ACCLAIM ENTERTAINMENT INC - 10-K Annual Report

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. ¨

Portions of the registrant’s definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K, with respect to the 2002 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on Form 10-K. This report consists of 86 sequentially numbered pages. The Exhibit Index is located at sequentially numbered page 78.

This Annual Report on Form 10-K, including Item 1 (“Business”) and Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”), contains forward-looking statements about circumstances that have not yet occurred. All statements, trend analysis and other information contained below relating to markets, our products and trends in revenue, as well as other statements including words such as “anticipate”, “believe” or “expect” and statements in the future tense are forward-looking statements. These forward-looking statements are subject to business and economic risks, and actual events or our actual future results could differ materially from those set forth in the forward-looking statements due to such risks and uncertainties. We will not necessarily update this information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to, those discussed under the heading “Factors Affecting Future Performance” on pages 12 to 20.

Acclaim Entertainment, Inc. was founded in 1987 as a Delaware corporation, and maintains operations in the United States, the United Kingdom, Germany, France, Spain, Australia and Japan. We develop, publish, market and distribute, under our brand names, interactive entertainment software for a variety of hardware platforms, including Sony’s PlayStation^® 2, Microsoft’s Xbox^™, and Nintendo’s GameCube^™ and Game Boy^™ Advance and, to a lesser extent, personal computer systems. We develop software internally, as well as engaging third parties to develop software on our behalf.

Through our subsidiaries in North America, the United Kingdom, Germany, France, Spain, and Australia, we distribute our software products directly to retailers and other outlets, and we also utilize regional distributors in Japan and the Pacific Rim to distribute software within those geographic areas. As an additional aspect of our business, we distribute software products which have been developed by third parties. A less significant aspect of our business is the development and publication of strategy guides relating to our software products and the issuance of certain “special edition” comic magazines to support some of our time valued brands.

Since the Company’s inception, we have developed products for each generation of major gaming platforms, including IBM(R) Windows-based personal computers and compatibles, 16-bit Sega^™ Genesis^™ video game system, 16-bit Super Nintendo Entertainment System^®, 32-bit Nintendo Game Boy^®, Game Boy^® Advance and Game Boy^® Color, 32-bit Sony PlayStation^®, 64-bit Nintendo^® 64, Sega Dreamcast, 128-bit Sony Playstation^® 2, 128-bit Microsoft Xbox^™, and 128-bit Nintendo^™ GameCube. We also initially developed software for the 8-bit Nintendo Entertainment System and the 8-bit Sega Master System.

Substantially all of our revenue is derived from one industry segment, the development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 20 (Segment Information) of the notes to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Create and Maintain Diversity in Product Mix, Platforms and Markets. We are committed to maintaining a diversified mix of product offerings because a diversified product mix mitigates our operating risks, contributes to enhanced profitability and broadens our demographic market appeal. See “Factors Affecting Future Performance: We Depend on a Relatively Small Number of Franchises for a Significant Portion of Our Revenue and Profits.” Therefore, we strive to develop and publish products spanning a wide range of product categories, including action, adventure, action-sports, arcade style games, extreme sports, racing, role playing, simulation and strategy, and products designed for target audiences ranging from game enthusiasts and children to mass market consumers and “value priced” buyers. Presently, we concentrate on developing, publishing and distributing products that operate on Sony’s PlayStation^® 2, Microsoft’s Xbox^™, and Nintendo’s GameCube^™ console systems and Nintendo’s Game Boy^™ Advance, hand held device and personal computers. We may offer our products for use on multiple platforms in order to leverage our costs of development over a larger installed hardware base, therefore increasing potential unit sales. Accordingly, there are a number of factors that we take into consideration in determining the appropriate platform for each product developed including, amongst other things, the platform user demographics, the potential growth of the installed base of each platform and the competitive landscape at the time of a product’s release.

Create, Acquire and Maintain Strong Brands. We attempt to focus our game developing and publishing activities principally on products that are, or have the potential to become, franchise properties possessing sustainable consumer appeal and brand recognition. Such products can serve as the basis for sequels, prequels and related new products, which can be released over an extended period of time, similar to the movie entertainment industry. The publication and distribution of products based in large part on franchise properties has the potential to enhance the predictability of net revenue. We have entered into a number of strategic relationships with the owners of various forms of intellectual property, which have allowed us to acquire the rights to publish products based upon such franchises. See “Factors Affecting Future Performance: Our Future Depends on Our Ability to Release Popular Products.”

