UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24363
INTERPLAY ENTERTAINMENT CORP.
(Exact name of the registrant as specified in its charter)
DELAWARE 33-0102707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. CRESCENT DRIVE, BEVERLY HILLS, CALIFORNIA 90210
(Address of principal executive offices)
(310) 432-1958
(Registrant's telephone number, including area code)
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
CLASS ISSUED AND OUTSTANDING AT SEPTEMBER 30, 2007
----- --------------------------------------------
Common Stock, $0.001 par value 103,855,634
As of September 30, 2007, 103,855,634 shares of Common Stock of the Registrant
were issued and outstanding. This includes 4,658,216 shares of Treasury Stock
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2007
TABLE OF CONTENTS
--------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2007 (unaudited) and December 31, 2006 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months ended September 30, 2007
and 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2007 and 2006 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 6. Exhibits 22
SIGNATURES 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- -------------
ASSETS (unaudited)
Current Assets:
Cash ......................................................... $ 18,000 $ 50,000
Trade receivables ............................................ 1,794,000 227,000
Inventories .................................................. 8,000 8,000
Deposits ..................................................... 4,000 4,000
Prepaid expenses ............................................. 11,000 6,000
Other receivables ............................................ 15,000 17,000
------------- -------------
Total current assets ................................... 1,850,000 312,000
Property and equipment, net ..................................... 1,000 3,000
Other assets .................................................... 0 8,000
------------- -------------
Total assets .................................................... $ 1,851,000 $ 323,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Account payable .............................................. $ 1,272,000 $ 5,659,000
Accrued royalties ............................................ 200,000 170,000
Deferred income .............................................. 424,000 460,000
Notes Payable ................................................ 1,765,000 2,121,000
------------- -------------
Total current liabilities .............................. 3,661,000 8,410,000
------------- -------------
Commitments and contingencies
Stockholders' Deficit:
Preferred stock, $0.001 par value 5,000,000 shares authorized;
no shares issued or outstanding,
Common stock, $0.001 par value 150,000,000 shares authorized;
103,855,634 shares issued and outstanding .............. 104,000 104,000
Paid-in capital .............................................. 121,967,000 121,964,000
Accumulated deficit .......................................... (124,013,000) (130,205,000)
Accumulated other comprehensive income (loss) ................ 132,000 50,000
Treasury stock of 4,658,216 shares ........................... 0 0
------------- -------------
Total stockholders' deficit ............................ (1,810,000) (8,087,000)
------------- -------------
Total liabilities and stockholders' deficit ..................... $ 1,851,000 $ 323,000
============= =============
See accompanying notes.
3
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
Revenues .............................................. $ 47,000 $ 335,000 $ 5,940,000 $ 681,000
------------- ------------- ------------- -------------
Cost of goods sold .................................... 15,000 5,000 21,000 157,000
------------- ------------- ------------- -------------
Gross profit ....................................... 32,000 330,000 5,919,000 524,000
Operating expenses:
Marketing and sales ................................ 55,000 55,000 245,000 418,000
General and administrative ......................... 266,000 438,000 859,000 1,189,000
------------- ------------- ------------- -------------
Total operating expenses ........................ 321,000 493,000 1,104,000 1,607,000
------------- ------------- ------------- -------------
Operating income (loss) ............................... (289,000) (163,000) 4,815,000 (1,083,000)
Other income (expense):
Interest expense ................................... (9,000) (29,000) (50,000) (81,000)
Other (Reversal of certain prior years
accruals and accounts payable) ................... 795,000 1,825,000 1,427,000 4,327,000
------------- ------------- ------------- -------------
Income before benefit for income taxes ................ 497,000 1,633,000 6,192,000 3,163,000
Income taxes .......................................... -- -- -- --
------------- ------------- ------------- -------------
Net income ............................................ $ 497,000 $ 1,633,000 $ 6,192,000 $ 3,163,000
============= ============= ============= =============
Net income per common share:
Basic .............................................. $ 0.00 $ 0.02 $ 0.06 $ 0.03
============= ============= ============= =============
Diluted ............................................ $ 0.00 $ 0.02 $ 0.06 $ 0.03
============= ============= ============= =============
Shares used in calculating net income per common share:
Basic .............................................. 103,855,635 103,855,635 99,350,000 99,350,000
============= ============= ============= =============
Diluted ............................................ 103,855,635 103,855,635 99,350,000 99,350,000
============= ============= ============= =============
See accompanying notes.
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPT 30,
--------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net income ................................................. $ 6,192,000 $ 3,163,000
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization ........................... 2,000 3,000
Additional Paid in capital - Option Expense ............. 2,000 0
Reversal of prior years recorded liabilities ............ (1,234,000) (1,823,000)
Changes in Operating assets and liabilities:
Trade receivables, net ..................................... (1,567,000) 307,000
Inventories ............................................. 0 0
Deposits ................................................ 0 4,000
Prepaid expenses ........................................ 0 52,000
Other current assets, net ............................... (5,000) (5,000)
Other assets ............................................ 10,000 7,000
Accounts payable ........................................ (3,153,000) (1,729,000)
Accrued royalties ....................................... 30,000 (782,000)
Note Payable ............................................ (356,000) 0
Advances from distributors .............................. (36,000) 394,000
Accumulated other compensation income ................... 83,000 16,000
----------- -----------
Net cash provided by (used in) operating activities (32,000) (393,000)
----------- -----------
Cash Flow from investing activities:
Purchase of property and equipment ......................... 0 0
----------- -----------
Net cash used in investing activities ............. 0 0
----------- -----------
Cash flows from financing activities:
Repayment of current debt
Issuance of stock to reduce debt ........................... 0 296,000
----------- -----------
Net cash provided by (used in) financing activities 0 296,000
----------- -----------
Effect of exchange rate changes on cash
Net increase (decrease) in cash ............................... (32,000) (97,000)
Cash, beginning of period ..................................... $ 50,000 $ 122,000
----------- -----------
Cash, end of period ........................................... $ 18,000 $ 25,000
=========== ===========
Supplemental cash flow information:
Cash paid for:
Interest ................................................ $ 0 $ 0
=========== ===========
See accompanying notes.
5
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Interplay Entertainment Corp. (which we refer to as the "Company" in these
Notes) and its subsidiaries reflect all adjustments (consisting only of normal
recurring adjustments) that, in the opinion of management, are necessary for a
fair presentation of the results for the interim period in accordance with
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all information and footnotes required by accounting principles
generally accepted in the United States ("GAAP") for complete financial
statements. The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year or any
other period. The balance sheet at December 31, 2006 has been derived from the
audited consolidated financial statements at that date, but does not include all
information and footnotes required by GAAP for complete financial statements.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2006 as filed with the U.S. Securities and Exchange Commission ("SEC").
FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN STATUS
The Company's independent public accountant included a "going concern"
explanatory paragraph in his audit report on the December 31, 2006 consolidated
financial statements which were prepared assuming that the Company will continue
as a going concern.
To reduce working capital needs, the Company has implemented various
measures including a reduction of personnel, a reduction of fixed overhead
commitments and cancellation or suspension of development on future titles.
Management will continue to pursue various alternatives to improve future
operating results and further expense reductions, some of which may have a
long-term adverse impact on the Company's ability to generate successful future
business activities.
In addition, the Company continues to seek, external sources of funding
including, but not limited to, a private placement or public offering of the
Company's capital stock, the sale of selected assets including intellectual
properties rights, the licensing of certain product rights in selected
territories, selected distribution agreements, and/or other strategic
transactions sufficient to provide short-term funding, and potentially achieve
the Company's long-term strategic objectives. Although the Company has had some
success in licensing certain of its products in the past, no assurance can be
given that the Company will do so in the future.
The Company anticipates its current cash reserves, plus its expected
generation of cash from existing operations will only be sufficient to fund its
anticipated expenditures through the end of the third quarter of 2008.
Consequently, the Company expects that it will need to obtain additional
financing or income. However, no assurance can be given that alternative sources
of funding can be obtained on acceptable terms, or at all. These conditions,
combined with the Company's historical operating losses and its deficits in
stockholders' equity and working capital, raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and
liabilities that might result from the outcome of this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates made in
preparing the condensed consolidated financial statements include, among others,
sales returns and allowances, cash flows used to evaluate the recoverability of
prepaid licenses and royalties, channel exposure and long-lived assets, and
6
certain accrued liabilities related to litigation and the probability and
amounts of what creditors can collect on previously recorded accruals and
payables.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Co., Ltd. (Japan),
the business of which was closed during the 4th quarter 2006 (immaterial to
consolidated results), and Games On-line. All significant inter-company accounts
and transactions have been eliminated.
NOTE 2. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various legal proceedings, claims, and
litigation arising in the ordinary course of business, including disputes
arising over the ownership of intellectual property rights and collection
matters. In the opinion of management, the outcome of known routine claims will
not have a material adverse effect on the Company's business, financial
condition, or results of operations.
NOTE 3. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one principal business segment, which is
managed primarily from the Company's U.S. headquarters.
Net revenues, exclusive of the "Fallout" intellectual property sale, by
geographic regions were as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
2007 2006 2007 2006
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
North America .. $ 1 2% $ 156 47% $ 5 3% $ 200 29%
International .. 46 98% 164 49% 185 97% 379 56%
OEM, royalty and
licensing ... 0 0% 15 4% 0 0% 102 15%
------- ------- ------- ------- ------- ------- ------- -------
$ 47 100% $ 335 100% $ 190 100% $ 681 100%
======= ======= ======= ======= ======= ======= ======= =======
NOTE 4. REVERSAL OF CERTAIN PRIOR YEAR ACCRUALS AND ACCOUNTS PAYABLES
During the nine months ended September 30, 2007 the Company reversed
certain accruals and accounts payables of approximately $1,355,000, net. It is
the Company's policy to reverse outstanding accruals and accounts payables that
have been outstanding for over 3 years and no attempt has been made by the
vendor or claimant for that period of time to collect the outstanding balances.
Additional adjustments were also made to existing balances through negotiated
settlements with certain other creditors.
NOTE 5. EMPLOYEE STOCK OPTIONS
STOCK-BASED COMPENSATION
Effective January 1, 2006 the Company adopted SFAS No. 123(R),
"SHARE-BASED PAYMENT" ("SFAS 123R"), which requires the measurement and
recognition of compensation cost at fair value for all share-based payments,
including stock options and restricted stock awards. The Company adopted SFAS
123R using the modified prospective transition method and, as a result, did not
retroactively adjust results from prior periods. Under this transition method,
stock-based compensation is recognized for: (1) expense related to the remaining
non-vested portion of all stock awards granted prior to January 1, 2006 based on
the grant date fair value estimated in accordance with the original provisions
of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123") and the
same straight-line attribution method used to determine the pro forma
disclosures under SFAS 123; and (2) expense related to all stock awards granted
on or subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R.
7
At September 30, 2007, the Company has one stock-based employee
compensation plan. Stock-based employee compensation cost approximated $2,000 as
reflected in net income for the quarter ended September 30, 2007. No employee
stock options were granted during the nine months ended September 30, 2007.
NOTE 6. SALE OF FALLOUT
On April 4, 2007 the Company entered into an Asset Purchase Agreement
("the APA") and a Trademark License Agreement ("the License Back") with Bethesda
Software LLC, a video game developer and publisher ("Bethesda") regarding
"Fallout", intellectual property which was owned by the Company ("the IP").
Under the APA, the Company sold all of its rights to the IP to
Bethesda. Under the License Back , the Company obtained an exclusive license,
under certain conditions, to use the IP for the purpose of developing an
Interplay branded Fallout Massively Multiplayer Online Game ("MMOG").
NOTE 7. SUBSEQUENT EVENT
In October 2007 Bethesda paid the final installment of the
consideration due the Company under the APA.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
Interplay Entertainment Corp., which we refer to in this Report as "we,"
"us," or "our," is a developer, publisher and licensor of interactive
entertainment software and intellectual properties for both core gamers and the
mass market. The information contained in this Form 10-Q is intended to update
the information contained in our Annual Report on Form 10-K for the year ended
December 31, 2006, as amended, and presumes that readers have access to, and
will have read, the "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other information contained in such
Form 10-K, as amended.
This Report on Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and such forward-looking statements are subject
to the safe harbors created thereby. For this purpose, any statements contained
in this Form 10-Q, except for historical information, may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "should," "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to help identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions. For example, any statements regarding future cash flow,
revenue or expense expectations, including those forward-looking statements in
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations", financing activities, future cash flows, cash constraints, sales
or mergers and cost reduction measures are forward-looking statements and there
can be no assurance that we will effect any or all of these objectives in the
future. Specifically, the forward-looking statements in this Item 2 assume that
we will continue as a going concern. Risks and Uncertainties that may affect our
future results are discussed in more detail in the section titled "Risk Factors"
in Item 1A of part II of this Form 10-Q. Assumptions relating to our
forward-looking statements involve judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, our industry, business
and operations are subject to substantial risks, and the inclusion of such
information should not be regarded as a representation by management that any
particular objective or plans will be achieved. In addition, risks,
uncertainties and assumptions change as events or circumstances change. We
disclaim any obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-Q with the SEC
or otherwise to revise or update any oral or written forward-looking statement
that may be made from time to time by us or on our behalf.
