UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X].
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
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] Smaller reporting company [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [_] No [X].
As of June 30, 2008, the aggregate market value of voting common stock held by
non-affiliates was approximately $12,000,000 based upon the closing price of the
Common Stock on that date.
Documents incorporated by reference
Portions of the Registrant's definitive proxy statement relating to its 2009
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission pursuant to regulation 14A within 120 days of the close of
the Registrant's last fiscal year, are incorporated by reference into Part III
of this report.
As of March 31, 2009, 108,140,301 shares of Common Stock of the Registrant were
issued and outstanding. This includes 4,658,216 shares of Treasury Stock.
INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008
PAGE
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PART I
Item 1. Business 3
Item 1A. Risk Factors 6
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk 25
Item 8. Consolidated Financial Statements and Supplementary
Data 25
Item 9A.(T) Controls and Procedures 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions 27
Item 14. Principal Accounting Fees and Services 27
PART IV
Item 15. Exhibits, Financial Statement Schedules. 27
Signatures 28
Exhibit Index 29
2
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
AND 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
REPORT EXCEPT FOR HISTORICAL INFORMATION MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, OUR USE OF WORDS
SUCH AS "PLAN," "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND,"
"COULD," "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 IN THIS REPORT ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AS WELL AS
CERTAIN ASSUMPTIONS. FOR EXAMPLE, ANY STATEMENTS REGARDING FUTURE CASH FLOW,
CASH CONSTRAINTS, FINANCING ACTIVITIES, COST REDUCTION MEASURES, AND MERGERS,
SALES OR ACQUISITIONS ARE FORWARD-LOOKING STATEMENTS AND THERE CAN BE NO
ASSURANCE THAT WE WILL AFFECT ANY OR ALL OF THESE OBJECTIVES IN THE FUTURE.
ADDITIONAL RISKS AND UNCERTAINTIES THAT MAY AFFECT OUR FUTURE RESULTS ARE
DISCUSSED IN MORE DETAIL IN THE SECTION TITLED "RISK FACTORS" IN "ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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
REPORT 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.
INTERPLAY (R), INTERPLAY PRODUCTIONS(R), GAMES ON LINE (R) AND CERTAIN OF
OUR OTHER PRODUCT NAMES AND PUBLISHING LABELS REFERRED TO IN THIS REPORT ARE THE
COMPANY'S TRADEMARKS. THIS REPORT ALSO CONTAINS TRADEMARKS BELONGING TO OTHERS.
PART I
ITEM 1. BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
Interplay Entertainment Corp., which we refer to in this Report as "we,"
"us," or "our," is a publisher and licensor of interactive entertainment
software for both core gamers and the mass market. We were incorporated in the
State of California in 1982 and were reincorporated in the State of Delaware in
May 1998. We are most widely known for our titles in the action/arcade,
adventure/role playing game (RPG), and strategy/puzzle categories. We have
produced and licensed titles for many of the most popular interactive
entertainment software platforms.
We seek to publish or license out interactive entertainment software titles
that are, or have the potential to become, franchise software titles that can be
leveraged across several releases and/or platforms, and have published or
licensed many such successful franchise titles to date.
We own the intellectual property rights in several recognized video games
and intend, to develop sequels to some of our most successful games, including
Earthworm Jim, Dark Alliance, Descent and MDK, for the current generation of
video game consoles, personal computers and mobile platforms.
We have sold "Fallout" to a third party and entered into, subject to
satisfaction of various conditions, a license back which could allow us to
create, develop and exploit a "Fallout" Massively Multiplayer Online Game. We
are planning to exploit the license back of "Fallout" MMOG.
During March 2009 we entered into a binding letter of intent with Masthead
Studios to fund the development of a Massively Multiplayer Online Game (MMOG),
code named "Project: V13." The game has been in design and development at
Interplay since November 2007. Masthead and Interplay teams will work together
under the direction and control of Interplay to complete development of the
project. As a part of the agreement, the game will utilize Masthead's
proprietary tools and MMOG technology developed for Masthead's "Earthrise"
project.
3
Our business and industry has certain risks and uncertainties. For a fuller
discussion of the risk and uncertainties relating to our financial results, our
business and our industry, please see the section titled "Risk Factors" in Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our principal activities involve publishing of video game products,
licensing of our intellectual property rights, online distribution, back catalog
licensing and OEM/ merchandising.
PRODUCTS
We publish and distribute interactive entertainment software titles that
provide immersive game experiences by combining advanced technology with
engaging content, vivid graphics and rich sound.
Our strategy is to invest in products for those platforms, whether PC or
video game console, that have or will have sufficient installed bases or a large
enough number of potential subscribers for the investment to be economically
viable. We are currently internally developing one new product and have four new
products in early stage of design externally.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our software as proprietary and rely primarily 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. We hold copyrights on our
products, product literature and advertising and other materials, and hold
trademark rights in our name and certain of our product names and publishing
labels. We have licensed certain products to third parties for distribution in
particular geographic markets or for particular platforms, and receive royalties
on such licenses. We have also outsourced, from time to time, some of our
product development activities to third party developers. We contractually
retain all intellectual property rights related to such projects. We have also
licensed certain products developed by third parties and pay royalties on such
products.
While we provide "shrink wrap" license agreements or limitations on use
with our software, the enforceability of such agreements or limitations is
uncertain. We are aware that unauthorized copying occurs, and if a significantly
greater amount of unauthorized copying of our interactive entertainment software
products were to occur, our operating results could be materially adversely
affected. We have used copy protection on selected products and do not provide
source code to third parties unless they have signed nondisclosure agreements.
We rely on existing copyright laws to prevent the unauthorized distribution
of our software. Existing copyright laws afford only limited protection.
Policing unauthorized use of our products is difficult, and we expect software
piracy to be a persistent problem, especially in certain international markets.
Further, the laws of certain countries in which 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 U.S. or are weakly enforced. Legal
protection of our rights may be ineffective in such countries, and as we
leverage our software products using, such as using the Internet and on-line
services, our ability to protect our intellectual property rights, and to avoid
infringing the intellectual property rights of others, becomes more difficult.
In addition, the intellectual property laws are less clear with respect to such
emerging technologies. There can be no assurance that existing intellectual
property laws will provide our products with adequate protection in connection
with such emerging technologies.
As the number of software products in the interactive entertainment
software industry increases and the features and content of these products
further overlap, interactive entertainment software developers may increasingly
become subject to infringement claims. Although we take reasonable efforts to
ensure that our products do not violate the intellectual property rights of
others, there can be no assurance that claims of infringement will not be made.
Any such claims, with or without merit, can be time consuming and expensive to
defend. From time to time, we have received communications from third parties
asserting that features or content of certain of our products may infringe upon
such party's intellectual property rights. In some instances, we may need to
engage in litigation in the ordinary course of our business to defend against
such claims. There can be no assurance that existing or future infringement
claims against us will not result in costly litigation or require that we
license the intellectual property rights of third parties, either of which could
have a material adverse effect on our business, operating results and financial
condition.
PRODUCT DEVELOPMENT
We currently have four new products in early stages of development. We have
reinitiated our in-house game development studio, and have hired game developers
for this purpose.
4
During the years ended December 31, 2008, 2007 and 2006, we spent $328,000,
$18,000 and $0 respectively, on product research and development activities.
Those amounts represented 24%, 0.3% and 0% respectively, of net revenues in each
of those periods.
SEGMENT INFORMATION
We operate primarily in one industry segment, the development, publishing
and distribution of interactive entertainment software. For information
regarding the revenues associated with our geographic segments, see Note 13 of
the Notes to our Consolidated Financial Statements included elsewhere in this
Report.
SALES AND DISTRIBUTION
NORTH AMERICA. We distribute and license rights to our products and
intellectual property rights in our video games in North America and other
selected territories from our corporate offices in Beverly Hills, California.
INTERNATIONAL. We distribute and license rights to our products and
intellectual property rights in our video games in Europe and other selected
territories thru our wholly owned subsidiary, Interplay Productions Ltd, located
in London, England.
LICENSING
We entered into various licensing agreements during 2008 under which we
licensed others to exploit games that we have intellectual property rights to.
MARKETING
We assist our distributors in the development and implementation of
marketing programs and campaigns for each of our titles and product groups.
COMPETITION
The interactive entertainment software industry is intensely competitive
and is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations with significantly greater financial, marketing and product
development resources than ours. Due to these greater resources, certain of our
competitors are able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies, pay higher fees to licensors of desirable motion
picture, television, sports and character properties and pay more to third party
software developers than us. We believe that the principal competitive factors
in the interactive entertainment software industry include product features,
brand name recognition, access to distribution channels, quality, ease of use,
price, marketing support and quality of customer service.
We compete primarily with other publishers of PC and video game console
interactive entertainment software. Significant competitors include Activision,
Capcom, Eidos, Electronic Arts, Konami, Lucas Arts, Namco, Sega, Take-Two
Interactive, THQ and Ubi Soft. In addition, integrated video game console
hardware/software companies such as Sony Computer Entertainment, Microsoft
Corporation, and Nintendo compete directly with us in the development of
software titles for their respective platforms. Large diversified entertainment
companies, such as The Walt Disney Company, and Time Warner Inc., many of which
own substantial libraries of available content and have substantially greater
financial resources than us, also compete directly with us or have strategic
relationships with our competitors.
SEASONALITY
The interactive entertainment software industry is highly seasonal as a
whole, with the highest levels of consumer demand occurring during the year-end
holiday buying season. As a result, our net revenues, gross profits and
operating income have historically been highest during the second half of the
year. Our business and financial results may therefore be affected by the timing
of our introduction of new releases.
MANUFACTURING
Our PC-based products consist primarily of CD-ROMs and DVDs, manuals, and
packaging materials. Substantially all of our CD-ROM and DVD duplication is
performed by third parties. Printing of manuals and packaging materials,
manufacturing of related materials and assembly of completed packages are
performed to our specifications by third parties. To date, we have not
5
experienced any material difficulties or delays in the manufacture and assembly
of our CD-ROM and DVD based products, and we have not experienced significant
returns due to manufacturing defects.
Sony Computer Entertainment, Microsoft Corporation and Nintendo manufacture
and ship finished products that are compatible with their video game consoles to
our licensees for distribution.
If we experience unanticipated delays in the delivery of manufactured
software products by our third party manufacturers, our net sales and operating
results could be materially adversely affected.
BACKLOG
We do not carry any material inventories because all of our sales and
distribution efforts are handled by our licensees under the terms of our
respective distribution agreements with them. We do not have any backlog orders
EMPLOYEES
As of December 31, 2008, we had 7 employees, including 4 in games
development, and 3 in finance, general and administrative.
From time to time, we have retained actors and/or "voice over" talent to
perform in certain of our products, and we may continue this practice in the
future. These performers are typically members of the Screen Actors Guild or
other performers' guilds, which guilds have established collective bargaining
agreements governing their members' participation in interactive media projects.
We may be required to become subject to one or more of these collective
bargaining agreements in order to engage the services of these performers in
connection with future development projects.
ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the U.S. Securities and Exchange Commission or SEC. You
may obtain copies of these reports via the Internet at the SEC's homepage
located at www.sec.gov. You may also go to our Internet address located at
www.interplay.com/investors/ and go to "SEC filings" which will link you to the
SEC's homepage for our filed reports. In addition, copies of the reports we file
with the SEC may also be obtained at the SEC's Public Reference Room at 100 F
Street NE, Washington, DC 20549. You may obtain information on the operation of
the Public Reference Room by Calling the SEC at 1-800-SEC-0330.
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
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 CURRENTLY HAVE SOME OBLIGATIONS THAT WE ARE UNABLE TO MEET WITHOUT GENERATING
ADDITIONAL INCOME OR RAISING ADDITIONAL CAPITAL. IF WE CANNOT GENERATE
ADDITIONAL INCOME OR RAISE ADDITIONAL CAPITAL IN THE NEAR FUTURE, WE MAY BECOME
INSOLVENT AND/OR BE MADE BANKRUPT AND/OR MAY BECOME ILLIQUID OR WORTHLESS.