Disciplined Product Selection and Development Processes. The success of our publishing business depends, in significant part, on our ability to develop games that will generate high unit volume sales while simultaneously meeting our quality standards. Our quality publishing units use a formal control process for the selection, development, production and quality assurance of our products. We apply this process to products under development with external, as well as internal, resources. This process includes in-depth reviews of each project at numerous intervals during the development process by a team that includes a number of operating managers from our sales, marketing and product development areas.

In-house Development Group. We have a substantial in-house development staff, both domestically and internationally, who work in project teams to create our software. We are striving to provide our creative teams the independence and flexibility they need to build an environment that fosters creativity and teamwork. Employing in-house development teams provides us with the following advantages:

Historically, we have developed our products using a strategic combination of our internal development group and external development resources. We select our external developers based on their track record and expertise in producing products within certain categories. As part of that strategy, one external developer will often produce the same game for multiple platforms and will produce sequels to the original game. This selection process allows us to strengthen and leverage the particular expertise of our internal and external development resources.

We have invested, and will continue to invest, in the creation of state-of-the-art software programming tools utilized in our product development process. Utilizing these programming tools provides us with greater flexibility to create game engines for each of the next-generation hardware systems. These tools provide a competitive advantage in the creation of next-generation software, since not all entertainment software publishers maintain their own internal development studios.

During fiscal 2002, a majority of our gross revenue, approximately 57%, was derived from software developed at our internal studios by our in-house development group. The balance of our gross revenue for fiscal 2002 was derived from software development contracted through third-party developers. In fiscal 2003, we again anticipate that the majority of our revenue will be derived from software developed in our own studios, through the release of our major franchise titles such as Alias, All Star Baseball, Legends of Wrestling and NBA Jam.

The development time for a software title on both the dedicated game platforms and personal computers is between twelve and thirty-six months and the average development cost for a title ranges from $2 million to $8 million. The development time for portable systems such as Game Boy Advance is between six and nine months and the average development cost for a title ranges from $200,000 to $400,000. Gross margin percentages for cartridge based Game Boy^® Advance software are significantly lower than the gross margin percentages for disc-based software and the manufacturing time is significantly longer than that associated with disc-based software. The manufacturing lead time for disc-based software for the three platform systems is approximately one to three weeks from the placement of an order, as opposed to four to six weeks for cartridge based software.

Our product development methodology and organization have in the past been, and continue to be, modeled upon those used in the software industry. Our producers oversee, and are responsible for, the development of our software titles. These producers manage and monitor the quality, delivery schedule, milestones, and budget for each title, ensure that the title follows the approved product specifications, coordinate testing and final approval of the title, and report directly to the manager responsible for the title.

Additionally, we test all software, whether developed by our internal studios or by third-party developers, for bugs prior to the title’s manufacture. The software is also tested for bugs by the hardware manufacturers. The software titles for personal computers are also tested for bugs both internally and by independent testing organizations. To date, we have not had to recall any of our software due to bugs.

We utilize a brand structure and market our products under four distinct key brands: Acclaim, AKA Acclaim, Acclaim Sports, and Club Acclaim. We support this strategy through the regularly scheduled introduction of new titles featuring these brands. In fiscal 2002, we released a total of forty-two titles for PlayStation 2, Xbox, GameCube, Game Boy Advance and personal computers. In fiscal 2003, we currently plan on releasing a total of approximately fifty-five titles for PlayStation 2, Xbox, Gamecube, Game Boy Advance and personal computers. In the first quarter of fiscal 2003, we have released, to date, four titles for PlayStation 2, two titles for Xbox, three titles for Gamecube and three titles for Game Boy Advance. See “Factors Affecting Future Performance: Our Future Success Depends on our Ability to Release “Popular Products”.

The average life cycle of a new software title is largely dependent on its initial success and will generally range from three months to upwards of twelve to eighteen months, with the majority of sales of the game occurring in the first thirty to one hundred and twenty days after the games release. Therefore, we are constantly required to introduce new titles in order to generate revenue and/or replace declining revenue from older titles.

Some of the agreements granting us the rights to use these brands are restricted to individual properties, while some of the agreements cover a series of properties or grant rights to create software based on or featuring particular brands over a period of time. See “Factors Affecting Future Performance: Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales” and Note 2 (License Agreements) to the Notes to the Consolidated Financial Statements at Item 8 in this Form 10-K.