8
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including, among others, those related to revenue recognition,
prepaid licenses and royalties and software development costs. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
The following table sets forth certain selected consolidated statements
of operations data, segment data and platform data for the periods indicated in
dollars and as a percentage of total net revenues:
9
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
2007 2006 2007 2006
--------------------- --------------------- -------------------- --------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------- --------------------------------------------
(Dollars in thousands)
% OF NET % OF NET % OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUE AMOUNT REVENUES AMOUNT REVENUE
-------- -------- -------- -------- -------- -------- -------- -------
NET REVENUES ................... $ 47 100% $ 335 100% $ 5,940 100% $ 681 100%
COST OF GOODS SOLD ............. 15 32% 5 0% 21 0% 157 23%
-------- -------- -------- -------- -------- -------- -------- -------
GROSS PROFIT .............. 32 68% 330 100% 5,919 100% 524 77%
OPERATING EXPENSES :
MARKETING AND SALES ......... 55 117% 55 16% 245 4% 418 61%
GENERAL AND ADMINISTRATIVE .. 266 566% 438 131% 859 14% 1,189 175%
PRODUCT DEVELOPMENT ......... -- 0% -- 0% -- 0% -- 0%
-------- -------- -------- -------- -------- -------- -------- -------
TOTAL OPERATING EXPENSES . 321 683% 493 147% 1,104 18% 1,607 236%
-------- -------- -------- -------- -------- -------- -------- -------
OPERATING INCOME (LOSS) ........ (289) -615% (163) -47% 4,815 82% (1,083) -159%
OTHER INCOME (EXPENSES):
OTHER INCOME ........ 786 1672% 1,796 27% 1,377 23% 4,246 623%
INCOME TAXES ........ -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
NET INCOME .......... $ 497 1057% $ 1,633 -20% $ 6,192 105% $ 3,163 464%
======== ======== ======== ======== ======== ======== ======== =======
NET REVENUE BY GEOGRAPHIC REGION
EXCLUSIVE OF THE SALE OF
"FALLOUT":
NORTH AMERICA .................. 1 2% 156 47% 5 3% 200 29%
INTERNATIONAL .................. 46 98% 164 49% 185 97% 379 56%
OEM, ROYALTY AND LICENSING ..... -- 0% 15 4% -- 0% 102 15%
-------- -------- -------- -------- -------- -------- -------- -------
$ 47 100% $ 335 100% $ 190 100% $ 681 100%
======== ======== ======== ======== ======== ======== ======== =======
NET REVENUE BY PLATFORM EXCLUSIVE
OF THE SALE OF "FALLOUT":
PERSONAL COMPUTERS ............. 40 85% 106 32% 169 89% 210 31%
VIDEO GAME CONSOLE ............. 7 15% 214 64% 21 11% 369 54%
OEM, ROYALTY AND LICENSING ..... 0 0% 15 4% -- 0% 102 15%
-------- -------- -------- -------- -------- -------- -------- -------
$ 47 100% $ 335 100% $ 190 100% $ 681 100%
======== ======== ======== ======== ======== ======== ======== =======
10
Fallout
On April 4, 2007 the Company entered into an Asset Purchase Agreement
("the APA") and a Trademark License Agreement ("the License Back")with Bethesda
Software LLC, a video game developer and publisher ("Bethesda") regarding "
Fallout", intellectual property which was owned by the Company ("the IP").
Under the APA, the Company sold all of its rights to the IP to
Bethesda. Under the License Back, the Company obtained an exclusive license,
under certain conditions, to use the IP for the purpose of developing an
Interplay branded Fallout Massively Multiplayer Online Game ("MMOG").
The Company is focused on securing funding for development of a MMOG
based on the popular Fallout franchise. Along with its strategy of leveraging
its existing portfolio of gaming properties, the Company intends that Fallout
MMOG will play a key role in the future of the Company.
Originally released by Interplay in 1997, Fallout places a player in
the role of a vault dweller who ventures into a post-apocalyptic world of
mutants, radiation and violence. The game has been widely hailed as an
outstanding role-playing game.
Net Revenues
North American, International and OEM, Royalty and Licensing Net Revenues
Exclusive of the sale of "Fallout" Intellectual Property.
Geographically, our net revenues for the three and nine months ended
September 30, 2007 and 2006 break down as follows: (in thousands)
Three Months Ended September 30 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
North America ................... $ 1 $ 156 $ (155) (99%)
International ................... 46 164 (118) (72%)
OEM, Royalty & Licensing ........ 0 15 (15) (100%)
-------- -------- -------- --------
Net Revenues .................... $ 47 $ 335 $ (288) (86%)
======== ======== ======== ========
Nine Months Ended September 30 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
North America ................... $ 5 $ 200 $ (195) (98%)
International ................... 185 379 (194) (52%)
OEM, Royalty & Licensing ........ 0 102 (102) (100%)
-------- -------- -------- --------
Net Revenues .................... $ 190 $ 681 $ (491) (72%)
======== ======== ======== ========
Net revenues for the three months ended September 30, 2007 were $47,000
a decrease of 86% compared to the same period in 2006. This decrease resulted
from a 99% decrease in North American net revenues, a 100% decrease in OEM,
royalty and licensing net revenues, and a 72% decrease in International net
revenues.
Net revenues for the nine months ended September 30, 2007 were $190,000
a decrease of 72% compared to the same period in 2006 due to the decrease in
back catalog sales. This decrease resulted from a 98% decrease in North America
net revenues and 100% decrease in OEM, Royalty and licensing revenues and a 52%
decrease in International net revenues due to the decrease in back catalog
sales.
North American net revenues for the three months ended September 30,
2007 were $1,000. The decrease in North American net revenues in 2007 was mainly
due to a 99% decrease in back catalog sales.
North America net revenues for the nine months ended September 30, 2007
were $5,000. The decrease in North American net revenues in 2007 was mainly due
to a 98% decrease in back catalog sales.
International net revenues for the three months ended September 30,
2007 were $46,000. The decrease in International net revenues for the three
months ended September 30, 2007 was mainly due to 72% decrease in back catalog
sales.