As of December 31, 2008, our cash balance was approximately $0 and our
working capital deficit totaled approximately $2.4 million. If we do not receive
sufficient financing or sufficient funds from our operations we may (i)
liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue
operations, but incur material harm to our business, operations or financial
condition. These measures could have a material adverse effect on our ability to
continue as a going concern. Additionally, because of our financial condition,
our Board of Directors has a duty to our creditors that may conflict with the
interests of our stockholders. When a Delaware corporation is operating in the
vicinity of insolvency, the Delaware courts have imposed upon the corporation's
directors a fiduciary duty to the corporation's creditors. Our Board of
Directors may be required to make decisions that favor the interests of
creditors at the expense of our stockholders to fulfill its fiduciary duty. For
instance, we may be required to preserve our assets to maximize the repayment of
debts versus employing the assets to further grow our business and increase
shareholder value. 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 continue operations.
6
WE HAVE A HISTORY OF LOSSES, AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY
CURTAILING FUTURE OPERATIONS TO CONTINUE AS A BUSINESS.
For the year ended December 31, 2008, our net loss was $493,000. As of
December 31, 2008 we had an accumulated deficit of $2.4 million. Our ability to
fund our capital requirements out of our available cash and cash generated from
our operations depends on a number of factors. Some of these factors include the
progress of our product distributions and licensing, the rate of growth of our
business, and our products' commercial success. If we cannot generate positive
cash flow from operations, we will have to continue to reduce our costs and
raise working capital from other sources. These measures could include selling
or consolidating certain operations or assets, and delaying, canceling or
further scaling back operations. These measures could materially and adversely
affect our ability to publish successful titles, and may not be enough to permit
us to operate profitability, or at all.
OUR ABILITY TO EFFECT A FINANCING TRANSACTION TO FUND OUR OPERATIONS COULD
ADVERSELY AFFECT THE VALUE OF YOUR STOCK.
If we are not acquired by or merge with another entity or if we are not
able to raise additional capital by sale or license of certain of our assets, we
may need 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 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
FINANCIAL PLANNING AND DEVELOPMENT S.A. ("FPD") CONTROLS A MAJORITY OF OUR
VOTING STOCK AND CAN ELECT A MAJORITY OF OUR BOARD OF DIRECTORS AND PREVENT AN
ACQUISITION OF US THAT IS FAVORABLE TO OUR OTHER STOCKHOLDERS. ALTERNATIVELY,
FPD CAN ALSO CAUSE A SALE OF CONTROL OF OUR COMPANY THAT MAY NOT BE FAVORABLE TO
OUR OTHER STOCKHOLDERS.
FPD owns approximately 58 million shares of common stock. As a consequence,
FPD 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. This concentration of voting power could discourage or prevent a
change in control that otherwise could result in a premium in the price of our
common stock. Further, FPD can cause a sale of control of our Company that may
not be favorable to our stockholders. Such a sale, including if it involves a
dispersion of shares to multiple stockholders, further could have the effect of
making any business combination, or a sale of all of our shares as a whole, more
difficult.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP A "FALLOUT" MMOG.
We need to satisfy various conditions to maintain our license back of
"Fallout" MMOG. If we have failed or fail to do so (see Legal Proceedings
below), our license back may be terminated and we will not be able to develop a
"Fallout" MMOG.
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 CFO, and Mr. Caen has assumed the position of
interim-CFO and continues as CFO to date until a replacement can be found.
7
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.
Our losses in the past have 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
earnings.
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.
We believe that our future revenue will depend on the successful production
of hit titles on a continuous basis. The failure of one or more new products to
achieve market acceptance could cause material harm to our business. Further, if
our products do not achieve market acceptance, we could be forced to accept
substantial product returns or grant significant pricing concessions to maintain
our relationship with retailers and our access to distribution channels. If we
are forced to accept significant product returns or grant significant pricing
concessions, our business and financial results could suffer material harm.
8
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 solely 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 17%
and 4% of our total net revenues for years ended December 31, 2008 and 2007,
respectively. 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 past earnings 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.
SOME OF OUR CUSTOMERS HAVE THE ABILITY TO RETURN OUR 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 distributors. Our 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 our end users that our products will
be free from manufacturing defects. In addition, our distributors provide
pricing concessions to our customers to manage our customers' inventory levels
in the distribution channel. Our distributors could be forced to accept
substantial product returns and provide pricing concessions to maintain our
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.
9
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.
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:
10
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. 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
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.
11
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 2. PROPERTIES
The Company's headquarters are located in Beverly Hills, California, where
we lease approximately 3,100 square feet of office space. The facility is leased
on a month to month basis since April 2008. The Company's development studio is
located in Irvine, California, where we lease approximately 1,700 square feet of
office space. We also have a representation office in France.
ITEM 3. LEGAL PROCEEDINGS
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.
The litigation with Glutton Creeper was settled in April 2009.
Interplay recently received notice that Bethesda Softworks, LLC
("Bethesda") intends to terminate the trademark license agreement between
Bethesda and Interplay which was entered into April 4, 2007 for the development
of FALLOUT MMOG. Despite the fact that no formal action is currently pending,
Bethesda claims that Interplay is in breach of the trademark license agreement
for failure to commence fill scale development of same by April 4, 2009 and to
secure certain funding for the MMOG. Interplay adamantly disputes these claims.
Although the potential damages are currently unknown, if Bethesda ultimately
prevails and cancels the trademark license agreement, Interplay would lose its
license back of the "Fallout" MMOG and any damages resulting therefrom are
unknown at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company trades on the NASD-operated Over-the-Counter Bulletin
Board. Our common stock is currently traded on the NASD-operated
Over-the-Counter Bulletin Board under the symbol "IPLY." At March 30, 2009,
there were 97 holders of record of our common stock.
The following table sets forth the range of high and low sales prices
for our common stock for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31, 2008 HIGH LOW
------------------------------------ ---- ----
First Quarter .............................. $.08 $.07
Second Quarter ............................. .20 .07
Third Quarter .............................. .17 .12
Fourth Quarter ............................. .13 .07
FOR THE YEAR ENDED DECEMBER 31, 2007 HIGH LOW
------------------------------------ ---- ----
First Quarter .............................. $.17 $.05
Second Quarter ............................. .15 .06
Third Quarter .............................. .09 .05
Fourth Quarter ............................. .12 .06
DIVIDEND POLICY
It is not currently our policy to pay dividends.
STOCK COMPENSATION PLANS
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2008:
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
-------------------------- ------------------------- ---------------------- -----------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 3,160,000 0.074 6,840,000
Issuance of Warrants for
services and other
compensation not
approved by security
holders 9,150,298 0.290 --
------------------------- ---------------------- -----------------------------
Total 12,310,298 6,840,000
========================= ====================== =============================
We have one stock option plan currently outstanding. Under the 1997 Stock
Incentive Plan, as amended (the "1997 Plan"), we may grant up to 10 million
options to our employees, consultants and directors, which generally vest from
three to five years.
There were differences between the exercise price and the estimated fair
market value which was recorded as compensation expense in the amount of
$199,000, $12,000 and $38,000, respectively, for financial reporting purposes.
13
PERFORMANCE GRAPH
The following graph compares the cumulative 5-year total return attained by
shareholders on Interplay Entertainment Corp.'s common stock versus the
cumulative total returns of the NASDAQ Composite index, and two customized peer
groups of nine companies and eleven companies respectively, whose individual
companies are listed in footnotes 1 and 2 below. An investment of $100 (with
reinvestment of all dividends), if any, is assumed to have been made in the
Company's common stock, in each of the peer groups, and the index on 12/31/2003
and its relative performance is tracked through 12/31/2008.
(1.) The Company's old customized peer group includes nine companies which
are: Activision Blizzard Inco, Electronic Arts Inc, Futuremedia PLC, Giant
Interactive Group Inc, Majesco Entertainment Company, Shanda Interactive
Entertainment Limited, Take Two Interactive Software Inc, THQ Inc and Webzen
Inc.
(2.) There are eleven Companies included in the company's new customized
peer group which are: Activision Blizzard Inco, Electronic Arts Inc, Futuremedia
PLC, Giant Interactive Group Inc, GLU Mobile Inc, Majesco Entertainment Company,
Shanda Interactive Entertainment Limited, Southpeak Interactive Corp., Take Two
Interactive Software Inc, THQ Inc and Webzen Inc.
[PERFORMANCE GRAPH OMITTED]
-------------------------------------------------------------------------------------------------------
12/03 12/04 12/05 12/06 12/07 12/08
-------------------------------------------------------------------------------------------------------
INTERPLAY ENTERTAINMENT CORP. 100.00 18.67 10.67 180.00 106.67 106.67
NASDAQ COMPOSITE 100.00 109.96 112.90 126.64 138.40 80.76
OLD PEER GROUP 100.00 130.63 110.98 116.38 146.35 59.51
NEW PEER GROUP 100.00 130.63 110.98 116.38 146.35 59.31
The stock price performance included in this graph is not necessarily
indicative of future stock price performance.
In any of our filings under the Securities Act of 1933, as amended or the
Securities Exchange Act of 1934, as amended that incorporate this performance
graph and the data related thereto by reference, this performance graph and data
related thereto will be considered excluded from the incorporation by reference
and will not be deemed a part of any such other filing unless we expressly state
that the performance graph and the data related thereto is so incorporated.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for the years ended
December 31, 2008, 2007 and 2006 and the selected consolidated balance sheets
data as of December 31, 2008 and 2007 are derived from our audited consolidated
financial statements included elsewhere in this Report. Our historical results
are not necessarily indicative of the results that may be achieved for any other
period. The following data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
Report.
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2008 2007 2006 2005
--------- --------- --------- ---------
(Dollars in thousands, except share
and per share amounts)
STATEMENTS OF OPERATIONS DATA:
Net revenues .......................................... $ 1,378 $ 6,001 $ 967 $ 7,158
Cost of goods sold .................................... 12 8 167 478
--------- --------- --------- ---------
Gross profit .......................................... 1,366 5,993 800 6,680
Operating expenses .................................... 1,820 1,538 2,069 3,197
--------- --------- --------- ---------
Operating (income) loss ............................... (454) 4,455 (1,269) 3,483
Other income (expense) ................................ (39) 1,401 4,348 2,445
--------- --------- --------- ---------
Income (loss) before income taxes ..................... (493) 5,856 3,079 5,928
Provision (benefit) for income taxes .................. -- -- -- --
--------- --------- --------- ---------
Net income (loss) ..................................... $ (493) $ 5,856 $ 3,079 $ 5,928
========= ========= ========= =========
Cumulative dividend on participating preferred stock .. $ -- $ -- $ -- $ --
Accretion of warrant .................................. -- -- -- --
--------- --------- --------- ---------
Net income (loss) available to common stockholders .... $ (493) $ 5,856 $ 3,079 $ 5,928
========= ========= ========= =========
Net income (loss) per common share:
Basic ............................................ $ (0.042) $ 0.059 $ 0.030 $ 0.063
Diluted .......................................... $ (0.042) $ 0.057 $ 0.030 $ 0.063
Shares used in calculating net income (loss) per common
share - basic .................................... 103,482 99,197 100,513 93,856
Shares used in calculating net income (loss) per common
share - diluted .................................. 103,482 102,028 102,603 93,856
SELECTED OPERATING DATA:
Net revenues by geographic region:
North America .................................... $ 89 $ 5 $ 203 $ 2,885
International .................................... 239 246 632 4,056
OEM, royalty and licensing ....................... -- -- 132 217
Other ............................................ 1,050 5,750 -- --
Net revenues by platform:
Personal computer ................................ $ 261 $ 222 $ 456 $ 631
Video game console ............................... 67 29 379 971
OEM, royalty and licensing ....................... -- -- 132 217
Recognition of Revenue from expired contracts .... -- -- -- 4,574
Other ............................................ 1,050 5,750 -- --
Online licensing ................................. -- -- -- 768
DECEMBER 31,
-----------------------------------------------
2008 2007 2006 2005
--------- --------- --------- ---------
BALANCE SHEETS DATA: (Dollars in thousands)
Working capital (deficiency) .......................... $ (2,415) $ (2,279) $ (8,098) $ (11,497)
Total assets .......................................... 163 1,201 323 673
Total debt ............................................ 2,520 3,480 8,410 12,163
Stockholders' equity (deficit) ....................... (2,357) (2,279) (8,087) (11,490)
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements and notes thereto and other information
included or incorporated by reference herein.