	Fiscal Years Ended August 31,
	2002	2001	2000
Sony PlayStation 2	11	9	—
Sony PlayStation	—	12	9
Nintendo Gamecube	13	—	—
Microsoft XBox	6	—	—
Nintendo Game Boy	11	6	9
Sega Dreamcast	—	5	16
Nintendo 64	—	—	10
Personal Computers	1	3	4

Total	42	35	48

We do, and will continue to, develop and publish products for multiple hardware platforms, as this diversification is a key element of our business strategy. In the past, no hardware platform or video game system has achieved substantial long-term dominance in the interactive entertainment market. New entrants into the interactive entertainment and multimedia industries, such as cable television, telephone companies, and diversified media and entertainment companies, in addition to a proliferation of new technologies, such as online networks and the Internet, have increased the competition in our markets. See “Factors Affecting Future Performance: Industry Trends, Platforms Transitions and Technological Change May Adversely Affect Our Revenue and Profitability” and “Competition for Market Acceptance”

Sony released the PlayStation 2 platform in Japan in March 2000, in North America in October 2000 and in Europe in November 2000. The PlayStation 2 platform is a 128-bit, Digital Versatile Disk (“DVD”) based system that is Internet and cable ready, as well as backward compatible with the current PlayStation platform software. Nintendo launched the Nintendo GameCube platform in Japan in September 2001, North America in November 2001 and in Europe in May 2002. Nintendo GameCube provides for games which are delivered and played using a proprietary optical format. Microsoft launched the Xbox platform in North America in November 2001, in Japan in February 2002 and in Europe in March 2002. The Microsoft Xbox is a 128-bit DVD based system.

We and various Sony computer entertainment companies (collectively, “Sony”) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the “Sony” name and its proprietary information and technology in order to develop and distribute software for PlayStation and PlayStation 2 in various territories throughout the world, including North America, Australia, Europe and Asia. We pay to Sony a royalty fee, plus the manufacturing cost, for each unit Sony manufactures for us. This payment is made upon the manufacture of the units. Our agreements with Sony for PlayStation platforms expire at various times through 2003, and we do not expect any difficulties in renewing those licenses. See “Factors Affecting Future Performance: If We are Unable to Obtain or Renew Licenses from Hardware Developers, We Will Not be Able to Release Software for Popular Systems.”

We and various Nintendo entertainment companies (collectively, “Nintendo”) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the “Nintendo” name and its proprietary information and technology in order to develop and distribute software for GameCube in North America and for Game Boy Advance in Australia, Europe, New Zealand and North America, Game Boy and Game Boy Color in various territories, including North America, Australia, Europe and New Zealand. For Game Boy Advanced software we pay Nintendo a fixed amount per unit, based in part, on memory capacity and chip configuration. This amount includes the cost of manufacturing, printing and packaging of the unit, as well as a royalty for the use of Nintendo’s name, proprietary information and technology. For GameCube software we pay Nintendo a fixed amount which includes the cost of manufacturing the disc and printing of the packaging of the unit, as well as a royalty for the use of Nintendo’s name, propriety information and technology. These fees and charges are subject to adjustment by Nintendo in its discretion. Our agreements with Nintendo expire at various times through 2004, and we do not expect any difficulties in renewing those licenses. See “Factors Affecting Future Performance: If We are Unable to Obtain or Renew Licenses from Hardware Developers, We Will Not be Able to Release Software for Popular Systems.”

Acclaim and Microsoft have entered into an agreement pursuant to which we have a non-exclusive, non-transferable license to design, develop and distribute software for the Xbox system. Territories where Xbox software may be distributed by us are determined on a title-by-title basis by Microsoft when the concept of the applicable software title is approved by Microsoft. We pay Microsoft a royalty fee for each unit of finished products manufactured on our behalf by third-party manufacturers approved by Microsoft. Our agreement with Microsoft expires in 2004, and we do not expect any difficulties in renewing that license. See “Factors Affecting

We do not have the right to directly manufacture any CDs, DVDs or cartridges that contain our software for Sony’s PlayStation or PlayStation 2, or Nintendo’s GameCube, Game Boy Color or Game Boy Advance systems. We do have the right to manufacture CDs or DVDs for the Xbox system through subcontractors pre-approved by Microsoft. See “Factors Affecting Future Performance: If We are Unable to Obtain or Renew Licenses from Hardware Developers, We Will Not be Able to Release Software for Popular Systems.”

Pursuant to the agreements with the hardware manufacturers, Sony, Microsoft and Nintendo have the right to review and evaluate, under standards which vary for each hardware manufacturer, the content and playability of each title and the right to inspect and evaluate all art work, packaging and promotional materials used by us in connection with the software. We are responsible for resolving, at our own expense, any warranty or repair claims brought with respect to the software. To date, we have not experienced any material warranty claims.

