UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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.)
1682 LANGLEY AVENUE, IRVINE, CALIFORNIA 92614
(Address of principal executive offices)
(310) 432-1958
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
CLASS ISSUED AND OUTSTANDING AT JUNE 7, 2005
----- --------------------------------------
Common Stock, $0.001 par value 93,855,634
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2005
TABLE OF CONTENTS
--------------
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2005 (unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations
for the Three Months ended March 31, 2005 and
2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2005 and
2004 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 3. Defaults Upon Senior Securities 24
Item 6. Exhibits 24
SIGNATURES 25
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
--------- ---------
Current Assets: (unaudited)
Cash .......................................... $ 43 $ 29
Restricted Cash ............................... -- 2
Trade receivables from related parties,
net of allowances of $2,370 and
$2,370, respectively ...................... 20 10
Trade receivables, net of allowances
of $94 and $34 ........................... 305 139
Inventories ................................... 30 26
Prepaid licenses and royalties ................ 20 --
Deposits ...................................... -- --
Prepaid expenses .............................. 26 --
Other current assets .......................... 11 137
--------- ---------
Total current assets ...................... 455 343
Property and equipment, net ........................ 410 490
--------- ---------
Total assets .............................. $ 865 $ 833
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current debt .................................. $ 1,661 $ 1,575
Accounts payable .............................. 8,949 8,772
Accrued royalties ............................. 3,500 3,501
Deferred income ............................... 476 475
Advances from former related party ............ 3,857 3,872
--------- ---------
Total current liabilities ................. 18,443 18,195
--------- ---------
Commitments and contingencies
Stockholders' Deficit:
Preferred stock, $0.001 par value 5,000,000
shares authorized; no shares issued or
outstanding, respectively,
Common stock, $0.001 par value 150,000,000
shares authorized; 93,855,634 shares
issued and outstanding .................... 94 94
Paid-in capital ............................... 121,640 121,640
Accumulated deficit ........................... (139,427) (139,211)
Accumulated other comprehensive income ........ 115 115
--------- ---------
Total stockholders' deficit ............... (17,578) (17,362)
--------- ---------
Total liabilities and stockholders'
deficit ................................ $ 865 $ 833
========= =========
See accompanying notes.
3
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
(In thousands, except
per share amounts)
Net revenues ....................................... $ 793 $ 6,917
Net revenues from related party distributors ....... -- 1,492
-------- --------
Total net revenues ............................. 793 8,409
Cost of goods sold ................................. 171 5,083
-------- --------
Gross profit ................................... 622 3,326
Operating expenses:
Marketing and sales ............................. 103 991
General and administrative ...................... 648 1,206
Product development ............................. 81 2,007
-------- --------
Total operating expenses ..................... 832 4,204
-------- --------
Operating (loss) income ............................ (210) (878)
Other income (expense):
Interest expense ............................... (6) (14)
Other .......................................... -- (11)
-------- --------
Income before benefit for income taxes ............. (216) (903)
Benefit for income taxes ........................... -- --
-------- --------
Net (loss) income .................................. (216) (903)
-------- --------
Cumulative dividend on participating
preferred stock ................................ -- --
-------- --------
Net (loss) income available to common
stockholders ................................... $ (216) $ (903)
======== ========
Net (loss) income per common share:
Basic .......................................... $ (0.00) $ (0.01)
======== ========
Diluted ........................................ $ (0.00) $ (0.01)
======== ========
Shares used in calculating (loss) net income
per common share:
Basic .......................................... 93,856 93,856
======== ========
Diluted ........................................ 93,856 93,856
======== ========
See accompanying notes.
4
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------- -------
(In thousands)
Cash flows from operating activities:
Net (loss) income .......................................... $ (216) $ (903)
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization ........................... 79 283
Non-cash interest expense ............................... -- --
Changes in operating assets and liabilities:
Trade receivables from related parties ............... (10) 295
Trade receivables, net ............................... (166) (4)
Inventories .......................................... (4) (88)
Prepaid licenses and royalties ....................... (20) (90)
Other current assets, net ............................ 101 (548)
Accounts payable ..................................... 264 2,514
Accrued royalties .................................... -- 205
Payables to former related parties ................... (15) 10
Advances ............................................. -- (2,295)
------- -------
Net cash provided by (used in) operating activities 14 (621)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ......................... -- (5)
------- -------
Net cash used in investing activities ............. -- (5)
------- -------
Cash flows from financing activities:
Repayment of current debt .................................. -- (515)
------- -------
Net cash provided by (used in) financing activities -- (515)
Effect of exchange rate changes on cash ................. -- (2)
Net increase (decrease) in cash ......................... 14 (1,143)
Cash, beginning of period ..................................... 29 1,171
------- -------
Cash, end of period ........................................... $ 43 $ 28
======= =======
Supplemental cash flow information:
Cash paid for:
Interest .......................................... $ 6 $ 6
See accompanying notes.