EXECUTIVE OVERVIEW AND SUMMARY
Interplay Entertainment Corp. is a publisher and licensor of interactive
entertainment software for both core gamers and the mass market. We are most
widely known for our titles in the action/arcade, adventure/role playing game
(RPG), and strategy/puzzle categories. We have produced and licensed titles for
many of the most popular interactive entertainment software platforms.
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. The Report of our Independent Auditors for the December 31, 2008
consolidated financial statements includes an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern.
We entered into various licensing agreements during 2008 under which we
licensed others to exploit games that we have intellectual property rights to.
We expect in 2009 to enter into similar license arrangements to generate cash
for the Company's operations.
During 2007 we sold "Fallout" to a third party and entered into subject to
satisfaction of various conditions a license back which could allow us to
create, develop and exploit a "Fallout" Massively Multiplayer Online Game. We
are planning to exploit the license back of "Fallout" MMOG.
We have entered into a binding letter of intent with Masthead Studios to
fund the development of a Massively Multiplayer Online Game (MMOG), code named
"Project: V13." The game has been in design and development at Interplay since
November 2007. Masthead and Interplay teams will work together under the
direction and control of Interplay to complete development of the project. As a
part of the agreement, the game will utilize Masthead's proprietary tools and
MMOG technology developed for Masthead's "Earthrise" project.
We are now focused on a two-pronged growth strategy. While we are working
on the development of a MMOG code named: "Project:V13", 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, if we
enter into adequate transactions, to develop or have developed sequels to some
of our most successful games, including Earthworm Jim, Dark Alliance, Descent
and MDK. We have reinitiated our in-house game development studio, and are
hiring game developers.
We continue 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.
Our products were either designed and created by our employees or by
external software developers. When we used external developers, we typically
advanced development funds to the developers in installment payments based upon
the completion of certain milestones. These advances were typically considered
advances against future royalties. We currently have no product in development
with external developers.
Our operating results will continue to be impacted by economic, industry
and business trends affecting the interactive entertainment industry. Our
industry is highly seasonal, with the highest levels of consumer demand
occurring during the year-end holiday buying season. With the release of new
console systems by Sony, Nintendo and Microsoft, our industry has entered into a
new cycle that could affect marketability of new products, if any.
Our operating results have fluctuated significantly in the past and likely
will fluctuate significantly in the future, both on a quarterly and an annual
basis. A number of factors may cause or contribute to such fluctuations, and
many of such factors are beyond our control.
16
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these 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 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. We believe the following critical accounting policies
affect our more significant judgments and estimates used in preparation of our
consolidated financial statements.
REVENUE RECOGNITION
We record revenues when we deliver products to customers in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." and SEC
Staff Accounting Bulletin No. 104, Revenue Recognition.
We recognize revenue from sales by distributors, net of sales commissions,
only as the distributor recognizes sales of the Company's products to
unaffiliated third parties. For those agreements that provide the customers the
right to multiple copies of a product in exchange for guaranteed amounts,
revenue is recognized as earned. Guaranteed minimum royalties on sales, where
the guarantee is not recognized upon delivery, are recognized as the minimum
payments come due. The Company recognizes revenue on expired contracts when the
termination date of the contract is reached because guaranteed minimum royalties
are not reimbursable and are recorded as revenue.
We generally are not contractually obligated to accept returns, except for
defective, shelf-worn and damaged products. However, on a case-by-case
negotiated basis, we permit customers to return or exchange products and may
provide price concessions to our retail distribution customers on unsold or slow
moving products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," we record
revenue net of a provision for estimated returns, exchanges, markdowns, price
concessions, and warranty costs. We record such reserves based upon management's
evaluation of historical experience, current industry trends and estimated
costs. The amount of reserves ultimately required could differ materially in the
near term from the amounts provided in the accompanying consolidated financial
statements.
We also engage in the sale of licensing rights on certain products. The
terms of the licensing rights differ, but normally include the right to develop
and distribute a product on a specific video game platform. We recognize revenue
when the rights have been transferred and no other obligations exist.
PREPAID LICENSES AND ROYALTIES
Prepaid licenses and royalties consist of license fees paid to intellectual
property rights holders for use of their trademarks or copyrights. Also included
in prepaid royalties are prepayments made to independent software developers
under developer arrangements that have alternative future uses. These payments
are contingent upon the successful completion of milestones, which generally
represent specific deliverables. Royalty advances are recoupable against future
sales based upon the contractual royalty rate. We amortize the cost of licenses,
prepaid royalties and other outside production costs to cost of goods sold over
six months commencing with the initial shipment in each region of the related
title. We amortized these amounts at a rate based upon the actual number of
units shipped with a minimum amortization of 75% in the first month of release
and a minimum of 5% for each of the next five months after release. This minimum
amortization rate reflects our typical product life cycle. Our management relies
on forecasted revenue to evaluate the future realization of prepaid royalties
and charges to cost of goods sold any amounts they deem unlikely to be fully
realized through future sales. Such costs are classified as current and
noncurrent assets based upon estimated product release date. If actual revenue,
or revised sales forecasts, fall below the initial forecasted sales, the charge
may be larger than anticipated in any given quarter. Once the charge has been
taken, that amount will not be expensed in future quarters when the product has
shipped.
SOFTWARE DEVELOPMENT COSTS
SOFTWARE DEVELOPMENT COSTS. Software development costs include payments
made to independent software developers under development agreements, as well as
direct costs incurred for internally developed products.
17
We account for software development costs in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Software
development costs are capitalized once the technological feasibility of a
product is established and such costs are determined to be recoverable.
Technological feasibility of a product encompasses both technical design
documentation and game design documentation. For products where proven
technology exists, this may occur early in the development cycle. Technological
feasibility is evaluated on a product-by-product basis. Prior to a product's
release, we expense, as part of "cost of sales -- software royalties and
amortization," capitalized costs when we believe such amounts are not
recoverable. Capitalized costs for those products that are cancelled or
abandoned are charged to product development expense in the period of
cancellation. Amounts related to software development which are not capitalized
are charged immediately to product development expense. We evaluate the future
recoverability of capitalized amounts on a quarterly basis. The recoverability
of capitalized software development costs is evaluated based on the expected
performance of the specific products for which the costs relate. Criteria used
to evaluate expected product performance include: historical performance of
comparable products using comparable technology; orders for the product prior to
its release; and estimated performance of a sequel product based on the
performance of the product on which the sequel is based.
Commencing upon product release, capitalized software development costs are
amortized to "cost of sales -- software royalties and amortization" based on the
ratio of current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released
in prior periods, we evaluate the future recoverability of capitalized amounts
on a quarterly basis. The primary evaluation criterion is actual title
performance.
Significant management judgments and estimates are utilized in the
assessment of when technological feasibility is established, as well as in the
ongoing assessment of the recoverability of capitalized costs. In evaluating the
recoverability of capitalized costs, the assessment of expected product
performance utilizes forecasted sales amounts and estimates of additional costs
to be incurred. If revised forecasted or actual product sales are less than
and/or revised forecasted or actual costs are greater than the original
forecasted amounts utilized in the initial recoverability analysis, the net
realizable value may be lower than originally estimated in any given quarter,
which could result in an impairment charge.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. The policies related to
consolidation and loss contingencies require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under reexamination by
accounting standards setters and regulators. Although no specific conclusions
reached by these standard setters appear likely to cause a material change in
our accounting policies, outcomes cannot be predicted with confidence. Please
see Note 2 of Notes to Consolidated Financial Statements, Summary of Significant
Accounting Policies, which discusses accounting policies that must be selected
by management when there are acceptable alternatives.
18
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data and segment and platform data for the periods indicated
expressed as a percentage of net revenues:
YEARS ENDED DECEMBER 31,
---------------------------
2008 2007 2006
------ ------ ------
STATEMENTS OF OPERATIONS DATA:
Net revenues ......................................... 100% 100% 100%
Cost of goods sold ................................... -- -- 17
------ ------ ------
Gross margin ......................................... 100 100 83
Operating expenses:
Marketing and sales ............................. -- 4 52
General and administrative ...................... 108 21 161
Product development ............................. 24 -- --
------ ------ ------
Total operating expenses ........................ 132 25 213
------ ------ ------
Operating income (loss) .............................. (32) 75 (130)
Other income (expense) ............................... (3) 25 449
------ ------ ------
Income (loss) before provision for income taxes ..... (35) 100 319
Provision for income taxes ........................... -- -- --
------ ------ ------
Net income (loss) .................................... (35)% 100% 319%
====== ====== ======
SELECTED OPERATING DATA:
Net revenues by segment:
North America ................................... 6% 96% 21%
International ................................... 17 4 66
OEM, royalty and licensing ...................... 0 -- 13
Other ........................................... 76 -- --
------ ------ ------
100% 100% 100%
====== ====== ======
Net revenues by platform:
Personal computer ............................... 19% 4% 47%
Video game console .............................. 5 -- 39
OEM, royalty and licensing ...................... -- -- 14
Other ........................................... 76 96 --
------ ------ ------
100% 100% 100%
====== ====== ======
Geographically, our net revenues for the years ended December 31, 2008 and
2007 breakdown as follows: (in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
North America ................... $ 1,139 $ 5,755 $ (4,616) (80.20)%
International ................... 239 246 (7) (3)%
OEM, Royalty & Licensing ........ 0 0 0 0%
-------- -------- --------
Net Revenues .................... $ 1,378 $ 6,001 $ (4,623) (77)%
======== ======== ========
Geographically, our net revenues for the years ended December 31, 2007 and
2006 breakdown as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
North America ................... $ 5,755 $ 203 $ 5,552 2,734%
International ................... 246 632 (386) (61.1)%
OEM, Royalty & Licensing ........ 0 132 (132) 100%
-------- -------- --------
Net Revenues .................... $ 6,001 $ 967 $ 5,034 520%
======== ======== ========
19
NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES
Net revenues for the year ended December 31, 2008 were $1,378,000, a
decrease of 77% compared to the same period in 2007. The Company had $1,050,000
in revenue from Atari Interactive exercising an existing option to purchase,
from the Company intellectual property rights developed by the Company with the
Dungeon & Dragons games, with the balance due from the Company to Atari
Interactive under a Note of $1,050,000 being cancelled. This decrease resulted
from a 80.2% decrease significantly effected by the non recurring Fallout
transaction in 2007 in North American net revenue, and a 3% decrease in
International net revenue, royalty and licensing revenues and a 0% decrease in
OEM net revenue.
Net revenues for the year ended December 31, 2007 were $6,001,000, an
increase of 520% compared to the same period in 2006. The Company had $5,750,000
in income from recognition of the sale of "Fallout" and $5,000 in North American
royalties earned. This increase resulted from a 2,734% increase in North
American net revenue due to the sale of "Fallout" and a 61.1% decrease in
International net revenue, royalty and licensing revenues and a 100% decrease in
OEM net revenue.
North American net revenues for the year ended December 31, 2008 were
$1,139,000 as compared to $5,755,000 for the year ended December 31, 2007. The
Company had $1,050,000 from Atari Interactive exercising an existing option and
$89,000 in North American royalties earned in 2008.
North American net revenues for the year ended December 31, 2007 were
$5,755,000 as compared to $203,000 for the year ended December 31, 2006. The
Company had $5,750,000 in income from recognition of the sale of "Fallout" and
$5,000 in North American royalties earned in 2007.
International net revenues for the year ended December 31, 2008 were
$239,000, a decrease of $7,000 as compared to International net revenues for the
year ended December 31, 2007. The decrease in International net revenues
compared to the year ended December 31, 2007 was mainly due to a 3.0% decrease
in back catalog sales.
International net revenues for the year ended December 31, 2007 were
$246,000, a decrease of $386,000 as compared to International net revenues for
the year ended December 31, 2006. The decrease in International net revenues
compared to the year ended December 31, 2006 was mainly due to a 61.1% decrease
in back catalog sales.
OEM, royalty and licensing net revenues for the years ended December 31,
2008 were $0, no change from the year ended December 31, 2007.
OEM, royalty and licensing net revenues for the years ended December 31,
2007 were $0, a decrease of $132,000 as compared to the same period in 2006. The
decrease in OEM business was mainly attributable to our reorganization.
