software directly, technological
advancements incorporated in the newer Multimedia/PC Systems and
the higher gross margins realized by publishers of Software for
this category, the Company commenced marketing Software for
Multimedia/PC Systems in fiscal 1995 and intends to expand the
number of Software titles for Multimedia/PC Systems marketed by it
in fiscal 1996.
License Agreements
In December 1994, the Company entered into an agreement (the
"Sony Agreement") with Sony Computer Entertainment of America
("SCE"), pursuant to which the Company received, among other
things, a non-exclusive license to develop and distribute Software
for the Sony PlayStation(Trademark) platform in the United States and
Canada. The Sony Agreement expires in December 1998. In December
1994, the Company also entered into a five-year agreement with an
affiliate of SCE pursuant to which it received a non-exclusive
license to develop and distribute Software for the Sony
PlayStation(Trademark) platform in Japan.
The Company has various license agreements with Nintendo
(collectively, the "Nintendo License Agreements") pursuant to
which it has the nonexclusive right to utilize the "Nintendo" name
and its proprietary information and technology in order to develop
and market Software titles for various Nintendo platforms (other
than the Ultra 64 platform) in various territories throughout the
world. The Nintendo License Agreements for the different
platforms expire at various times between 1996 and 1997. The
7
Company has also been provided with development kits by Nintendo
for the development of Software for Nintendo's Ultra 64 system.
In April 1992, the Company entered into an agreement with
Sega (the "Sega Agreement"), pursuant to which the Company
received the nonexclusive right to utilize the "Sega" name and its
proprietary information and technology in order to develop and
distribute Software titles for use with various Sega platforms for
a two year period which expired in January 1994. The Company
exercised its option to extend the Sega Agreement, which
agreement, as amended, has been extended for a two-year period
expiring December 31, 1995. The Company is currently negotiating
an extension of the Sega Agreement; however, no assurance can be
given that the Company will be successful in negotiating such an
extension or the terms thereof.
SCE, Nintendo and Sega charge their licensees a fixed amount
per unit based, in part, on memory capacity, chip configuration
and/or the market price for compact disk manufacture. With
respect to Software for Nintendo and Sega platforms, this charge
covers manufacturing, printing and packaging of the unit, as well
as a royalty for use of their respective names, proprietary
information and technology. With respect to Software for Sony's
PlayStation(Trademark), the Company is required to make a separate
royalty payment to SCE for each Software unit manufactured by SCE for
the Company; this payment is made upon manufacture of the units. The
charges are subject to adjustment by SCE, Nintendo and Sega at their
discretion. The Company manufactures (through subcontractors)
substantially all of its Sega Software titles for worldwide
distribution and pays Sega a royalty for each Software unit so
manufactured and sold; this payment is made upon sale of the units by
the Company. See " -- Production, Sales and Distribution." However,
the Company does not have the right to manufacture any Software for
the Sony PlayStation(Trademark) or the Nintendo SNES and portable
platforms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SCE, Nintendo and Sega have the right to review and evaluate,
under standards established by them, the game program for each
title and the right to inspect and evaluate all artwork, packaging
and promotional materials used by the Company in connection with
the Software. The Company is responsible for resolving at its own
expense any warranty or repair claims brought with respect to the
Software. To date, the Company has not experienced any material
warranty claims.
Under each of these license agreements, the Company bears the
risk that the information and technology licensed from SCE,
Nintendo or Sega and incorporated in the Software may infringe the
rights of third parties and must indemnify SCE, Nintendo or Sega
with respect to, among other things, any claims for copyright or
trademark infringement brought against SCE, Nintendo or Sega and
8
arising from the development and distribution of the game programs
incorporated in the Software by the Company. See
" -- Trademark, Copyright and Patent Protection," " -- Marketing
and Advertising" and "Legal Proceedings."
The Company has a license agreement with 3DO for the
development of Software for its 32-bit system and has been
provided with product specifications for M2, 3DO's latest hardware
platform which is being manufactured and marketed by Matsushita,
although the Company has not yet announced that it will market
Software for either of these platforms. No assurance can be given
that any of the newly introduced or announced systems will achieve
commercial success or market penetration similar to that achieved
by the SNES or Genesis systems or that the Company's Software for
such platforms will be "hits" or otherwise achieve market
acceptance.
Although the Company has historically been able to renew
and/or negotiate extensions of its Software license agreements
with hardware developers, there can be no assurance that, at the
end of their current terms, the Company will continue to be able
to do so or that the Company will be successful in negotiating
definitive license agreements with developers of new hardware
systems. The inability to negotiate agreements with developers of
new hardware systems or the termination of all of the Company's
license agreements will, and the termination of any one of the
Company's license agreements could, have a material adverse effect
on the Company's financial position and results of operations.
Development Of Software
The Company's product development staff closely manages the
development of new Software titles by its entertainment software
developers. Individuals within the Creative and Product
Development department assume the role of producers and direct and
closely supervise the Software development process from its
initial stages until completion. Each producer is responsible for
the game concept and story boards. The titles are designed for a
licensed Property and are based on concepts created by the Company
alone or in cooperation with its own or independent
developers/designers. The Company generally pays its independent
developers/software designers recoupable advances, followed by the
payment of royalties based on sales.
In 1995, the Company expanded its ability to develop Software
through its acquisition of Sculptured and Probe in October 1995
and Iguana in January 1995. The Company now has approximately 450
employees in both its product development and research and
development departments who have developed titles such as WWF
Wrestlemania, the Arcade Game and The Simpsons (for the Company),
Primal Rage (for Time Warner Interactive) and FIFA Soccer '96 (for
9
Electronic Arts). The Company's product development resources
have significantly expanded through these acquisitions.
The Company attempts to obtain licenses to use existing
intellectual property rights and popular icons and personalities
as the basis for one or more families of Software titles to be
produced by the Company. In most cases, the Company may obtain a
license from, and pay a royalty to, the owner or licensor of the
rights to an existing character or game concept used by the
Company in the new title. For example, the Company has entered
into an agreement with Titan Sports, Inc. ("Titan") (which owns
the rights to utilize the names, likenesses and physical
characteristics of certain WWF wrestlers), which expires in March
1999, to create Software based upon any character licensed from
Titan.
The Company has agreements with Lightstorm Entertainment
("Lightstorm") and Content Inc., a subsidiary of Edward R.
Pressman Film Corporation ("Pressman Films") which expire in March
1998 and November 1997, respectively. Under these agreements, the
Company has the right of first refusal to create Software titles
based upon any feature film released by Lightstorm or Pressman
Films, as the case may be, at any time during the term of the
respective agreements. These agreements, which cover the rights
to dedicated and portable interactive entertainment systems, as
well as home computers, such as Apple, IBM and Commodore, provide
that individual Software titles created or acquired by the Company
during the term of the respective agreements may continue to be
sold after the expiration of the term of the master license
agreements.
In October 1995, the Company entered into an agreement with
Warner Bros. Interactive Entertainment ("WBIE"), pursuant to which
the Company and WBIE have agreed jointly to publish three Software
titles across multiple hardware platforms based on Warner Bros.
feature films.
The Company constantly seeks alternate sources of licensed
products from which to develop software and has historically
obtained such rights from a variety of sources in the film (e.g.,
Terminator II), comic book publishing (e.g., Spiderman), sports
(e.g., NFL Quarterback Club and World Wrestling Federation), coin-
operated arcade (e.g. Double Dragon II) and other entertainment
industries (e.g., the television program, The Simpsons). The
contractual agreements granting the Company rights to use such
properties are varied -- some agreements are restricted to
individual properties (e.g., Batman Forever) and some agreements
cover a series of properties or grant rights to create Software
based on particular characters over a period of time (e.g., the
Company's agreement with Titan Sports allows it to create Software
based on characters licensed by the World Wrestling Federation
through 1999; the Company's agreement with Lightstorm provides the
10
Company an option to create Software based on motion pictures
released by Lightstorm through 1998). Sales of Software
incorporating certain of such rights have accounted for
significant portions of the Company's revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." The Company intends to continue to seek such rights
from various sources; however, no assurance can be given that the
Company will be successful in obtaining such licenses or that, if
such licenses are obtained, Software titles based thereon will be
successful.
Once the Company has obtained the rights to an existing game
or approved a new game created by software developers, a prototype
of the game is developed and play-tested by the Company and the
developers. However, there can be no assurance that play-testing
will necessarily discover or resolve all possible defects ("bugs")
in the software code and, if it were to distribute a title with
serious bugs, the Company might be required to recall those
titles. The software code, game prototype and the related
artwork, user instructions, warranty information, brochures and
packaging designs developed by the Company are delivered to SCE,
Nintendo or Sega, as the case may be, for its approval and testing
for bugs (both in the United States and Japan). The Company's
Software for Multimedia/PC Systems is tested for bugs both
internally and by third party testers. To date, the Company has
not had to recall any titles due to bugs.
Products
Since inception, the Company has developed Software for ten
dedicated hardware systems (NES, Game Boy, SNES, Genesis, Master
System, Game Gear, Sega CD, Sega 32x, Sega Saturn and Sony
PlayStation(Trademark)) and, from time to time, has developed
Commodore- and Amiga-compatible Software for sale in Europe. More
recently, the Company has introduced Software for various
Multimedia/PC Systems worldwide. To date, the Company has released
266 Software products, 86 of which were released in fiscal 1995.
Although older titles may still be available for sale, the Company
generally actively markets only its ten to fifteen most recently
released titles.
The Company believes that the life cycle of a Software
product ranges generally from one month to up to eighteen months.
The life cycle of a particular Software product is dependent in
large part on the initial success of the product. Although actual
results vary greatly from product to product (i.e., depending on
whether or not the product is a "hit"), the retail sell-through of
a Software product is highest during the three months immediately
after its introduction. The Company believes that the life cycle
of Software products during the transition phase to new generation
platforms is generally longer and that retail sell-through is
highest during a longer period. The Company's future success is
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dependent in large part on its ability to develop and market new
Software products that achieve widespread market acceptance for
use with the hardware platforms that dominate the market. If the
Company were unable, for any reason, to develop and market "hit"
Software products for the hardware platforms that dominate the
market, the Company's financial position and results of operations
would be materially adversely affected.
32-Bit Software (cartridge, CD and Multimedia/PC):
The Company released ten Software products in fiscal 1995 for
32-bit CD systems. The retail price for the Company's 32-bit CD
Software generally ranges between $29 and $60.
16-Bit Cartridges:
The Company has released 93 16-bit Software products since
inception, 43 of which were released in fiscal 1995. Of such
products, 21 were released for the SNES and 22 for Genesis. The
retail price for the Company's SNES Software and the Company's
Genesis Software generally ranges between $19 and $75 and between
$19 and $60, respectively. Retail prices (including for the
Company's portable Software) are generally $5 to $10 higher in
European and Asian markets.
Portables:
The Company has released 76 portable Software products since
inception, 25 of which were released in fiscal 1995. Of such
products, 11 were released for Game Boy and 14 for Game Gear. The
retail price for the Company's Game Boy Software and for the
Company's Game Gear Software generally ranges between $14 and $32
and between $14 and $40, respectively.
Other:
The Company commenced marketing and distributing infra-red
remote controllers for use with the SNES and Genesis systems in
November 1993. The Company has also, from time to time, entered
into strategic distribution agreements for the publication of its
Properties on PC and Amiga platforms in floppy disk format.
Production, Sales And Distribution
Nintendo generally manufactures and delivers Software to the
Company within 45 to 75 days after the opening by the Company of a
letter of credit with respect to a particular Software title. SCE
generally manufactures and delivers Software to the Company within
three weeks after the placement of a purchase order. The Company
commenced the manufacture, through subcontractors, of certain of
its Genesis Software in August 1992 and currently manufactures
(through subcontractors) substantially all of its Sega Software.
12
The manufacture of its own Software results in better liquidity
and more control by the Company over its inventory. In addition,
the cost of Software manufactured by the Company, together with
the royalties payable to Sega for such manufacturing, is lower
than the cost of the Company's Software products when manufactured
by Sega. The Company also manufactures (through subcontractors)
all of its Software for Multimedia/PC Systems. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." Software is generally shipped by air or sea at the
Company's expense to its freight forwarders or warehouses. The
Software is cleared through customs and then is shipped, at the
Company's instructions, to its customers.
The Company's Software is sold in the United States using 14
regional sales representative organizations which receive
commissions based on the net sales of each product sold. The
Company maintains an in-house sales management team led by the
Vice President of Sales, including a national sales director and
eight regional and district sales managers, to supervise the sales
representatives. The sales representatives also act as sales
representatives for certain of the Company's competitors. Two of
the sales representative organizations marketing the Software are
owned in whole or in part by James Scoroposki, an officer,
director and principal stockholder of the Company.
The Company markets its Software primarily to mass
merchandise companies, large retail toy store chains, department
stores and specialty stores. The Software is also sold, to a
lesser extent, to wholesale distributors. The Company does not
have written agreements with its customers. Sales to Toys "R" Us,
Inc. accounted for approximately 11%, 12% and 13% of the Company's
net revenues for each of the fiscal years ended August 31, 1995,
1994 and 1993, respectively. No other customer or distributor
accounts for more than 10% of the Company's net revenues. Other
important North American customers include Wal-Mart, Target,
Sears, KayBee, Blockbuster Entertainment, Electronics Boutique and
NeoStar. Although the loss of any important customer could have a
material adverse effect on the Company, the Company believes that
its other customers would be able to merchandise much of the
resulting available volume of Software.
Outside the United States, the Company distributes Software
directly in Austria, Belgium, Canada, France, Germany, Ireland,
Japan, Luxembourg, the Netherlands, Spain, Switzerland and the
United Kingdom. The sales and distribution activities of the
Company's European subsidiaries are administered through a central
management division, Acclaim Europe, based in London. Outside of
these countries, the Company's Software is sold through various
regional distributors.
13
The Company's Software products are currently available to
customers in over 50,000 stores worldwide. The Company believes
its Software products are available in over 50 countries.
Marketing And Advertising
The Company's ability to promote and market its products has
become more important to its continued success as the number of
Software publishers and available game titles increase. The
Company's ability to maintain favorable relations with retailers
and to receive the maximum advantage from its advertising
expenditures is dependent in part on its ability to provide
retailers with a timely and continuous flow of product. See " --
Development of Software."
The target customers for the Company's Software are primarily
males aged 11 to 21. With the expansion of the number of new
platforms (including Multimedia/PC Systems) for which the Company
publishes Software, the demographics of the Company's customers
has broadened to include younger and older customers. The Company
does not have much experience in marketing Software for customers
outside its core market and there can be no assurance that it will
be successful in doing so in the future.
In selecting an existing game or a new concept for
development and distribution, the Company's management seeks
products it believes will appeal to the imagination of its target
customers and develops a packaging concept and advertising
strategy consistent with the product's theme to attract that
customer. The Company then supports the product with
advertisements on television and in trade and consumer magazines,
newspapers, tabloids and flyers; consumer contests and promotions;
publicity activities; and trade shows. In addition, certain of
the Company's retail customers participate in cooperative
advertising with the Company, featuring the Company's products in
the retail customer's own advertisements to its customers. Dealer
displays and in-store merchandising are also used to increase
consumer awareness of the Company's products. The Company also
indirectly benefits from advertising by hardware manufacturers for
whom the Company markets Software, as well as from general market
awareness of the characters and concepts featured in the Company's
products. From time to time, the Company also offers rebate
programs on particular Software titles either independently or in
conjunction with third parties (such as the Company's recent
rebate coupon for its Batman Forever title, which was offered by
the Company in conjunction with Warner Bros.' release of the home
version of the feature film).
The Company attempts to release its significant Software
titles simultaneously across a series of platforms. For its major
multi-platform releases, the Company creates marketing events
through pre-release promotions and point of sale materials. These
14
events are similar to promotional concepts utilized in the film
and record industries.