5
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Interplay Entertainment Corp. (which we refer to as the "Company" in these
Notes) and its subsidiaries reflect all adjustments (consisting only of normal
recurring adjustments) that, in the opinion of management, are necessary for a
fair presentation of the results for the interim period in accordance with
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all information and footnotes required by accounting principles
generally accepted in the United States ("GAAP") for complete financial
statements. The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year or any
other period. The balance sheet at December 31, 2004 has been derived from the
audited consolidated financial statements at that date, but does not include all
information and footnotes required by GAAP for complete financial statements.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004 as filed with the U.S. Securities and Exchange Commission ("SEC").
FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN STATUS
The Company's independent public accountants included a "going concern"
explanatory paragraph in their audit report on the December 31, 2004
consolidated financial statements which were prepared assuming that the Company
will continue as a going concern.
To reduce working capital needs, the Company has implemented various
measures including a reduction of personnel, a reduction of fixed overhead
commitments, cancellation or suspension of development on future titles which
management believes do not meet sufficient projected profit margins. All costs
incurred and expected to be incurred associated with the restructuring
activities of the Company are considered insignificant. Management will continue
to pursue various alternatives to improve future operating results, and further
expense reductions, some of which may have a long-term adverse impact on the
Company's ability to generate successful future business activities.
In addition, the Company continues to seek and expects to require
external sources of funding, including but not limited to, a sale or merger of
the Company, a private placement of the Company's securities, the sale of
selected assets, the licensing of certain product rights, selected distribution
agreements, and/or other strategic transactions sufficient to provide short-term
funding, and potentially achieve the Company's long-term strategic objectives.
The Company expects that it will need to substantially reduce its
working capital needs and/or raise additional capital. However, no assurance can
be given that alternative sources of funding could 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 condensed 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.
See Note 5 for additional factors relating to the Company's going
concern status.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates made in
preparing the condensed consolidated financial statements include, among others,
sales returns and allowances, cash flows used to evaluate the recoverability of
prepaid licenses and royalties, channel exposure and long-lived assets, and
certain accrued liabilities related to litigation.
6
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include
the accounts of Interplay Entertainment Corp. and its wholly-owned subsidiaries,
Interplay Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions
Pty Ltd (Australia), Interplay Co., Ltd., (Japan) and Games On-line.com, Inc.
All significant intercompany transactions have been eliminated.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's
condensed consolidated financial statements to conform to classifications used
in the current period.
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.
With the signing of the new Vivendi distribution agreement in August 2002,
substantially all of the Company's sales were made by two related party
distributors (Note 6), Vivendi, which owns less than 5% of the outstanding
shares of the Company's common stock at March 31, 2005, and Avalon Interactive
Group Ltd. ("Avalon"), formerly Virgin Interactive Entertainment Limited, a
wholly owned subsidiary of Titus, the Company's largest stockholder.
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 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 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 negotiated basis, the Company
permits customers to return or exchange products and may provide markdown
allowances on products unsold by a customer. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right
of Return Exists," revenue is recorded net of an allowance for estimated
returns, exchanges, markdowns, price concessions and warranty costs. Such
reserves are 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 included in
the accompanying condensed consolidated financial statements.
The Company also engages in the licensing of 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 for the Company.
