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, 2008
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, a non-accelerated filer,or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Smaller reporting company [ ]
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, 2008
----- --------------------------------------------
Common Stock, $0.001 par value 105,855,634
As of September 30, 2008, 105,855,634 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, 2008
TABLE OF CONTENTS
--------------
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2008 (unaudited) and December 31, 2007 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 2008 and 2007
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2008 and 2007 (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 4T. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 3. Default Upon Senior Securities 17
Item 6. Exhibits 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
ASSETS 2008 2007
------------- -------------
Current Assets: (unaudited)
Cash ...................................... $ 5,000 $ 1,138,000
Trade receivables ......................... 2,000 26,000
Inventories ............................... 1,000 1,000
Deposits .................................. 7,000 4,000
Prepaid expenses .......................... 20,000 10,000
Other receivables ......................... 17,000 13,000
------------- -------------
Total current assets ................. 52,000 1,192,000
Property and equipment, net .................. 51,000 9,000
------------- -------------
Total assets ................................. $ 103,000 $ 1,201,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Account payable ........................... $ 1,013,000 $ 911,000
Accrued royalties ......................... 0 200,000
Deferred income ........................... 796,000 595,000
Note Payable .............................. 0 1,045,000
Note Payable to officer and directors ..... 519,000 729,000
------------- -------------
Total current liabilities ....... 2,328,000 3,480,000
------------- -------------
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 300,000,000
shares authorized; 105,855,634 shares
issued and outstanding ............... 106,000 104,000
Paid-in capital ........................... 122,247,000 121,976,000
Accumulated deficit ....................... (124,561,000) (124,349,000)
Accumulated other comprehensive (loss) .... (17,000) (10,000)
Treasury stock of 4,658,216 shares ........ 0 0
------------- -------------
Total stockholders' deficit .......... (2,225,000) (2,279,000)
------------- -------------
Total liabilities and stockholders' deficit .. $ 103,000 $ 1,201,000
============= =============
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,
------------------------------ ------------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
Revenues ................................... $ 1,083,000 $ 47,000 $ 1,187,000 $ 5,940,000
------------- ------------- ------------- -------------
Cost of goods sold ......................... -- 15,000 3,000 21,000
------------- ------------- ------------- -------------
Gross profit ............................ 1,083,000 32,000 1,184,000 5,919,000
Operating expenses:
Marketing and sales ..................... -- 55,000 -- 245,000
General and administrative .............. 313,000 266,000 982,000 859,000
Product Development ..................... 90,000 -- 253,000 --
------------- ------------- ------------- -------------
Total operating expenses ............. 403,000 321,000 1,235,000 1,104,000
------------- ------------- ------------- -------------
Operating income (loss) .................... 680,000 (289,000) (51,000) 4,815,000
Other income (expense):
Interest expense ........................ (7,000) (9,000) (24,000) (50,000)
Other (Reversal of certain prior years
accruals and accounts payable in 2007) (49,000) 795,000 (137,000) 1,427,000
------------- ------------- ------------- -------------
Income before benefit for income taxes ..... 624,000 497,000 (212,000) 6,192,000
Income taxes ............................... -- -- -- --
------------- ------------- ------------- -------------
Net income ................................. $ 624,000 $ 497,000 $ (212,000) $ 6,192,000
============= ============= ============= =============
Net income (loss) per common share:
Basic ............................ $ 0.01 $ 0.01 $ (0.00) $ 0.06
============= ============= ============= =============
Diluted .......................... $ 0.01 $ 0.00 $ (0.00) $ 0.06
============= ============= ============= =============
Shares used in calculating net income (loss)
per common share:
Basic ............................ 101,198,000 99,197,000 101,198,000 99,197,000
============= ============= ============= =============
Diluted .......................... 101,264,000 102,116,000 101,198,000 102,116,000
============= ============= ============= =============
See accompanying notes.