Under each of our platform license agreements, we bear the risk that the information and technology licensed from Sony, Microsoft and Nintendo, and incorporated in the software may infringe the rights of third parties. Further, we must indemnify Sony, Microsoft and Nintendo with respect to, among other things, any claims for copyright or trademark infringement brought against them, as applicable, and arising from the development and distribution of the game programs incorporated in the software by us. To date, we have not received any material claims of infringement. See discussion below on “Patent, Trademark, Copyright and Product Protection.”

The target consumers for our software titles vary due to the specific content of the title and the title’s rating from the Entertainment Software Ratings Board. The primary audience for these titles is generally comprised of males aged twelve to thirty-five. For PC titles our target audience is primarily males aged fifteen to thirty-five. We are also continuing to target one of the industry’s fastest growing, yet under-served segments: the “youth/girl gamers.” The successful Mary-Kate and Ashley brand titles are positioned for the “youth/girl gamers” segment of the female market and attempts to leverage the popularity of these young actresses. According to current Toy Retail Sales Tracking Service (“TRSTS”) sales data, our Mary-Kate and Ashley brand is currently the top-performing female youth oriented brand in the interactive entertainment industry.

In developing a marketing strategy for a title, we seek story concepts and brands or franchises that we believe will appeal to the interests of the title’s target consumer. We strive to create marketing campaigns which are consistent with this strategy and which we believe will appeal to the targeted consumers for each of those titles. We market our software through:

We think that there will be opportunities for further exploitation of our intellectual properties through the Internet, online services, hand held and other wireless devices and dedicated Internet online game services, as the hardware platform technology evolves and becomes more accepted. We are actively exploring the establishment of online game playing opportunities for the Internet and wireless services as (1) a method for realizing additional revenue from our products and (2) an additional platform for our products. We also plan to develop online components which will support online play for certain of our existing franchises, as well as for new software titles currently being developed for the next generation platforms. As an example, we intend to release an online version of All-Star Baseball 2004 for one or more of the game platforms. As wireless and online technologies evolve, we think that a number of our intellectual properties may have the potential to be exploited through these mediums.

We prepare a set of master program copies, documentation and packaging materials for our products for each respective hardware platform upon which the product is released. Except with respect to products for use on the Sony and Nintendo systems, our disc duplication, packaging, printing, manufacturing, warehousing, assembly and shipping are performed by third party subcontractors. In order to maintain protection over their hardware technologies, Sony and Nintendo generally specify or control the manufacturing of the finished products. We deliver the master materials to the licensor or its approved replicator, which then manufactures the finished goods and delivers them to us and/or our warehouse facility for distribution to our customers. At the time our product unit orders are filled by the manufacturer, we become responsible for the costs of manufacturing and the applicable per unit royalty on such units, even if the units do not ultimately sell. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products or material returns due to product defects.

Pursuant to our agreements with Nintendo and Sony, each hardware manufacturer manufactures the CDs or DVDs embodying the software we have developed for its system. Pursuant to our agreement with Nintendo, we are required to open a letter of credit simultaneously with the placing of a purchase order for the software. Game Boy Advance software is delivered to us approximately four weeks after order placement. Disc-based software for the three platforms is manufactured and then delivered to our warehouse within seven to twenty one days after we place the order with the manufacturer. See “Factors Affecting Future Performance: If We Are Unable to Obtain or Renew Licenses from Hardware Developers, We Will Not be Able to Release Software for Popular Systems.”

We distribute our software by tailoring our distribution methods to each geographic market. In North America, our software is sold directly by our sales force, complemented by regional sales representative organizations which receive commissions based on the net sales of each product sold. We maintain an in-house sales management team to supervise the regional sales representatives. These sales representatives also act as sales representatives for some of our competitors. One of the sales representative organizations marketing our software is owned by James Scoroposki, an officer, director and principal stockholder of Acclaim. Please see Note 19B (Related Party Transactions) of the notes to Consolidated Financial Statements in Item 8 in this Form 10-K.

Circuit City. Sales to Wal-Mart accounted for approximately 10 %, 12%, and 15% of our gross revenue for fiscal 2002, 2001, and 2000, respectively. Sales to Toys R Us accounted for approximately 9%, 11% and 10% of our gross revenue for fiscal 2002, 2001 and 2000, respectively. Our customers do not have any commitments to purchase our software.