International net revenues for the nine months ended September 30, 2007
were $185,000. The decrease in International net revenue for the nine months
ended September 30, 2007 was mainly due to a 52% decrease in back catalog sales.
11
OEM, royalty and licensing net revenues for the three months ended
September 30, 2007 were $0, a decrease of 100% as compared to the same period in
2006 due to a decrease in back catalog sales.
OEM, royalty and licensing net revenues for the nine months ended
September 30, 2007 were $0, a decrease of 100% as compared to the same period in
2006 due to a decrease in back catalog sales.
PLATFORM NET REVENUES
Our platform net revenues for the three and nine months ended September
30, 2007 and 2006 break down as follows exclusive of the sale of "Fallout"
Intellectual Property: (in thousands)
Three Months Ended September 30 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Personal Computer ............... $ 40 $ 106 $ (66) (62%)
Video Game Console .............. 7 214 (207) (96%)
OEM, Royalty & Licensing ........ 0 15 (15) (100%)
-------- -------- -------- --------
Net Revenues .................... $ 47 $ 335 $ (288) (86%)
======== ======== ======== ========
Nine Months Ended September 30 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Personal Computer ............... $ 169 $ 210 $ (41) (20%)
Video Game Console .............. 21 369 (348) (94%)
OEM, Royalty & Licensing ........ 0 102 (102) (100%)
-------- -------- -------- --------
Net Revenues .................... $ 190 $ 681 $ (491) (72%)
======== ======== ======== ========
PC net revenues for the three months ended September 30, 2007 were
$40,000, a decrease of 62% compared to the same period in 2006. The decrease in
PC net revenues in 2007 was primarily due to lower back catalog sales. Video
game console net revenues were $7,000, a decrease of 96% for the three months
ended September 30, 2007 compared to the same period in 2006, mainly due to
lower back catalog sales.
PC net revenues for the nine months ended September 30, 2007 were
$169,000 a decrease of 20% compared to the same period in 2006. The decrease in
PC net revenues in the nine months ended September 30, 2007 was primarily due to
lower back catalog sales. Video Game console net revenues were $21,000 a
decrease of 94% for the nine months ended September 30, 2007 compared to the
same period in 2006, mainly due to lower back catalog sales.
COST OF GOODS SOLD; GROSS PROFIT MARGIN EXCLUSIVE OF THE SALE OF " FALLOUT".
Our net revenues exclusive of the sale of " Fallout" intellectual
property , cost of goods sold and gross margin for the three and nine months
ended September 30, 2007 and 2006 breakdown as follows: (in thousands)
Three Months Ended September 30 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Net Revenues .................... $ 47 $ 335 $ (288) (86%)
Cost of Goods Sold .............. 15 5 10 200%
-------- -------- -------- --------
Gross Profit Margin ............. $ 32 $ 330 $ (298) (90%)
======== ======== ======== ========
Nine Months Ended September 30 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Net Revenues .................... $ 190 $ 681 $ (491) (72%)
Cost of Goods Sold .............. 21 157 (136) (87%)
-------- -------- -------- --------
Gross Profit Margin ............. $ 169 $ 524 $ (355) (67%)
======== ======== ======== ========
Three Months Ended September 30 2007 2006 Change
---------------------------------------------- ------ ------ ------
Net Revenues ................................. 100% 100% 0%
Cost of Goods Sold ........................... 32% 1% 31%
------ ------ ------
Gross Profit Margin .......................... 68% 99% (31%)
====== ====== ======
12
Nine Months Ended September 30 2007 2006 Change
---------------------------------------------- ------ ------ ------
Net Revenues ................................. 100% 100% 100%
Cost of Goods Sold ........................... 11% 23% 12%
------ ------ ------
Gross Profit Margin .......................... 89% 77% 98%
====== ====== ======
Cost of goods sold related to PC and video game console net revenues
represents the manufacturing and related costs of interactive entertainment
software products, including costs of media, manuals, duplication, packaging
materials, assembly, freight and royalties paid to developers, licensors and
hardware manufacturers. Cost of goods sold related to royalty-based net revenues
primarily represents third party licensing fees and royalties paid by us.
Typically, cost of goods sold as a percentage of net revenues for video game
console products is higher than cost of goods sold as a percentage of net
revenues for PC based products due to the relatively higher manufacturing and
royalty costs associated with video game console and affiliate label products.
We also include in the cost of goods sold the amortization of prepaid royalty
and license fees paid to third party software developers. We expense prepaid
royalties over a period of six months commencing with the initial shipment of
the title at a rate based upon the number of units shipped. We evaluate the
likelihood of future realization of prepaid royalties and license fees
quarterly, on a product-by-product basis, and charge the cost of goods sold for
any amounts that we deem unlikely to realize through future product sales.
Our cost of goods sold increased 200% to $15,000 in the three months
ended September 30, 2007 compared to the same period in 2006 due to additional
price protection .
Our cost of goods sold decreased 87% to $21,000 in the nine months
ended September 30, 2007 compared to the same period in 2006 mainly due to lower
back catalog sales.
Our gross margin decreased 90% for the three months ended September 30,
2007 mainly due to lower back catalog sales.
Our gross margin decreased 67% for the nine months ended September 30,
2007 period from 77% in the comparable 2006 period mainly due to lower back
catalog sales.
MARKETING AND SALES
Our marketing and sales expense for the three months and nine months
ended September 30, 2007 and 2006 break down as follows: (in thousands)
Marketing and Sales 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Three Months Ended September 30 . $ 55 $ 55 $ 0 0%
Nine Months Ended September 30 .. $ 245 $ 418 $ (173) (41%)
Marketing and sales expenses primarily consist of advertising and
retail marketing support, sales commissions, marketing and sales personnel,
customer support services and other related operating expenses. Marketing and
sales expenses for the three months ended September 30, 2007 were $55,000, was
unchanged as compared to the 2006 period. Marketing and sales expenses for the
nine months ended September 30, 2007 were $245,000 a 41% decrease as compared to
the same period during 2006 due to discontinuing of the business of Interplay
Japan.
GENERAL AND ADMINISTRATIVE
Our general and administrative expense for the three and nine months
ended September 30, 2007 and 2006 break down as follows: (in thousands)
General and Administrative 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Three Months Ended September 30 . $ 266 $ 438 $ (172) (40%)
Nine Months Ended September 30 .. $ 859 $ 1,189 $ (330) (28%)
General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses for the
13
three months ended September 30, 2007 were $266,000, a 40% decrease as compared
to the same period in 2006. The decrease is mainly due to decreases in personnel
costs and general expenses. General and administrative expenses for the nine
months ended September 30, 2007 were $859,000 a 28% decrease as compared to the
same period in 2006. The decrease is mainly due to decreases in personnel costs
and general expenses as a result of a reduction in administrative personnel and
CEO compensation during 2007.