The Company's warranty policy is to provide the original
purchaser with replacement or repair of defective Software for a
period of 90 days after sale. To date, the Company has not
experienced significant warranty claims.
The Company employs "game counselors" who provide information
and game-play tips by telephone regarding its Software.
Trademark, Copyright And Patent Protection
Each of SCE, Nintendo and Sega incorporate a security device
in the Software and their respective hardware units in order to
prevent unlicensed software publishers from infringing SCE's,
Nintendo's or Sega's proprietary rights, as the case may be, by
manufacturing games compatible with their hardware. In addition,
Nintendo requires its licensees to display the "Nintendo Seal of
Approval" and Sega requires its licensees to display the "Sega
Seal of Quality" to notify the public that the product has been
approved by Nintendo or Sega, as the case may be, for use with its
hardware. Under its various license agreements with SCE, Nintendo
and Sega, the Company is obligated to obtain or license any
available trademark, copyright and patent protection for the
original work developed by the Company and embodied in or used
with the Software and to display the proper notice thereof, as
well as notice of the licensor's intellectual property rights, on
all its Software.
Each Software title may embody a number of separately
protected Properties: (i) the trademark for the character on
which the Software title is based (for example, Spiderman); (ii)
the copyright and trademark for the game concept (for example, WWF
Royal Rumble); (iii) the software copyright; (iv) the name and
label trademarks, such as "LJN" and "Acclaim"; and (v) the
copyright for SCE's, Nintendo's or Sega's proprietary technical
information.
The Company has registered the logo "Acclaim" in the United
States and in certain foreign territories and owns the copyrights
for many of its game programs. "Nintendo," "Nintendo
Entertainment System," "Game Boy" and "Super NES" are trademarks
of Nintendo of America, Inc.; "Sega," "Sega Genesis," "Master
System," "Sega MegaDrive" and "Game Gear" are trademarks of Sega
and "Sony", "Sony Computer Entertainment" and "PlayStation" are
trademarks of Sony and SCE. The Company does not own the
trademarks, copyrights or patents covering the proprietary
information and technology utilized in the NES, SNES, Game Boy,
Genesis, Master System, MegaDrive, Game Gear or Sony
PlayStation(Trademark) or, to the extent licensed from third parties,
the characters, concepts and game programs comprising the Software.
Accordingly,
15
the Company must rely on the trademarks, copyrights and patents of
such licensors for protection of such intellectual property from
infringement. Under the Company's license agreements with certain
of the software developers, the Company may bear the risk of
claims of infringement brought by third parties and arising from
the sale of the Software and each of the Company and such
developers has agreed to indemnify the other for costs and damages
incurred arising from such claims and attributable to infringing
proprietary information, if any, embodied in the Software and
provided by the indemnitor. See "Legal Proceedings."
There can be no assurance that the information and technology
licensed or developed by the Company will not be independently
developed or misappropriated by third parties.
Competition
Competition to develop and market Software is intense. The
Company competes with Nintendo, Sega, Sony and publishers licensed
by Nintendo, Sega and/or Sony to develop Software for use with
their respective hardware systems. Nintendo, Sega and Sony, as
well as certain other publishers, have greater financial and other
resources than the Company.
The Company believes, based on certain retail sales
information, that it is one of the largest publishers of Software
in the world after Nintendo and Sega. The Company also believes
that the competition with respect to 16-bit Software has narrowed
to approximately five companies, including the Company, that share
a significant portion of the 16-bit market in North America and
Europe. However, with respect to the new entertainment hardware
platforms and Multimedia/PC Systems, competition has increased and
is fragmented.
Software publishers compete based, in part, on marketing
ability for limited distribution channels and retail shelf space.
These companies also compete based on their ability to select
titles that will appeal to consumers and to obtain rights to
commercially marketable concepts and characters to incorporate in
game designs. In addition, competition is based on creative
product development and product quality, including game play,
story line, graphics and sound effects. Other competitive factors
include proprietary technology, research and development
capability, breadth and depth of worldwide retail distribution
channels, management experience and pricing strategies. The
Company believes it competes favorably on each of such bases of
competition.
Comic book publishing
Through the acquisition of Acclaim Comics in July 1994, the
Company commenced its development and publication of comic books.
16
To date, substantially all of Acclaim Comics' revenues have been
derived from sales of comic books on a nonreturnable basis through
unaffiliated distributors to the comic book direct market, which
consists of comic book specialty stores and mail order comic book
dealers. In 1995, Acclaim Comics entered into an agreement with
Diamond Comic Distributors, Inc. for exclusive distribution of its
books.
Acclaim Comics has created a superhero and action/adventure
comic book series based on characters licensed or created by
Acclaim Comics, which are published under its VALIANT, ARMADA and
DIME imprints. Acclaim Comics currently publishes between ten and
fifteen monthly comic books, including Solar Man of the Atom, X-O
Manowar, Eternal Warrior, Turok: Dinosaur Hunter, Bloodshot and
Secret Weapons. The foregoing properties are owned by Acclaim
Comics, except for the Solar and Turok characters, which are
licensed. Acclaim Comics also publishes books based on Magic: The
Gathering, which is licensed from Wizards of the Coast Inc. The
Company intends to release Software products based on characters
licensed or created by Acclaim Comics for a variety of platforms.
Acclaim Comics has generally experienced declines in monthly
sales, gross profit margins and net income during the year ended
August 31, 1995, as compared to the 1994 period which, the Company
believes, is attributable to reduced purchases by speculators,
relative saturation of the market, increased number of
publications and decreased capacity in the direct market. Acclaim
Comics' future sales growth, if any, will depend on increased unit
sales of comic books, the introduction of new comic titles, the
licensing and development of its characters in other media such as
motion picture or television, the use of its characters in the
Company's Software and coin-operated games, and Acclaim Comics'
entry into the mass market for distribution and sales of its comic
books outside the United States. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Distribution of Affiliated Labels
The Company, through ADI, has entered into agreements for the
marketing and distribution of Software developed by other software
publishers ("Affiliated Labels"). In August 1994, the Company
entered into an exclusive sales and distribution agreement with
Digital Pictures for the distribution by ADI of Software developed
by Digital Pictures. The Company also entered into an arrangement
with Marvel Entertainment Group ("Marvel") for the distribution by
ADI of Software developed by the Company for Marvel, under the
Marvel label. The Company commenced distribution of its first
Affiliated Label products, which are delivered to the Company as
completed products, in October 1994. In fiscal 1995, the Company
entered into agreements with Sunsoft Software, Sound Source and
Interplay for the distribution by ADI of Software developed by
17
them. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Motion Capture Services
ATG was initially established in January 1991 to develop
tools that would enable the Company's independent designers more
efficiently and cost-effectively to create and animate characters
for Software and enhance game play and product quality. With the
advancement of CD-ROM technology, ATG's activities expanded to
include the development of a new three-dimensional animation
creation process and designing tools for use in programming
Software for CD-ROM platforms or cartridge-based platforms
utilizing 32-bit or 64-bit processors.
The animation process begins with scanning, or traditional
modeling, and texture mapping to create a three-dimensional
character. The character is then animated through a proprietary
motion capture process which provides biomechanically accurate
data of the subject's skeletal movements. The Company's
tetherless optical motion capture process allows the capture of
real-time performances of multiple actors with lifelike accuracy.
A new motion editing system was created to provide directorial
control of the "digital actors."
In September 1994, the Company constructed its motion capture
studio. Development of the studio continued in 1995, when the
Company unveiled its blue screen studio utilizing advanced
ultimate software and proprietary video processing tools for
compositing and layering characters in a variety of entertainment
media. The Company began to market Software utilizing its three-
dimensional animation technology in calendar 1995 (Foreman for
Real and Frank Thomas Big Hurt Baseball).
In addition to such use, the Company believes that its motion
capture technology has applications in other entertainment media
and has marketed its technology and studio services. Pursuant to
an agreement with Warner Bros., Warner Bros. used the Company's
motion capture technology and studio services to create certain of
the special effects for Batman Forever, which was released in the
summer of 1995. New Line Cinema utilized the Company's motion
capture technology to create certain home video animation special
effects for Mortal Kombat and Twentieth Century Fox utilized the
Company's motion capture technology to create certain special
effects for the 1995 motion picture, Power Rangers. To date, the
Company's revenues from the licensing of its motion capture
technology and studio services has not been material. No
assurance can be given that the Company will be successful in
marketing its technology and selling its studio services and, even
if it were successful, that revenues generated therefrom will be
material.
18
Coin-operated arcade games
In August 1995, the Company acquired Lazer-Tron, which
creates and markets coin-operated ticket redemption games for use
in family entertainment centers and other entertainment venues.
Redemption games award tickets to players based on their skill
level in playing the games and these tickets may be redeemed for
prizes or merchandise. As designer, developer, manufacturer and
marketer, Lazer-Tron has created such games as Spin-To-Win(Trademark),
Ribbit Racin(Trademark), Aftershock(Trademark) and Pogger(Trademark),
the first arcade game featuring popular POG(Trademark) games pieces.
See Note 3 of the Notes to Consolidated Financial Statements.
In July 1994, the Company established Acclaim Coin-Operated
Entertainment, Inc. ("Acclaim Coin-Op"), a wholly-owned subsidiary
based in California, for the creation and distribution of stand-
alone coin-operated games. Acclaim Coin-Op anticipates shipping
its first video game in the spring of 1996. The Company intends
to utilize Lazer-Tron's administrative services, its sales force
and manufacturing capabilities to support the operations of
Acclaim Coin-Op. It is the Company's current intention to
release, commencing in fiscal 1996, between three to four coin-
operated games per year. The successful creation and marketing of
such games will be dependent, in large part, on the Company's
ability to hire and retain developers for the creation of, and to
license or create properties for use in, coin-operated games which
achieve wide-spread market acceptance. There can be no assurance
that the Company will be successful in creating and marketing
coin-operated games or that any revenues derived by the Company
from the sale of such games will be material.
The Company has licensed certain hardware technology from SCE
and Sega for the development of its coin-operated games. The
Company is also developing its own proprietary hardware technology
for future applications, although there can be no assurance that
the Company will be successful in creating such technology. In
addition, the Company has developed new data compression audio
technology with high fidelity, motion picture sound quality, which
has applications in the coin-operated arcade game platform, as
well as other high-end game platforms.
Electronic Distribution
On October 19, 1994, Acclaim Cable Holdings, Inc., a wholly-
owned subsidiary of the Company, entered into a Partnership
Agreement (the "Partnership Agreement") with TCI GameCo Ventures,
Inc., an indirect wholly-owned subsidiary of TCI, for the creation
of a Delaware limited partnership (the "Joint Venture"), the
interests in which are indirectly held 65% by the Company and 35%
by TCI. The principal purposes of the Joint Venture are to
develop and acquire (including by purchase or license),
entertainment software for interactive networks, as well as to
19
promote a standard for broadband network gaming to be incorporated
into advanced set-top boxes.
It is currently intended that the Company will initially
license to the Joint Venture, on a non-exclusive "most preferred
status" basis, electronic distribution rights in Properties owned
or licensed by the Company and that TCI and its affiliates will
provide 100% distribution rights on its various networks to the
Joint Venture, which will initially be on a non-exclusive "most
preferred status" basis. It is also intended that the Company
will have the exclusive right to distribute the Joint Venture's
properties through nonelectronic distribution channels. The
funding obligations of the partners in respect of the Joint
Venture are to be established and agreed upon and will be
guaranteed by Acclaim and TCI Technology, Inc., respectively.
Employees
The Company currently employs approximately 800 persons
world-wide on a full-time basis, approximately 620 of whom are
employed in the United States. The Company believes that its
relationship with its employees is good.
20
Item 2. PROPERTIES.
The Company owns and occupies a 70,000 square foot office
building and an adjoining parcel of land in Glen Cove, New York.
The Company also leases approximately 10,000 square feet of office
space in Glen Cove, New York and owns a 10,000 square foot office
building in Oyster Bay, New York, which has been leased to a third
party tenant. The Company's motion capture studio, located at the
Glen Cove site, was completed in September 1994 and, in November
1995, the Company completed the purchase of the building
containing its ultimate studio.
In addition, the Company's United States subsidiaries lease
and occupy approximately 40,000 square feet of warehouse and
office space in New York, and office space in California, Texas
and Utah.
The Company's foreign subsidiaries also lease offices in
Canada, Japan, France, Germany and the United Kingdom.
21
Item 3. LEGAL PROCEEDINGS.
By complaints dated December 4, 1995 and December 5, 1995,
the Company was sued in eight actions (the "Actions") entitled (i)
Mohammed Ali Kahn v. Gregory E. Fischbach, James Scoroposki,
Robert Holmes and Acclaim Entertainment, Inc. (CV 95 4983), (ii)
Richard J. Wenski, individually and on behalf of all other persons
similarly situated, v. Acclaim Entertainment. Inc., Gregory E.
Fischbach, Robert Holmes and Anthony Williams (CV 95 4996), (iii)
Yosef Stern v. Acclaim Entertainment, Inc.; Gregory E. Fischbach;
James Scoroposki: Robert Holmes and Anthony Williams (CV 95 4990),
(iv) Marc Jaffe, on behalf of himself and all others similarly
situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach,
James Scoroposki, Robert Holmes, and Anthony Williams (CV 95
4989), (v) Robert Bloom v. Acclaim Entertainment, Inc. and Robert
Holmes (CV 95 4993), (vi) James Bencivenga, on behalf of himself
and all others similarly situated, v. Gregory E. Fischbach, James
Scoroposki, Robert Holmes, Anthony Williams and Acclaim
Entertainment, Inc. (CV 95 4985), (vii) Henry Vredeveld, on behalf
of himself and all others similarly situated, v. Anthony Williams
and Acclaim Entertainment, Inc. (CV 95 4979), (viii) Michael Leitzes,
individually and on behalf of all others similarly situated, v.
Acclaim Entertainment, Inc., Robert Holmes and Gregory Fischbach (CV
95 5004) and (ix) Alan Yakuboff, on behalf of himself and all others
similarly situated, v. Acclaim Entertainment, Inc., Gregory E.
Fischbach, James Scoroposki and Anthony Williams (CV 95 5017), all in
the United States District Court in the Eastern District of New York.
The individual named defendants are directors and/or executive
officers of the Company. The plaintiffs, on behalf of a class of the
Company's stockholders, claim unspecified damages arising from the
Company's December 4, 1995 announcement that it is revising results
for the fiscal year ended August 31, 1995 to reflect a decision to
defer $18 million of revenues and $10.5 million of net income
previously reported on October 17, 1995 for the fiscal year ended
August 31, 1995. Additional claims may be brought arising from these
facts and circumstances. The Company intends to defend the Actions
vigorously.
The Company and WMS Industries Inc. ("WMS") entered into a
two-year Master Option and License Agreement in March 1989 (as
extended in June 1991), pursuant to which WMS granted the Company
a right of first refusal to create software for "computer games",
"home video games" and "handheld game machines" based on arcade
games released by WMS through March 21, 1995. Of the 15 arcade
games released by WMS from March 1989 through March 21, 1995, the
Company exercised its right of first refusal with respect to 12
games and created and published Software based on nine of such
games. The Company's revenues from the sale of individual
Software products and such Software products in the aggregate were
not material during fiscal 1990, 1991 and 1992. Sales of Software
based on games released by WMS constituted a significant portion
of the Company's revenues in each of fiscal 1993 (Mortal Kombat),
1994 (NBA Jam and Mortal Kombat II) and 1995 (NBA Jam Tournament
Edition). Sales of Software based on games released by WMS were
not a material portion of the Company's revenues in the quarter
ended August 31, 1995. Sales of software products incorporating
22
WMS game releases accounted for sales in excess of three million,
nine million and four million units across all hardware platforms
in fiscal 1993, 1994 and 1995, respectively.