We are not contractually obligated to accept returns except for defective products. However, we grant price concessions to our key customers who are major retailers that control market access to the consumer, when those concessions are necessary to maintain our relationships with the retailers and access to their retail channel customers. If the consumers’ demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we may negotiate a price concession or credit to spur further sales by retailers to maintain the relationship. As the market for each generation of game consoles matures and as more titles become available, the risk of product price concessions and returns increases. We establish sales allowances at the time we record revenue for expected product price concessions and returns based primarily on (1) market acceptance of our products, (2) level of retail inventories, (3) seasonal factors, and (4) historical price concession and return rates. Management continually monitors and adjusts these allowances to take into account actual developments and sales results in the marketplace. There can be no assurance that actual price concessions will not exceed our established allowances and reserves. See “Factors Affecting Future Performance: If Price Concessions and/or Product Returns Exceed Allowances, We May Incur Losses” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Revenue” at Item 7 in this Form 10-K.

Some of our software titles are based upon brands or franchises which we have licensed from third parties, such as Major League Baseball, the National Basketball Association and their respective players’ associations, Home Box Office, Dualstar Entertainment and Disney Interactive. Typically, we are obligated to make certain non-refundable advance payments against royalties that may become due from the sales of the games which embody such licensed rights. We can recoup these advance payments against royalty payments otherwise due in connection with future software sales. License agreements relating to these rights generally extend for a term of two to three years. These agreements are terminable upon the occurrence of a number of factors, including our material breach of the agreement, failure to pay amounts due to the licensor in a timely manner, bankruptcy or insolvency.

Our licenses relating to South Park and World Wrestling Federation (“WWF”) game software were either not renewed or were terminated in fiscal 2001 based on our product release strategy, financial resources and the economic viability of the products. As a result of Extreme Championship Wrestling’s (“ECW’s”) bankruptcy in fiscal 2000, we can no longer use the ECW license. Sales of titles using ECW properties aggregated 10%, using WWF properties aggregated 11% and using South Park properties aggregated 20% of our gross revenue for fiscal 2000.

Some of these licenses are limited to specific territories and/or specific game platforms. Each license typically provides that the licensor retains the right to exploit the licensed property for all other purposes, including the right to license the property for use with other products and, in some cases, software for other game platforms. From time to time, licenses may not be renewed or may be terminated. See “Factors Affecting Future Performance: Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales”.

Each hardware manufacturer incorporates a security device in the software and in each of their respective hardware platforms. This is done in an effort to prevent unlicensed manufacture of software and infringement of the hardware manufacturers proprietary rights. Under our various license agreements with Sony, Microsoft and Nintendo, we are obligated to obtain all available trademark, copyright and patent protection for the original work we develop and embody in, or use in conjunction with, the software we create. We are also required to display on game packaging materials the proper notice of such protection, as well as notice of the licensor’s intellectual property rights.

We have registered the “Acclaim” logo and name in the United States and in numerous foreign territories and we own the copyrights for many of our game programs. “Nintendo,” “Game Boy,” “Game Boy Color,” “GameCube,” “Game Boy Advance,” and “N64” are trademarks of Nintendo; “Sony,” “Sony Computer Entertainment,” “PlayStation,” and “PlayStation 2” are trademarks of Sony; “Microsoft” and “Xbox” are trademarks of Microsoft and “Sega,” “Saturn” and “Dreamcast” are trademarks of Sega. We do not own the trademarks, copyrights or patents covering the proprietary information and technology utilized in the game systems marketed by Sony, Microsoft or Nintendo. Additionally, in certain instances, we do not own the trademarks, copyrights or patents for properties licensed from third parties, or the brands, concepts or game programs featured in and comprising the software. Accordingly, we must rely on the trademarks, copyrights and patents of these third-party licensors for protection from infringement of such intellectual property. Under our license agreements with certain independent software developers, we may bear the risk of claims of infringement brought by third parties and arising from the sale of our software.

The interactive entertainment software business is highly competitive. It is characterized by the continuous introduction of new titles and the development of new technologies. Our competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than ours. The availability of significant financial resources has become a major competitive factor in the interactive entertainment software industry, primarily as a result of the costs associated with the development and marketing of game software. See “Factors Affecting Future Performance: Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition With the Hardware Manufacturers Affects Our Revenue and Profitability”.