PUBLISHING NET REVENUES BY PLATFORM, ATARI OPTION EXERCISE AGREEMENT", CONTRACTS
AND LICENSING DEALS NET REVENUES
Our publishing net revenues by platform, contracts and licensing deals net
revenues for the years ended December 31, 2008 and 2007 breakdown as follows:
(in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
Personal Computer ............... $ 261 $ 222 $ 39 17.4%
Video Game Console .............. 67 29 38 131%
OEM, Royalty & Licensing ........ 0 0 0 0
Other ........................... 1,050(1) 5,750(2) 4,700 (82.0)%
-------- -------- --------
Net Revenues .................... $ 1,378 $ 6,001 $ (4,623) (77)%
======== ======== ========
(1) Recognition of Revenue of Atari Option Exercise Agreement.
(2) Recognition of Revenue on the sale of "Fallout" transaction.
PC net revenues for PC net revenues the year ended December 31, 2008 were
$261,000, an increase of 17.4% compared to the same period in 2007. The increase
in PC net revenues in 2008 was primarily due to an increase in back catalog
sales.
Our video game console net revenues for the year ended December 31, 2008
were $67,000 an increase of 131% compared to the same period in 2007, mainly due
to an increase in back catalog sales.
20
The Company had $1,050,000 in income from Atari Interactive exercising an
existing option as a onetime non-recurring event.
Our publishing net revenues by platform, sale of "Fallout" contracts and
licensing deals net revenues for the years ended December 31, 2007 and 2006
breakdown as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
Personal Computer ............... $ 222 $ 456 $ (234) (51.3%)
Video Game Console .............. 29 379 (350) (92.3%)
OEM, Royalty & Licensing ........ 0 132 (132) (100%)
Recognition of revenue on
the sale of "Fallout" ......... 5,750 0 5,750 100%
-------- -------- --------
Net Revenues .................... $ 6,001 $ 967 $ 5,034 520%
======== ======== ========
PC net revenues for the year ended December 31, 2007 were $222,000, a
decrease of 51.3 % compared to the same period in 2006. The decrease in PC net
revenues in 2007 was primarily due to lower back catalog sales.
Our video game console net revenues for the year ended December 31, 2007
were $29,000 a decrease of 92.3% compared to the same period in 2006, mainly due
to lower back catalog sales.
In 2007 the Company had $5,750,000 in income from recognition of the sale
of "Fallout" as a onetime non- recurring event
COST OF GOODS SOLD; GROSS MARGIN
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 are 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 we pay 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 numbers 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 net revenues, cost of goods sold and gross margin for the years ended
December 31, 2008 and 2007 breakdown as follows: (in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
Net Revenues .................... $ 1,378 $ 6,001 $ (4,623) (77.0)%
Cost of Goods Sold .............. 12 8 (4) (50.0)%
-------- -------- --------
Gross Margin .................... $ 1,366 $ 5,993 $ (4,627) (77.2)%
======== ======== ========
Our cost of goods sold increased to $12,000 in the year ended December 31,
2008 compared to $8,000 in the same period in 2007. Our gross margin decreased
to $1,366,000 for the twelve months ended December 31, 2008 from $5,993,000 in
the comparable period in 2007. The decrease in gross margin was mainly
attributable to our sale of " Fallout" in 2007.
Our net revenues, cost of goods sold and gross margin for the years ended
December 31, 2007 and 2006 breakdown as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
Net Revenues .................... $ 6,001 $ 967 $ 5,034) 520.5%
Cost of Goods Sold .............. 8 167 (159) (95.2%)
-------- -------- -------- --------
Gross Margin .................... $ 5,993 $ 800 $ (5,193) 649.1%)
======== ======== ======== ========
21
Our cost of goods sold decreased to $8,000 in the year ended December 31,
2007 compared to $167,000 in the same period in 2006. We expect our cost of
goods sold to increase in 2007 as compared to 2006 because we anticipate new
product releases.
Our gross margin increased to $5,993,000 for the twelve months ended
December 31, 2007 from $800,000 in the comparable period in 2006. The increase
in gross margin was mainly attributable to our sale of "Fallout".
MARKETING AND SALES
Our marketing and sales expenses for the years ended December 31, 2008 and
2007 breakdown as follows: (in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
Marketing and Sales ............ $ 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 twelve months ended December 31, 2008 were $0, a 100.00%
decrease as compared to the same period in 2007.
Our marketing and sales expenses for the years ended December 31, 2007 and
2006 breakdown as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
Marketing and Sales ............ $ 245 $ 509 $ (264) (51.9%)
Marketing and sales expenses for the twelve months ended December 31, 2007
were $245,000, a 51.9% decrease as compared to the 2006 period due to
discontinuing of the business of Interplay Japan.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses for the years ended December 31,
2008 and 2007 breakdown as follows: (in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
General and Administrative ........ $ 1,492 $ 1,275 $ 217 17%
General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, and other related
operating expenses. General and administrative expenses for the year ended
December 31, 2008 were $1.5 million, a 17% increase as compared to the same
period in 2007.
Our general and administrative expenses for the years ended December 31,
2007 and 2006 breakdown as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
General and Administrative ........ $ 1,274 $ 1,560 $ (286) (18.34%)
General and administrative expenses for the year ended December 31, 2007
were $1.3 million, a 18.3% 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 the administrative personnel and CEO compensation
during 2007.
PRODUCT DEVELOPMENT
Our product development expenses for the years ended December 31, 2008 and
2007 breakdown as follows: (in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
Product Development ............... $ 328 $ 18 $ 310 172.2%
22
Product development expenses for the year ended December 31, 2008 were $
328,000, a 172.2% increase as 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 expenses for the years ended December 31, 2007 and
2006 breakdown as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
Product Development .............. $ 18 $ 0 $ 18 (100.0%)
Product development expenses for the year ended December 31, 2007 were $
18,000, a 100% increase as compared to the same period in 2006. This increase
was mainly due to the hiring of a software developer in the fourth quarter of
2007.
OTHER EXPENSE (INCOME), NET
Our other expense for the years ended December 31, 2008 and 2007 breakdown
as follows: (in thousands)
2008 2007 Change % Change
-------- -------- -------- --------
Other Expense (Income) ........... $ 39 $ (1,401) $ 1,440 1,027%
Other income consists primarily of interest expense on debt in the amount
of $35,000, California Franchise Tax (Alternative Minimum Tax) for the year
ended 2007 in the amount of $39,000, bad debt expenses in the amount of $6,000,
litigation reserve in the amount of $31,000, foreign currency exchange
transactions gains of($9,000), reversal of bad debts ($34,000), rental income in
the amount of ($24,000) and interest income in the amount of ($7,000) and
additional miscellaneous adjustments of $2,000.
Our other expense for the years ended December 31, 2007 and 2006 breakdown
as follows: (in thousands)
2007 2006 Change % Change
-------- -------- -------- --------
Other Expense (Income) .......... $ (1,401) $ (4,348) $ (2,947) (67.8%)
Other income consists primarily of reversal and adjustments to certain
accrual and accounts payables in the amount of $1,425,000, interest expense on
debt in the amount of $59,000, foreign currency exchange transactions gains and
losses, and rental income in the amount of $73,000 and bad debts of $38,000. The
decrease is attributable to reversals of a smaller amount of prior year
accruals.
PROVISION (BENEFIT) FOR INCOME TAXES
We recorded no tax provision for the years ended December 31, 2008, 2007
and 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, we had a working capital deficit of approximately
$2,400,000, and our cash balance was approximately $0. In any event, we cannot
continue to fund our current operations without obtaining additional financing
or income.
We sold "Fallout" to a third party and entered into subject to satisfaction
of various condition the license back which could allow us to create, develop
and exploit a "Fallout" MMOG. We are planning to exploit the license back of
"Fallout" MMOG.
We have entered into a binding letter of intent with Masthead Studios to
fund the development of a Massively Multiplayer Online Game (MMOG), code named
"Project: V13." The game has been in design and development at Interplay since
November 2007. Masthead and Interplay teams will work together under the
direction and control of Interplay to complete development of the project. As a
part of the agreement, the game will utilize Masthead's proprietary tools and
MMOG technology developed for Masthead's "Earthrise" project
We are exploring ways to leverage our portfolio of gaming properties
through sequels and various development and publishing arrangements. We are
planning, if we can obtain financing, to develop sequels to some of our 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 was l mainly derived from the
remaining proceeds from the sale of "Fallout".
23
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, 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.
If we do not receive sufficient financing or income we may (i) liquidate
assets, (ii) sell the company (iii) seek protection from our creditors including
the filing of voluntary bankruptcy or being the subject of involuntary
bankruptcy, and/or (iv) continue operations, but incur material harm to our
business, operations or financial conditions. These conditions, combined with
our historical operating losses and our deficits in stockholders' equity and
working capital, raise substantial doubt about our ability to continue as a
going concern.
Our primary capital needs have historically been working capital
requirements necessary to fund our operations. Our operating activities used
cash of $1,162,000 during the twelve months ended December 31, 2008. Atari
Interactive exercised an existing option to purchase, from the Company
intellectual property rights developed by the Company in connection with
Dungeons & Dragons games and the balance of all amounts due from the Company to
Atari Interactive under a note of approximately $1,050,000 was cancelled and
terminated..
We entered into various licensing agreements during 2008 under which we
licensed others to exploit games that we have intellectual property rights to.
We expect in 2009 to enter into similar license arrangements to generate cash
for the Company's operations.
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 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 (January 2003), as may be modified
or supplemented) in an unconsolidated entity that is held by, and material to,
the registrant, where such entity provides financing, liquidity, market risk or
credit risk support to, or engages in leasing, hedging or research and
development services with the registrant.
CONTRACTUAL OBLIGATIONS
The following table summarizes certain of our contractual obligations under
non-cancelable contracts and other commitments at December 31, 2008, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods (in thousands).
----------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 - 3 3 - 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS
----------------------------------------------------------------------------------------------
Lease Commitments (1) 22 14 8 0 0
----------------------------------------------------------------------------------------------
(1) We had a lease commitment at the Beverly Hills office through April 2008.
The Company is presently in negotiations to extend that lease but no
commitments have been made. We also have a lease commitment in Irvine for
our new development offices through March 31, 2009. We also have a lease
commitment at the French representation office through February 28, 2011
with an option for an additional 3 years.
24
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -- INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115 ("SFAS No. 159"). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Subsequent unrealized
gains and losses on items for which the fair value option has been elected will
be reported in earnings. The provisions of SFAS No. 159 are effective for
financial statements issued for fiscal years beginning after November 15, 2007.
We are evaluating if we will adopt SFAS No. 159 and what impact the adoption
will have on our Consolidated Financial Statements if we adopt.
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS 109, ACCOUNTING FOR
INCOME TAXES. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for years
beginning after December 15, 2006. We will adopt FIN 48 as of December 30, 2006,
as required. Currently, we are not able to estimate the impact FIN 48 will have
on our financial statements.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of December 31,
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 risk associated with foreign currency
fluctuations.
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 a $9,000 gain, $60,000 loss and $9,000 loss during the years
ended December 31, 2008, 2007 and 2006, respectively, primarily in connection
with foreign exchange fluctuations in the timing of payments received on
accounts receivable from foreign distributors or licensees.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements begin on page F-1 of this report.
ITEM 9A.(T) 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
25
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
periods specified by the SEC 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 December 31, 2008 that have
materially affected or reasonably likely to materially affect these controls.
Our management, including the CEO, 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.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management, including our Chief Executive Officer and interim
Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting (as such term is defined in
Exchange Act Rule 13a-15(f) and 15d-15(f)) for Interplay Entertainment Corp. and
its subsidiaries (the "Company"). The Company's internal control system was
designed to provide reasonable assurance to the Company's management and Board
of Directors regarding the preparation and fair presentation of published
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.
Because of its inherent limitations, a system of internal control over
financial reporting can provide only reasonable assurance and may not prevent or
detect misstatements. Further, because of changing conditions, effectiveness of
internal control over financial reporting may vary over time. The Company's
processes contain self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Management has assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2008, based on the criteria for
effective internal control described in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its assessment, management concluded that the Company's internal
control over financial reporting was effective as of December 31, 2008.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in Item10 is incorporated herein by reference to the
section entitled "Proposal One ---- Election of Directors" contained in the
Proxy Statement ( the "Proxy Statement") for the 2009 annual meeting of the
stockholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended December 31, 2008.