On March 30, 1994, Nintendo and WMS announced the formation
of a joint venture for the publication of software for Nintendo's
64-bit hardware system to be introduced in 1995, which
announcement then led the Company to conclude that its license
agreement with WMS would not be renewed.
By summonses dated April 4, April 8 and April 22, 1994, the
Company was sued in actions entitled (i) Ulisses Covar v. Acclaim
Entertainment, Inc., Gregory Fischbach and James Scoroposki (CV 94
1530), (ii) Victor Edwin Stewart v. Acclaim Entertainment, Inc.,
Gregory Fischbach, James Scoroposki, Robert A. Holmes and Anthony
Williams (CV 94 1539), (iii) Loretta C. Hartless v. Acclaim
Entertainment, Inc., Gregory Fischbach and James Scoroposki (CV 94
1501) and (iv) David Scheirer v. Acclaim Entertainment, Inc.,
Gregory Fischbach, James Scoroposki, Robert A. Holmes and Anthony
Williams (CV 94 1948), all in the United States District Court in
the Eastern District of New York. The individual named defendants
are directors and/or executive officers of the Company.
The actions have been consolidated and on July 21, 1994, the
plaintiffs served a second consolidated amended class action
complaint entitled In re Acclaim Entertainment, Inc., Securities
Litigation (CV 94 1501). The plaintiffs claim unspecified damages
based on their allegations that, by no later than January 12,
1994, the Company knew or should have known that (i) it was likely
that the license agreement with WMS would not be renewed, (ii) the
nonrenewal of the license agreement would have a material adverse
impact on the Company, (iii) any joint venture or other agreement
between WMS and the Company that might be entered into in the
future, however unlikely that may be, would be on terms
substantially less advantageous to the Company than the license
agreement and (iv) statements by the Company's representative that
rumors relating to the nonrenewal of the license agreement were
"unsubstantiated" and that talks between the Company and WMS were
continuing were materially false and misleading. Accordingly, the
plaintiffs claim that the defendants should have disclosed the
likely nonrenewal of the license agreement in the Company's
Quarterly Report on Form 10-Q for the quarter ended November 30,
1993, which was filed on January 13, 1994. The effect of
nonrenewal of the Company's license agreement with WMS is that the
Company does not have a right of first refusal with respect to
arcade games released by WMS after March 21, 1995. Discovery in
the actions is on-going. The Company believes that the actions
are without merit and lack any basis in fact and intends to defend
the actions vigorously.
In February 1986, Nintendo was named as a defendant in a
patent infringement suit brought in the District Court of the
23
Southern District of New York by Alpex Computer Corporation
("Alpex"), alleging that certain aspects of the NES and NES
Software infringe a patent held by Alpex relating to the use in
NES Software of rotating images, and seeking compensatory and
injunctive relief. By letter dated April 14, 1988, Alpex alleged
possible patent infringement by the Company and informed the
Company that it was willing to offer the Company a license for its
patent. Alpex also indicated that it was its intention to pursue
remedies against all infringers of its patent. The Company was
informed by Nintendo that Nintendo believed the Alpex patent to be
invalid and that the NES and NES Software did not infringe such
patent. The Company did not further pursue its options with Alpex
and, to date, no actual claim of infringement has been made
against the Company nor has the Company been named in any
litigation by Alpex nor has the Company received any further
communication from Alpex.
In June 1994, Alpex's patent infringement suit against
Nintendo was tried and a jury found Alpex's patent to be valid and
infringed by certain NES Software, including "Wizards and
Warriors" and "Rambo" which are Software titles published by the
Company. On August 1, 1994, damages of approximately $208.2
million (which are payable by Nintendo) were awarded by the jury.
In October 1995, Nintendo appealed the verdict and the award. To
date, no damages have been sought from the Company in respect of
the NES Software titles published by the Company and found by the
jury to infringe Alpex's patent or in respect of any other titles
published by the Company, although there can be no assurance that
such damages will not be sought. The Company cannot predict the
final outcome of the litigation between Alpex and Nintendo.
However, based on the Software products identified as infringing
the Alpex patent in the litigation, the Company believes that the
impact, if any, of the litigation on the Company would not be
material.
On April 28, 1995, Lazer-Tron and certain of its directors
and officers were named as defendants in a lawsuit filed in the
Superior Court of the State of California, County of Alameda --
Eastern Division. This action, titled Goldstein v. Lazer-Tron
Corporation, et al., was filed seeking, among other things,
certification of the lawsuit as a class action on behalf of all
Lazer-Tron shareholders, a preliminary and permanent injunction to
prohibit consummation of the merger and to compel the individual
defendants to fulfill what the plaintiff claimed were their
fiduciary duties to, among other things, cooperate with any other
entity with an interest in acquiring Lazer-Tron and enhance Lazer-
Tron's value as a merger candidate. On May 30, 1995, an amended
complaint was filed. The plaintiff alleged that the individual
defendants violated state law by committing unfair business
practices, and breached their fiduciary duties as a result of the
manner in which, and the timing of, the determination to merge
Lazer-Tron occurred, the manner in which negotiations with Acclaim
24
were conducted and in recommending approval of the merger
agreement and the merger. The merger was consummated on August
31, 1995. Lazer-Tron intends to defend this action vigorously.
Management believes, based on the allegations stated in the
complaint, discovery proceedings to date and preliminary
settlement discussions, that the ultimate outcome of this action
will not have a material adverse effect on the Company.
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.
25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock is traded on The NASDAQ Stock Market
National Market System. On December 7, 1995, the closing sale
price of the Common Stock was $12.50 per share. As of such date,
there were approximately 1,100 holders of record of the Common
Stock.
The following table sets forth the range of high and low
sales prices for the Common Stock for each of the periods
indicated:
Price
--------------
Period High Low
------ ---- ---
Fiscal Year 1994
First Quarter $31.38 $21.75
Second Quarter 25.63 19.63
Third Quarter 27.13 13.25
Fourth Quarter 19.25 14.25
Fiscal Year 1995
First Quarter $20.63 $15.63
Second Quarter 15.63 13.44
Third Quarter 17.50 13.69
Fourth Quarter 27.50 16.25
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on
the Common Stock and has no present intention to declare or pay
cash dividends on the Common Stock in the foreseeable future. The
guaranty of Acclaim Comics' obligations to Midland Bank plc
executed by the Company in July 1994 contains restrictions on the
payment of dividends by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
Note 11 of the Notes to Consolidated Financial Statements. The
Company intends to retain any earnings which it may realize in the
foreseeable future to finance its operations.
27
Item 6. SELECTED FINANCIAL DATA.
The following tables should be read in conjunction with the
consolidated financial statements of the Company and the notes
thereto and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section appearing elsewhere
in this Form 10-K.
Fiscal Year Ended August 31,
--------------------------------------------------
(in 000s, except per share information) 1995(3) 1994(2) 1993 1992(1) 1991
------- ------- ---- ------- ----
Statement of Operations Data:
Net revenues $566,723 $480,756 $327,091 $214,628 $122,136
Cost of revenues 268,501 220,744 170,748 114,114 76,423
Gross profit 298,222 260,012 156,343 100,514 45,713
Selling, advertising, general and
administrative expenses 214,056 176,725 104,986 68,642 46,989
Operating interest 3,957 1,979 1,183 1,583 3,628
Depreciation and amortization 9,543 3,838 3,227 3,197 2,394
Earnings (loss) from operations 70,666 77,470 46,947 27,092 (7,298)
Other income (expense), net 5,608 (475) 1,138 (3,255) (444)
Earnings (loss) before income taxes 76,274 76,995 48,085 23,837 (7,742)
Net Earnings (loss) 44,770 45,055 28,185 13,846 (5,839)
Net Earnings (loss) per common and
common equivalent share $0.86 $1.00 $0.63 $0.37 $(0.21)
Weighted average number of common &
common equivalent shares outstanding 52,300 45,150 44,875 37,815 27,969
All common share information has been restated to reflect the
three-for-two stock split in the form of a 50% stock dividend
distributed on August 23, 1993.
(1) Includes results of operations of Arena from January 4, 1992
(2) Includes results of operations of Acclaim Comics from July 29,
1994
(3) Includes results of operations of Iguana from January 4, 1995
and of Lazer-Tron for the year
August 31,
----------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $200,455 $131,820 $80,564 $51,402 $16,654
Total assets 453,479 335,878 206,771 129,179 75,608
Current portion of long-term debt 25,196 1,538 87 87 4,087
Long-term liabilities 461 41,754 2,538 3,380 3,030
Stockholders' equity 325,359 175,243 96,867 64,706 32,667
28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
Acclaim Entertainment, Inc. ("Acclaim"), together with its
subsidiaries (Acclaim and its subsidiaries are collectively
hereinafter referred to as the "Company"), is a mass market
entertainment company whose principal business to date has been as
a leading publisher of interactive entertainment software
("Software") for use with interactive entertainment hardware
platforms. The Company also engages in (i) the development and
publication of comic books, which commenced in July 1994 through
the acquisition of Acclaim Comics, Inc. ("Acclaim Comics"),
formerly Voyager Communications, Inc., (ii) the distribution of
Software for affiliated labels, which commenced in the first
quarter of fiscal 1995, (iii) the marketing of its motion capture
technology and studio services, which commenced in the first
quarter of fiscal 1995 and (iv) the distribution of coin-operated,
location-based ticket redemption games, which commenced in August
1995 through the acquisition of Lazer-Tron Corporation ("Lazer-
Tron"). The Company plans to engage in the distribution of coin-
operated video arcade games, commencing in the spring of 1996, and
the electronic distribution of interactive entertainment software
through the partnership (the "Joint Venture") established in
October 1994 between a subsidiary of Acclaim and a subsidiary of
Tele-Communications, Inc. ("TCI"), commencing not earlier than
fiscal 1997. To date, the Company's principal business has been
as a leading publisher of Software for dedicated interactive
entertainment hardware platforms ("Entertainment Platforms").
The interactive entertainment industry is characterized by
rapid technological change, resulting in hardware platform and
related Software product cycles. No single hardware platform or
system has achieved long-term dominance. The Company's revenues
have traditionally been derived from sales of Software for the
then dominant platforms. Accordingly, the Company's revenues are
subject to fluctuation and have been and, in the future, could be
materially adversely affected during transition periods when new
hardware platforms have been introduced but none has achieved mass
market acceptance or become dominant.
From inception through fiscal 1991, substantially all of the
Company's revenues were derived from sales of Software for the
8-bit Nintendo Entertainment System ("NES"). Although the Company
commenced the publication of Software for Game Boy, the portable
system marketed by Nintendo Co., Ltd. (Japan) (Nintendo and its
subsidiary, Nintendo of America, Inc., are collectively
hereinafter referred to as "Nintendo"), in fiscal 1990, for the
Super Nintendo Entertainment System ("SNES") in fiscal 1991 and
for Genesis and Game Gear, the 16-bit dedicated and portable
hardware systems, respectively, marketed by Sega Enterprises Ltd.
("Sega") in fiscal 1992, the Company did not derive significant
29
revenues from the sale of portable or 16-bit Software until fiscal
1992.
The interactive entertainment industry is currently
undergoing, and management anticipates that in both the short- and
long-term future it will continue to undergo, significant changes
due, in large part, to (i) the success of personal
computer/compact disk/multimedia hardware systems ("Multimedia/PC
Systems"), (ii) the introduction of the next generation of
Entertainment Platforms incorporating 32- and 64-bit processors,
(iii) the development of remote and electronic delivery systems
and (iv) the entry and participation of new companies in the
industry. The new hardware platforms are equipped with read-only
memory ("ROM") cartridges, compact disk ("CD"), flash memory
and/or other technologies as the dominant software storage device.
In 1993, Sega introduced the Sega CD, a CD player which
consists of an attachment for its 16-bit Genesis system.
Additional CD platforms, including personal computer systems for
which Software products are published, are currently marketed by
Philips, Commodore, Apple, IBM, IBM-compatible manufacturers and
The 3DO Company ("3DO"). Atari launched Jaguar, its 64-bit
cartridge-based system, in November 1993 and Sega launched 32X,
its 32-bit cartridge-based attachment for its 16-bit Genesis
system, in November 1994. Sega and Sony Corporation ("Sony")
launched 32-bit CD-based systems in Japan in November 1994. Sega
shipped limited quantities of its Saturn system in the United
States commencing in May 1995 and Sony released its
PlayStation(Trademark) system in the United States in September 1995.
Nintendo has announced plans to release Ultra 64, its new 64-bit ROM
cartridge-based system, in Japan in the spring of 1996.
The Company believes that sales of new 16-bit hardware
systems peaked in calendar 1993, have decreased substantially
since that time and will continue to do so, and that 16-bit
Software sales peaked in calendar 1994 (the year following the
peak year for hardware sales).
The Company believes that hardware incorporating 32- and 64-
bit processors, including Multimedia/PC Systems, will become the
dominant hardware platforms in the interactive entertainment
industry over the next few years. The Company believes that
Sega's Saturn and Sony's PlayStation(Trademark) have both achieved
commercial success in Japan and, based on preliminary sales
information, that the limited quantities of the PlayStation(Trademark)
shipped to date have achieved high retail sell through in the United
States. However, there can be no assurance that either of these
platforms or any of the other newly introduced or announced platforms
will achieve commercial success or the timing or the impact thereof on
the industry.
The Company's strategy is to develop and/or publish Software
for the hardware platforms that currently dominate the market and
to develop Software for the hardware platforms that the Company
30
perceives as having the potential to achieve mass market
acceptance, rather than to be the first Software publisher for an
emerging hardware platform. However, in order to promote its
strategic relationships, the Company may from time to time publish
Software for a hardware platform before it attains mass market
appeal. No assurance can be given that the Company will correctly
identify the systems with mass market potential or be successful
in publishing Software for such platforms and systems.
In the late 1980's and early 1990's management believed that
the floppy and personal computer market was characterized by (i)
numerous hardware and software incompatibilities; (ii) high price
points for multimedia PC hardware; (iii) a large number of
software titles; and (iv) consumer demographics that were
different from those of the Company's core customers.
Accordingly, the Company participated in this category through
distribution agreements which, in the opinion of management,
provided the greatest return on the investment of time and effort
needed to service a fragmented market. However, based on
management's belief that, by 1995, this category now has
sufficient mass market penetration to warrant publishing Software
directly, technological advancements incorporated in the newer
Multimedia/PC Systems and the higher gross margins realized by
publishers of Software for this category, the Company commenced
marketing Software for Multimedia/PC Systems in fiscal 1995 and
intends to expand the number of Software titles for Multimedia/PC
Systems marketed by it in fiscal 1996.
Based on the decline of the 16-bit hardware market and the
related slowdown in retail sell-through of 16-bit Software
published by the Company as well as on an industry-wide basis,
management believes that, in order to reduce inventory levels,
certain retailers have reduced purchases of the Company's 16-bit
Software as compared to prior fiscal quarters and that these and
other retailers will continue to reduce purchases of the Company's
16-bit Software over the next several fiscal quarters. Management
anticipates that such reduction in retail purchasing will decrease
the Company's rate of growth as discussed below. The slow down in
retail sell-through of 16-bit Software has resulted in increased
retail inventories, and could continue to increase retail
inventories which, in turn, has forced and will force the Company
to liquidate excess inventory levels at retail by offering price
protection and other concessions to its customers in future
periods. As the transition to the next generation of
Entertainment Platforms continues and as new Entertainment
Platforms and Multimedia/PC Systems achieve market acceptance,
management believes that the risk of returns of the Company's
16-bit Software titles has increased and will continue to
increase. No assurance can be given that future price protection,
returns and other similar concessions will not exceed the
Company's reserves for such concessions and, if so exceeded, the
Company's results of operations and financial condition will be
materially adversely affected. In addition, the Company has
incurred and expects to continue to incur higher marketing
31
expenses in connection with the sale of 16-bit Software, which
higher expenses are anticipated to affect adversely the Company's
profitability.