4
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPT 30,
--------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net (loss) income .................................... $ (212,000) $ 6,192,000
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization ..................... 6,000 2,000
Additional Paid in capital - Option Expense ....... 273,000 2,000
Reversal of prior years recorded liabilities ...... 0 (1,234,000)
Changes in Operating assets and liabilities:
Trade receivables, net ............................... 24,000 (1,567,000)
Inventories ....................................... 0 0
Deposits .......................................... (3,000) 0
Prepaid expenses .................................. (10,000) 0
Other current assets, net ......................... (4,000) (5,000)
Other assets ...................................... 0 10,000
Accounts payable .................................. 107,000 (3,153,000)
Accrued royalties ................................. (200,000) 30,000
Note Payable Officer and Directors ................ (210,000) 0
Note Payable ...................................... 0 33,000
Note Payable obligation exchanged for
intellectual property .......................... (1,050,000) 0
Advances from distributors ........................ 201,000 (36,000)
Accumulated other compensation income ............. (7,000) 83,000
----------- -----------
Net cash provided by (used in) operating activities (1,085,000) 357,000
Cash Flow from investing activities:
Purchase of property and equipment ................... (48,000) 0
----------- -----------
Net cash used in investing activities ............. (48,000) 0
----------- -----------
Cash flows from financing activities:
Repayment of debt .................................... 0 (389,000)
Issuance of stock to reduce debt ..................... 0 0
----------- -----------
Net cash provided by (used in) financing activities 0 (389,000)
----------- -----------
Effect of exchange rate changes on cash
Net increase (decrease) in cash ................... (1,133,000) (32,000)
Cash, beginning of period ............................... $ 1,138,000 $ 50,000
----------- -----------
Cash, end of period ..................................... $ 5,000 $ 18,000
=========== ===========
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
NINE MONTHS ENDED SEPTEMBER 30, 2008
(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, 2007 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, 2007 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, 2007 consolidated
financial statements which were prepared assuming that the Company will continue
as a going concern.
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, 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 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.
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.
6
NOTE 2. NOTE PAYABLE
On July 24, 2008, the Company entered into an Option Exercise Agreement (the
"Agreement") with Atari Interactive, Inc. ("Atari Interactive"). Under the
Agreement, Atari Interactive and the Company settled outstanding disputes among
them, including in connection with an existing Promissory Note dated August 19,
2004 of the Company in favor of Atari Interactive (the "Note"). Pursuant to the
Agreement, Atari Interactive exercised an existing option to purchase, and
purchased, from the Company intellectual property rights developed by the
Company in connection with the Dungeons & Dragons games. The balance of all
amounts due from the Company to Atari Interactive under the Note of
approximately $1,050,000.00 was cancelled and terminated and was recognized as
revenue.
NOTE 3. NOTE PAYABLE TO OFFICER AND DIRECTORS
The Company issued on October 2, 2006 to the following officer and directors
Herve Caen, Eric Caen and Michel Welter conditional demand notes which have
since become demand notes (due to the change in control resulting from Financial
Planning and Development SA's acquisition of approximately 56% of the Company's
outstanding stock) bearing a 5% annual interest rate. The demand notes were
issued for the earned but unpaid directors' fees to Herve Caen for $50,000, to
Eric Caen for $50,000, to Michel Welter for $85,000, and for earned but unpaid
salary to Herve Caen in the amount of $500,000. A total of $519,000 in principal
and interest remains outstanding under the demand notes as of September 30,
2008. Interest accrued on the demand notes as of September 30, 2008 was $24,000.
NOTE 4. ADVANCES FROM DISTRIBUTORS AND LICENSEES WHICH ARE CONSIDERED DEFERRED
INCOME
Non refundable advances received for future distribution and license rights
as of September 30, 2008 amounted to $796,000.