STOCK-BASED EMPLOYEE COMPENSATION
At March 31, 2005, the Company has one stock-based employee
compensation plan. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The Company incurred stock-based
employee compensation expense for the three months ended March 31, 2005 and
2004. The following table illustrates the effect on net income (loss) and
earnings (loss) per common share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
7
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
------- -------
(Dollars in thousands,
except per share
amounts)
Net income (loss) available to common stockholders,
as reported ....................................... $ (216) $ (903)
Pro forma compensation expense ....................... (2) (16)
------- -------
Pro forma net income (loss) available to common
stockholders ...................................... $ (218) $ (919)
======= =======
Earnings (loss) per common share, as reported
Basic ............................................. $ -- $ (0.01)
Diluted ........................................... $ -- $ (0.01)
Earnings per common share, pro forma
Basic ............................................. $ (0.00) $ (0.01)
Diluted ........................................... $ (0.00) $ (0.01)
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December
31, 2004 audited financial statements, filed previously with the SEC in Form
10-K, that were required to be adopted during the period ended March 31, 2005
did not have a significant impact on the Company's financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2005 2004
--------- ---------
(Dollars in thousands)
Packaged software ................... $ 30 $ 26
======== =========
NOTE 3. PREPAID LICENSES AND ROYALTIES
Prepaid licenses and royalties consist of the following:
MARCH 31, DECEMBER 31,
2005 2004
-------- --------
(Dollars in thousands)
Prepaid royalties for titles in development ......... $ 20 $ 0
======== ========
Amortization of prepaid licenses and royalties is included in cost of
goods sold and totaled $0 and $0 for the three months ended March 31, 2005 and
2004, respectively. Included in the amortization of prepaid licenses and
royalties are write-offs of development projects that were cancelled because
they were not expected to meet the Company's desired profit requirements. These
amounts totaled $0 and $0 for the three months ended March 31, 2005 and 2004,
respectively.
8
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
NOTE 4. ADVANCES FROM DISTRIBUTORS AND OTHERS
Advances from distributors and original equipment manufacturers
("OEMs") consist of the following:
MARCH 31, DECEMBER 31,
2005 2004
---------- ----------
(Dollars in thousands)
Advances for other distribution rights ............ $ 475 $ 476
========== ==========
Net advance from Vivendi distribution agreements .. $ 3,857 $ 3,872
========== ==========
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is 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, results of operations or cash flows. From time to time, the Company
may also be engaged in legal proceedings arising outside of the ordinary course
of business.
On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a
$98.8 million complaint for damages against Atari Interactive, Inc. (formerly
known as Infogrames Interactive, Inc.) and other Atari Interactive affiliates as
well as our subsidiary GamesOnline.com, Inc., ("GOL") alleging, among other
things, breach of contract, misappropriation of trade secrets, breach of
fiduciary duties and breach of implied covenant of good faith in connection with
an electronic distribution agreement dated November 2001 between KBK and GOL.
KBK has alleged that GOL failed to timely deliver to KBK assets to a product,
and that it improperly disclosed confidential information about KBK to Atari.
KBK amended its complaint to add us as a separate defendant. GOL counterclaimed
against KBK for breach of contract as KBK owes GOL $700,000 in guaranteed
advanced fees under the term of the agreement. In addition, the Company filed an
action against Atari Interactive for breach of indemnity, among other claims. In
October 2004, the California Superior court dismissed the legal action of KBK
against the Company and its subsidiary GOL and granted a judgment to GOL in the
cross complaint from GOL against KBK for $890,730. GOL dismissed its action
against Atari Interactive in April 2005.
On October 24, 2002, Synnex Information Technologies Inc ("Synnex")
initiated legal proceedings against the company for various claims. The
Company's attorney's have filed and obtained a motion to be relieved as counsel
on August 10, 2004. The company has not yet retained replacement counsel in this
action.
On November 25, 2002, Special Situations Fund III, Special Situations
Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P. (collectively, "Special Situations") initiated
legal proceedings against us seeking damages of approximately $1.3 million,
alleging, among other things, that we failed to secure a timely effective date
for a Registration Statement for our shares purchased by Special Situations
under a common stock subscription agreement dated March 29, 2002 and that we are
therefore liable to pay Special Situations $1.3 million. This matter was settled
and the case dismissed in December 2003. Special Situations had entered into a
settlement agreement with us contemplating payments over time. We are currently
in default of the settlement agreement.
On or about October 9, 2003, Warner Brothers Entertainment, Inc.
("Warner") filed suit against us in the Superior Court for the State of
California, County of Orange, alleging default on an Amended and Restated
Secured Convertible Promissory Note held by Warner dated April 30, 2002, with an
original principal sum of $2.0 million. At the time the suit was filed, the
current remaining principal sum due under the note was $1.4 million in principal
including interest. We owe a remaining balance of approximately $0.34 million
payable in one remaining installment.
In March 2004, we instituted litigation in the Superior Court for the
State of California, Los Angeles County, against Battleborne Entertainment, Inc.
("Battleborne") Battleborne was developing a console product for us tentatively
titled "Airborne: Liberation". Our complaint alleges that Battleborne repudiated
the contract with us
9
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
and subsequently renamed the product and entered into a development agreement
with a different publisher. We seek a declaration from the court that we retain
rights to the product, or damages.