As a result of the Company's acquisitions of Iguana,
Sculptured and Probe in 1995, the Company's fixed costs relating
to the development of Software will be higher commencing in fiscal
1996 as compared to prior periods. However, this increase in
research and development expenses will be offset in part by
reduced royalties payable to developers, a variable cost which is
currently included in selling, advertising, general and
administrative expenses. In addition, to the extent the Company
incurs development costs related to a particular Software title in
any period in which that Software title is not shipped, the
Company's general and administrative expenses in such period will
be materially higher as compared to its historical rate and the
Company's profitability will be materially adversely affected.
The Company has also incurred and expects to continue to incur
increased research and development as well as general and
administrative expenses in connection with the start-up of its new
business operations. If the Company is not successful in
generating revenues from these new businesses, its profitability
will be adversely affected.
The release of individual "hit" Software products or families
of products can significantly affect revenues. Historically,
"hit" products or families of products have accounted for
significant portions of the Company's gross revenues during
particular periods. In prior periods, the Simpsons family of
products and the WWF family of products have accounted for
significant portions of the Company's gross revenues. In fiscal
1995, the Batman Forever and NBA Jam Tournament Edition families
of products each accounted for a significant portion of gross
revenues; in fiscal 1994, the Mortal Kombat II and NBA Jam
families of titles each accounted for a significant portion of
gross revenues; and in fiscal 1993, the Mortal Kombat family of
titles accounted for a significant portion of gross revenues. See
"Legal Proceedings."
The timing of the release of Software products can cause
quarterly revenue and earnings fluctuations. A significant
portion of the Company's revenues in any quarter are generally
derived from Software products or families of products first
shipped in that quarter. Product development schedules are
difficult to predict due, in large part, to the difficulty of
scheduling accurately the creative process and, with respect to
Software for new hardware platforms, the use of new development
tools and the learning process associated with development for new
technologies, including the Company's own motion capture and
related technologies. As the industry trend toward more
sophisticated Entertainment Platforms and Multimedia/PC Systems
continues, the related Software products frequently include more
original, creative content and are more complex to develop and,
accordingly, cause additional development and scheduling risk. As
32
a result, the Company's quarterly results of operations are
difficult to predict and the failure to meet product development
schedules or even minor delays in product deliveries could cause a
shortfall in shipments in any given quarter, which could cause the
results of operations and net income for such quarter to fall
significantly below anticipated levels.
Due to the decline of the market for Software for 16-bit
Entertainment Platforms in 1995 and the related transition to
Multimedia/PC Systems and the next generation of Entertainment
Platforms, the Company experienced a lower rate of growth in
fiscal 1995 as compared to fiscal 1994 and 1993. Preliminary
retail sales information in respect of Christmas 1995 indicates
that, to date, sales have fallen short of expectations. Sales of
higher-priced Software products have been adversely impacted
during the pre-Christmas season, with the result that sales of
comparable units of Software will result in lower revenues as
compared to prior periods which will, in turn, adversely affect
profitability. Accordingly, management anticipates that it will
increase its reserves to higher levels relative to its sales
during the first half of fiscal 1996 than has been its historic
practice. In addition, management believes that the current
market for Software for 16-bit Entertainment Platforms supports
fewer "hit" and higher-priced titles. Management anticipates, as
a result of the foregoing, that its results of operations and
profitability during the first two quarters of fiscal 1996 will be
materially lower than comparable periods in fiscal 1995 and that
the Company's results of operations and profitability during
fiscal 1996 will be lower than in fiscal 1995.
The Company's ability to sustain its results of operations
and profitability and to generate sales growth in the long-term
future will be dependent in large part on (i) the Company's
ability to identify, develop and publish "hit" Software titles for
the hardware platforms that are established in the mass market,
(ii) the growth of the interactive entertainment Software market
and (iii) the Company's ability to develop and generate revenues
from its other entertainment operations.
33
Results of Operations
The following table sets forth certain statements of
consolidated earnings data as a percentage of net revenues for the
periods indicated:
Fiscal Year Ended August 31,
------------------------------------
1995 1994 1993
---- ---- ----
Domestic revenues 74.8% 76.4% 60.8%
Foreign revenues 25.2 23.6 39.2
----- ----- -----
Net revenues 100.0 100.0 100.0
Cost of revenues 47.4 45.9 52.2
----- ----- -----
Gross profit 52.6 54.1 47.8
Selling, advertising, general
and administrative expenses 37.8 36.8 32.1
Operating interest 0.7 0.4 0.4
Depreciation and amortization 1.7 0.8 0.9
----- ----- -----
Total operating expenses 40.2 38.0 33.4
Earnings from operations 12.4 16.1 14.4
Other income (expense), net 1.0 (0.1) 0.3
Earnings before income taxes 13.5 16.0 14.7
Net earnings 7.9 9.4 8.6
Net Revenues
The increase in the Company's net revenues from $480.8
million for the year ended August 31, 1994 to $566.7 million for
the year ended August 31, 1995 was predominantly due to increased
sales of CD Software and increased foreign sales and, to a lesser
extent, revenues of Lazer-Tron (which are included in the
Company's results of operations for the year) and Acclaim Comics.
The increase in the Company's net revenues from $327.1
million for year ended August 31, 1993 to $480.8 million for the
year ended August 31, 1994 was predominantly due to increased unit
sales of 16-bit Software in North America and, to a lesser extent,
sales of its newly introduced CD Software, which was offset by
declines in 8-bit and portable Software sales and, to a lesser
extent, slightly lower foreign sales. The Company believes that
the lower foreign sales for the year ended August 31, 1994 were
the result of industry declines in the European and Asian markets.
The Company is substantially dependent on Sony, Sega and
Nintendo as the sole manufacturers of the hardware platforms
marketed by them and as the sole licensors of the proprietary
information and technology needed to develop Software for those
platforms. In fiscal years 1993, 1994 and 1995, the Company
derived 66%, 45% and 47% of its gross revenues, respectively, from
sales of Nintendo-compatible products and in fiscal years 1993,
1994 and 1995, the Company derived 34%, 55% and 46% of its gross
revenues, respectively, from sales of Sega-compatible products.
The Company anticipates that its revenues from sales of
34
Sony-compatible products and from PC CD Software will also be
material in fiscal 1996.
The majority of the Company's gross revenues were derived
from the following product categories:
1995 1994 1993
---- ---- ----
8-Bit Software --- 1.0% 12.0%
Portable Software 10.0% 13.0 23.0
16-Bit Software 74.0 83.0 65.0
CD Software 10.0 2.0 ---
The results of operations of Lazer-Tron, which was acquired
on August 31, 1995, are included in the consolidated financial
statements of the Company for fiscal 1995 but were not material to
the results of operations of the Company.
Gross Profit
Gross profit fluctuates as a result of four factors: (i) the
level of manufacture by the Company of its Sega Software; (ii) the
percentage of CD Software sales; (iii) the percentage of foreign
sales; and (iv) the percentage of foreign sales to third party
distributors.
The Company arranges for the manufacture of its Sega Software
under a license granted by Sega. The Company believes that it has
improved cash flows and better control over the flow of its
inventory as a result of the decreased lead time resulting from
its ability to manufacture Software. The cost of Software
manufactured by the Company, together with the royalties payable
to Sega for such manufacturing, is lower than the cost of the
Company's Software products when manufactured by Sega. The
royalty payable to Sega for Software manufactured by the Company
is included as an operating expense, rather than as part of cost
of revenues and increased levels of manufacturing by the Company
result in higher gross profit as a percentage of net revenues.
See "Business -- License Agreements."
The Company's margins on sales of CD Software are higher than
those on cartridge Software as a result of significantly lower
product costs. As the percentage of sales of the Company's CD
Software increases, the Company expects that its gross margin will
also increase (subject to the other variables listed above).
The Company's margins on foreign sales are typically lower
than those on domestic sales due to higher prices charged by
hardware licensors for Software distributed by the Company outside
North America. The Company's margins on foreign sales to third
party distributors are approximately one-third lower than those on
sales that the Company makes directly to foreign retailers.
35
Management anticipates that the Company's future gross profit
will be affected by (i) its product mix (i.e., the percentage of
CD Software and cartridge Software sales and sales related to the
Company's new businesses) and (ii) the percentage of returns,
price protection and other similar concessions in respect of the
Company's 16-bit Software sales. The Company's gross margins on
coin-operated video arcade games are anticipated to be
substantially lower than on its cartridge and CD Software.
Although gross margins on sales of CD Software are and are
anticipated to continue to be higher than those on sales of
cartridge Software, management believes that it will be required
to effect stock-balancing programs for its Multimedia/CD Software
products to allow for the historically higher rate of return of
Multimedia/CD Software. As the percentage of sales of
Multimedia/CD Software increases, management anticipates that its
reserves for such returns will increase, thereby offsetting a
portion of the higher gross margins generated from Multimedia/CD
Software sales. Additionally, returns and other similar
concessions to retailers in respect of 16-bit Software sales are
expected to have a material adverse effect on the Company's gross
margins in future periods.
Gross profit increased from $260.0 million (54% of net
revenues) for the year ended August 31, 1994 to $298.2 million
(53% of net revenues) for the year ended August 31, 1995. The
dollar increase is predominantly attributable to increased sales
volume. The reduction in gross profit as a percentage of net
revenues is primarily attributable to the lower percentage of
sales of Sega Software (all of which was manufactured by the
Company) during fiscal 1995, which was offset by increased sales
of higher margin CD Software in that year.
Gross profit increased from $156.3 million (48% of net
revenues) for the year ended August 31, 1993 to $260.0 million
(54% of net revenues) for the year ended August 31, 1994,
predominantly due to increased sales volume. The percentage
increase is predominantly due to an increased level of domestic
manufacturing of Genesis Software as the royalty payable to Sega
for Software manufactured by the Company is included as an
operating expense, rather than as part of cost of revenues and,
accordingly, increased levels of manufacturing by the Company
result in higher gross profit as a percentage of net revenues. In
addition, the Company's gross profit was slightly higher on sales
of Genesis Software compared to SNES Software, particularly
Genesis Software manufactured by the Company.
The Company purchases substantially all of its products at
prices payable in United States dollars. Appreciation of the yen
could result in increased prices charged by either Nintendo or
Sega to the Company (although, to date, neither Nintendo nor Sega
has effected such a price increase), which the Company may not be
able to pass on to its customers and which could adversely affect
its results of operations.
36
Operating Expenses
Selling, advertising, general and administrative expenses
increased from $176.7 million (37% of net revenues) for fiscal
1994 to $214.1 million (38% of net revenues) for fiscal 1995. The
percentage increase is attributable to increased expenses across
the board, which increases were offset, in part, by reduced
royalties payable to Sega.
Selling, advertising, general and administrative expenses
increased from $104.9 million (32% of net revenues) for the year
ended August 31, 1993 to $176.7 million (37% of net revenues) for
the year ended August 31, 1994. The increase is predominantly
attributable to increased advertising costs resulting from
television campaigns, increased manufacturing royalties payable to
Sega as a result of the higher proportion of Software manufactured
by the Company during the fiscal year ended August 31, 1994, and a
third royalty (in addition to that generally payable to the owner
of the Property and the developer) associated with NBA Jam payable
by the Company to the NBA.
Operating interest expense was $1.2 million (0.4% of net
revenues) for fiscal 1993, $2.0 million (0.4% of net revenues) for
fiscal 1994 and $4.0 million (0.7% of net revenues) for fiscal
1995, primarily as a result of increased sales volume which
resulted in higher outstanding balances under the Company's
principal credit facility.
Depreciation and amortization increased from $3.2 million for
fiscal 1993 to $3.8 million for fiscal 1994 to $9.5 million for
fiscal 1995. The increase in fiscal 1995 is primarily
attributable to increased amortization of the excess of costs over
net assets acquired arising from the acquisition of Acclaim Comics
and Iguana and increased depreciation relating to the acquisition
of the Company's new corporate headquarters.
Quarterly Results of Operations
The following tables set forth certain statements of
consolidated earnings data for each of the Company's last eight
quarters and such data as a percentage of the Company's net
revenues for each period. This quarterly financial information is
unaudited but gives effect to all adjustments (all of which were
normal recurring entries) necessary, in the opinion of management
of the Company, to present fairly this information.
37
The results of operations for any quarter should not be taken
as indicative of results for the full fiscal year.
(in 000's) Three Months Ended
-----------------------------------------------------------------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1995 1995 1995 1994 1994 1994 1994 1993
-------- ------- -------- -------- -------- ------- ------- --------
Domestic revenues $93,008 $83,954 $131,427 $115,207 $117,886 $66,837 $84,107 $98,449
Foreign revenues 40,484 23,700 29,846 49,097 30,982 22,160 31,424 28,911
------- ------- -------- -------- -------- ------- ------- -------
Net revenues 133,492 107,654 161,273 164,304 148,868 88,997 115,531 127,360
Cost of revenues 63,588 53,792 73,456 77,665 75,606 37,853 51,167 56,118
------- ------- -------- -------- -------- ------- ------- -------
Gross profit 69,904 53,862 87,817 86,639 73,262 51,144 64,364 71,242
Total operating
expenses 63,863 39,669 64,821 59,203 48,573 37,585 46,492 49,892
------- ------- -------- -------- -------- ------- ------- -------
Earnings from
operations 6,041 14,193 22,996 27,436 24,689 13,559 17,872 21,350
Earnings before
income taxes 10,313 15,062 23,633 27,266 24,428 13,378 18,138 21,051
Net earnings 6,101 8,855 13,856 15,958 14,132 7,949 10,638 12,336
Three Months Ended
----------------------------------------------------------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
1995 1995 1995 1994 1994 1994 1994 1993
-------- ------- -------- -------- -------- ------- -------- --------
Domestic revenues 69.7% 78.0% 81.5% 70.1% 79.2% 75.1% 72.8% 77.3%
Foreign revenues 30.3 22.0 18.5 29.9 20.8 24.9 27.2 22.7
----- ----- ----- ----- ----- ----- ----- -----
Net revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues 47.6 50.0 45.5 47.3 50.8 42.5 44.3 44.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 52.4 50.0 54.5 52.7 49.2 57.5 55.7 55.9
Total operating expenses 47.8 36.8 40.2 36.0 32.6 42.3 40.2 39.1
----- ----- ----- ----- ----- ----- ----- -----
Earnings from operations 4.5 13.2 14.3 16.7 16.6 15.2 15.5 16.8
Earnings before
income taxes 7.7 14.0 14.7 16.6 16.4 15.0 15.7 16.5
Net earnings 4.6 8.2 8.6 9.7 9.5 8.9 9.2 9.7
38
Seasonality
The Company's business is seasonal, with higher revenues and
operating income typically occurring during its first, second and
fourth fiscal quarters (which correspond to the Christmas and
post-Christmas selling season). The timing of the delivery of
Software titles and the releases of new products cause significant
fluctuations in the Company's quarterly revenues and earnings.
Liquidity and Capital Resources
The Company's primary source of liquidity during the fiscal
years ended August 31, 1994 and 1995 was cash flows from
operations and, in fiscal 1995, such cash flows were augmented by
the sale of shares of TCI capital stock received by the Company in
connection with the Company's sale of shares of its common stock
to TCI. See Note 4 of the Notes to Consolidated Financial
Statements. The Company had net cash from operations of
approximately $29.1 million in fiscal 1994 and used net cash from
operations of approximately $7.2 million. The decrease in net
cash from operations in fiscal 1995 is primarily attributable to
relatively higher levels of cash paid to suppliers and employees
and higher payments of interest to the Company's commercial
lenders in connection with higher outstanding balances on the
Company's working capital loans and acquisition financing.