NOTE 5. 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 during 2007
and "Atari" note cancelation and termination in 2008, by geographic regions were
as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
2008 2007 2008 2007
---------------------------------------- ----------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
North America ......... $ 1 3% $ 1 2% $ 1 1% $ 5 3%
International ......... 32 97% 46 98% 136 99% 185 97%
OEM, royalty &licensing 0 0% 0 0% 0 0% 0 0%
------- ------- ------- ------- ------- ------- ------- -------
$ 33 100% $ 47 100% $ 137 100% $ 190 100%
======= ======= ======= ======= ======= ======= ======= =======
7
NOTE 6. COMMON STOCK AND EMPLOYEE STOCK OPTIONS
STOCK-BASED COMPENSATION
The Company utilizes 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.
At September 30, 2008, the Company has one stock-based employee compensation
plan. 800,000 options were granted on May 20, 2008 to Eric Caen and Michel
Welter respectively as Directors. Each was granted 250,000 options in lieu of
cash compensation for directors' fees and 150,000 options for directors' fees.
Such options have an exercise price of $0.175 and are exercisable consistently
with the Company's stock option plan. On May 20, 2008 various employees received
a total of 950,000 stock incentive options. Such options have an exercise price
of $0.175 and are exercisable consistently with the Company's stock option plan.
5,000,000 10 year warrants were issued on May 20, 2008 at an exercise price of
$0.175 to Herve Caen, the Chief Executive Officer and Interim Chief Financial
Officer, to reduce his compensation to $250,000 through May 15, 2009.
Stock-based employee compensation cost approximated $165,000 as reflected in net
income (loss) for the three and nine months ended September 30, 2008.
EXERCISE OF WARRANTS
On June 30, 2008, Herve Caen, Chief Executive Officer and Interim Chief
Financial Officer, exercised 2,000,000 warrants issued in 2006 at an exercise
price of 0.0279. These shares were paid for by reducing the balance due from the
Company to Herve Caen including accrued interest.
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, 2007, 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 I of our Form 10-K. 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
8
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.
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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
2008 2007
----------------------- -----------------------
(Dollars in thousands)
% OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- ---------
NET REVENUES ............................. $ 1,083 100% $ 47 100%
COST OF GOODS SOLD ....................... -- 0% 15 32%
--------- --------- --------- ---------
GROSS PROFIT ........................ 1,083 100% 32 68%
OPERATING EXPENSES:
MARKETING AND SALES ................... -- 0% 55 117%
GENERAL AND ADMINISTRATIVE ............ 313 29% 266 566%
PRODUCT DEVELOPMENT ................... 90 8% -- 0%
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES ........... 403 37% 321 683%
--------- --------- --------- ---------
OPERATING INCOME (LOSS) .................. 680 63% (289) (615)%
OTHER INCOME (EXPENSES):
OTHER INCOME .......................... (56) (5)% 786 1,672%
INCOME TAXES .......................... -- -- -- --
--------- --------- --------- ---------
NET INCOME ............................ $ 624 58% $ 497 1,057%
========= ========= ========= =========
NET REVENUE BY GEOGRAPHIC REGION EXCLUSIVE
OF THE SALE OF "FALLOUT" IN 2007 AND
ATARI IN 2008:
NORTH AMERICA ............................ 1 3% 1 2%
INTERNATIONAL ............................ 32 97% 46 98%
OEM, ROYALTY & LICENSING ................. -- 0% -- 0%
--------- --------- --------- ---------
$ 33 100% $ 47 100%
========= ========= ========= =========
NET REVENUE BY PLATFORM EXCLUSIVE OF THE
SALE OF "FALLOUT" IN 2007 AND ATARI IN
2008:
PERSONAL COMPUTERS ....................... 33 100% 40 85%
VIDEO GAME CONSOLE ....................... 0 0% 7 15%
OEM, ROYALTY & LICENSING ................. 0 0% 0 0%
--------- --------- --------- ---------
$ 33 100% $ 47 100%