We compete with Sony, Microsoft and Nintendo, which each publish software for their respective hardware platforms. We also compete with numerous companies which are, like us, licensed by the platform manufacturers to develop software products for use on their systems. These competitors include Activision, Capcom, Eidos, Electronic Arts, Infogrames, Interplay Entertainment, Konami, Lucas Arts, Midway, Namco, Sega, Take-Two Interactive, THQ, 3DO and Ubi Soft, among others. Although Sega no longer manufactures videogame platforms, it continues to be a major videogame software publisher. We also face additional competition from the entry of new companies, including large diversified entertainment companies such as Disney Interactive and Fox Interactive, into our market.

Nevertheless, we are one of the larger independent publicly traded publishers of software for game platforms in the United States. Data derived from the Toy Retail Sales Tracking Service (“TRSTS”) indicates that, for the first ten months of calendar 2002, our market share of software sold for PlayStation 2 was 3.8%, for Xbox was 3.6%, for GameCube was 6.4% and for Game Boy Advance was 1.9%. For calendar 2001, our market share of software sold for PlayStation 2 was 4.1%, for Xbox was 0.9%, for GameCube was 5.9% and for Game

We rely upon our product quality, marketing and sales abilities, proprietary technology and product development capability, the depth of our worldwide retail distribution channels and management experience to compete in the interactive entertainment industry. See “Factors Affecting Future Performance: Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition With the Hardware Manufacturers, Affects Our Revenue and Profitability.”

Our subsidiary, Acclaim Comics, publishes strategy guides relating to our software products and “special issue” comic books. We have not derived significant revenue and profit from the sale of Acclaim Comics’ products. Although we intend to continue releasing software for multiple platforms based on characters licensed or created by Acclaim Comics, as well as strategy guides relating to our software and, at times, “special issue” comic books, as a result of our exiting the comic book publishing business in fiscal 2000, future revenue derived by Acclaim Comics, other than from the sale of video games, will primarily depend on: (1) the licensing and merchandising of certain characters, such as, Shadow Man and Turok, in interactive entertainment and other media, such as motion pictures or television, (2) the use of those characters in our software, and (3) the publication and sale of software strategy guides and “special issue” comic books.

Name	Position and Principal Occupation	Age
Gregory E. Fischbach	Co-Chairman of the Board, and Chief Executive Officer	60
James Scoroposki	Co-Chairman of the Board, Senior Executive Vice President, Secretary and Treasurer	54
Edmond Sanctis	President and Chief Operating Officer—North America	40
Rodney Cousens	President and Chief Operating Officer—International of Acclaim Europe	51
Gerard F. Agoglia	Executive Vice President and Chief Financial Officer	52
John Ma	Executive Vice President of Strategy and Business Development	48

Gregory E. Fischbach, a founder of our Company, has been our Chief Executive Officer since its formation, a member of our Board of Directors since 1987 and Co-Chairman of our Board of Directors since March 1989. Mr. Fischbach was also our President from its formation to January 1990 and again from October 1996 to December 2001.

James Scoroposki, a founder of our Company, has been our Senior Executive Vice President since December 1993, a member of our Board of Directors since 1987, Co-Chairman of our Board of Directors since March 1989 and our Secretary and Treasurer since our formation. Mr. Scoroposki was also Chief Financial Officer from April 1988 to May 1990, Executive Vice President from formation to November 1993 and acting Chief Financial Officer from November 1997 to August 1999. Since December 1979, he has also been the President and sole shareholder of Jaymar Marketing Inc., a sales representative organization. Please see Note 19B (Related Party Transactions) of the notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Edmond Sanctis has been our President and Chief Operating Officer for our North American operations since December of 2001. Formerly, Mr. Sanctis was an executive at NBC, holding various management positions from 1993 through 2000. Mr. Sanctis was appointed President and Chief Operating Officer of NBCi in November 1999. Previously he held positions in several operating divisions of NBC, including Cable and Business Development, and NBC Entertainment. Prior to NBC, Mr. Sanctis worked at Sony USA in marketing and communications. Mr. Sanctis has a Masters of Business Administration Degree.

Rodney Cousens became an executive officer in August 1998. Mr. Cousens has been President and Chief Operating Officer—International of Acclaim Europe, one of our divisions, since October 1996. From June 1994 to October 1996, Mr. Cousens was President of Acclaim Europe, and from March 1991 to June 1994, he was Vice President of Acclaim Europe.

Gerard F. Agoglia became an executive officer in August 2000, when he joined us as Executive Vice President and Chief Financial Officer. Mr. Agoglia was Senior Vice President, Chief Financial Officer of Lantis Eyewear Corporation from October, 1998 to September, 2000 and prior to that, Mr. Agoglia served as Corporate Controller of Calvin Klein, Inc. from June, 1997 to September, 1998. Mr. Agoglia has over 20 years of corporate financial management experience in the apparel and accessories industries. Mr. Agoglia is a Certified Public Accountant and has a Masters of Business Administration degree.