The Company generally purchases its inventory of Nintendo and
Sega (to the extent not manufactured by the Company) Software by
opening letters of credit when placing the purchase order. At
August 31, 1993, 1994 and 1995, amounts outstanding under letters
of credit were approximately $57.7 million, $48.6 million and
$24.1 million, respectively.
The Company has a revolving credit and security agreement
with its principal domestic bank in the amount of $70 million,
which agreement expires on January 31, 1996. The credit agreement
will be automatically renewed for another year by its terms,
unless terminated upon 90 days' prior notice by either party. The
Company draws down working capital advances and opens letters of
credit against the facility in amounts determined on a formula
based on factored receivables and inventory, which advances are
secured by the Company's assets. This bank also acts as the
Company's factor for the majority of its North American
receivables, which are assigned on a nonrecourse, pre-approved
basis. The factoring charge is 0.25% of the receivables assigned
and the interest on advances is at the bank's prime rate minus
one-half of one percent. At August 31, 1995, the Company had $32
million available under such facility.
The Company currently has a $30 million trade finance
facility with another bank. The Company's Asian and European
subsidiaries currently have independent facilities totalling
approximately $20 million and $25 million, respectively, with
various banks.
39
In connection with its acquisition by the Company, Acclaim
Comics entered into a credit agreement with Midland Bank plc
("Midland") for a loan (the "Loan") of $40 million. In connection
with the establishment of the Joint Venture and the related stock
swap with TCI, the Company reached an agreement with Midland
pursuant to which it repaid $15 million of the Loan and the
remaining $25 million principal amount of the Loan is being
amortized over a four and one-half year period terminating in July
1999. See Note 11 of the Notes to Consolidated Financial
Statements. The Loan, which is a direct obligation of Acclaim
Comics, bears interest, at the borrower's option, at either (i)
the higher of the federal funds rate plus one-half of one percent
and the lender's prime rate, in each case, plus 125 basis points
or (ii) the London interbank offered rate plus 250 basis points,
and is secured by a first priority lien on substantially all of
the assets of Acclaim Comics. The Loan is also guaranteed by
Acclaim and certain of its subsidiaries and is secured by a first
priority lien on all of the issued and outstanding shares of
Acclaim Comics and by a third priority lien on substantially all
of the assets of the Company. The credit agreement and related
documents establishing and securing the Loan, as well as the
guarantees delivered by Acclaim and its subsidiaries, contain
customary financial, affirmative and negative covenants, including
mandatory prepayments from excess cash flow of Acclaim Comics and
from the proceeds of asset sales or sales of equity by the Company
and restrictions on the declaration or payment of dividends by
Acclaim Comics and the Company.
During 1995, the Company also received a waiver through August
31, 1995 with respect to a financial covenant. The lender has advised
the Company that it intends to amend that covenant so that the Company
will be in compliance. However, because the revised covenant is not
yet in effect, the Company has reclassified the outstanding balance of
the loan as a current liability.
During the year ended August 31, 1994, the Company acquired
certain marketable securities which were financed with cash flows
from operations. Substantially all of the securities were
disposed of during the fiscal year.
The Company completed the purchase of a 70,000 square foot
building and an adjoining parcel of land in April 1994. The
purchase price for such property (on which the Company's motion
capture studio is now located), and capital expenditures of
approximately $18 million for improvements to the property through
August 31, 1995, were financed with cash flows from operations.
Management believes that cash flow from operations and the
Company's borrowing facilities will be adequate to provide for the
Company's liquidity and capital needs for the foreseeable future.
The Company is party to various litigations arising in the
course of its business, the resolution of none of which, the
Company believes, will have a material adverse effect on the
Company's liquidity or financial condition. The Company is also
party to class action litigations. See "Legal Proceedings"
and Note 19 of the Notes to Consolidated Financial Statements.
40
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants
Board of Directors and Stockholders,
Acclaim Entertainment, Inc.
We have audited the accompanying consolidated balance sheets
of Acclaim Entertainment, Inc. and Subsidiaries as of August 31,
1995 and 1994 and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years in the
three-year period ended August 31, 1995. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Acclaim Entertainment, Inc. and Subsidiaries
as of August 31, 1995 and 1994 and the results of their operations
and their cash flows for each of the years in the three-year
period ended August 31, 1995 in conformity with generally accepted
accounting principles.
We have also audited financial statement schedule II of
Acclaim Entertainment, Inc. and Subsidiaries for each of the years
in the three-year period ended August 31, 1995. In our opinion,
the financial statement schedule presents fairly, in all material
respects, the information required to be set forth therein.
As described in Note 19, the Company and certain officers
have been named as defendants in various class action claims, the
outcome of which cannot presently be determined. Accordingly, no
provision for any liability that might result upon the resolution
of these matters has been made in the consolidated financial
statements.
GRANT THORNTON LLP
New York, New York
December 8, 1995
41
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)
August 31,
1995 1994
---- ----
ASSETS
CURRENT ASSETS
Cash $ 44,749 $ 34,676
Marketable securities 26,503 1,926
Accounts receivable - net 179,311 164,794
Inventories 16,015 15,295
Prepaid expenses 41,083 23,214
Other current assets 18,825 10,796
------- ------
TOTAL CURRENT ASSETS 326,486 250,701
------- -------
OTHER ASSETS
Fixed assets - net 33,970 15,638
Excess of cost over net assets acquired - net of
accumulated amortization of $9,091 and $5,951,
respectively 59,837 59,400
Other assets 33,186 10,139
------- -------
TOTAL ASSETS $453,479 $335,878
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 49,072 $ 69,376
Short-term borrowings 4,233 1,757
Accrued expenses 47,017 43,914
Income taxes payable 180 2,031
Current portion of long-term debt 25,196 1,538
Obligation under capital leases - current 333 265
------- -------
TOTAL CURRENT LIABILITIES 126,031 118,881
------- -------
LONG-TERM LIABILITIES
Long-term debt ---- 40,196
Obligation under capital leases - noncurrent 408 719
Other long-term liabilities 53 839
------- -------
TOTAL LIABILITIES 126,492 160,635
------- -------
MINORITY INTEREST 1,628 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 1,000 shares
authorized; None issued -- --
Common stock, $0.02 par value; 100,000 and
50,000 shares authorized, respectively; 46,281 and
39,348 shares issued and outstanding, respectively 926 787
Additional paid-in capital 168,785 69,246
Retained earnings 153,141 106,571
Treasury stock (807) (807)
Unrealized gain on available-for-sale securities 2,503 --
Foreign currency translation adjustment 811 (554)
------- -------
TOTAL STOCKHOLDERS' EQUITY 325,359 175,243
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $453,479 $335,878
------- -------
See notes to consolidated financial statements.
42
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
(in 000s, except per share data)
Fiscal Year Ended August 31,
1995 1994 1993
---- ---- ----
NET REVENUES $566,723 $480,756 $327,091
COST OF REVENUES 268,501 220,744 170,748
------- ------- -------
GROSS PROFIT 298,222 260,012 156,343
------- ------- -------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses 214,056 176,725 104,986
Operating interest 3,957 1,979 1,183
Depreciation and amortization 9,543 3,838 3,227
------- ------- -------
TOTAL OPERATING EXPENSES 227,556 182,542 109,396
------- ------- -------
EARNINGS FROM OPERATIONS 70,666 77,470 46,947
------- ------- -------
OTHER INCOME (EXPENSE)
Interest income 2,131 1,338 1,078
Other income (expense) 6,859 (1,143) 1,347
Interest expense (3,382) (670) (1,287)
------- ------- -------
EARNINGS BEFORE INCOME TAXES 76,274 76,995 48,085
------- ------- -------
PROVISION FOR INCOME TAXES 31,625 31,940 19,975
------- ------- -------
EARNINGS BEFORE MINORITY INTEREST 44,649 45,055 28,110
------- ------- -------
MINORITY INTEREST 121 -- 75
------- ------- -------
NET EARNINGS $44,770 $45,055 $28,185
------- ------- -------
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $0.86 $1.00 $0.63
------- ------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT 52,300 45,150 44,875
SHARES OUTSTANDING ------- ------- -------
See notes to consolidated financial statements.
43
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(in 000s, except per share data)
Preferred Stock(1) Common Stock Common Unrealized Foreign
Issued Issued Additional Stock Due Gain On Currency
------------------ ------------ Paid-In Retained Treasury From Marketable Translation
Shares Amount Shares Amount Capital Earnings Stock MCA Securities Adjustment
------ ------ ------ ------ ---------- -------- -------- -------- ---------- -----------
Balance August 31, 1992 -- -- 23,303 $466 $30,533 $ 33,579 -- $(807) -- $ 935
---- ----- ------ --- ------ ------- --- ---- ----- ------
Net Earnings -- -- -- -- -- 28,185 -- -- -- --
Exercise of Stock Options -- -- 1,536 31 6,716 -- -- -- -- --
50% Stock Dividend -- -- 12,420 248 -- (248) -- -- -- --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 1,128 -- -- -- -- --
Shares Received from MCA -- -- -- -- -- -- $(807) 807 -- --
Foreign Currency Translation Loss -- -- -- -- -- -- -- -- -- (3,899)
---- ----- ------ --- ------ ------- --- ---- ----- ------
Balance August 31, 1993 -- -- 37,259 745 38,377 61,516 (807) 0 -- (2,964)
---- ----- ------ --- ------ ------- --- ---- ----- ------
Net Earnings -- -- -- -- -- 45,055 -- -- -- --
Issuances -- -- 971 19 14,981 -- -- -- -- --
Exercise of Stock Options -- -- 1,118 23 7,435 -- -- -- -- --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 8,453 -- -- -- -- --
Foreign Currency Translation Gain -- -- -- -- -- -- -- -- -- 2,410
---- ----- ------ --- ------ ------- --- ---- ----- ------
Balance August 31, 1994 -- -- 39,348 787 69,246 106,571 (807) 0 -- (554)
---- ----- ------ --- ------ ------- --- ---- ----- ------
Net Earnings -- -- -- -- -- 44,770 -- -- -- --
Issuances -- -- 5,182 104 83,659 -- -- -- -- --
Exercise of Stock Options -- -- 628 13 4,170 -- -- -- -- --
Pooling of Interests with Lazer-Tron -- -- 1,123 22 10,609 1,800 -- -- -- --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 1,101 -- -- -- -- --
Foreign Currency Translation Gain -- -- -- -- -- -- -- -- -- 1,365
Unrealized Gain on
Marketable Securities -- -- -- -- -- -- -- -- $2,503 --
---- ----- ------ --- ------ ------- --- ---- ----- ------
Balance August 31, 1995 -- -- 46,281 $926 $168,785 $153,141 $(807) $ 0 $2,503 $ 811
---- ----- ------ --- ------ ------- --- ---- ----- ------
Total
-----
Balance August 31, 1992 $ 64,706
------
Net Earnings 28,185
Exercise of Stock Options 6,747
50% Stock Dividend --
Tax Benefit from Exercise of
Stock Options 1,128
Shares Received from MCA --
Foreign Currency Translation Loss (3,899)
-------
Balance August 31, 1993 96,867
-------
Net Earnings 45,055
Issuances 15,000
Exercise of Stock Options 7,458
Tax Benefit from Exercise of
Stock Options 8,453
Foreign Currency Translation Gain 2,410
-------
Balance August 31, 1994 175,243
-------
Net Earnings 44,770
Issuances 83,763
Exercise of Stock Options 4,183
Pooling of Interests with Lazer-Tron 12,431
Tax Benefit from Exercise of
Stock Options 1,101
Foreign Currency Translation Gain 1,365
Unrealized Gain on
Marketable Securities 2,503
-------
Balance August 31, 1995 $325,359
(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.
44
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)
Fiscal Year Ended August 31,
1995 1994 1993
---- ---- ----
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Cash received from customers $ 570,698 $ 470,396 $ 299,517
Cash paid to suppliers and employees (550,629) (409,767) (276,743)
Interest received 2,131 1,338 1,078
Interest paid (7,339) (2,649) (2,470)
Income taxes paid (22,127) (30,236) (16,974)
--------- --------- --------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (7,266) 29,082 4,408
--------- --------- --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Acquisition of subsidiaries, net 1,743 (47,805) --
Investment in marketable securities -- (10,375) --
Sales of marketable securities 57,160 8,314 --
Acquisition of fixed assets, excluding
capital leases (29,862) (10,195) (2,308)
Disposal of fixed assets 284 15 --
Acquisition of other assets (2,919) (2,954) (148)
--------- --------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 24,406 (63,000) (2,456)
--------- --------- --------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from term loan -- 40,000 --
Proceeds from short-term bank loans 11,304 14,278 51,034
Payment of short-term bank loans (8,769) (20,313) (44,159)
Payment of mortgage (1,342) (87) (87)
Exercise of stock options 4,183 7,458 6,747
Payment of obligation under capital
leases (292) (156) (446)
Issuance of common stock 1,398 -- --
Payment of long-term debt (16,046) -- --
--------- --------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (9,564) 41,180 13,089
--------- --------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 497 1,669 (2,982)
--------- --------- --------
NET INCREASE IN CASH 10,073 8,931 12,059
CASH AT BEGINNING OF YEAR 34,676 25,745 13,686
--------- --------- --------
CASH AT END OF YEAR $ 44,749 $ 34,676 $ 25,745
--------- --------- --------
45
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)
Fiscal Year Ended August 31,
1995 1994 1993
---- ---- ----
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings $ 44,770 $45,055 $ 28,185
-------- ------- -------
Adjustment to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,543 3,838 3,227
(Gain) loss on investment in marketable
securities (5,968) 135 --
(Decrease) increase in allowance for returns
and discounts (18,747) 10,748 12,080
Deferred taxes 8,610 (3,571) (4,037)
Minority interest in net earnings of
consolidated subsidiary (121) -- (75)
Other non-cash charges 1,752 32 17
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 9,713 (69,982) (53,081)
Decrease (Increase) in inventories 1,298 8,643 (14,114)
(Increase) in prepaid expenses (17,345) (3,446) (9,073)
(Increase) Decrease in other current assets (8,813) 2,111 8
Decrease in advance payment to suppliers -- 2,492 2,277
(Decrease) Increase in trade accounts payable (23,031) 10,940 25,938
Increase in accrued expenses 580 13,147 13,889
(Decrease) Increase in income taxes payable (9,507) 8,940 (833)
-------- ------- -------
Total adjustments (52,036) (15,793) (23,777)
-------- ------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $ (7,266) $29,082 $ 4,408
-------- ------- -------
Supplemental schedule of noncash investing and financing activities:
In fiscal 1995, the Company purchased all of the capital stock of Iguana
Entertainment, Inc. for $5,513, net of cash received. In connection with the
acquisition, liabilities assumed were as follows:
Fair value of assets acquired $ 9,179
Cash paid for the capital stock (5,513)
-------
Liabilities assumed $ 3,666
-------
In fiscal 1995, the Company issued 4,349 shares of its common stock, valued at
$71,472, in exchange for 3,403 shares of Tele-Communications, Inc. Class A
common stock.
In fiscal 1994, the Company purchased all of the capital stock of Acclaim Comics
for $62,805, net of cash received. In connection with the acquisition,
liabilities assumed were as follows:
Fair value of assets acquired $ 67,478
Cash paid for the capital stock (50,588)
Fair market value of common stock issued (15,000)
--------
Liabilities assumed $ 1,890
--------
See notes to consolidated financial statements.
46
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
1. SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of
Acclaim Entertainment, Inc. and its subsidiaries (the "Company").
All material intercompany balances and transactions have been
eliminated.