========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------------------
2008 2007
----------------------- ----------------------
(Dollars in thousands)
% OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- ---------
NET REVENUES ............................. $ 1,187 100% $ 5,940 100%
COST OF GOODS SOLD ....................... 3 0% 21 0%
--------- --------- --------- ---------
GROSS PROFIT ........................ 1,184 100% 5,919 100%
OPERATING EXPENSES:
MARKETING AND SALES ................... -- 0% 245 4%
GENERAL AND ADMINISTRATIVE ............ 982 83% 859 14%
PRODUCT DEVELOPMENT ................... 253 21% -- 0%
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES ........... 1,235 104% 1,104 18%
--------- --------- --------- ---------
OPERATING INCOME (LOSS) .................. (51) (4)% 4,815 82%
OTHER INCOME (EXPENSES):
OTHER INCOME .......................... (161) (14)% 1,377 23%
INCOME TAXES .......................... -- -- -- --
--------- --------- --------- ---------
NET INCOME ............................ $ (212) (18)% $ 6,192 105%
========= ========= ========= =========
NET REVENUE BY GEOGRAPHIC REGION EXCLUSIVE
OF THE SALE OF "FALLOUT" IN 2007 AND
ATARI IN 2008:
NORTH AMERICA ............................ 1 1% 5 3%
INTERNATIONAL ............................ 136 99% 185 97%
OEM, ROYALTY & LICENSING ................. -- 0% -- 0%
--------- --------- --------- ---------
$ 137 100% $ 190 100%
========= ========= ========= =========
NET REVENUE BY PLATFORM EXCLUSIVE OF THE
SALE OF "FALLOUT" IN 2007 AND ATARI IN
2008:
PERSONAL COMPUTERS ....................... 131 96% 169 89%
VIDEO GAME CONSOLE ....................... 6 4% 21 11%
OEM, ROYALTY & LICENSING ................. -- 0% -- 0%
--------- --------- --------- ---------
$ 137 100% $ 190 100%
========= ========= ========= =========
10
NET REVENUES
North American, International and OEM, Royalty and Licensing Net Revenues
Exclusive of the sale of "Fallout" Intellectual Property in 2007 and "Atari"
note cancelation and termination in 2008.
Geographically, our net revenues for the three and nine months ended
September 30, 2008 and 2007 break down as follows: (in thousands)
Three Months Ended September 30, 2008 2007 Change % Change
-------------------------------- -------- -------- -------- --------
North America .................. $ 1 $ 1 $ 0 0%
International .................. 32 46 (14) (30%)
OEM, Royalty & Licensing ....... 0 0 0 0%
-------- -------- -------- --------
Net Revenues ................... 33 $ 47 $ (14) (30%)
Nine Months Ended September 30, 2008 2007 Change % Change
-------------------------------- -------- -------- -------- --------
North America ................... $ 1 $ 5 $ (4) (80%)
International ................... 136 185 (49) (26%)
OEM, Royalty & Licensing ........ 0 0 0 0%
-------- -------- -------- --------
Net Revenues .................... $ 137 $ 190 $ (53) (28%)
Net revenues for the three months ended September 30, 2008 were $33,000 a
decrease of 30% compared to the same period in 2007. This decrease resulted from
a 30% decrease in International net revenues.
Net revenues for the nine months ended September 30, 2008 were $137,000, a
decrease of 28% compared to the same period in 2007. This decrease resulted from
a 80% decrease in North America net revenues and a 26% decrease in International
net revenues due to the decrease in back catalog sales.
North American net revenues for the three months ended September 30, 2008
were $1,000. There was no change in North American net revenues in 2008.
North America net revenues for the nine months ended September 30, 2008 were
$1,000. A decrease in North American net revenues in 2008 was mainly due to an
80% decrease in back catalog sales.
International net revenues for the three months ended September 30, 2008
were $32,000. The decrease in International net revenues for the three months
ended September 30, 2008 was mainly due to 30% decrease in back catalog sales.
International net revenues for the nine months ended September 30, 2008 were
$136,000. The decrease in International net revenue for the nine months ended
September 30, 2008 was mainly due to a 26% decrease in back catalog sales.