ITEM 11. EXECUTIVE COMPENSATION
The information in Item 11 is incorporated herein by reference to the
section entitled "Proposal One ---- Election of Directors" contained in the
Proxy Statement.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information in Item12 is incorporated herein by reference to the
section entitled "General Information" ---- Security Ownership of Certain
Beneficial Owners and Management" and "Proposal One ---- Election of Directors"
contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Item 13 is incorporated herein by reference to the
section entitled "Proposal One --- Election of Directors" contained in the Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information in Item 14 is incorporated herein by reference to the
section entitled by reference to the section entitled "Proposal Two ---
Ratification of the Appointment of Independent Registered Public Accountant
Firm" contained in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents, except for exhibit 32.1 which is being furnished
herewith, are filed as part of this report:
(1) Financial Statements
The list of financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the Reports of
Independent Auditors is herein incorporated by reference.
(2) Financial Statement Schedules
The list of financial statement schedules contained in the
accompanying Index to Consolidated Financial Statements covered by the
Reports of Independent Auditors is herein incorporated by reference.
All other schedules are omitted because they are not applicable or the
required information is included in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits
The list of exhibits on the accompanying Exhibit Index is herein
incorporated by reference.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, at Beverly Hills,
California this 31st day of April, XX 2009.
INTERPLAY ENTERTAINMENT CORP.
/s/ Herve Caen
By:___________________________________
Herve Caen
Its: Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)
Exhibit 24.1
POWER OF ATTORNEY
The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Herve Caen with full power of substitution and
resubstitution, as their true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent, may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto, and we do hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report and Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Herve Caen
_________________________ Chief Executive Officer, Interim April 15, 2009
Herve Caen Chief Financial Officer and
Director (Principal Executive
and Financial and Accounting
Officer)
/s/ Eric Caen
_________________________ Director April 15, 2009
Eric Caen
/s/ Michel Welter
_________________________ Director April 15, 2009
Michel Welter
/s/ Alberto Haddad
_________________________ Director April 15, 2009
Alberto Haddad
/s/ Xavier de Portal
_________________________ Director April 15, 2009
Xavier de Portal
28
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
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 Quarterly Report on Form 10-Q for the Quarter
ended March 31, 2008).
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 1, 2008; (incorporated herein by reference to Exhibit 3.6
to the Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 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 1, 2008; (incorporated herein by reference to Exhibit 3.7
to the Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 2008).
3.8 Amended and Restated Bylaws of the Company; (incorporated herein by
reference to Exhibit 3.8 to the Company's Quarterly Report on Form 10-Q
for the Quarter ended September 30, 2008).
4.1 Specimen form of stock certificate for Common Stock; (incorporated
herein by reference to Exhibit 4.1 to the Form S-1)
10.01 Third Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan");
(incorporated herein by reference to Appendix A of the Definitive Proxy
Statement filed on August 20, 2002).
10.02 Form of Stock Option Agreement pertaining to the 1997 Plan;
(incorporated herein by reference to exhibit 10.2 to the form S-1).
10.03 Form of Restricted Stock Purchase Agreement pertaining to the 1997
Plan; (incorporated herein by reference to Exhibit 10.3 to the Form
S-1).
10.04 Form of Indemnification Agreement for Officers and Directors of the
Company; (incorporated herein by reference to Exhibit 10.11 to the Form
S-1).
10.05 Employment Agreement between the Company and Herve Caen dated November
9, 1999; (incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999).
10.06 Trademark License Agreement by and between Bethesda Softworks LLC and
the Company dated as of April 4, 2007; (incorporated herein by
reference to exhibit 10.49 to the Company's 8-K filed on April 12,
2007).
29
10.07 Form of Option exercise agreement dated July 24,2008 between Atari
Interactive Inc. and the Company.; (incorporated herein by reference to
exhibit 10.08 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008.
14.1 Code of Ethics of the Company; (incorporated herein by reference to
Exhibit 14.1 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended December 31, 2003 filed on April 27, 2004).
21.1 Subsidiaries of the Company.
23.1 Consent of Jeffrey S. Gilbert, Independent Registered Public Accounting
firm
24.1 Power of Attorney (included on signature page to this Form 10-K)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer and interim Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Herve Caen.
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITOR
PAGE
----
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at December 31, 2008 and 2007 F-3
Consolidated Statements of Operations for the years ended
December 31, 2008 2007 and 2006 F-4
Consolidated Statements of Stockholder's Equity (Deficit) and
Comprehensive Income (loss) for the years ended
December 31, 2008, 2007, 2006 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Interplay Entertainment Corp.
I have audited the consolidated balance sheets of Interplay Entertainment
Corp. (a majority-owned subsidiary of Financial Planning and Development S.A. )
and Subsidiaries (the "Company") as of December 31, 2008 and 2007 and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive income(loss)and cash flows each of the years in the three year
period ending December 31, 2008. My audit included the schedule of valuation and
qualifying accounts for the years ended December 31, 2008 and 2007and 2006.
These consolidated financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these consolidated
financial statements and the schedule based on my audit.
I conducted my audit in accordance with standards Of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, I express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. I believe my audit provides a reasonable basis for my
opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Interplay Entertainment Corp. and Subsidiaries as of December 31, 2008 and 2007
and the results of their operations and their cash flows for each of the years
in the three year period ending December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also, in my
opinion the related financial statement schedule for the years ended December
31, 2008, 2007 and 2006 when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has limited liquid resources,
a history of losses, negative working capital of $2,405,000 and stockholders'
deficit of $2,302,000. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 1. The consolidated financial statements do
not include any adjustment that might result from the outcomes of these
uncertainties.
/S/ JEFFREY S. GILBERT
----------------------------
JEFFREY S. GILBERT
Los Angeles, California
April 15, 2009
F-2
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
ASSETS 2008 2007
------------- -------------
Current Assets:
Cash ............................................. $ 0 $ 1,138,000
Trade receivables, net of allowances
of $6,000 and $37,000, respectively .......... 87,000 26,000
Inventories ...................................... 1,000 1,000
Deposits ......................................... 7,000 4,000
Prepaid expenses ................................. 11,000 10,000
Other receivables ................................ 9,000 13,000
------------- -------------
Total current assets .......................... 115,000 1,192,000
Property and equipment, net ........................... 48,000 9,000
------------- -------------
Total assets ............................... $ 163,000 $ 1,201,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Drawings in excess of cash balances .............. $ 24,000 $ 0
Convertible note payable ......................... 53,000 1,045,000
Notes payable officer and directors .............. 469,000 729,000
Accounts payable ................................. 1,186,000 911,000
Accrued royalties ................................ 23,000 200,000
Deferred income .................................. 710,000 595,000
------------- -------------
Total current liabilities ..................... 2,465,000 3,480,000
------------- -------------
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value 5,000,000 shares
authorized; no shares issued or outstanding,
respectively,
Common stock, $0.001 par value 300,000,000 shares
authorized; issued and outstanding 108,140,301
shares in 2008 and 103,855,634 shares in 2007 . 108,000 104,000
Paid-in capital .................................. 122,309,000 121,976,000
Accumulated deficit .............................. (124,842,000) (124,349,000)
Accumulated other comprehensive income ........... 123,000 (10,000)
Treasury stock of 4,658,216 shares at December 31,
2008 and 2007
------------- -------------
Total stockholders' (deficit) ................. (2,302,000) (2,279,000)
------------- -------------
Total liabilities and stockholders' (deficit) $ 163,000 $ 1,201,000
============= =============
See accompanying notes.
F-3
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2008 2007 2006
---------------- ---------------- ----------------
Revenue ................................ $ 1,378,000 $ 6,001,0000 $ 967,000
Cost of goods sold ..................... 12,000 8,000 167,000
---------------- ---------------- ----------------
Gross profit ........................ 1,366,000 5,993,000 800,000
---------------- ---------------- ----------------
Operating expenses:
Marketing and sales ................. -- 245,000 509,000
General and administrative .......... 1,492,000 1,275,000 1,560,000
Product development ................. 328,000 18,000 --
---------------- ---------------- ----------------
Total operating expenses ......... 1,820,000 1,538,000 2,069,000
---------------- ---------------- ----------------
Operating income (loss) .......... (454,000) 4,455,000 (1,269,000)
---------------- ---------------- ----------------
Other income (expense):
Interest expense .................... (35,000) (59,000) (139,000)
Other (primarily reversal in 2007
and 2006 of prior year recorded
liabilities and settlements) ..... (4,000) 1,460,000 4,487,000
---------------- ---------------- ----------------
Total other income (expense) ..... (39,000) 1,401,000 4,348,000
---------------- ---------------- ----------------
Income (loss) before provision (benefit)
for income taxes ................. (493,000) 5,856,000 3,079,000
Provision (benefit) for income taxes ... -- -- --
---------------- ---------------- ----------------
Net income (loss) ...................... $ (493,000) $ 5,856,000 $ 3,079,000
================ ================ ================
Net income (loss) per common share:
Basic .................................. $ (0.004) $ 0.059 $ 0.032
================ ================ ================
Diluted ................................ $ (0.004) $ 0.057 $ 0.032
================ ================ ================
Weighted average number of shares used
in calculating net income (loss) per
common share:
Basic .................................. 103,482,000 99,197,000 95,030,000
================ ================ ================
Diluted ................................ 103,482,000 102,027,000 97,120,000
================ ================ ================
F-4
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(DOLLARS IN THOUSANDS)
PREFERRED STOCK COMMON STOCK
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
Balance, December 31, 2005 ....... -- $ -- 93,855,634 $ 94
------------- ------------- ------------- -------------
Issuance of Stock Options ..... -- -- -- --
Shares for Debt - Special
Situations ................ -- -- 10,000,000 10
Treasury stock
Net income .................... -- -- -- --
Other comprehensive income,
net of income taxes:
Foreign currency translation
adjustment ................ -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2006 ....... -- -- 103,855,634 104
------------- ------------- -------------
Net Income .................... -- -- -- --
Other comprehensive income,
net of income taxes:
Foreign currency translation
adjustment ................ -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2007 ....... -- -- 103,855,634 $ 104
Exercise of warrants for common
stock by CEO .............. -- -- 4,000,000 4
Sale of common stock .......... -- -- 284,667 --
Issuance of Warrants for
services .................. -- -- -- --
Issuance of Stock Option ...... -- -- -- --
Treasury stock
Net Income .................... -- -- -- --
Other comprehensive income,
net of income taxes:
Foreign currency translation
adjustment ................ -- -- -- --
============= ============= ============= =============
Balance, December 31, 2008 ....... -- $ -- 108,140,301 $ 108
============= ============= ============= =============
ACCUMULATED
OTHER
PAID-IN ACCUMULATED COMPREHENSIVE
CAPITAL DEFICIT INCOME (LOSS) TOTAL
------------- ------------- ------------- -------------
Balance, December 31, 2005 ....... $ 121,640 $ (133,283) $ 59 $ (11,490)
------------- ------------- ------------- -------------
Issuance of Stock Options ..... 38 -- -- 38
Shares for Debt - Special
Situations ................ 286 -- -- --
Treasury stock
Net income .................... -- 3,079 -- 3,079
Other comprehensive income,
net of income taxes:
Foreign currency translation
adjustment ................ -- (1) (9) (10)
------------- ------------- ------------- -------------
Balance, December 31, 2006 ....... 121,966 (130,205) 50 (8,087)
------------- ------------- ------------- -------------
Net Income .................... -- 5,856 -- 5,856
Other comprehensive income,
net of income taxes:
Foreign currency translation
adjustment ................ -- -- (60) (60)
------------- ------------- ------------- -------------
Balance, December 31, 2007 ....... $ 121,976 $ (124,349) $ (10) $ (2,279)
Exercise of warrants for common
stock by CEO .............. 107 -- -- 111
Sale of common stock .......... 27 -- -- 27
Issuance of Warrants for
services .................. 174 -- -- 174
Issuance of Stock Option ...... 25 -- -- 25
Treasury stock
Net Income .................... -- (493) -- (493)
Other comprehensive income,
net of income taxes:
Foreign currency translation
adjustment ................ -- -- 133 133
============= ============= ============= =============
Balance, December 31, 2008 ....... $ 122,309 $ (124,842) $ 123 $ (2,302)
============= ============= ============= =============
See accompanying notes.