OTHER EXPENSE (INCOME), NET
Our other expense (income) for the three months and nine months ended
September 30, 2007 and 2006 break down as follows: (in thousands)
Other (Income) Expenses 2007 2006 Change % Change
--------------------------------- -------- -------- -------- --------
Three Months Ended September 30 . $ (786) $ (1,796) $ (1,010) (56%)
Nine Months Ended September 30 . $ (1,377) $ (4,246) $ (2,869) (68%)
Other income for the three months ended September 30, 2007 consists
primarily of reversal and adjustments to certain accrual and accounts payables
in the amount of $786,000, interest expense on debt in the amount of $10,000,
foreign currency exchange transactions gains and losses, and rental income in
the amount of $10,000. Other income for the nine months ended September 30, 2007
of which $1,355,000, consisted of reversal and adjustments to certain accrual
and accounts payables, interest expense on debt in the amount of $50,000,
foreign currency exchange transactions and losses, and rental income in the
amount of $32,000 as compared to $4,246,000 of income in the same period in
2006. The decrease is attributable to various settlements in 2007 and reversal
of a smaller amount of prior year accruals.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, we had a working capital deficit of
approximately $1.8 million, and our cash balance was approximately $18,000.
We have sold "Fallout" to a third party and have obtained the License
Back to allow us to create, develop and exploit a "Fallout" MMOG. We are
planning to exploit the License Back of "Fallout" MMOG and are reviewing the
avenues for securing financing of at least $30 million to fund its production.
The Company is now focused on a two-pronged growth strategy. As the
Company is working to secure funding for the development of a MMOG based on the
popular "Fallout" franchise, the Company is at the same time exploring ways to
leverage its portfolio of gaming properties through sequels and various
development and publishing arrangements.
The Company is reinitiating its in-house game development studio, and
has hired a veteran game developer.
Initial funding for these steps will derive from the remaining proceeds
from the sale of "Fallout".
The Company is also planning, if the Company can obtain financing, to
develop sequels to some of the most successful games, including Earthworm Jim,
Dark Alliance, Descent and MDK.
The Company continues to seek external sources of funding, including
but not limited to, incurring debt, the selling of assets or securities,
licensing of certain product rights in selected territories, selected
distribution agreements, and/or other strategic transactions sufficient to
provide short-term funding, and achieve our long-term strategic objectives.
Historically, we have funded our operations primarily from the sale of,
or royalties generated by licensing of, our intellectual property rights and
distribution fee advances of our products.
Our operating activities used cash of $32,000 during the nine months
ended September 30, 2007. We expect in the remainder of 2007 to enter into
license arrangements and to seek funding for the development of games.
Our current cash reserves plus our expected cash from existing
operations our currently expected to be sufficient to fund our anticipated
expenditures through the end of third quarter of 2008.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements under which we have
obligations under a guaranteed contract that has any of the characteristics
identified in paragraph 3 of FASB Interpretation No. 45 "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". We do not have any retained or contingent interest in
assets transferred to an unconsolidated entity or similar arrangement that
serves as credit, liquidity or market risk support to such entity for such
assets. We also do not have any obligation, including a contingent obligation,
under a contract that would be accounted for as a derivative instrument. We have
14
no obligations, including a contingent obligation arising out of a variable
interest (as referenced in FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, as amended) in an unconsolidated entity that is held by, and
material to, us, where such entity provides financing, liquidity, market risk or
credit risk support to, or engages in leasing, hedging or research and
development services with us.
CONTRACTUAL OBLIGATIONS
The following table summarizes certain of our contractual obligations
under non-cancelable contracts and other commitments at September 30, 2007, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods: (in thousands)
-----------------------------------------------------------------------------------------------
LESS THAN 1 - 3 3 - 5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
-----------------------------------------------------------------------------------------------
Lease Commitments (1) ........... $ 72 $ 72 -- -- --
Total ........................... $ 72 $ 72 -- -- --
(1) We have a lease commitment at the Beverly Hills office through April 2008.
We also have a lease commitment at our French representation office through
February 28, 2008 with an option for the Company to take up to an additional 6
years.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS,
which defines fair value, creates a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. We will adopt SFAS 157 on
its effective date. The Company has not yet determined the effect, if any, that
the application of SFAS No. 157 will have on its consolidated financial
statements.
In September 2006, the Securities and Exchange Commission ("SEC")
issued SAB No. 108, Topic 1-N, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB No. 108 requires companies to evaluate the materiality of
current year misstatements using both the rollover approach and the iron curtain
approach. SAB No. 108 is effective for statements covering the first fiscal year
ending after November 15, 2006. The adoption of SAB No. 108 did not have a
material impact on the Company's consolidated financial position and results of
operations.
Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the American Institute of Certified Public
Accountants and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of September 30,
2007. However, we are exposed to certain market risks arising from transactions
in the normal course of business, principally the risk associated with foreign
currency fluctuations. We do not hedge our interest rate risk, or our risk
associated with foreign currency fluctuations.
15
INTEREST RATE RISK
Currently, we do not have a line of credit, but we anticipate we may
establish a line of credit in the future.
FOREIGN CURRENCY RISK
Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our foreign receivables.
We recognized gains of $35,000 and $1,000 during the nine months ended September
30, 2007 and 2006 respectively, primarily in connection with foreign exchange
fluctuations in the timing of payments received on accounts receivable which
have been from Interplay Productions Ltd.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and interim Chief Financial Officer of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
this evaluation, our Chief Executive Officer and interim Chief Financial Officer
concluded that our disclosure controls and procedures were effective, at the
reasonable assurance level, in ensuring that information required to be
disclosed is recorded, processed, summarized and reported within the time period
specified in the SEC's rules and forms and in timely alerting him to material
information required to be included in this report.
There were no changes made in our internal controls over financial
reporting that occurred during the nine months ended September 30, 2007 that
have materially affected or are reasonably likely to materially affect these
controls.
Our management, including the Chief Executive Officer and Interim Chief
Financial Officer, does not expect that our disclosure controls and procedures
or our internal control over financial reporting will necessarily prevent all
fraud and material errors. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations on all internal
control systems, our internal control system can provide only reasonable
assurance of achieving its objectives and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within our Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, and/or by management override of the control. The design of any system
of internal control is also based in part upon certain assumptions about the
likelihood of future events, and can provide only reasonable, not absolute
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in circumstances, and/or the degree of compliance with the policies
and procedures may deteriorate.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required in this Item 1 is incorporated herein by
reference to the information in "Note 2. Commitments and Contingencies" to our
condensed consolidated financial statements located in Item 1, Part 1 of this
Report.