11
PLATFORM NET REVENUES
Our platform net revenues for the three and nine months ended September 30,
2008 and 2007 break down as follows exclusive of the sale of "Fallout"
Intellectual Property and "Atari" note cancelation and termination: (in
thousands)
Three Months Ended September 30, 2008 2007 Change % Change
--------------------------------- -------- -------- -------- --------
Personal Computer ............... $ 33 $ 40 $ (7) (18%)
Video Game Console .............. 0 7 (7) (100%)
OEM, Royalty & Licensing ........ 0 0 0 0
-------- -------- -------- --------
Net Revenues .................... $ 33 $ 47 $ (14) (30%)
Nine Months Ended September 30, 2008 2007 Change % Change
--------------------------------- -------- -------- -------- --------
Personal Computer ............... $ 131 $ 169 $ (38) (22%)
Video Game Console .............. 6 21 (15) (72%)
OEM, Royalty & Licensing ........ 0 0 0 0
--------------------------------- -------- -------- -------- --------
Net Revenues .................... $ 137 $ 190 $ 53 (27)%
PC net revenues for the three months ended September 30, 2008 were $33,000,
a decrease of 18% compared to the same period in 2007. The decrease in PC net
revenues in 2007 was primarily due to lower back catalog sales. Video game
console net revenues were $0, a decrease of 100% for the three months ended
September 30, 2008 compared to the same period in 2007, mainly due to lower back
catalog sales.
PC net revenues for the nine months ended September 30, 2008 were $131,000 a
decrease of 22% compared to the same period in 2007. The decrease in PC net
revenues in the nine months ended September 30, 2008 was primarily due to lower
back catalog sales. Video Game console net revenues were $6,000 a decrease of
72% for the nine months ended September 30, 2008 compared to the same period in
2007, mainly due to lower back catalog sales.
COST OF GOODS SOLD; GROSS PROFIT MARGIN EXCLUSIVE OF THE SALE OF "FALLOUT" AND
"ATARI".
Our net revenues exclusive of the sale of "Fallout" intellectual property
and "Atari" note cancelation and termination, cost of goods sold and gross
margin for the three and nine months ended September 30, 2008 and 2007 breakdown
as follows: (in thousands)
Three Months Ended September 30, 2008 2007 Change % Change
-------------------------------- -------- -------- -------- --------
Net Revenues .................... $ 33 $ 47 $ (14) (30%)
Cost of Goods Sold .............. 0 15 (15) 100%
-------- -------- -------- --------
Gross Profit Margin ............. $ 33 $ 32 $ 1 (3%)
Nine Months Ended September 30, 2008 2007 Change % Change
--------------------------------- -------- -------- -------- --------
Net Revenues .................... $ 137 $ 190 $ (53) (28%)
Cost of Goods Sold .............. 3 21 (18) (86%)
-------- -------- -------- --------
Gross Profit Margin ............. $ 134 $ 169 $ (35) (21%)
Three Months Ended September 30, 2008 2007 Change
------------------------------------------- -------- -------- --------
Net Revenues .............................. 100% 100% 0%
Cost of Goods Sold ........................ 0% 32% (32%)
-------- -------- --------
Gross Profit Margin ....................... 100% 68% (32%)
Nine Months Ended September 30, 2008 2007 Change
------------------------------------------- -------- -------- --------
Net Revenues .............................. 100% 100% 100%
Cost of Goods Sold ........................ 0% 11% (11%)
-------- -------- --------
Gross Profit Margin ....................... 100% 89% 11%
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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 decreased 100% to $0 in the three months ended
September 30, 2008 compared to the same period in 2007.
Our cost of goods sold decreased 86% to $3,000 in the nine months ended
September 30, 2008 compared to the same period in 2007 mainly due to lower back
catalog sales.
Our gross margin increased to 100% for the three months ended September 30,
2008.
Our gross margin increased to 100% for the nine months ended September 30,
2008 period from 89% in the comparable 2007 period.