F-5
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2008 2007 2006
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) ................................. $ (493,000) $ 5,856,000 $ 3,079,000
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization .................. 9,000 2,000 4,000
Deposit ........................................ -- -- 4,000
Issuance of stock options ...................... 25,000 12,000 38,000
Issuance of warrants for services .............. 174,000 -- --
Exercise of warrants for common stock by CEO ... 107,000 -- --
Shares issued for settlement of liability ..... -- -- 296,000
Reversal of prior year recorded liabilities .... -- (1,425,000) (4,441,000)
Changes in assets and liabilities:
Trade receivables, net ...................... (61,000) 201,000 201,000
Trade receivables from related parties ...... -- -- 17,000
Inventories ................................. -- 7,000 --
Deposits .................................... (3,000) -- --
Prepaid expenses ............................ (1,000) (4,000) 54,000
Settlement of Atari Note .................... (1,050,000) -- --
Other current assets/receivables ............ 4,000 4,000 (9,000)
Drawings in excess of cash balance .......... 24,000 -- --
Accounts payable ............................ 269,000 (3,315,000) (367,000)
Accrued royalties ........................... (177,000) 30,000 (7,000)
Note payable officer ........................ (269,000) 35,000 694,000
Deferred Income ............................. 115,000 135,000 355,000
Accumulated other comprehensive income ...... 133,000 (60,000) 10,000
----------- ----------- -----------
Net cash provided by (used in) operating
activities ........................... (1,190,000) 1,478,000 (72,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ............... (52,000) (8,000) --
----------- ----------- -----------
Net cash (used in) investing activities . (52,000) (8,000) --
----------- ----------- -----------
Cash flows from financing activities:
Payment of debt ................................... -- (382,000) --
Exercise of warrants for common stock by CEO ...... 111,000 -- --
Sale of common stock .............................. 27,000 -- --
Proceeds from debt ................................ 53,000 -- --
----------- ----------- -----------
Net cash used in financing activities ... 191,000 (382,000) --
Net increase (decrease) in cash ...................... (1,162,000) 1,088,000 (72,000)
Cash, beginning of year .............................. 1,138,000 50,000 122,000
----------- ----------- -----------
Cash, end of year .................................... $ (24,000) $ 1,138,000 $ 50,000
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest ........... $ 33,000 $ 371,000 $ --
=========== =========== ===========
See accompanying notes.
F-6
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
1. DESCRIPTION OF BUSINESS AND OPERATIONS
Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the "Company"), publish and license to others interactive entertainment
software. The Company's software is developed for use on various interactive
entertainment software platforms, including personal computers and video game
consoles. The Company's common stock is quoted on the NASDAQ OTC Bulletin Board
under the symbol "IPLY".
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company had net loss of $493,000 in 2008. At
December 31, 2008, the Company had a stockholders' deficit of $2,302,000 and a
working capital deficit of $2,405,000. The Company has historically funded its
operations from licensing fees, royalty and distribution fee advances, and will
continue to exploit its existing intellectual property rights in our videogames
to provide future funding.
In addition, the Company continues to seek, external sources of funding
including, but not limited to, a sale or merger of the Company, 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 or sales of 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 to fund its current operations. However, no assurance can be given that
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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., Games On-line and Interplay
Japan which is inactive. All significant inter-company accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with insignificant
interest rate risks and original maturities of three months or less from the
date of purchase to be cash equivalents. The carry amounts of cash and cash
equivalents approximate their fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates made in
preparing the consolidated financial statements include, among others, sales
returns and allowances, allowances for uncollectible receivables, cash flows
F-7
used to evaluate the recoverability of prepaid licenses and royalties and
long-lived assets, and certain accrued liabilities related to restructuring
activities and litigation. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company operates in a highly competitive industry that is subject to
intense competition, potential government regulation and rapid technological
change. The Company's operations are subject to significant risks and
uncertainties including financial, operational, technological, regulatory and
other business risks associated with such a company.
INVENTORIES
Inventories consist of packaged software ready for shipment, including
video game console software. Inventories are valued at the lower of cost
(first-in, first-out) or market. The Company regularly monitors inventory for
excess or obsolete items and makes any valuation corrections when such
adjustments are known. Based on management's evaluation, the Company had not
established any valuation allowance at December 31, 2008.
Net realizable value is based on management's forecast for sales of the
Company's products in the ensuing years. The industry in which the Company
operates is characterized by technological advancement and changes. Should
demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's inventories could be
substantially less than the amount shown on the accompanying consolidated
balance sheets.
PREPAID LICENSES AND ROYALTIES
The Company has in the past had prepaid licenses and royalties consisting
of fees paid to intellectual property rights holders for use of their trademarks
or copyrights. Also included in prepaid royalties were prepayments made to
independent software developers under development arrangements that have
alternative future uses. These payments were contingent upon the successful
completion of milestones, which generally represent specific deliverables.
Royalty advances were recoupable against future sales based upon the contractual
royalty rate. The Company amortized these costs of licenses, prepaid royalties
and other outside production costs to cost of goods sold over six months
commencing with the initial shipment in each region of the related title. The
Company amortized these amounts at a rate based upon the actual number of units
shipped with a minimum amortization of 75% in the first month of release and a
minimum of 5% for each of the next five months after release. This minimum
amortization rate reflected the Company's typical product life cycle. Management
evaluates the future realization of such costs quarterly and charges to cost of
goods sold any amounts that management deems unlikely to be fully realized
through future sales. Such costs were classified as current and noncurrent
assets based upon estimated product release dates. There were no prepaid
licenses and royalties at December 31, 2008.
SOFTWARE DEVELOPMENT COSTS
SOFTWARE DEVELOPMENT COSTS. Software development costs include payments
made to independent software developers under development agreements, as well as
direct costs incurred for internally developed products.
We account for software development costs in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Software
development costs are capitalized once the technological feasibility of a
product is established and such costs are determined to be recoverable.
Technological feasibility of a product encompasses both technical design
documentation and game design documentation. For products where proven
technology exists, this may occur early in the development cycle. Technological
feasibility is evaluated on a product-by-product basis. Prior to a product's
release, we expense, as part of "cost of sales -- software royalties and
amortization," capitalized costs when we believe such amounts are not
recoverable. Capitalized costs for those products that are cancelled or
abandoned are charged to product development expense in the period of
cancellation. Amounts related to software development which are not capitalized
are charged immediately to product development expense. We evaluate the future
recoverability of capitalized amounts on a quarterly basis. The recoverability
of capitalized software development costs is evaluated based on the expected
performance of the specific products for which the costs relate. Criteria used
to evaluate expected product performance include: historical performance of
comparable products using comparable technology; orders for the product prior to
its release; and estimated performance of a sequel product based on the
performance of the product on which the sequel is based.
F-8
Commencing upon product release, capitalized software development costs are
amortized to "cost of sales -- software royalties and amortization" based on the
ratio of current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released
in prior periods, we evaluate the future recoverability of capitalized amounts
on a quarterly basis. The primary evaluation criterion is actual title
performance.
Significant management judgments and estimates are utilized in the
assessment of when technological feasibility is established, as well as in the
ongoing assessment of the recoverability of capitalized costs. In evaluating the
recoverability of capitalized costs, the assessment of expected product
performance utilizes forecasted sales amounts and estimates of additional costs
to be incurred. If revised forecasted or actual product sales are less than
and/or revised forecasted or actual costs are greater than the original
forecasted amounts utilized in the initial recoverability analysis, the net
realizable value may be lower than originally estimated in any given quarter,
which could result in an impairment charge.
Research and development costs, which consisted primarily of software
development costs, are expensed as incurred.
ACCRUED ROYALTIES
Accrued royalties consist of amounts due to outside developers and
licensors based on contractual royalty rates for sales of shipped titles. The
Company records a royalty expense based upon a contractual royalty rate after it
has fully recouped the royalty advances paid to the outside developer, if any,
prior to shipping a title.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of computers,
equipment, and furniture and fixtures is provided using the straight-line method
over a period of five to seven years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life or the
remaining lease term. Upon the sale or retirement of property and equipment, the
accounts are relieved of the cost and the related accumulated depreciation, with
any resulting gain or loss included in the consolidated statements of
operations.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. If the cost basis of a long-lived asset is greater than the
estimated fair value, based on various models, including projected future
undiscounted net cash flows from such asset (excluding interest) and replacement
value, an impairment loss is recognized. Impairment losses are calculated as the
difference between the cost basis of an asset and its estimated fair value.
There can be no assurance, however, that market conditions will not change or
demand for the Company's products or services will continue which could result
in additional impairment of other long-lived assets in the future.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and identifiable intangible assets that have indefinite useful
lives are not be amortized but rather be tested at least annually for
impairment, and identifiable intangible assets that have finite useful lives be
amortized over their useful lives. At December 31, 2008 and 2007, the Company
had no goodwill or intangible assets subject to amortization.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and accounts payable
approximates the fair value. In addition, the carrying value of all borrowings
approximates fair value based on interest rates currently available to the
Company. The fair value of trade receivable from related parties, advances from
related party distributor, loans to/from related parties and payables to related
parties are not determinable as these transactions are with related parties.
REVENUE RECOGNITION
Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" and SEC Staff Accounting Bulletin No. 104, Revenue Recognition.
F-9
The Company recognizes revenue from sales by distributors, net of sales
commissions, only as the distributor recognizes sales of the Company's products
to unaffiliated third parties. For those agreements that provide the customers
the right to multiple copies of a product in exchange for guaranteed amounts,
revenue is recognized at the delivery and acceptance of the product gold master.
Per copy royalties on sales that exceed the guarantee are recognized as earned.
Guaranteed minimum royalties on sales, where the guarantee is not recognizable
upon delivery, are recognized as the minimum payments come due. The Company
recognizes revenue on expired contracts when the termination date of the
contract is reached because guaranteed minimum royalties are not reimbursable
and is therefore, recorded as revenue.
The Company is generally not contractually obligated to accept returns,
except for defective, shelf-worn and damaged products in accordance with
negotiated terms. However, on a case by case basis, the Company may permit
customers to return or exchange product and may provide markdown allowances on
products unsold by a customer. Revenue is recorded net of an allowance for
estimated returns, exchanges, markdowns, price concessions and warranty costs.
Such allowances are based upon management's evaluation of historical experience,
current industry trends and estimated costs. Management of the Company estimated
that no allowances were necessary at December 31, 2008 and 2007. The amount of
allowances ultimately required could differ materially in the near term from the
amounts included in the accompanying consolidated financial statements.
Customer support provided by the Company is limited to internet support.
These costs are not significant and are charged to expenses as incurred.
The Company also engages in the sale of licensing rights on certain
products. The terms of the licensing rights differ, but normally include the
right to develop and distribute a product on a specific video game platform. For
these activities, revenue is recognized when the rights have been transferred
and no other obligations exist. The Company has entered into various licensing
agreements during 2008 under which it licensed others to exploit games to which
the Company had intellectual property rights.
REVERSAL OF CERTAIN PRIOR YEAR ACCRUALS AND ACCOUNTS PAYABLE
During the year ended December 31, 2007 and 2006 the Company has reversed
certain accruals and accounts payables of approximately $1.4 million and $4.5
million respectively. It is the Company's policy to reverse outstanding accruals
and accounts payables that have been outstanding for over 4 years and no effort
has been made by the vendor or claimant for that period of time to collect the
outstanding balances.
ADVANCES FROM DISTRIBUTORS
Deferred income is recognized when contracts with distributors expire or
are terminated.
ADVERTISING COSTS
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns that are deferred and charged
to expense at the first run of the advertising. Cooperative advertising with
distributors and retailers is accrued when revenue is recognized. Cooperative
advertising credits are reimbursed when qualifying claims are submitted.
Advertising costs approximated $0, $245,000 and $509,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by the SFAS No. 109, "Accounting for Income Taxes." The statement
requires an asset and liability approach for financial accounting and reporting
of income taxes. Deferred income taxes are provided for temporary differences in
the recognition of certain income and expense items for financial reporting and
tax purposes given the provisions of the enacted tax laws. A valuation allowance
has been provided for all deferred tax assets equal to the amounts of these
assets.