ITEM 1A. RISK FACTORS
RISK FACTORS
Our future operating results depend upon many factors and are subject
to various risks and uncertainties. These major risks and uncertainties are
discussed below. There may be additional risks and uncertainties which we do not
16
believe are currently material or are not yet known to us but which may become
such in the future. Some of the risks and uncertainties which may cause our
operating results to vary from anticipated results or which may materially and
adversely affect our operating results are as follows:
RISKS RELATED TO OUR FINANCIAL RESULTS
WE NEED TO GENERATE ADDITIONAL INCOME OR RAISE ADDITIONAL CAPITAL.
As of September 30, 2007, our cash balance was approximately $18,000.
Our outstanding accounts payable and current liabilities totaled approximately
$3.8 million . As of September 30, 2007 we had an accumulated deficit of $124
million If we cannot generate enough income from our operations or are unable to
locate additional funds through financing, we will not have sufficient resources
to fund are anticipated expenditures beyond we believe the end of the third
quarter 2008.
OUR ABILITY TO EFFECT A FINANCING TRANSACTION TO FUND OUR OPERATIONS COULD
ADVERSELY AFFECT THE VALUE OF YOUR STOCK.
We expect to consummate a financing transaction to receive additional
liquidity. This additional financing may take the form of raising additional
capital through public or private equity offerings or debt financing. To the
extent we raise additional capital by issuing equity securities, we cannot be
certain that additional capital will be available to us on favorable terms and
our stockholders will likely experience substantial dilution. Our certificate of
incorporation provides for the issuance of preferred stock however we currently
do not have any preferred stock issued and outstanding. Any new equity
securities issued may have greater rights, preferences or privileges than our
existing common stock. Material shortage of capital may require us to take
drastic steps such as reducing our level of operations, disposing of selected
assets, effecting financings on less than favorable terms or seeking protection
under federal bankruptcy laws.
RISKS RELATED TO OUR BUSINESS
WE BELIEVE THERE MAY HAVE BEEN OR MAY BE ABOUT TO BE A SALE BY TITUS INTERACTIVE
SA (PLACED IN INVOLUNTARY BANKRUPTCY IN JANUARY, 2005) OF A MAJORITY OF OUR
VOTING STOCK.
Titus owned approximately 58 million shares of common stock and had
majority ownership of us. If Titus has sold its interest in us, the new
shareholders can control substantially all matters requiring stockholder
approval, including the election of directors, subject to our stockholders'
cumulative voting rights, and the approval of mergers or other business
combination transactions. If there remains a concentration of voting power, it
could discourage or prevent a change in control that otherwise could result in a
premium in the price of our common stock. We have not been contacted by any new
shareholder(s) as of the date of this filing, but we believe there may have been
or may be about to be a sale by Titus. Further, any sale by Titus, if it has
occurred or occurs, may not be favorable to our other stockholders and could
have the effect of making any business combination, or a sale of all of our
shares as a whole, more difficult.
THE LACK OF ANY CREDIT AGREEMENT HAS RESULTED IN A SUBSTANTIAL REDUCTION IN THE
CASH AVAILABLE TO FINANCE OUR OPERATIONS.
We are currently operating without a credit agreement or credit
facility. There can be no assurance that we will be able to enter into a new
credit agreement or that if we do enter into a new credit agreement, it will be
on terms favorable to us.
WE CONTINUE TO OPERATE WITHOUT A CHIEF FINANCIAL OFFICER, WHICH MAY AFFECT OUR
ABILITY TO MANAGE OUR FINANCIAL OPERATIONS.
We are presently without a permanent CFO, and Mr. Caen assumed the
position of interim-CFO and continues as interim -CFO. Although the Company has
been able to operate for some extended period without a permanent CFO, this may
affect out ability to manage our financial operations.
17
OUR BUSINESS AND INDUSTRY IS BOTH SEASONAL AND CYCLICAL. IF WE FAIL TO DELIVER
OUR PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER.
Our business is highly seasonal, with the highest levels of consumer
demand occurring in the fourth quarter. Our industry is also cyclical. The
timing of hardware platform introduction is often tied to the year-end season
and is not within our control. As new platforms are being introduced into our
industry, consumers often choose to defer game software purchases until such new
platforms are available, which would cause sales of our products on current
platforms to decline. This decline may not be offset by increased sales of
products for the new platform.
THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE TO REMAIN
DEPRESSED OR TO DECLINE FURTHER.
Our operating results have fluctuated in the past and may fluctuate in
the future due to several factors, some of which are beyond our control. These
factors include:
o demand for our products and our competitors' products;
o the size and rate of growth of the market for interactive
entertainment software;
o changes in personal computer and video game console platforms;
o the timing of announcements of new products by us and our
competitors and the number of new products and product
enhancements released by us and our competitors;
o changes in our product mix;
o the number of our products that are returned; and
o the level of our international and original equipment
manufacturer royalty and licensing net revenues.
Many factors make it difficult to accurately predict the quarter in
which we will ship our products. Some of these factors include:
o the uncertainties associated with the interactive
entertainment software development process;
o approvals required from content and technology licensors; and
o the timing of the release and market penetration of new game
hardware platforms.
THERE ARE HIGH FIXED COSTS TO DEVELOPING OUR PRODUCTS. IF OUR REVENUES DECLINE
BECAUSE OF DELAYS IN THE DISTRIBUTION OF OUR PRODUCTS, OR IF THERE ARE
SIGNIFICANT DEFECTS OR DISSATISFACTION WITH OUR PRODUCTS, OUR BUSINESS COULD BE
HARMED.
Although for the year ended December 31, 2006, our net income was $3.1
million, $4.5 million was from one time non-recurring events, and we have
incurred significant net losses in previous years and $4.5 million did not
generate cash flow. Our losses in the past stemmed partly from the significant
costs we incurred to develop our entertainment software products, product
returns and price concessions. Moreover, a significant portion of our operating
expenses is relatively fixed, with planned expenditures based largely on sales
forecasts. At the same time, most of our products have a relatively short life
cycle and sell for a limited period of time after their initial release, usually
less than one year.