MARKETING AND SALES
Our marketing and sales expense for the three months and nine months ended
September 30, 2008 and 2007 break down as follows: (in thousands)
Marketing and Sales 2008 2007 Change % Change
------------------------------ --------- --------- --------- ---------
Three Months Ended
September 30 .............. $ 0 $ 55 $ (55) (100%)
Nine Months Ended
September 30 .............. $ 0 $ 245 $ (245) (100%)
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, 2008 were $0. Marketing and
sales expenses for the nine months ended September 30, 2008 were $0 a 100%
decrease as compared to the same period during 2007.
PRODUCT DEVELOPMENT
Our Product Development expense for the three months ended September 30,
2008 and 2007 breakdown as follows: (in thousands)
Product Development 2008 2007 Change % Change
------------------------------ --------- --------- --------- ---------
Three Months Ended
September 30 .............. $ 90 $ 0 $ 90 100%
Nine Months Ended
September 30 .............. $ 253 $ 0 $ 253 100%
Product development expenses increased 100% to $90,000, an increase of 100%
in the three months ended September 30, 2008 compared to the same period in
2007. This increase was mainly due to the hiring of a software development team
in the first quarter of 2008.
Our product development increased 100% to $253,000 for the nine months ended
September 30, 2008 period compared to the same period in 2007. This increase was
mainly due to the hiring of a software development team in the first quarter of
2008.
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GENERAL AND ADMINISTRATIVE
Our general and administrative expense for the three and nine months ended
September 30, 2008 and 2007 break down as follows: (in thousands)
General and Administrative 2008 2007 Change % Change
------------------------------ --------- --------- --------- ---------
Three Months Ended
September 30 .............. $ 313 $ 266 $ 47 18%
Nine Months Ended
September 30 .............. $ 982 $ 859 $ 123 14%
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
three months ended September 30, 2008 were $313,000, an 18% increase as compared
to the same period in 2007. The increase is mainly due to the increase in
personnel costs and general expenses. General and administrative expenses for
the nine months ended September 30, 2008 were $982,000 a 14% increase as
compared to the same period in 2007. The increase is mainly due to increase in
personnel costs and general expenses.
OTHER EXPENSE (INCOME), NET
Our other expense (income) for the three months and nine months ended
September 30, 2008 and 2007 break down as follows: (in thousands)
Other (Income) Expenses 2008 2007 Change % Change
------------------------------ --------- --------- --------- ---------
Three Months Ended
September 30 .............. $ 56 $ (786) $ 842 1,073%
Nine Months Ended
September 30 .............. $ 161 $ (1,377) $ 1,538 1,117%
Other expenses for the three months ended September 30, 2008 consists
primarily interest expense on debt in the amount of $7,000, foreign currency
exchange transactions gains and losses $2,000, California Franchise Tax for the
year ending 2007 in the amount of $39,000, expensing of employee options in the
amount of $7,000 and miscellaneous expenses in the amount of $7,000 and rental
income in the amount of ($6,000). Other expenses for the nine months ended
September 30, 2008 was $161,000, comprised of interest expense on debt in the
amount of $24,000, foreign currency exchange transactions and losses and
additional miscellaneous write offs ($11,000), California Franchise Tax for the
year ending 2007 $39,000 and rental income in the amount of ($18,000), reversal
of bad debts ($38,000), and expensing of employee options $165,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, we had a working capital deficit of approximately
$2.3 million, and our cash balance was approximately $5,000. We cannot continue
to fund our current operations without obtaining additional financing or income.
We have sold "Fallout" to a third party and have obtained the License Back
to allow us to create, develop and exploit "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.
We are now focused on a two-pronged growth strategy. While we are working to
secure funding for the development of a MMOG based on the popular "Fallout"
franchise, we are at the same time exploring ways to leverage our portfolio of
gaming properties through sequels and various development and publishing
arrangements. We are planning, to develop sequels to some of the most successful
games, including Earthworm Jim, Dark Alliance, Descent and MDK. We have
reinitiated our in-house game development studio, and have hired game
developers. Initial funding for these steps will mainly derive from license
arrangements or other financing that we may enter into.