F-10
FOREIGN CURRENCY
The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the United
States are translated into U.S. dollars at the rate of exchange in effect at the
balance sheet date. Income and expense items are translated at the weighted
average exchange rate prevailing during the period. Gains or losses arising from
the translation of the foreign subsidiaries' financial statements are included
in the accompanying consolidated financial statements as a component of other
comprehensive loss. Gains and Losses resulting from foreign currency
transactions amounted to a $9,000 gain, $60,000 loss and $9,000 loss during the
years ended December 31, 2008, 2007 and 2006, respectively, and is included in
other income (expense) in the consolidated statements of operations.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed by dividing income
(loss) attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share is
computed by dividing income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding plus the effect of any
convertible debt, dilutive stock options and common stock warrants if any. For
the years ended December 31, 2008, all options and warrants outstanding to
purchase common stock were excluded from the loss per share computation as these
were antidilutive. For the year ended December 31, 2007 and 2006 certain
warrants and options were dilutive and were included in diluted net income per
share.
Segment Information
The Company discloses information regarding segments in accordance with
SFAS No. 131 DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes standards for reporting of financial information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports. The
Company is managed, and financial information is developed, on a geographical
basis, rather than a product line basis. Thus, the Company has provided segment
information on a geographical basis (see Note 13).
Allowance for Doubtful Accounts
Management establishes an allowance for doubtful accounts based on
qualitative and quantitative review of credit profiles of the Company's
customers, contractual terms and conditions, current economic trends and
historical payment, return and discount experience. Management reassesses the
allowance for doubtful accounts each period. If management made different
judgments or utilized different estimates for any period, material differences
in the amount and timing of revenue recognized could result. Accounts receivable
are written off when all collection attempts have failed.
Cost of Software Revenue
Cost of software revenue primarily reflects the manufacture expense and
royalties to third party developers, which are recognized upon delivery of the
product. Cost of support incl4udes (i) sales commissions and salaries paid to
employees who provide support to clients and (ii) fees paid to consultants,
which are recognized as the services are performed. Sales commissions are
expensed as incurred.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) of the Company includes net income (loss)
adjusted for the change in foreign currency translation adjustments. The net
effect of income taxes on comprehensive income (loss) is immaterial.
STOCK-BASED COMPENSATION
The Company follows the principal of SFS 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.
F-11
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2008, the FASB issued the final version of Staff Position No. APB
14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash
Upon Conversions (Including Partial Cash Settlement) ("APB 14-1") that requires
the liability and equity components of convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) to be
separately accounted for in a manner that reflects the issuer's nonconvertible
debt borrowing rate. APB 14-1 is effective for fiscal years beginning after
December 15, 2008, which for the Company will be fiscal 2009, and interim
periods within those fiscal years and must be applied retrospectively to all
periods presented, which for the Company would include the comparative quarterly
presentations for fiscal 2009. Accordingly, commencing in fiscal 2010, the
Company will present prior period comparative results reflecting the impact of
APB 14-1 if determined to apply to the Company at that time. The Company is
currently evaluating the impact APB 14-1 will have on its consolidated financial
statements, if any.
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination
of the Useful Life of Intangible Assets ("FAS 142-3") that amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. The intent of FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under Statement 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141 and other U.S. generally accepted
accounting principles. FAS 142-3 is effective for fiscal years and interim
periods beginning after December 15, 2008. The Company is currently evaluating
the impact of this pronouncement on its consolidated financial statements, if
any.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements," or SFAS No. 160. SFAS No. 160 amends
Accounting Research Bulletin 51, "Consolidated Financial Statements," or ARB 51,
and requires all entities to report noncontrolling (minority) interests in
subsidiaries within equity in the consolidated financial statements, but
separate from the parent shareholders' equity. SFAS No. 160 also requires any
acquisitions or dispositions of noncontrolling interests that do not result in a
change of control to be accounted for as equity transactions. Further, SFAS No.
160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not believe the adoption of SFAS
No. 160 will have a material affect on our financial statements.
In February 2007, the FASB issued Statement No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -- INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115 ("SFAS No. 159"). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Subsequent unrealized
gains and losses on items for which the fair value option has been elected will
be reported in earnings. The provisions of SFAS No. 159 are effective for
financial statements issued for fiscal years beginning after November 15, 2007.
We are evaluating if we will adopt SFAS No. 159 and what impact the adoption
will have on our Consolidated Financial Statements if we adopt.
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS 109, ACCOUNTING FOR
INCOME TAXES. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for years
beginning after December 15, 2006. We will adopt FIN 48 as of December 30, 2006,
as required. Currently, we are not able to estimate the impact FIN 48 will have
on our financial statements.
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.
F-12
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. 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.
3. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------
2008 2007
------ ------
(Dollars in thousands)
Computers and equipment ........................ $ 38 $ 9
Furniture and fixtures ......................... 10 8
Web Page ....................................... 17 --
------ ------
65 17
Less: Accumulated depreciation
and amortization ............................ (17) (7)
------ ------
Net Equipment ................... $ 48 $ 10
====== ======
For the years ended December 31, 2008, 2007 and 2006, the Company incurred
depreciation and amortization expense of $10,000, $2,000 and $4,000,
respectively. During the years ended December 31, 2008, 2007 and 2006, the
Company disposed of fully depreciated equipment having an original cost of $0,
$14,000 and $0, respectively.
4. NOTES PAYABLE
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 $526,000 in
principal and interest remains outstanding under the demand notes as of December
31, 2008. Interest accrued on the demand notes as of December 31, 2008 was
$30,000.
The Company issued on June 27, 2008 to Interactive Game Group a convertible
promissory note in the amount of $52,000 for consideration received in cash. The
unpaid principal balance of this Convertible Note shall bear interest at a per
annum rate equal to the three (3) months Libor interest rate plus one percent
adjusted quarterly and due with a six month term. (Current interest rate of
2.26%). The note is convertible into 400,000 shares of the Company's common
stock price as of June 30, 2008 ($0.13 per share) which was the market price at
the date of the agreement.
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 was recognized as revenue.
F-13
5. ADVANCES FROM DISTRIBUTORS WHICH ARE CONSIDERED DEFERRED INCOME
DECEMBER 31,
-------------------
2008 2007
-------- --------
(Dollars in thousands)
Non refundable advances for future distribution rights ... $710,000 $595,000
======== ========
6. INCOME TAXES
Income (loss) before provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2008 2007 2006
----------- ----------- -----------
(Dollars in thousands)
Domestic ............ $ (469,000) $ 5,640,000 $ 3,624,000
Foreign ............. (24,000) 216,000 (550,000)
----------- ----------- -----------
Total ............... $ (493,000) $ 5,856,000 $ 3,079,000
=========== =========== ===========
The provision for income taxes is comprised of the following:
YEARS ENDED DECEMBER 31,
2008 2007 2006
------ ------ ------
(Dollars in thousands)
Current:
Federal ...................... $ -- $ -- $ --
State ........................ -- -- --
Foreign ...................... -- -- --
------ ------ ------
Deferred:
Federal ...................... -- -- --
State ........................ -- -- --
------ ------ ------
$ -- $ -- $ --
====== ====== ======
The Company files a consolidated U.S. Federal income tax return, which
includes all of its domestic operations. The Company files separate tax returns
for each of its foreign subsidiaries in the countries in which they reside. The
Company's available net operating loss ("NOL") carry forward for Federal tax
reporting purposes approximates $132 million and expires through the year 2028.
The Company's NOL for California State tax reporting purposes approximate $34
million and expires through the year 2018. The utilization of the federal and
state net operating losses may be limited by Internal Revenue Code.
Due to changes in control the utilization of net operating loss
carryforwards maybe subject to annual limitations under provisions of the
internal revenue code, such limitations could result in the permanent loss of a
portion of the net operating loss carryforwards.
F-14
A reconciliation of the statutory Federal income tax rate and the effective
tax rate as a percentage of pretax loss is as follows:
2008 2007 2006
------ ------ ------
Statutory Federal income tax rate ............ 34.0% 34.0% 34.0%
State income tax effect, net of
federal benefits ........................... 5.8 5.8 5.8
Valuation allowance ........................ (39.8) (39.5) (39.5)
Tax rate differentiation of
foreign earnings
Other
------ ------ ------
-- -- --
====== ====== ======
The components of the Company's net deferred income tax asset (liability)
are as follows:
DECEMBER 31,
----------------------
2008 2007
-------- --------
(Dollars in thousands)
Current deferred tax asset (liability):
Deferred Royalties ............................ $ 113 $ (237)
Accrued expenses .............................. -- (8)
Foreign loss and credit carryforward .......... 974 2,875
Federal and state net operating losses ........ 51,597 53,648
Other ......................................... -- --
-------- --------
52,684 56,278
-------- --------
Non-current deferred tax asset (liability):
Depreciation expense .......................... -- --
Nondeductible reserves ........................ -- --
-------- --------
-- --
-------- --------
Net deferred tax asset before
valuation allowance ........................... 52,684 56,278
Valuation allowance ................................ 52,684 (56,278)
-------- --------
Net deferred tax asset ............................. $ -- $ --
======== ========
The Company maintains a valuation allowance against its deferred tax assets
due to the uncertainty regarding future realization. In assessing the
realizability of its deferred tax assets, management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies. The valuation allowance on deferred tax assets decreased
$3.6 million during the year ending December 31, 2008 and increased $1.8 million
during the year ending December 31, 2007.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is currently on a month to month lease arrangement for the
Beverly Hills office. During 2008 the Company was subleasing on a short-term
basis a portion of the office space to an independent third party. We also have
a lease commitment in Irvine for our new development offices through March 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. The Company
also has a lease commitment at the French representation office through February
28, 2008 with an option for an additional 6 years.
F-15
Total net rent expense was $ 155,000, $83,000 and $77,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
LITIGATION
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.
The litigation with Glutton Creeper was settled in April 2009 without any
material liability to the Company.
Interplay recently received notice that Bethesda Softworks, LLC
("Bethesda") intends to terminate the trademark license agreement between
Bethesda and Interplay which was entered into April 4, 2007 for the development
of FALLOUT MMOG. Despite the fact that no formal action is currently pending,
Bethesda claims that Interplay is in breach of the trademark license agreement
for failure to commence fill scale development of same by April 4, 2009 and to
secure certain funding for the MMOG. Interplay adamantly disputes these claims.
Although the potential damages are currently unknown, if Bethesda ultimately
prevails and cancels the trademark license agreement, Interplay would lose its
license back of the "Fallout" MMOG and any damages resulting therefrom are
unknown at this time.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK AND COMMON STOCK
The Company's articles of incorporation authorize up to 5,000,000 shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors determine. As
of December 31, 2008, there were no shares of preferred stock outstanding.
In August 2001, the former majority shareholder converted 336,070 shares of
Series A Preferred Stock it purchased in April 2000 into 6,679,306 shares of
Common Stock. This conversion did not include accumulated dividends of $740,000
on the Preferred Stock; these were reclassified as an accrued liability since
Titus had elected to receive the dividends in cash. In March 2002, the former
majority shareholder converted its remaining 383,354 shares of Series A
Preferred Stock into 47,492,162 shares of Common Stock. In connection with sale
of Preferred Stock with the former majority shareholder in April 2000 the
Company issued a warrant to purchase 350,000 shares of the Company's common
stock at $3.79 per share and another warrant to the former majority shareholder
to purchase 50,000 shares of the Company's common stock at $3.79 per share. Both
warrants expire in April 2010.
The Company on June 30, 2008 amended and restated its Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock, par value $0.001 per share, a total of 300,000,000 shares of
Common Stock.
WARRANTS ISSUED
The Company issued a total of 5,820,000 warrants during 2008:
On May 20, 2008 the Company issued 5,000,000 10 year warrants at an
exercise price of $0.175 to Herve Caen, the Chief Executive officer and Interim
Chief Financial Officer, in exchange for a reduction in his compensation to
$250,000 through May 15, 2009.
These warrants were valued using the Black-Scholes Model. The amount of $
145,000 was charged to 2008 operations.
On June 30, 2008 the Company issued to Intelligence Agency a warrant to
purchase 20,000 shares of Common Stock of the Company as consideration for
providing a discount for investor relations services to the Company. Such
warrant was issued, and any underlying shares of Common Stock would be issued,
in a private placement exempt from registration pursuant to section 4(2) of the
Securities Act of 1933. Such warrant has a term of 10 years, an exercise price
of $0.13, is immediately exercisable. These warrants were valued using the
Black-Scholes Model.
