WSJ: December 18th 1996

GLEN COVE, N.Y. -- Acclaim Entertainment Inc., which led the home video-game market two Christmases ago with hits such as Mortal Kombat and NBA Jams, said its auditors warned that its losses for the latest fiscal year "raise substantial doubt about its ability to continue as a going concern."

The company disclosed fiscal fourth-quarter and full-year losses that were wider than preliminary estimates made earlier this month by Acclaim. And the company said its cash flow won't meet its needs in the current year.

The bad news sent Acclaim's stock down $2.625, or 41%, to $3.75 a share in Nasdaq Stock Market trading. The stock has traded as high as $13.875 in the past 52 weeks.

In a filing with the Securities and Exchange Commission, Acclaim's accounting firm, KPMG Peat Marwick, raised doubts about Acclaim's ability to stay in business because the company's cash flow isn't enough to meet expenses for the current fiscal year. Peat Marwick also said it was concerned over a number of other uncertainties, including whether certain shareholder lawsuits can be resolved and how the company's lenders will react.

Acclaim said its cash-flow problems had put it in violation of its loan agreements on its $40 million in debt and the lenders could seek immediate repayment or "other relief." However, the company said that it is now negotiating with its banks. The company defaulted on its loan agreements in October, when it projected lower-than-expected fourth-quarter earnings, but succeeded in securing waivers of the violation.

Peat Marwick, which was hired in July after Acclaim had a disagreement with former auditors Grant Thornton, declined to comment.

Gregory Fischbach, Acclaim's chairman and chief executive officer, said in a statement that the company has made "organizational, procedural and personnel changes, which we believe will strengthen our company." He said, "We will continue to make necessary changes as appropriate in order to return our company to profitability."

In an interview, Mark Hattendorf, the company's chief financial officer, said the company "has absolutely no plans and has not discussed" filing for protection under Chapter 11 of the U.S. Bankruptcy Code. But he acknowledged that the company is looking to raise capital, possibly through the sale of certain assets.

Analysts are watching closely in part because Acclaim's precipitous fall comes at a time when the whole home video-game business is struggling to reinvent itself. Acclaim and other game makers have been scrambling to keep pace with rapidly changing technology in video-game hardware. Nintendo Co.'s new 64-bit players, for instance, are arriving in stores even before 32-bit players such as Sega Enterprises Ltd.'s Saturn and Sony Corp.'s PlayStation have become as popular as 16-bit players were two years ago. Meanwhile, the Internet is siphoning off a growing portion of game players' money and time.

Acclaim yesterday reported a loss of $162.2 million, or $3.38 a share, for the fiscal fourth quarter ended Aug. 31 because of a $138.3 million pretax write-off mainly related to excess 16-bit game inventory. The loss is 12% higher than Acclaim estimated two weeks ago in a preliminary filing with the SEC. In the year-earlier fourth quarter, the company reported net income of $6.1 million, or 11 cents a share.

Acclaim didn't announce revenue for the latest fourth quarter. Mr. Hattendorf said the company had to account for so many retail credits that related to shipments made in previous quarters that it more than wiped out revenue for the latest quarter. Acclaim reports revenue when games are shipped.

For the year, the company reported a loss of $221.4 million, or $4.47 a share, compared with net income of $44.8 million, or 86 cents a share, a year earlier. The annual loss includes a fiscal second-quarter write-off of $51.2 million for excess inventory of 16-bit games. After accounting for credits and allowances, Acclaim said full-year revenue was $161.9 million, compared with $566.7 million a year earlier.

Mr. Fischbach said Acclaim's mistake was that "we thought 16-bit hardware systems had one more good Christmas left in them." Because it takes as long as a year to design and manufacture a new cartridge game, Acclaim was stuck with games designed for the 16-bit cartridge players in 1994, long before the runaway success of the 32-bit CD-ROM players released in the fall of 1995.