Relatively fixed costs and short windows in which to earn revenues mean
that sales of new products are important in enabling us to recover our
development costs, to fund operations and to replace declining net revenues from
older products. Our failure to accurately assess the commercial success of our
new products, and our delays in licensing existing products could reduce our
net.
IF OUR PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR BUSINESS COULD BE
HARMED SIGNIFICANTLY.
Consumer preferences for interactive entertainment software are always
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved continued market acceptance.
Instead, a limited number of releases have become "hits" and have accounted for
a substantial portion of revenues in our industry. Further, publishers with a
history of producing hit titles have enjoyed a significant marketing advantage
because of their heightened brand recognition and consumer loyalty. We expect
the importance of introducing hit titles to increase in the future. We cannot
assure you that our licensing of products will achieve significant market
acceptance, or that we will be able to sustain this acceptance for a significant
length of time if we achieve it.
18
We believe that our future revenue will continue to depend on the
successful production of hit titles on a continuous basis by us or our
licensees. Because we and our licensees introduce a relatively limited number of
new products in a given period, the failure of one or more of these products to
achieve market acceptance could cause material harm to our business. Further, if
our or are licensees' products do not achieve market acceptance, we could be
forced to accept substantial product returns or grant significant pricing
concessions to maintain our or our licensees' relationship with retailers and
our or our licensees' access to distribution channels. If we or our licensees
are forced to accept significant product returns or grant significant pricing
concessions, our business and financial results could suffer material harm.
WE HAVE A LIMITED NUMBER OF KEY MANAGEMENT AND OTHER PERSONNEL. THE LOSS OF ANY
SINGLE MEMBER OF MANAGEMENT OR KEY PERSON OR THE FAILURE TO HIRE AND INTEGRATE
CAPABLE NEW KEY PERSONNEL COULD HARM OUR BUSINESS.
Our business requires extensive time and creative effort to produce and
market. Our future success also will depend upon our ability to attract,
motivate and retain qualified employees and contractors, particularly software
design and development personnel. Competition for highly skilled employees is
intense, and we may fail to attract and retain such personnel. Alternatively, we
may incur increased costs in order to attract and retain skilled employees. Our
executive management team currently consists of CEO and interim CFO Herve Caen.
Our failure to recruit or retain the services of key personnel, including
competent executive management, or to attract and retain additional qualified
employees could cause material harm to our business.
OUR INTERNATIONAL SALES EXPOSE US TO RISKS OF UNSTABLE FOREIGN ECONOMIES,
DIFFICULTIES IN COLLECTION OF REVENUES, INCREASED COSTS OF ADMINISTERING
INTERNATIONAL BUSINESS TRANSACTIONS AND FLUCTUATIONS IN EXCHANGE RATES.
Our net revenues from international sales accounted for approximately
56% of our total net video game revenues for the nine months ending September
30, 2007 and 57% for 2006. To the extent our resources allow, we intend to
continue to expand our direct and indirect sales, marketing and product
localization activities worldwide.
Our international sales are subject to a number of inherent risks,
including the following:
o recessions in foreign economies may reduce purchases of our
products;
o translating and localizing products for international markets
is time consuming and expensive;
o accounts receivable are more difficult to collect and when
they are collectible, they may take longer to collect;
o regulatory requirements may change unexpectedly;
o it is difficult and costly to staff and manage foreign
operations;
o fluctuations in foreign currency exchange rates;
o political and economic instability; and
o delays in market penetration of new platforms in foreign
territories.
These factors may cause material declines in our future international
net revenues and, consequently, could cause material harm to our business.
A significant, continuing risk we face from our international sales and
operations stems from currency exchange rate fluctuations. Because we do not
engage in currency hedging activities, fluctuations in currency exchange rates
have caused significant reductions in our net revenues from international sales
and licensing due to the loss in value upon conversion into U.S. Dollars. We may
suffer similar losses in the future.
OUR OR OUR LICENSEES' CUSTOMERS HAVE THE ABILITY TO RETURN PRODUCTS OR TO
RECEIVE PRICING CONCESSIONS AND SUCH RETURNS AND CONCESSIONS COULD REDUCE OUR
NET REVENUES AND RESULTS OF OPERATIONS.
We are exposed to the risk of product returns and pricing concessions
with respect to our or our licensees' distributors. Our or our licensees'
distributors allow retailers to return defective, shelf-worn and damaged
products in accordance with negotiated terms, and also offer a 90-day limited
warranty to end users that products will be free from manufacturing defects. In
addition, our or our licensees' provide pricing concessions to customers to
manage customers' inventory levels in the distribution channel. Our or our
19
licensees' distributors could be forced to accept substantial product returns
and provide pricing concessions to maintain relationships with retailers and
their access to distribution channels.
RISKS RELATED TO OUR INDUSTRY
INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS COULD PREVENT US FROM ENFORCING OR
DEFENDING OUR PROPRIETARY TECHNOLOGY.
We regard our software as proprietary and rely on a combination of
patent, copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights. We
own or license various copyrights and trademarks, and hold the rights to one
patent application related to one of our titles. While we provide "shrink-wrap"
license agreements or limitations on use with our software, it is uncertain to
what extent these agreements and limitations are enforceable. We are aware that
some unauthorized copying occurs within the computer software industry, and if a
significantly greater amount of unauthorized copying of our interactive
entertainment software products were to occur, it could cause material harm to
our business and financial results.
Policing unauthorized use of our products is difficult, and software
piracy can be a persistent problem, especially in some international markets.
Further, the laws of some countries where our products are or may be distributed
either do not protect our products and intellectual property rights to the same
extent as the laws of the United States, or are weakly enforced. Legal
protection of our rights may be ineffective in such countries, and as we
leverage our software products using emerging technologies such as the Internet
and online services, our ability to protect our intellectual property rights and
to avoid infringing others' intellectual property rights may diminish. We cannot
assure you that existing intellectual property laws will provide adequate
protection for our products in connection with these emerging technologies. We
lack resources to defend proprietary technology.
WE MAY UNINTENTIONALLY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH COULD EXPOSE US TO SUBSTANTIAL DAMAGES OR RESTRICT OUR OPERATIONS.
As the number of interactive entertainment software products increases
and the features and content of these products continue to overlap, software
developers increasingly may become subject to infringement claims. Although we
believe that we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, it is possible that third
parties still may claim infringement. From time to time, we receive
communications from third parties regarding such claims. Existing or future
infringement claims against us, whether valid or not, may be time consuming and
expensive to defend. Intellectual property litigation or claims could force us
to do one or more of the following:
o cease selling, incorporating or using products or services
that incorporate the challenged intellectual property;
o obtain a license from the holder of the infringed intellectual
property, which license, if available at all, may not be
available on commercially favorable terms; or
o redesign our interactive entertainment software products,
possibly in a manner that reduces their commercial appeal.