B. Marketable Securities
The Company determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Securities are
classified as held-to-maturity when the Company has the intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at cost and investment income is included in
earnings. The Company classifies certain highly liquid securities
as trading securities. Trading securities are stated at fair
value and unrealized holding gains and losses are included in
income. Securities that are not classified as held-to-maturity or
trading are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized holding
gains and losses, net of tax, reported as a separate component of
stockholders' equity.
C. Inventories
Inventories are stated at the lower of FIFO cost (first-in,
first-out) or market and consist principally of finished goods.
D. Fixed Assets
Property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful
lives of the assets, or, where applicable, the terms of the
respective leases, whichever is shorter. The asset values of
capitalized leases are included in fixed assets and the associated
liabilities are reflected as obligations under capital leases.
E. Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on the
straight-line basis over periods ranging from five to forty years
from the original date of acquisition. In March 1995, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121") that establishes
accounting standards for the impairment of long-lived assets,
certain intangibles, and goodwill related to those assets to be
47
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. In conformity with SFAS No. 121,
it is the Company's policy to evaluate and recognize an impairment
if it is probable that the recorded amounts are in excess of
anticipated undiscounted future cash flows.
F. Net Revenues
Revenues are recorded when products are shipped to customers.
The Company records allowances for returns and discounts, based
upon management's evaluation of historical experience as well as
current industry trends. The Company also recognizes revenue on
sub-licensing of its intellectual properties. Such revenues are
recognized under royalty agreements when the Company fulfills all
of its obligations in accordance with such agreements.
G. Foreign Currency Translations
In accordance with Statement of Financial Accounting
Standards No. 52, assets and liabilities of foreign operations are
translated at current rates of exchange while results of
operations are translated at average rates in effect for the
period. Unrealized gains and losses from the translation of
foreign assets and liabilities are classified as a separate
component of stockholders' equity. Included in other income
(expense) are realized gains and (losses) from foreign currency
transactions of $5,092 and ($4,576), $2,610 and ($3,336) and
$5,468 and ($3,862) for fiscal years 1995, 1994 and 1993,
respectively. The Company does not enter into material foreign
currency hedging transactions.
H. Reclassifications
Certain reclassifications were made to prior period amounts
to conform to current period classifications.
2. LICENSE AGREEMENTS
The Company has various license agreements with Nintendo Co.,
Ltd. (Japan) (Nintendo Co., Ltd. and its subsidiary, Nintendo of
America, Inc., are collectively herein referred to as "Nintendo")
pursuant to which it has the nonexclusive right to utilize the
"Nintendo" name and its proprietary information and technology in
order to develop and market interactive entertainment software
("Software") for use with the 8-bit Nintendo Entertainment System
("NES"), the Nintendo Game Boy portable game console ("Game Boy")
and the 16-bit Nintendo Entertainment System ("SNES") in various
territories throughout the world. The license agreements with
48
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
2. LICENSE AGREEMENTS (continued)
Nintendo for the different platforms expire at various times
between 1996 and 1997.
In April 1992, the Company entered into an agreement with
Sega Enterprises Ltd. ("Sega"), pursuant to which the Company
received the nonexclusive right to utilize the "Sega" name and its
proprietary information and technology in order to develop and
distribute Software titles for use with the 8-bit Sega Master
System ("Master System"), the 16-bit Sega Genesis ("Genesis")
system, the Sega Game Gear ("Game Gear") portable system and the
Sega CD ("Sega CD") system for a two-year period which expired in
January 1994. The Company exercised its option to extend the Sega
Agreement, which agreement, as amended, has been extended for a
two-year period expiring December 31, 1995.
In December 1994, the Company entered into agreements with
divisions of Sony Electronic Publishing Company pursuant to which
the Company received the nonexclusive right to utilize its
proprietary information and technology in order to develop and
distribute Software titles for use with the CD-based
PlayStation(Trademark) for a four-year period expiring in December
1998 in the United States and a five-year period expiring in December
1999 in Japan.
3. ACQUISITIONS
IGUANA ENTERTAINMENT, INC.
On January 4, 1995, the Company acquired Iguana
Entertainment, Inc. ("Iguana"), a developer of interactive video
games, pursuant to the terms of an Agreement and Plan of Merger
dated December 20, 1994. The acquisition was accounted for as a
purchase. The operating results of Iguana are included in the
Statements of Consolidated Earnings from the acquisition date.
Accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of
acquisition.
In consideration for the stock of Iguana, the Company paid
$5,000 in cash. The total cost of the acquisition was $7,342,
(which includes direct acquisition costs) of which $2,357 was
allocated to identified net tangible assets. The remaining
balance of $4,985 represents the excess of the purchase price over
the valuation of the net assets acquired, which is being amortized
on a straight-line basis over five years.
Pro forma results of operations, assuming the acquisition had
been made at the beginning of each year presented, would not be
materially different from the results reported.
49
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
3. ACQUISITIONS (continued)
LAZER-TRON CORPORATION
On August 31, 1995, the Company acquired Lazer-Tron
Corporation ("Lazer-Tron"), a developer and manufacturer of
coin-operated redemption games, pursuant to an Agreement and Plan
of Merger dated March 22, 1995, as amended. Under the terms of
the agreement, Lazer-Tron shareholders received 0.314 of a share
of the Company's common stock for each share of Lazer-Tron common
stock. Accordingly, the Company issued approximately 1,123 shares
of its common stock for all the outstanding shares of Lazer-Tron
common stock. Additionally, outstanding options and warrants to
acquire Lazer-Tron common stock were converted to options and
warrants to acquire 318 shares of the Company's common stock.
The acquisition was accounted for as a pooling of interests
and accordingly, the Company's financial statements for the year
ended August 31, 1995 have been restated to include the results of
Lazer-Tron. Prior period financial statements were not restated
as the acquisition did not have a material effect upon previously
reported net income of the consolidated entities.
ACCLAIM COMICS, INC.
On July 29, 1994, the Company acquired Acclaim Comics, Inc.
(formerly Voyager Communications Inc.) ("Acclaim Comics"),
publisher of Valiant Comics, pursuant to the terms of an Agreement
and Plan of Merger dated April 30, 1994. The acquisition was
accounted for as a purchase. The operating results of Acclaim
Comics are included in the Statements of Consolidated Earnings
from the acquisition date. Accordingly, the acquired assets and
liabilities have been recorded at their estimated fair values at
the date of acquisition.
In consideration for the stock of Acclaim Comics, the Company
paid $65,000 comprised of (i) $50,000 in cash and (ii) 971 shares
of the Company's common stock. The total cost of the acquisition
was $65,588 (which includes direct acquisition costs) of which
$9,505 was allocated to identified net tangible assets. The
remaining balance of $56,083 represents the excess of the purchase
price over the valuation of the net assets acquired, which will be
amortized on a straight-line basis over forty years. In
connection with the acquisition, Acclaim Comics obtained a $40,000
term loan. (See note 11.)
50
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
3. ACQUISITIONS (continued)
The following unaudited combined pro forma information shows
the results of operations for the periods presented as though the
purchase of Acclaim Comics had been made at the beginning of each
of the fiscal years.
Twelve Months Ended
August 31,
1994 1993
---- ----
Net sales $504,436 $357,354
Net earnings 47,695 34,678
Net earnings per share 1.04 0.76
The pro forma results of operations are not necessarily
indicative of the actual results of operations that would have
occurred had the purchase been made at the beginning of the
respective fiscal years, or of results which may occur in the
future.
4. MARKETABLE SECURITIES
On October 19, 1994, Acclaim Cable Holdings, Inc., a wholly-
owned subsidiary of the Company, entered into a Partnership
Agreement (the "Partnership Agreement") with TCI GameCo Ventures,
Inc., an indirect wholly-owned subsidiary of Tele-Communications,
Inc. ("TCI"), for the creation of a Delaware limited partnership
(the "Joint Venture"), the interests in which are indirectly held
65% by the Company and 35% by TCI. The principal purposes of the
Joint Venture are to develop and acquire (including by purchase or
license), entertainment software for interactive networks, as well
as to promote a standard for broadband network gaming to be
incorporated into advanced set-top boxes.
In connection with the execution of the Partnership
Agreement, the Company entered into an Exchange Agreement (the
"Exchange Agreement") with TCI and TCI GameCo Holdings, Inc. ("TCI
Sub"), pursuant to which the Company issued and sold to TCI Sub
4,349 shares of the Company's common stock in exchange for 3,403
shares of Class A Common Stock of TCI. Marketable securities at
August 31, 1995 consist primarily of Class A Common Stock of TCI.
Such shares have been classified as "available-for-sale"
securities and accordingly, are stated at fair market value and
unrealized holding gains of $2,503 (net of income taxes of $1,784)
are classified as a component of stockholders' equity. In fiscal
1995, other income includes realized gains from the sale of
marketable securities of $5,968, as determined using the specific
cost method.
51
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
5. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
August 31,
1995 1994
---- ----
Receivables assigned to factor $155,782 $147,457
Less advances from factor 37,082 12,192
-------- --------
Due from factor 118,700 135,265
Unfactored accounts receivable 33,093 7,848
Accounts receivable - Foreign 41,743 47,235
Other receivables 5,410 9,773
Allowances for returns
and discounts (19,635) (35,327)
-------- --------
$179,311 $164,794
-------- --------
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, nonrecourse
basis. The factoring charge amounts 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
Company has entered into a revolving credit and security agreement
with the same bank, which expires on January 31, 1996, in the
amount of $70 million. Pursuant to the terms of the agreement,
which can be cancelled by either party upon 90 days' written
notice, the Company is required to maintain specified levels of
working capital and net worth. 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,
inventory and cost of imported goods under outstanding letters of
credit. Interest is charged at the bank's prime lending rate
minus one-half of one percent (8.25% at August 31, 1995) per annum
on such advances. Pursuant to the terms of certain distribution,
warehouse and credit and collection agreements, certain of the
Company's foreign accounts receivable are due from certain
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 August 31, 1995 and 1994, the
balance due from a distributor was approximately 19% and 47% of
Accounts receivable - Foreign, respectively.
52
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
6. PREPAID EXPENSES
Prepaid expenses are comprised of the following:
August 31,
1995 1994
---- ----
Royalty advances $25,640 $18,392
Prepaid advertising costs 6,292 2,875
Other prepaid expenses 9,151 1,947
------- -------
$41,083 $23,214
------- -------
Royalty advances represent advance payments made to
independent developers and licensors of intellectual properties.
All payments with respect to these agreements are recoupable
against future royalties in excess of minimum nonrefundable
advances made in respect of games licensed under the terms of
these agreements. Prepaid advertising costs consist principally
of advance payments in respect of television and other media
advertising. Advertising expenses are charged to operations upon
first utilization. Advertising expenses for fiscal years 1995, 1994
and 1993 were approximately $33,145, $30,329 and $15,562,
respectively.
7. FIXED ASSETS
The major classes of fixed assets are as follows:
August 31,
1995 1994
---- ----
Buildings and improvements $21,351 $3,307
Furniture, fixtures
and equipment 19,608 8,493
Automotive equipment 1,368 1,327
------- -------
42,327 13,127
Less: accumulated depreciation (8,357) (4,366)
Construction in progress --- 6,877
------- -------
$33,970 $15,638
------- -------
53
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
8. OTHER ASSETS
Other assets are comprised of the following:
August 31,
1995 1994
---- ----
Deferred compensation $10,652 ---
Royalty advances 5,000 $3,675
Investments 4,000 ---
Other assets 13,534 6,464
------- -------
$33,186 $10,139
------- -------
Deferred compensation represents escrow accounts on behalf of
certain executives pursuant to employment agreements. Such amounts
will be recorded as expense when earned over the terms of the
agreements, generally three to five years, and are recoverable by the
Company if the executives' employment with the Company is terminated
upon the occurrence of certain events specified in the respective
employment agreements.
9. SHORT-TERM BORROWINGS
Short-term borrowings consist of notes payable to banks in
Japan and are guaranteed by the Company. The notes are
short-term, maturing within 90 days and are collateralized by
inward letters of credit and promissory notes from distributors.
The annual interest rate applicable to the bank loans at August
31, 1995 was 3%. Such agreement also provides that the bank has
the right to offset cash of the Company collected under the inward
letters of credit and promissory notes from distributors and
deposited with it against the associated short-term notes.
10. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
August 31,
1995 1994
---- ----
Accrued royalties payable $18,712 $22,209
Accrued selling expenses 8,957 6,711
Accrued payroll and
payroll taxes 5,750 4,932
Other accrued taxes 3,606 3,661
Other accrued expenses 9,992 6,401
------- -------
$47,017 $43,914
------- -------
54
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
11. LONG-TERM DEBT
Long-term debt consists of the following:
August 31,
1995 1994
---- ----
(A) Term loan $25,000 $40,000
(B) Mortgage note --- 1,342
Other 196 392
------- -------
25,196 41,734
Less: current portion 25,196 1,538
------- -------
$ 0 $40,196
------- -------
(A) In connection with its acquisition by the Company,
Acclaim Comics entered into a credit agreement for a loan (the
"Loan") of $40 million. In connection with the establishment of
the Joint Venture and the related stock swap with TCI, the Company
reached an agreement with the lender pursuant to which it repaid
$15 million of the Loan and the remaining $25 million principal
amount of the Loan is being amortized over a four and one-half
year period terminating in July 1999. The Loan, which is a direct
obligation of Acclaim Comics, bears interest, at the borrower's
option, at either (i) the higher of the federal funds rate plus
one-half of 1% and the lender's prime rate, in each case, plus 125
basis points or (ii) London interbank offered rate plus 250 basis
points, and is collateralized by a first priority lien on
substantially all of the assets of Acclaim Comics (8.375% at
August 31, 1995). The credit agreement and related documents
establishing and securing the Loan, as well as the guarantees
delivered by the Company, contain customary financial, affirmative
and negative covenants, including mandatory prepayments from
excess cash flow of Acclaim Comics and from the proceeds of asset
sales or sales of equity by the Company and restrictions on the
encumbrance of assets and on the declaration or payment of
dividends by Acclaim Comics and the Company. During 1995, the Company
received a waiver through August 31, 1995 with respect to a financial
covenant under the credit agreement. The lender has advised the
Company that it intends to amend that covenant so that the Company
will be in compliance. However, because the revised covenant is not
yet in effect, the Company has reclassified the outstanding balance of
the loan as a current liability.
(B) The mortgage note bore interest at 1/2% above the bank's
prime lending rate (7.75% at August 31, 1994) and was payable in
monthly installments of $7 plus interest commencing March 1, 1990
up to and including February 1, 1995. On March 1, 1995, the
principal balance with accrued interest was due and paid.
55
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
11. LONG-TERM DEBT (continued)
The annual maturities for the years ending August 31 are as
follows:
1996 $25,196
-------
$25,196
-------
12. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
The Company is committed under various capital leases for
automotive and computer equipment expiring at various dates
through 1999. Future minimum payments required under such leases
are as follows:
Years ending August 31,
1996 $379
1997 209
1998 207
1999 28
----
Total minimum lease payments 823
Less: amount representing
interest 82
----
Present value of net minimum
lease payments $741
----
The present value of net minimum lease payments is reflected
on the balance sheet as current and noncurrent obligations under
capital leases of $333 and $408, respectively.
The Company has operating leases for rental space and
equipment which expire on various dates through 2003. The leases
provide for contingent rentals based upon escalation clauses.
Future minimum rental payments required under such leases are as
follows:
Years ending August 31,
1996 $1,996
1997 1,976
1998 1,701
1999 1,022
2000 954
Thereafter 1,374
------
Total minimum lease payments $9,023
------
56
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
13. PROVISION FOR INCOME TAXES
During fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes. The statement requires the use of the asset and liability
approach for financial accounting and reporting for income taxes.