John Ma became an executive officer in October 2000. Mr. Ma has been with the Company since 1991 serving as Senior Executive Vice President of Worldwide Operations, Product Development and is currently Executive Vice President of Strategy and Business Development. Prior to joining us, Mr. Ma held similar positions with Activision, Inc.

If we (1) do not substantially achieve our overall projected revenue levels for fiscal 2003, (2) fail to operate within our projected expense levels as reflected in our business operating plans, or (3) do not receive the ongoing support of our primary lender, GMAC Commercial Credit LLC and our vendors, then we will be unable to meet our cash and operating requirements for the next twelve months, which would in turn require us to seek additional financing to fund operations and/or implement additional expense reductions. Our fiscal 2003 business plan includes (a) lowering fixed and variable expenses worldwide, (b) eliminating the continued development of certain marginal software products which are not expected to achieve our financial return parameters within the next 12 to 18 months, (c) limiting and eliminating non-essential marketing expenses and (d) reducing employee related expenses through staff reductions. Some of these measures would require third-party consents or approvals, including that of our primary lender, and there can be no assurance that such consents or approvals will be obtained. We rely on our primary lender to assist us in meeting our cash needs from time to time in the form of advances against receivables and inventory and periodic discretionary supplemental loans. We also rely on our vendors to provide us with favorable payment terms. See “If Cash Flows from Operations Are Not Sufficient To Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, or Further Downsize Our Operations”.

Failing to substantially achieve our projected revenue levels for fiscal 2003 may also result in a default under our credit agreement with our primary lender. If a default were to occur under our credit agreement and it is not timely cured by us or waived by our lender, or if this were to happen and our debt could not be refinanced or restructured, our lender could pursue its remedies, including: (1) penalty rates of interest; (2) demand for immediate repayment of the debt; and/or (3) the foreclosure on any of our assets securing the debt. If this were to happen and we were liquidated or reorganized, after payment to our creditors, there would likely be insufficient assets remaining for any distribution to our stockholders.

In March and June of 2002, we amended certain provisions of our credit agreement and factoring agreements with our lender, and we are currently negotiating with our lender to further amend and/or restate those agreements. As of August 31, 2002, we received waivers from GMAC with respect to those financial covenants contained in the credit agreement for which we were not in compliance. If waivers from GMAC are necessary in the future, we cannot be assured that we will be able to obtain waivers of any future covenant violations, as we have in the past. We currently anticipate that we will need to implement significant expense reductions in fiscal 2003 and have begun implementing certain headcount reductions and eliminating the continued development of certain marginal software products, as well as limiting and eliminating non-essential marketing expenses during the first quarter of fiscal 2003. We cannot assure our stockholders and investors that we will achieve the overall projected sales levels based on our planned product release schedule, achieve profitability or achieve the cash flows necessary to avoid further expense reductions in fiscal 2003. See “Factors Affecting Future Performance: If Cash Flows from Operations Are Not Sufficient to Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, or Further Downsize Our Operations”, and “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability.”

During the first half of fiscal 2003, we have commenced and will continue to implement certain expense reduction initiatives which we anticipate will reduce our operating expenses commencing with the first quarter of fiscal 2003 and throughout fiscal 2003, so that our operating expenses are in line with our sales forecasts. Our operating plan for fiscal 2003 focuses on (1) lowering fixed and variable expenses worldwide, (2) eliminating the continued development of certain marginal software products which are not expected to achieve our financial return parameters within the next 12 to 18 months, (3) limiting and eliminating non-essential marketing expenses and (4) reducing employee related expenses through staff reductions. Although we believe the actions we are taking should return our operations to profitability, we cannot assure our stockholders and investors that we will achieve the sales necessary to achieve sufficient liquidity and avoid further expense reduction actions such as selling assets or consolidating operations, reducing staff, refinancing debt and/or otherwise restructuring our operations. See “Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability” below and “Managements Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

If we violate the financial or other covenants contained in our credit agreement with GMAC, we will be in default under the credit agreement. If a default occurs under the credit agreement and is not timely cured by us or waived by GMAC, GMAC could seek remedies against us, including: (1) penalty rates of interest; (2) immediate repayment of the debt; and/or (3) the foreclosure on any assets securing the debt. Pursuant to the terms of the credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other covenants. As of August 31, 2002, we received waivers from GMAC with respect to those financial covenants contained in the credit agreement for which we were not in compliance. If waivers from GMAC are necessary in the future, we cannot be assured that we will be able to obtain waivers of any future covenant violations, as we have in the past. If Acclaim is liquidated or reorganized, after payment to the creditors, there are likely to be insufficient assets remaining for any distribution to our stockholders.