Any of these actions may cause material harm to our business and
financial results.
OUR BUSINESS IS INTENSELY COMPETITIVE AND PROFITABILITY IS INCREASINGLY DRIVEN
BY A FEW KEY TITLE RELEASES. IF WE ARE UNABLE TO DELIVER KEY TITLES, OUR
BUSINESS MAY BE HARMED.
Competition in our industry is intense. New videogame products are
regularly introduced. Increasingly, profits and revenues in our industry are
dominated by certain key product releases and are increasingly produced in
conjunction with the latest consumer and media trends. Many of our competitors
may have more finances and other resources for the development of product titles
than we do. If our competitors develop more successful products, or if we do not
continue to develop consistently high-quality products, our revenue will
decline.
20
IF WE FAIL TO ANTICIPATE CHANGES IN VIDEO GAME PLATFORMS AND TECHNOLOGY, OUR
BUSINESS MAY BE HARMED.
The interactive entertainment software industry is subject to rapid
technological change. New technologies could render our current products or
products in development obsolete or unmarketable. Some of these new technologies
include:
o operating systems;
o new media formats
o releases of new video game consoles;
o new video game systems by Sony, Microsoft, Nintendo and
others.
We must continually anticipate and assess the emergence of, and market
acceptance of, new interactive entertainment software platforms well in advance
of the time the platform is introduced to consumers. Because product development
cycles are difficult to predict, we must make substantial product development
and other investments in a particular platform well in advance of introduction
of the platform. If the platforms for which we develop new software products or
modify existing products are not released on a timely basis or do not attain
significant market penetration, or if we develop products for a delayed or
unsuccessful platform, our business and financial results could suffer material
harm.
New interactive entertainment software platforms and technologies also
may undermine demand for products based on older technologies. Our success will
depend in part on our ability to adapt our products to those emerging game
platforms that gain widespread consumer acceptance. Our business and financial
results may suffer material harm if we fail to:
o anticipate future technologies and platforms and the rate of
market penetration of those technologies and platforms;
o obtain licenses to develop products for those platforms on
favorable terms; or
o create software for those new platforms on a timely basis.
OUR SOFTWARE MAY BE SUBJECT TO GOVERNMENTAL RESTRICTIONS OR RATING SYSTEMS.
Legislation is periodically introduced at the state and federal levels
in the United States and in foreign countries to establish a system for
providing consumers with information about graphic violence and sexually
explicit material contained in interactive entertainment software products. In
addition, many foreign countries have laws that permit governmental entities to
censor the content of interactive entertainment software. We believe that
mandatory government-run rating systems eventually will be adopted in many
countries that are significant markets or potential markets for our products. We
may be required to modify our products to comply with new regulations, which
could delay the release of our products in those countries.
Due to the uncertainties regarding such rating systems, confusion in
the marketplace may occur, and we are unable to predict what effect, if any,
such rating systems would have on our business. In addition to such regulations,
certain retailers have in the past declined to stock some of our products
because they believed that the content of the packaging artwork or the products
would be offensive to the retailer's customer base. While to date these actions
have not caused material harm to our business, we cannot assure you that similar
actions by our distributors or retailers in the future would not cause material
harm to our business.
RISKS RELATED TO OUR STOCK
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT OUR ABILITY TO RECEIVE A
PREMIUM PRICE FOR YOUR SHARES.
Our Certificate of Incorporation, as amended, provides for 5,000,000
authorized shares of Preferred Stock. Our Board of Directors has the authority,
without any action by the stockholders, to issue up to 4,280,576 shares of
preferred stock and to fix the rights and preferences of such shares. 719,424
shares of Series A Preferred Stock was issued to Titus in the past, which amount
has been fully converted into our common stock. In addition, our certificate of
incorporation and bylaws contain provisions that:
o eliminate the ability of stockholders to act by written
consent and to call a special meeting of stockholders; and
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o require stockholders to give advance notice if they wish to
nominate directors or submit proposals for stockholder
approval.
These provisions may have the effect of delaying, deferring or
preventing a change in control, may discourage bids for our common stock at a
premium over its market price and may adversely affect the market price, and the
voting and other rights of the holders, of our common stock.
OUR COMMON STOCK MAY BE SUBJECT TO THE "PENNY STOCK" RULES WHICH COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
"Penny stocks" generally include equity securities with a price of less
than $5.00 per share, which are not traded on a national stock exchange or on
NASDAQ, and are issued by a company that has tangible net assets of less than
$2,000,000 if the company has been operating for at least three years. The
"penny stock" rules require, among other things, broker dealers to satisfy
special sales practice requirements, including making individualized written
suitability determinations and receiving a purchaser's written consent prior to
any transaction. In addition, additional disclosure in connection with trades in
the common stock are required, including the delivery of a disclosure schedule
prescribed by the SEC relating to the "penny stock" market. These additional
burdens imposed on broker-dealers may discourage them from effecting
transactions in our common stock, which may make it more difficult for an
investor to sell their shares and adversely affect the market price of our
common stock.
OUR STOCK IS VOLATILE
The trading price of our common stock has previously fluctuated and
could continue to fluctuate in response to factors that are largely beyond our
control, and which may not be directly related to the actual operating
performance of our business, including:
o general conditions in the computer, software, entertainment,
media or electronics industries;
o changes in earnings estimates or buy/sell recommendations by
analysts;
o investor perceptions and expectations regarding our products,
plans and strategic position and those of our competitors and
customers; and
o price and trading volume volatility of the broader public
markets, particularly the high technology sections of the
market.
ITEM 6. EXHIBITS
(a) Exhibits - The following exhibits, other than exhibit 32.1
which is being furnished herewith, are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------- --------------------------------------------------------------
31.1 Certificate of Herve Caen, Chief Executive Officer of
Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of
the Securities and Exchange Act of 1934, as amended.
31.2 Certificate of Herve Caen, Interim Chief Financial Officer of
Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of
the Securities and Exchange Act of 1934, as amended.
32.1 Certificate of Herve Caen, Chief Executive Officer and Interim
Chief Financial Officer of Interplay Entertainment Corp.
pursuant to Rule 13a-14(b) of the Securities and Exchange Act
of 1934, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERPLAY ENTERTAINMENT CORP.
Date: November 13, 2007 By: /S/ HERVE CAEN
------------------------------------
Herve Caen,
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)