Financial statements for prior years have not been restated and
the cumulative effect of the accounting change was not material.
The provision for taxes on income consists of the following:
1995 1994 1993
---- ---- ----
Current:
Federal $20,131 $21,382 $17,322
Foreign (457) 991 1,627
State 2,240 4,685 3,935
------- ------- -------
21,914 27,058 22,884
------- ------- -------
Deferred:
Federal 8,880 (3,551) (3,760)
Foreign (270) (20) (277)
------- ------- -------
8,610 (3,571) (4,037)
------- ------- -------
Charge in lieu of income taxes 1,101 8,453 1,128
------- ------- -------
Total income tax provision $31,625 $31,940 $19,975
------- ------- -------
The following is a reconciliation of the federal statutory
tax rate with the effective tax rate:
1995 1994 1993
---- ---- ----
Statutory tax rate 35.0% 35.0% 34.6%
State income taxes, net of
federal income tax benefit 2.2 3.6 5.5
Nondeductible amortization 2.1 1.0 1.4
Foreign tax rates, net of
foreign tax credits 0.2 1.3 ---
Other, net 2.0 0.6 ---
---- ---- ----
Effective rate 41.5% 41.5% 41.5%
---- ---- ----
57
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
13. PROVISION FOR INCOME TAXES (continued)
The deferred tax assets and deferred tax liabilities recorded
on the consolidated balance sheets are as follows:
1995 1994
-------------------------- --------------------------
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
---------- ------------ ---------- ------------
Reserves and allowances $1,662 --- $9,371 ---
Investment in subsidiary 3,664 --- 4,274 ---
Unrealized gains on marketable
securities --- $1,784 --- ---
Foreign net operating loss
carryforwards 1,059 --- 487
Other 692 43 507 $243
------ ------ ------- ----
7,077 1,827 14,639 243
Valuation allowance 548 -- 487 --
------ ------ ------- ----
$6,529 $1,827 $14,152 $243
------ ------ ------- ----
At August 31, 1995 and 1994, one of the Company's foreign
subsidiaries had unused tax benefits of $548 and $487,
respectively, related to foreign net operating loss carryforwards.
A full valuation allowance has been recognized to offset the
related deferred tax asset due to the uncertainty of realizing the
benefit of the loss carryforwards. Deferred tax assets of $2,259
and $10,796 are classified as other current assets at August 31,
1995 and 1994, respectively. During fiscal 1995, additional tax
benefits at $1,187 attributable to Acclaim Comics were recorded as
a reduction of the excess cost over the net assets acquired.
Included in other current assets are refundable income taxes of
$14,171 at August 31, 1995.
A provision for additional taxes on income which would become
payable upon the repatriation of the earnings from its foreign
subsidiaries has not been provided since, upon repatriation, the
tax consequences of such distributions would be substantially
offset by available foreign tax credits.
14. STOCK SPLIT
On August 2, 1993, the Board of Directors authorized a
three-for-two stock split of the Company's common stock in the
form of a 50% stock dividend, to stockholders of record on August
12, 1993. Except for shares authorized, all references to number
of shares and to per share information in the consolidated
financial statements have been adjusted to reflect the stock split
on a retroactive basis.
58
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
15. EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
Earnings per common share and common share equivalents are
computed by dividing net earnings by the weighted average number
of common shares and common share equivalents outstanding. The
weighted average number of common shares and common share
equivalents used in computing net earnings per common share for
the years ended August 31, 1995, 1994 and 1993 were 52,300, 45,150
and 44,875, respectively. Antidilutive stock options and warrants
were not included.
16. STOCK OPTION PLAN
In May 1988, the Board of Directors adopted a stock option
plan whereby the Company may grant options for the purchase of up
to 2,250 shares of its common stock to key employees. On May 22,
1990, the stockholders authorized an increase from 2,250 to 4,500
in the number of shares subject to options under the plan and
authorized the grant of such options to any employee, not only to
key employees of the Company. The Board and the stockholders
subsequently approved certain changes in the 1988 Stock Option
Plan, including an increase in the number of shares with respect
to which options may be granted thereunder to 15,000. The
exercise price per share of all options heretofore granted has
been the market price, or 110% thereof for certain employees, or,
for non-incentive options, not less than 85% of market price, of
the Company's common stock on the date of grant. Generally,
outstanding options become exercisable evenly over a three year
period from the date of grant (although this may be accelerated
due to retirement or death). Outstanding options must be
exercised within ten years from the date of the grant, or within
five years from the date of the grant for certain employees. The
1988 Stock Option Plan terminates in May 1998. At August 31,
1995, options to purchase approximately 4,193 shares were
exercisable.
59
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
16. STOCK OPTION PLAN (continued)
Transactions are summarized as follows:
Shares Under Option
------------------------- Exercise
Incentive Non-Incentive Price
--------- ------------- --------
Outstanding, August 31, 1992 2,616 3,898 $0.89-5.92
----- ------
Granted 1,831 1,900 $11.17-21.33
Exercised (832) (736) $0.89-4.58
Cancelled (20) --- $1.95-5.92
----- ------
Outstanding, August 31, 1993 3,595 5,062 $0.89-21.33
----- ------
Granted 864 2,303 $13.25-25.25
Exercised (451) (635) $1.95-11.17
Cancelled (450) (1,726) $1.95-25.25
----- ------
Outstanding, August 31, 1994 3,558 5,004 $0.89-21.75
----- ------
Conversion of Lazer-Tron Options 108 27 $5.41-40.61
Granted 1,596 2,861 $13.75-24.00
Exercised (464) (43) $1.95-17.92
Cancelled (427) (2,022) $3.92-20.63
----- ------
Outstanding, August 31, 1995 4,371 5,827 $0.89-40.61
----- ------
In addition, options to purchase 37 shares of common stock at
$4.17 per share, 37 shares of common stock at $5.67 per share, 37
shares of common stock at $4.58 per share, 56 shares of common stock
at $2.08 per share, 150 shares of common stock at $2.04 per share,
11 shares of common stock at $3.92 per share, 19 shares of common
stock at $13.25 per share, 56 shares of common stock at $16.00 per
share and 250 shares of common stock at $13.25 per share were granted
outside the 1988 Stock Option Plan.
17. STOCK WARRANTS
At August 31, 1995, 2,625 stock warrants were outstanding and
exercisable. The stock warrants entitle the holders thereof to
purchase 1,500 shares of common stock at $2.42 per share and 1,125
shares of common stock at $3.00 per share. The stock warrants
expire in 1996.
In addition, at August 31, 1995, the 851 outstanding stock
warrants to purchase shares of Lazer-Tron (see note 3) were
converted into warrants entitling the holders thereof to purchase
17 shares of common stock at $30.57 per share, 40 shares of common
stock at $9.55 per share and 105 shares of common stock at $15.92
per share. In addition, certain of such warrants entitle the
holders thereof to receive warrants to purchase 20 shares of
common stock at $15.92 per share. All of these warrants expire at
various times between 1996 and 1998.
60
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
18. MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS
A. Major Suppliers and Customers
The Company is substantially dependent on Nintendo as the
sole manufacturer of SNES and Game Boy hardware and a significant
portion of the Software for those platforms and as the sole
licensor of the proprietary information and the technology needed
to develop the Software for those platforms; and on Sega as the
sole manufacturer of Genesis, Master System, Game Gear and Sega CD
hardware and a portion of Software for those platforms and as the
sole licensor of the proprietary information and the technology
needed to develop Software for those platforms. In fiscal years
1995, 1994 and 1993, the Company derived 47%, 45% and 66% of its
gross revenues, respectively, from sales of Nintendo-compatible
products and in fiscal years 1995, 1994 and 1993, the Company
derived 46%, 55% and 34% of its gross revenues, respectively, from
sales of Sega-compatible products.
The Company markets its products primarily to mass
merchandise companies, large retail toy store chains, department
stores and specialty stores. Sales to one customer represented
approximately 11%, 12% and 13% of revenues for the years ended
August 31, 1995, 1994 and 1993, respectively.
B. Related Party Transactions
Sales commissions are payable to companies owned or
controlled by one of the Company's principal stockholders for
sales obtained by these companies. These commissions amounted to
approximately $2,249, $3,657 and $2,326 for the years ended August
31, 1995, 1994 and 1993, respectively, of which $458 and $1,236
are included in accrued expenses at August 31, 1995 and 1994,
respectively.
19. COMMITMENTS AND CONTINGENCIES
In February 1986, Nintendo was named as a defendant in a
patent infringement suit brought in the District Court of the
Southern District of New York by Alpex Computer Corporation
("Alpex"), alleging that certain aspects of the NES and NES
Software infringe a patent held by Alpex relating to the use in
NES Software of rotating images, and seeking compensatory and
injunctive relief. By letter dated April 14, 1988, Alpex alleged
possible patent infringement by the Company and informed the
Company that it was willing to offer the Company a license for its
patent. Alpex also indicated that it was its intention to pursue
remedies against all infringers of its patent. The Company was
informed by Nintendo that Nintendo believed the Alpex patent to be
invalid and that the NES and NES Software did not infringe such
61
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
19. COMMITMENTS AND CONTINGENCIES (continued)
patent. The Company did not further pursue its options with Alpex
and, to date, no actual claim of infringement has been made
against the Company nor has the Company been named in any
litigation by Alpex nor has the Company received any further
communication from Alpex.
In June 1994, Alpex's patent infringement suit against
Nintendo was tried and a jury found Alpex's patent to be valid and
infringed by certain NES Software, including "Wizards and
Warriors" and "Rambo" which are Software titles published by the
Company. On August 1, 1994, damages of approximately $208.2
million (which are payable by Nintendo) were awarded by the jury.
In October 1995, Nintendo appealed the liability verdict and the
damages award. To date, no damages have been sought from the
Company in respect of the NES Software titles published by the
Company and found by the jury to infringe Alpex's patent or in
respect of any other titles published by the Company, although
there can be no assurance that such damages will not be sought.
The Company cannot predict the final outcome of the litigation
between Alpex and Nintendo. However, based on the Software
products identified as infringing the Alpex patent in the
litigation, the Company believes that the impact, if any, of the
litigation on the Company would not be material.
LJN Toys, Ltd., a subsidiary of the Company, is a party to
various lawsuits arising in the course of its business prior to
its acquisition by the Company. However, MCA INC., the former
owner, has agreed to defend and indemnify the Company from
liabilities arising out of such lawsuits. Additionally, the
Company is a defendant in various lawsuits arising in the ordinary
course of business. It is the opinion of management of the
Company that it has meritorious defenses against all such claims
and that the outcome of such litigation would not have a material
adverse effect on the financial condition of the Company.
In April 1994, the Company and its executive officers were
sued in four actions, which were consolidated in July 1994. In
the amended class action complaint, the plaintiffs claim
unspecified damages based on their allegation that, by no later
than January 12, 1994, the Company knew or should have known that
(i) it was likely that its license agreement with WMS Industries,
Inc. ("WMS") would not be renewed, (ii) the nonrenewal of the
license agreement would have a material adverse impact on the
Company, (iii) any joint venture or other agreement between WMS
and the Company that might be entered into in the future, however
unlikely that may be, would be on terms substantially less
advantageous to the Company than the license agreement and (iv)
statements by the Company's representative that rumors relating to
the nonrenewal of the license agreement were "unsubstantiated" and
62
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
19. COMMITMENTS AND CONTINGENCIES (continued)
that talks between the Company and WMS were continuing, were
materially false and misleading. Accordingly, the plaintiffs
claim that the defendants should have disclosed the likely
nonrenewal of the license agreement in the Company's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1993, which
was filed on January 13, 1994. The effect of nonrenewal of the
Company's license agreement with WMS is that the Company does not
have a right of first refusal with respect to arcade games
released by WMS after March 21, 1995. Sales of Mortal Kombat
Software products (a game released by WMS) represented a
significant portion of the Company's revenues in fiscal 1993,
sales of each of Mortal Kombat II and NBA Jam Software products
(games released by WMS) represented a significant portion of the
Company's revenues in fiscal 1994 and sales of NBA Jam Tournament
Edition Software products (a game released by WMS) represented a
significant portion of the Company's revenues in fiscal 1995.
Discovery in the actions is on going. The Company believes that
the actions are without merit and lack any basis in fact and
intends to defend the actions vigorously.
On April 28, 1995, Lazer-Tron and certain of its directors
and officers were named as defendants in a lawsuit filed in the
Superior Court of the State of California, County of Alameda --
Eastern Division. This action, titled Goldstein v. Lazer-Tron
Corporation, et al., was filed seeking, among other things,
certification of the lawsuit as a class action on behalf of all
Lazer-Tron shareholders, a preliminary and permanent injunction to
prohibit consummation of the merger and to compel the individual
defendants to fulfill what the plaintiff claimed were their
fiduciary duties to, among other things, cooperate with any other
entity with an interest in acquiring Lazer-Tron and enhance Lazer-
Tron's value as a merger candidate. On May 30, 1995, an amended
complaint was filed. The plaintiff alleged that the individual
defendants violated state law by committing unfair business
practices, and breached their fiduciary duties as a result of the
manner in which, and the timing of, the determination to merge
Lazer-Tron occurred, the manner in which negotiations with Acclaim
were conducted and in recommending approval of the merger
agreement and the merger. The merger was consummated on August
31, 1995. Lazer-Tron intends to defend this action vigorously.
By complaints dated December 4, 1995 and December 5, 1995,
the Company was sued in eight actions (the "Actions") entitled (i)
Mohammed Ali Kahn v. Gregory E. Fischbach, James Scoroposki,
Robert Holmes and Acclaim Entertainment, Inc. (CV 95 4983), (ii)
Richard J. Wenski, individually and on behalf of all other persons
similarly situated, v. Acclaim Entertainment. Inc., Gregory E.
Fischbach, Robert Holmes and Anthony Williams (CV 95 4996), (iii)
Yosef Stern v. Acclaim Entertainment, Inc.; Gregory E. Fischbach;
63
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
19. COMMITMENTS AND CONTINGENCIES (continued)
James Scoroposki: Robert Holmes and Anthony Williams (CV 95 4990),
(iv) Marc Jaffe, on behalf of himself and all others similarly
situated, v. Acclaim Entertainment, Inc., Gregory E. Fischbach,
James Scoroposki, Robert Holmes, and Anthony Williams (CV 95
4989), (v) Robert Bloom v. Acclaim Entertainment, Inc. and Robert
Holmes (CV 95 4993), (vi) James Bencivenga, on behalf of himself
and all others similarly situated, v. Gregory E. Fischbach, James
Scoroposki, Robert Holmes, Anthony Williams and Acclaim
Entertainment, Inc. (CV 95 4985), (vii) Henry Vredeveld, on behalf
of himself and all others similarly situated, v. Anthony Williams
and Acclaim Entertainment, Inc. (CV 95 4979), (viii) Michael Leitzes,
individually and on behalf of all others similarly situated, v.
Acclaim Entertainment, Inc., Robert Holmes and Gregory Fischbach (CV
95 5004), and (ix) Alan Yakuboff, on behalf of himself and all others
similarly situated, v. Acclaim Entertainment, Inc., Gregory E.
Fischbach, James Scoroposki and Anthony Williams (CV 95 5017), all in
the United States District Court in the Eastern District of New York.
The individual named defendants are directors and/or executive
officers of the Company. The plaintiffs, on behalf of a class of the
Company's stockholders, claim unspecified damages arising from the
Company's December 4, 1995 announcement that it is revising results
for the fiscal year ended August 3l, 1995 to reflect a decision to
defer $18 million of revenues and $10.5 million of net income
previously reported on October 17, 1995 for the fiscal year ended
August 31, 1995. The Company intends to defend the Actions
vigorously.