14
We have entered into a Game Production Agreement with Interactive Game Group
which provides for the financing of the development of games under certain
conditions.
We continue to seek external sources of funding, including but not limited
to, private and public securities offerings, incurring debt, the selling of
assets , 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 $1,133,000 million during the nine
months ended September 30, 2008. We expect in the remainder of 2008 to enter
into license arrangements and to seek funding for the development of games.
No assurance can be given that funding can be obtained by us on acceptable
terms, or at all. These conditions, combined with our deficits in stockholders'
equity and working capital, raise substantial doubt about our ability to
continue as a going concern.
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
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, 2008, 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) ..... $ 25 $ 25 $ 0 $ 0 $ 0
--------- --------- --------- --------- ---------
Total ..................... $ 25 $ 25 $ 0 $ 0 $ 0
--------- --------- --------- --------- ---------
(1) We have a lease commitment at our Beverly Hills office through April
2008. The Company is currently on a month to month lease arrangement. We
also have a lease commitment in Irvine for our new development offices
through May 31, 2009. We also have a lease commitment at our French
representation office through February 28, 2011 with an option for an
additional 3 years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of September 30,
2008. 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 $2,000 and $35,000 during the nine months ended
September 30, 2008 and 2007 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 4T. 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 quarter ended September 30, 2008 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.
PART II - OTHER INFORMATION
There have been no material changes to the risk factors disclosed in Item 1A
to Part 1 of our Form 10-K for the fiscal year ended December 31, 2007.
ITEM 1. LEGAL PROCEEDINGS
On or about April 8, 2008 Glutton Creeper Games (GCG) filed a complaint
against the Company in the Los Angeles Superior Court seeking damages in excess
of $400,000 in connection with a non exclusive license agreement granting rights
to GCG to develop a Pen and Paper game based on the pre-existing Fallout games.
The complaint arose as a result of Bethesda and Zenimax sending cease and desist
notices to GCG and the Company following their acquisition of certain of the
Fallout property from the Company in 2007. On or about June 12, 2008, the
Company filed a cross-complaint against Bethesda and Zenimax alleging causes of
action for Tortuous Interference with an Existing Contract and Implied
Indemnity. The Company claims that Bethesda and Zenimax improperly interfered
with the Company's license agreement with GCG and are therefore liable for any
and all damages that might be awarded to GCG. The court dismissed the
cross-complaint without prejudice, due to lack of jurisdiction, allowing
Interplay to pursue its claims against Bethesda and Zenimax in either Maryland
or Delaware. Interplay continues to vigorously and aggressively defend GCG's
claims against it, including conducting detailed discovery. Trial is set for
March 11, 2009.
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ITEM 3. DEFAULT UPON SENIOR SECURITIES
See Note 2 to the Financial Information in Part I, which is incorporated
herein by reference.
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
------- ------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company;
(incorporated herein by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003).
3.2 Certificate of Designation of Preferences of Series A Preferred Stock,
as filed with the Delaware Secretary of State on April 14, 2000;
(incorporated herein by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999).
3.3 Certificate of Amendment of Certificate of Designation of Rights,
Preferences, Privileges and Restrictions of Series A Preferred Stock, as
filed with the Delaware Secretary of State on October 30, 2000;
(incorporated herein by reference to Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003).
3.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company, as filed with the Delaware Secretary of
State on November 2, 2000; (incorporated herein by reference to Exhibit
3.4 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003).
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company, as filed with the Delaware Secretary of
State on January 21, 2004; (incorporated herein by reference to Exhibit
3.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003).
3.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company, as filed with the Delaware Secretary of
State on July 2, 2008;
3.7 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company, as filed with the Delaware Secretary of
State on July 2, 2008;
3.8 Amended and restated Bylaws of the Company
10.8 Form of option exercise agreement July 24, 2008 between Atari
Interactive Inc. and the Company.
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.
17
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 19, 2008 By: /S/ HERVE CAEN
----------------------------------
Herve Caen,
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)
18