F-16
These warrants were valued using the Black-Scholes Model. The amount of $
1,000 was charged to 2008 operations.
On June 30, 2008 the Company issued to The Gersh Law Firm a warrant to
purchase 400,000 shares of Common Stock of the Company as consideration for
providing a discount for legal services to the Company. Such warrant was issued,
and any underlying shares of Common Stock would be issued, in a private
placement exempt from registration pursuant to section 4(2) of the Securities
Act of 1933. Such warrant has a term of 10 years, an exercise price of $0.13, is
immediately exercisable. These warrants were valued using the Black-Scholes
Model.
These warrants were valued using the Black-Scholes Model. The amount of $
14,000 was charged to 2008 operations.
On June 30, 2008 the Company issued to Interactive Game Group, LLC a
warrant to purchase up to 2,000,000 shares of Common Stock of the Company as
consideration for entering into a Game Production Agreement with the Company.
Such warrant was issued, and any underlying shares of Common Stock would be
issued, in a private placement exempt from registration pursuant to section 4(2)
of the Securities Act of 1933. Such warrant has a term of 10 years, an exercise
price of $0.13, is immediately exercisable as to 400,000 shares of Common Stock
and becomes exercisable at any time after 60 days with respect to 400,000 shares
of Common Stock for each game up to 4 games that meets the requirements for
production and funding under the Game Production Agreement between the Company
and Interactive Game Group, LLC, The warrants were valued using the
Black-Scholes model. The amount of the $14,000 for the issuance of 400,000
warrants was charged to 2008 operations.
These warrants were valued using the Black-Scholes Model. The amount of $
14,000 was charged to 2008 operations.
During 2006 the Company issued 6,370,000 warrants to purchase the Company's
common stock at $.0279 per share (average closing price over ten days subsequent
to the resolution authorizing the issuance of the warrants) to the officer and
directors.
The 6,100,000 warrants were issued to the officer to reduce his
compensation and to convert a portion of his unpaid compensation into a
conditional demand note. The conditions includes that such note will be paid
only if the tangible net worth of the Company exceeds $1 million or in a case of
change in control. The demand note will accrue interest at a rate of 5%
annually. These warrants were valued using the Black-Scholes Model.
In addition 270,000 warrants were issued to the directors to convert their
earned but unpaid director's fees to conditional demand notes. The conditions
include that such notes will be paid only if the tangible net worth of the
Company exceeds $1 million or in a case of change in control. The demand notes
will accrue interest at a rate of 5% annually. These warrants were valued using
the Black-Scholes Model.
EXERCISE OF WARRANTS
On June 30, 2008 and December 9, 2008 respectively, Herve Caen, Chief
Executive Officer and Interim Chief Financial Officer, exercised an aggregate of
4,000,000 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 of $60,000 and principal of $52,000.
F-17
Outstanding Warrants
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2008 2007 2006
------------------------ ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Warrants outstanding at
beginning of year .. 7,330,000 $ .38 7,330,000 $ .38 9,587,068 $ 1.84
Granted ............ 5,820,000 .175 -- -- 6,370,000 .0279
Exercised .......... (4,000,000) .028 -- -- -- --
Canceled ........... -- -- -- -- (8,626,770) --
---------- ---------- ----------
Warrants outstanding
and exercisable at
end of year ...... 9,150,298 $ .41 7,330,298 $ .38 7,330,298 $ .38
========== ========== ==========
A detail of the warrants outstanding and exercisable as of December 31,
2008 is as follows:
WARRANTS OUTSTANDING AND EXERCISABLE
-----------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE EXERCISE
PRICES OUTSTANDING CONTRACT LIFE PRICE
----------------------- -------------- ------------------ ---------
$1.75 - $1.75 500,000 2.33 $1.75
$3.79 - $3.79 460,298 2.29 3.79
$0.175 - $0.175 5,000,000 9.40 .175
$.13 - $.13 820,000 9.50 .13
$.0279 - $.0279 2,370,000 7.75 .0279
--------------
TOTAL 9,150,298
==============
SALE OF COMMON STOCK
On October 22, 2008 and on December 5, 2008 the Company sold to two private
investors a total of 284,667 shares of Common Stock of the Company, (84,667
shares at $0.09 and 200,000 shares at $0.10 per share) for a total consideration
of $27,620.00. Such shares were issued, in a private placement exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
SHARES RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance at December 31, 2008 is as
follows:
Stock option plan:
Outstanding ........................................... 3,160,000
Available for future grants ........................... 6,840,000
----------
10,000,000
----------
Warrants ................................................. 9,150,298
----------
Total .................................................... 19,150,298
==========
F-18
TREASURY STOCK
In December 2005, NBC Universal returned their 4,658,216 shares of the
Company's common stock at no cost to the Company. The Company included these
shares as treasury stock in 2008 and 2007.
9. NET EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed as net earnings (loss)
available to common stockholders divided by the weighted average number of
common shares outstanding for the period and does not include the impact of any
potentially dilutive securities. Diluted earnings per common share is computed
by dividing the net earnings available to the common stockholders by the
weighted average number of common shares outstanding plus the effect of any
dilutive stock options and common stock warrants and the conversion of
outstanding convertible debentures.
YEARS ENDED DECEMBER 31,
----------------------------------
2008 2007 2006
--------- --------- ---------
(Amounts in thousands, except
per share amounts)
Net income (loss) available to common stockholders ..................... $ (493) $ 5,856 $ 3,079
Interest related to conversion of secured convertible promissory note -- -- --
--------- --------- ---------
Dilutive net income (loss) available to common stockholders ......... $ (493) $ 5,856 $ 3,079
--------- --------- ---------
Shares used to compute net income (loss) per common share:
Weighted-average common shares ...................................... 103,482 99,197 95,030
Dilutive stock equivalents .......................................... -- 2,831 2,090
--------- --------- ---------
Dilutive potential common shares .................................... 103,482 102,028 97,120
========= ========= =========
Net income (loss) per common share:
Basic ............................................................... $ (0.004) $ 0.059 $ 0.032
Diluted ............................................................. $ (0.004) $ 0.057 $ 0.032
There were options and warrants outstanding to purchase 12,310,298 shares
of common stock at December 31, 2008, which were excluded from the earnings per
common share computation as the exercise price was greater than the average
market price of the common shares.
The weighted average exercise price at December 31, 2008, 2007 and 2006 was
$.41, $.38 and $.38, respectively, for the options and warrants outstanding.
In 2008 the warrants and options were anti-dilutive.
For the year ended December 31, 2007 and 2006 certain warrants and options
were dilutive and were included in diluted net income per share.
10. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
The Company has one stock option plan currently outstanding. Under the 1997
Stock Incentive Plan, as amended (the "1997 Plan"), the Company may grant
options to its employees, consultants and directors, which generally vest from
three to five years. At the Company's 2002 annual stockholders' meeting, its
stockholders voted to approve an amendment to the 1997 Plan to increase the
number of authorized shares of common stock available for issuance under the
1997 Plan from four million to 10 million. The Company's Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan- 1991, as amended
(the "1991 Plan"), and the Company's Incentive Stock Option and Nonqualified
Stock Option Plan-1994, as amended, (the "1994 Plan"), have been terminated.
F-19
The following is a summary of option activity pursuant to the Company's
stock option plans:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2008 2007 2006
------------------------ ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding at
beginning of year . 1,410,000 $ .045 2,660,000 $ .05 70,000 $ .30
Granted ........... 1,750,000 $ .175 -- -- 2,590,000 .045
Exercised ......... -- -- -- -- -- --
Canceled .......... -- -- (1,250,000) .045 -- --
---------- ---------- ----------
Options outstanding
at end of year .. 3,160,000 $ .074 1,410,000 $ .045 2,660,000 $ .05
========== ========== ==========
Options exercisable 3,210,000 1,460,000 2,640,000
========== ========== ==========
Black Scholes Single Option approach was used to estimate the fair value
information presented utilizing ratable amortization. There were 1,750,000, 0
and 2,590,000 options granted in 2008, 2007 and 2006, respectively.
A detail of the options outstanding and exercisable as of December 31, 2008
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACT LIFE PRICE OUTSTANDING PRICE
------------------ ----------- ----------------- -------- ----------- --------
$ 0.0279 - $ .68 3,160,000 4.50 $ .074 3,210,000 $ 0.074
11. CONCENTRATION OF CREDIT RISK
The Company typically sells to distributors and retailers on unsecured
credit, with terms that vary depending upon the customer and the nature of the
product. The Company has the risk of non-payment from its customers, whether due
to their financial inability to pay, or otherwise. In addition, while the
Company maintains a reserve for uncollectible receivables, the reserve may not
be sufficient in every circumstance. As a result, a payment default by a
significant customer could cause material harm to the Company's business and
cash flow.
12. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one principal business segment, which is managed
primarily from the Company's U.S. headquarters.
F-20
Net revenues by geographic regions were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2007 2006 2006
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(Dollars in thousands)
North America .. $ 1,139(1) 83% $ 5,755(2) 96% $ 203 21%
Europe ......... 239 17 246 4 471 49
Rest of World .. -- -- -- -- 161 17
OEM, royalty and
licensing ... -- -- -- -- 132 13
------- ------- ------- ------- ------- -------
$ 1,378 100% $ 6,001 100% $ 967 100%
======= ======= ======= ======= ======= =======
(1) Included in the net revenues by geographic regions is the exercising of the
option by Atari Interactive in the amount of $1,050,000.
(2) Included in the net revenues by geographic regions is the sale of "Fallout"
transaction in the amount of $5,750,000.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's summarized quarterly financial data is as follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
Year ended December 31, 2008:
Net revenues ............................. $ 57 $ 40 $ 1,083 $ 199
============ ============ ============ ============
Gross profit ............................. $ 57 $ 2 $ 1,083 $ 190
============ ============ ============ ============
Net income (loss) ........................ $ (344) $ (492) $ 624 $ (281)
============ ============ ============ ============
Net income (loss) per common share basic . $ (0.004) $ (0.005) $ 0.01 $ (0.00)
============ ============ ============ ============
Net income (loss) per common share diluted $ (0.004) $ (0.005) $ 0.01 $ (0.00)
============ ============ ============ ============
Year ended December 31, 2007:
Net revenues ............................. $ 79 $ 5,812 $ 47 $ 63
============ ============ ============ ============
Gross profit ............................. 75 5,810 $ 32 $ 76
============ ============ ============ ============
Net income (loss) ........................ $ 229 $ 5,467 $ 497 (337)
============ ============ ============ ============
Net income (loss) per common share basic . $ (0.00) $ 0.055 $ 0.00 $ (0.00)
============ ============ ============ ============
Net income (loss) per common share diluted $ (0.00) $ 0.055 $ 0.00 $ (0.00)
============ ============ ============ ============
F-21
14. SUBSEQUENT EVENTS
On March 24, 2009 the Company sold to Microprose, LLC, an affiliate of
Interactive Game Group, 5,454,967 shares of Common Stock of the Company and
issued a warrant to purchase 1,677,483 shares of Common Stock of the Company for
a total consideration of $327,298. Such shares and warrant were issued, and any
underlying shares of Common Stock would be issued, in a private placement exempt
from registration pursuant to section 4(2) of the Securities Act of 1933. Such
warrant has a term of 3 years, an exercise price of $0.06, and is immediately
exercisable. Out of the consideration of $327,298, $148,000 was received in
cash, $126,000 was satisfied by the acquisition of certain intellectual property
rights by the Company, and $53,298 was satisfied by the cancelation of the
convertible promissory note (see Note 4) in the amount of $52,000 and accrued
interest thereon from Interactive Game Group.
F-22
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
TRADE RECEIVABLES ALLOWANCE
-------------------------------------------------------------------
BALANCE AT PROVISIONS FOR
BEGINNING OF RETURNS RETURNS AND BALANCE AT END
PERIOD PERIOD AND DISCOUNTS DISCOUNTS OF PERIOD
---------------------------- -------------- -------------- -------------- --------------
Year ended December 31, 2006 $ 2,190 $ (2,173) $ -- $ 17
============== ============== ============== ==============
Year ended December 31, 2007 $ 17 $ 20 $ -- $ 37
============== ============== ============== ==============
Year ended December 31, 2008 $ 37 $ 6 $ (37) $ 6
============== ============== ============== ==============
S-1