At August 31, 1995, the Company had outstanding letters of
credit aggregating approximately $24,085 for the purchase of
merchandise. In addition to its factoring and revolving credit
arrangement (see note 5), the Company currently has a $30,000
trade finance facility with another bank. The Company's
subsidiaries had independent facilities totalling approximately
$45,000 with various banks at August 31, 1995.
Trade accounts payable include $22,000 and $34,542 at August
31, 1995 and 1994, respectively, which were collateralized under
outstanding letters of credit.
The Company has established an Employee Savings Plan (the
"Plan") as of April 1, 1995, which qualifies as a deferred salary
arrangement under section 401(k) of the Internal Revenue Code.
The Plan is available to all United States employees who meet the
eligibility requirements. Under the Plan, participating employees
may elect to defer a portion of their pretax earnings, up to the
maximum allowed by the Internal Revenue Service (up to 15% or
$9,240 for calendar year 1995). All amounts vest immediately.
Generally, the Plan assets in a participant's account will be
distributed to a participant or his or her beneficiaries upon
termination of employment, retirement, disability or death. The
Plan provides for, at the Company's option, additional
contributions to the Plan by the Company. No additional
64
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
19. COMMITMENTS AND CONTINGENCIES (continued)
contributions were made during fiscal 1995. All Plan
administrative fees are paid by the Company.
The Company has entered into employment agreements with
certain of its directors and officers which provide for annual
bonus payments based on consolidated income before income taxes,
in addition to their base compensation.
20. OPERATIONS IN GEOGRAPHIC AREAS
The Company is primarily engaged in one industry segment, the
development, marketing and distribution of Software products. The
following information sets forth geographic information on the
Company's sales, earnings from operations and identifiable assets.
North Consoli-
America Europe Asia Eliminations dated
------- ------ ---- ------------ --------
Year ended August 31, 1995:
Sales to unaffiliated customers $443,893 $95,556 $27,274 --- $566,723
Transfers between geographic areas 11,388 102 --- $(11,490) ---
-------- ------- ------- -------- --------
Total net revenues $455,281 $95,658 $27,274 $(11,490) $566,723
-------- ------- ------- -------- --------
Earnings from operations $51,062 $17,732 $1,872 $ --- $70,666
-------- ------- ------- -------- --------
Identifiable Assets at August 31, 1995 $434,234 $19,259 $10,461 $ --- $463,954
-------- ------- ------- -------- --------
Year ended August 31, 1994:
Sales to unaffiliated customers $384,540 $78,878 $17,338 --- $480,756
Transfers between geographic areas 11,057 333 11,728 $(23,118) ---
-------- ------- ------- -------- --------
Total net revenues $395,597 $79,211 $29,066 $(23,118) $480,756
-------- ------- ------- -------- --------
Earnings from operations $63,607 $9,438 $4,425 $ --- $77,470
-------- ------- ------- -------- --------
Identifiable Assets at August 31, 1994 $297,604 $32,982 $5,292 $ --- $335,878
-------- ------- ------- -------- --------
Year ended August 31, 1993:
Sales to unaffiliated customers $209,826 $91,793 $25,472 --- $327,091
Transfers between geographic areas 8,094 --- 33,181 $(41,275) ---
-------- ------- ------- -------- --------
Total net revenues $217,920 $91,793 $58,653 $(41,275) $327,091
-------- ------- ------- -------- --------
Earnings from operations $19,295 $20,888 $6,764 $ --- $46,947
-------- ------- ------- -------- --------
Identifiable Assets at August 31, 1993 $166,092 $21,998 $18,681 $ --- $206,771
-------- ------- ------- -------- --------
65
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly
financial information:
Quarter Ended
------------------------------------------------------------------
November 30, February 28, May 31, August 31,
1994 1995 1995 1995 Total
------------ ------------ ------- ---------- -----
Net revenues $164,304 $161,273 $107,654 $133,492 $566,723
Cost of revenues 77,665 73,456 53,792 63,588 268,501
Net earnings 15,958 13,856 8,855 6,101 44,770
Net earnings per share $0.34 $0.28 $0.17 $0.11 $0.86
Quarter Ended
------------------------------------------------------------------
November 30, February 28, May 31, August 31,
1993 1994 1994 1994 Total
------------ ------------ ------- ---------- -----
Net revenues $127,360 $115,531 $88,997 $148,868 $480,756
Cost of revenues 56,118 51,167 37,853 75,606 220,744
Net earnings 12,336 10,638 7,949 14,132 45,055
Net earnings per share $0.27 $0.24 $0.18 $0.31 $1.00
The sum of the quarterly net earnings per share amounts do
not equal the annual amount reported, as per share amounts are
computed independently for each quarter and for the twelve months
based on the weighted average common and common equivalent shares
outstanding in each such period.
22. SUBSEQUENT EVENTS
On October 9, 1995, the Company acquired Sculptured Software,
Inc. ("Sculptured") and on October 16, 1995, the Company acquired
Probe Entertainment Limited ("Probe"). Sculptured and Probe are
developers of interactive video games. Both transactions will be
accounted for as poolings of interests and were effected through
the exchange of 2,745 shares of common stock of the Company for
all the issued and outstanding shares of Sculptured and Probe.
The operations of Sculptured and Probe are not material to the
Company's consolidated operations.
66
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(in 000s, except per share data)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
67
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information called for by Item 10 is set forth under the
heading "Election of Directors" in the Company's Proxy Statement
for its 1996 annual meeting of stockholders (the "1996 Proxy
Statement"), which is incorporated herein by this reference.
Item 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is set forth under the
heading "Executive Compensation" in the 1996 Proxy Statement,
which is incorporated herein by this reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information called for by Item 12 is set forth under the
heading "Security Ownership of Certain Beneficial Owners and
Management" in the 1996 Proxy Statement, which is incorporated
herein by this reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 is set forth under the
heading "Certain Relationships and Related Transactions" in the
1996 Proxy Statement, which is incorporated herein by this
reference.
68
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) and (d) 1. Financial Statements:
The following Financial Statements of the Company are
included in Part II: Item 8
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets ---
August 31, 1995 and 1994.
Statements of Consolidated Earnings ---
Years Ended August 31, 1995, 1994 and 1993.
Statements of Consolidated Stockholders' Equity ---
Years Ended August 31, 1995, 1994 and 1993.
Statements of Consolidated Cash Flows ---
Years Ended August 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
(a) and (d) 2. Financial Statement Schedules:
Schedule II -- Allowance for Returns and Discounts
All other schedules have been omitted because they are not
applicable, or not required, or because the required information
is included in the Consolidated Financial Statements or notes
thereto.
(b) Current Reports on Form 8-K:
None.
(c) Exhibits:
Exhibit No. Description
3.1 Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1,
filed on April 21, 1989, as amended (Registration
Number 33-28274) (the "1989 S-1")).
3.2 Amendment to the Certificate of Incorporation of
the Company (incorporated by reference to Exhibit
3.2 to the 1989 S-1).
3.3 Amendment to the Certificate of Incorporation of
the Company (incorporated by reference to Exhibit
4(d) to the Company's Registration Statement on
Form S-8, filed on May 19, 1995 (Registration
Number 33-59483) (the "1995 S-8").
69
3.4 Amended and Restated By-Laws of the Company
(incorporated by reference to Exhibit 4(e) to the
1995 S-8).
4 Specimen form of the Company's Common Stock
certificate (incorporated by reference to Exhibit
4 to the Company's Annual Report on Form 10-K for
the year ended August 31, 1989, as amended (File
No. 0-16986) (the "1989 10-K")).
10.1+ Employment Agreement dated as of March 1, 1988
between the Company and G. Fischbach (incorporated
by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, filed on July
25, 1988, as amended (Registration No. 33-23158)
(the "1988 S-1")); Amendment dated as of September
1, 1990 (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for
the year ended August 31, 1990 (the "1990 10-K")).
10.2+ Employment Agreement dated as of March 1, 1988
between the Company and J. Scoroposki
(incorporated by reference to Exhibit 10.2 to the
1988 S-1); Amendment dated as of September 1, 1990
(incorporated by reference to Exhibit 10.2 to the
1990 10-K).
10.3+ Employment Agreement dated as of March 1, 1988
between the Company and R. Holmes (incorporated by
reference to Exhibit 10.3 to the 1988 S-1);
Amendment dated as of September 1, 1990
(incorporated by reference to Exhibit 10.3 to the
1990 10-K).
10.4+ Employment Agreement, dated as of September 1,
1990, between the Company and A. Williams
(incorporated by reference to Exhibit 10.25 to the
1990 10-K).
10.5+ 1988 Stock Option Plan (incorporated by reference
to Exhibit 4(a) to the Company's 1995 S-8).
10.6* Master Option and License Agreement dated March
23, 1990 by and among WMS Industries, Inc.,
Williams Electronic Games, Inc., Midway
Manufacturing Company and the Company
(incorporated by reference to Exhibit 10.17 to the
1990 10-K); Second Master Option and License
Agreement, dated June 28, 1991, by and among WMS
Industries, Inc., Williams Electronics Games, Inc.
and Midway Manufacturing Company (incorporated by
reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, filed on
70
November 7, 1991, as amended (Registration No.
33-43826) (the "1991 S-1")).
10.7 Confidentiality Agreement, dated September 1,
1990, between the Company and P. Samulski
(incorporated by reference to Exhibit 10.26 to the
1990 10-K).
10.8 Confidentiality Agreement, dated September 1,
1990, between the Company and S. Goldberg
(incorporated by reference to Exhibit 10.27 to the
1990 10-K).
10.9 Form of Warrant issued to Messrs. G. Fischbach and
J. Scoroposki (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 28, 1991
(File No. 0-16986)).
10.10 Revolving Credit and Security Agreement, dated as
of January 1, 1993, between the Company, Acclaim
Distribution Inc., LJN Toys, Ltd., Acclaim
Entertainment Canada, Ltd. and Arena Entertainment
Inc., as borrowers, and BNY Financial Corporation,
as lender, as amended and restated on February 28,
1995 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for
the quarter ended February 28, 1995 (File No. 0-
16986) (the "1995 10-Q")).
10.11 Restated and Amended Factoring Agreement, dated as
of February 28, 1995, between the Company and BNY
Financial Corporation (incorporated by reference
to Exhibit 10.2 to the 1995 10-Q).
10.12* License Agreement, dated March 15, 1991, between
Nintendo Co., Ltd. and Acclaim Japan, Ltd.
(incorporated by reference to Exhibit 10.33 to the
1991 S-1).
10.13* License Agreement for Game Boy, dated as of April
3, 1992, between Nintendo Co., Ltd. and Acclaim
Japan Ltd. (incorporated by reference to Exhibit
10.37 to the Company's Annual Report on Form 10-K
for the year ended August 31, 1992 (File No.
0-16986) (the "1992 10-K")).
10.14* License Agreement for Game Boy, dated as of July
21, 1992, between Nintendo Co., Ltd. and Acclaim
Japan Ltd. (incorporated by reference to Exhibit
10.38 to the 1992 10-K).
10.15* License Agreement for Game Boy, dated as of
January 15, 1993, between Nintendo of America Inc.
71
and LJN Toys, Inc. (incorporated by reference to
Exhibit 10.39 to the Company's Annual Report on
Form 10-K for the year ended August 31, 1993
(File No. 0-16986) (the "1993 10-K")).
10.16* License Agreement for Game Boy, dated as of
January 15, 1993, between Nintendo of America Inc.
and the Company (incorporated by reference to
Exhibit 10.40 to the 1993 10-K).
10.17* License Agreement for Super NES, dated as of March
11, 1993, between Nintendo of America Inc. and LJN
Toys, Inc. (incorporated by reference to Exhibit
10.41 to the 1993 10-K).
10.18* Third Renewal of License Agreement for NES, dated
as of June 12, 1993, between Nintendo of America
Inc. and the Company (incorporated by reference to
Exhibit 10.42 to the 1993 10-K).
10.19* Manufacturing Option Addendum to Third Renewal of
License Agreement for NES, dated as of June 12,
1993, between Nintendo of America Inc. and the
Company (incorporated by reference to Exhibit
10.43 to the 1993 10-K).
10.20* First Renewal of License Agreement for Super NES,
dated as of September 10, 1993, between Nintendo
of America Inc. and the Company (incorporated by
reference to Exhibit 10.44 to the 1993 10-K).
10.21* Second Renewal of Non-exclusive License Agreement
for Nintendo Product Accessories dated as of
January 2, 1994 between Nintendo of America, Inc.
and the Company (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended August 31, 1994 (File
No. 0-16984) (the "1994 10-K")).
10.22* Second Renewal of Non-exclusive International
License Agreement for Nintendo Product Accessories
dated as of January 2, 1994 between Nintendo of
America, Inc. and the Company (incorporated by
reference to Exhibit 10.22 to the 1994 10-K).
10.23* International License Agreement for Game Boy dated
as of March 2, 1994 between Nintendo Co., Ltd. and
the Company (incorporated by reference to Exhibit
10.23 to the 1994 10-K).
10.24* International License Agreement for SNES dated as
of March 2, 1994 between Nintendo Co., Ltd. and
the Company (incorporated by reference to Exhibit
10.24 to the 1994 10-K).
72
10.25* International License Agreement for SNES dated as
of February 19, 1993 between Nintendo Co., Ltd.
and LJN Toys, Ltd (incorporated by reference to
Exhibit 10.25 to the 1994 10-K).
10.26 Partnership Agreement dated as of October 19, 1994
between Acclaim Cable Holdings, Inc. and TCI
GameCo Ventures, Inc. (incorporated by reference
to Exhibit 1 to the Company's Current Report on
Form 8-K dated October 28, 1994) (File No. 0-
16984).
10.27 Agreement and Plan of Merger dated as of March 22,
1995 and amended as of June 15, 1995 and as of
July 24, 1995 between the Company, Acclaim Arcade
Holdings, Inc. and Lazer-Tron Corporation
(incorporated by reference to Exhibits 2, 2.1 and
2.2 to the Company's Registration Statement on
Form S-4 (File Number 33-58883)).
21 Subsidiaries of Registrant
-------------------
* Confidential treatment has been requested with respect to
certain information contained in this exhibit.
+ Management contract or compensatory plan or arrangement
required to be identified pursuant to Item 14(a)3 of this
report.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 6, 1995 By Gregory Fischbach
Gregory Fischbach
Co-Chairman of the Board and
Chief Executive Officer
December 6, 1995 By Anthony R. Williams
Anthony R. Williams
Executive Vice President and
Chief Financial and Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Gregory Fischbach Co-Chairman of the Board December 6, 1995
Gregory Fischbach Chief Executive Officer,
Director
James Scoroposki Co-Chairman of the Board December 6, 1995
James Scoroposki Executive Vice President;
Treasurer, Secretary;
Director
Robert Holmes President; Chief Operating December 6, 1995
Robert Holmes Officer; General Manager;
Director
Bernard J. Fischbach Director December 6, 1995
Bernard J. Fischbach
Michael Tannen Director December 6, 1995
Michael Tannen
Robert Groman Director December 6, 1995
Robert Groman
James Scibelli Director December 6, 1995
James Scibelli
Bruce Ravenel Director December 6, 1995
Bruce Ravenel
74
Schedule II
ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
ALLOWANCE FOR RETURNS AND DISCOUNTS
(in 000s, except per share data)
BALANCE
AT PROVISIONS BALANCE
BEGINNING FOR RETURNS AT
OF RETURNS AND AND END OF
PERIOD PERIOD DISCOUNTS DISCOUNTS PERIOD
------ --------- ----------- --------- -------
Year ended
August 31, 1993 $12,035 $36,680 $24,607 $24,108
Year ended
August 31, 1994 $24,108 $40,015 $28,796 $35,327
Year ended
August 31, 1995 $35,327 $25,081 $40,773 $19,635