The timely shipment of a new title depends on various factors, including the development process, debugging, approval by hardware licensors and approval by third-party licensors. It is likely that some of our titles will not be released in accordance with our operating plans. Because net revenue associated with the initial shipments of a new product generally constitute a high percentage of the total net revenue associated with the life of a product, a significant delay in the introduction of one or more new titles would negatively affect or limit sales (as was the case in the first and third quarters of fiscal 2002) and would have a negative impact on our financial condition, liquidity and results of operations, as was the case in fiscal 2000 and 2001. We cannot assure stockholders that our new titles will be released in a timely fashion in accordance with our business plan.

The average life cycle of a new title generally ranges from three months to upwards of twelve to eighteen months, with the majority of sales occurring in the first thirty to one hundred twenty days after release. Factors such as competition for access to retail shelf space, consumer preferences and seasonality could result in the shortening of the life cycle for older titles and increase the importance of our ability to release new titles on a timely basis. Therefore, we are constantly required to introduce new titles in order to generate revenue and/or to replace declining revenue from older titles. In the past, we experienced delays in the introduction of new titles, which have had a negative impact on our results of operations. The complexity of next-generation systems has

resulted in higher development expenditures, longer development cycles and the need to carefully monitor and plan the product development process. If we do not introduce titles in accordance with our operating plans for a period, our results of operations, liquidity and profitability in that period could be negatively affected.

A significant portion of our revenue is derived from products based on a relatively small number of popular franchises each year. In addition, many of these products have substantial production or acquisition costs and marketing budgets. In fiscal 2002, 61% of our gross revenue was derived from five franchises. In fiscal 2001, four franchises accounted for 53% of our gross revenue. In fiscal 2000, four franchises accounted for 51% of our gross revenue. We expect that a limited number of popular brands will continue to produce a disproportionately large amount of our revenue. Due to this dependence on a limited number of brands, the failure of one or more products based on these brands to achieve anticipated results may significantly harm our business and financial results. For example, during the fourth quarter of fiscal 2002, our failure to achieve our projected revenue from two titles, Turok: Evolution and Aggressive Inline, due to lower than anticipated consumer acceptance of the products, resulted in a net loss for the fourth quarter and fiscal year 2002.

The life cycle of existing game systems and the market acceptance and popularity of new game systems significantly affects the success of our products. We cannot guarantee that we will be able to predict accurately the life cycle or popularity of each system. If we (1) do not develop software for games consoles that achieve significant market acceptance; (2) discontinue development of software for a system that has a longer-than-expected life cycle; (3) develop software for a system that does not achieve significant popularity; or (4) continue development of software for a system that has a shorter-than-expected life cycle, our revenue and profitability may be negatively affected and we could experience losses from operations.

When new platforms are announced or introduced into the market, consumers typically reduce their purchases of software products for the current platforms, in anticipation of new platforms becoming available. During these periods, sales of our software products can be expected to slow down or even decline until the new platforms have been introduced and have achieved wide consumer acceptance. Each of the three current principal hardware producers launched a new platform in recent years. Sony made the first shipments of its PlayStation 2 console system in North America and Europe in the fourth quarter of calendar year 2000. Microsoft made the first shipments of its Xbox console system in North America in November 2001 and in Europe and Japan in the first quarter of calendar 2002. Nintendo made the first shipments of its Nintendo GameCube console system in North America in November 2001 and in Europe in May 2002. Additionally, in June 2001, Nintendo launched its Game Boy Advance hand held device. On occasion the video and computer

Delaware		38-2698904
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

One Acclaim Plaza, Glen Cove, New York		11542
(Address of principal executive offices)		(Zip Code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.02 per share		Nasdaq Small-Cap Market

		Page No.
PART I		1
Item 1.	Business	1
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	22

PART II		23
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	77

PART III		77
Item 10.	Directors and Executive Officers of the Registrant	77
Item 11.	Executive Compensation	77
Item 12.	Security Ownership of Certain Beneficial Owners and Management	77
Item 13.	Certain Relationships and Related Transactions	77
Item 14.	Controls and Procedures	77

PART IV		78
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	78
	Signatures	83

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