In April 2004, Arden Realty Finance IV LLC ("Arden") filed an unlawful
detainer action against the Company in the Superior Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement. At the time the suit was filed, the alleged outstanding rent
totaled $431,823. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004, Arden obtained a judgment
of approximately $588,000 exclusive of interest. In addition the Company is in
the process of resolving a prior claim with the landlord in the approximate
amount of $148,000, exclusive of interest. The Company has negotiated a
forbearance agreement whereby Arden has agreed to accept payments commencing in
January 2005 in the amount of $60,000 per month until the full amount is paid.
The Company has not accrued any amount for any remaining lease obligation,
should such obligation exist. We are currently in default of the forbearance
agreement.
In April 2004, Bioware Corporation filed an action against the Company
in the Superior Court for the State of California, County of Orange, alleging
breach of contract for failure to pay royalties. At the time of filing, Bioware
alleged that it was owed approximately $156,000 under various agreements for
which it obtained a writ of attachment to secure payment of the alleged
obligation if it is successful at trial. Bioware also sought and obtained a
temporary restraining order prohibiting the Company from transferring assets up
to the amount sought in the writ of attachment. We successfully opposed the
preliminary injunction and vacated the temporary restraining order. Bioware
subsequently dismissed their action.
Monte Cristo Multimedia, a French video game developer and publisher,
filed a breach of contract complaint against the Company in the Superior Court
for the State of California, County of Orange, on August 6, 2002, alleging
damages in the amount of $886,406 plus interest, in connection with an exclusive
distribution agreement. This claim was settled for $100,000, payable in twelve
installments, however, the Company was unable to satisfy its payment obligations
and consequently, Monte Cristo has filed a stipulated judgment against the
Company in the amount of $100,000. If Monte Cristo executes the judgment, it
will negatively affect the Company's cash flow, which could further restrict the
Company's operations and cause material harm to our business.
Snowblind entered into a partial settlement agreement on June 23, 2004
following the suit filed by Snowblind on November 19, 2003. Snowblind filed a
second amended complaint against the Company on or about July 12, 2004 claiming
various causes of action including but not limited to, breach of contract,
account stated, open book account, and recission. The action was settled in
April 2005 and we granted Snowblind the exclusive license to develop games using
the DARK ALLIANCE Trademark under certain conditions. We retained the right to
develop massively multiplayer online games using the DARK ALLIANCE trademark.
In August 2003, Reflexive Entertainment, Inc. filed an action against
the Company in the Orange County Superior Court that was settled in July 2004.
The Company was unable to make the payments and Reflexive sought and obtained
judgment against the company.
On March 27, 2003, KDG France SAS ("KDG") filed an action against
Interplay OEM, Inc. and Herve Caen for various claims. On December 29, 2003 a
settlement agreement was entered into whereby Herve Caen was dismissed from the
action. Further the settlement was entered into with Interplay OEM only in the
amount of $170,000 however KDG reserved its rights to proceed against the
Company if the settlement payment was not made. As of this date the settlement
payment was not made.
In July 2004, we entered into a tri-party agreement with Atari
Interactive, Inc and Vivendi that allows Vivendi to resume North American and
international distribution pursuant to their pre-existing agreements with us of
certain Dungeons & Dragons games, including Baldur's Gate Dark Alliance II. The
agreement provided for proceeds due us to be paid directly to Atari by Vivendi,
up to an amount of $1.0 million of which approximately $.1 million was still
outstanding as of March 31, 2005. As a result we did not receive any proceeds
from Vivendi since July 2004.
10
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
The Company received notice from the Internal Revenue Service ("IRS")
that it owes approximately $117,000 in payroll tax penalties which it has
accrued for at March 31, 2005.
The Company was unable to meet certain 2004 payroll obligations to its
employees; as a result several employees filed claims with the State of
California Labor Board ("Labor Board"). The Labor Board has fined the Company
approximately $10,000 for failure to meet its payroll obligations and set trial
dates for August 2005.
The Company's property, general liability, auto, fiduciary liability,
workers compensation and employment practices liability, have been cancelled.
The Company subsequently entered into a new workers compensation insurance plan.
The Labor Board fined the Company approximately $79,000 for having lost workers
compensation insurance for a period of time. The Company is appealing the Labor
Board fines. On December 29, 2004, Piper Rudnick LLP ("Piper Rudnick") filed an
action against Interplay Entertainment Corp. for various claims for unpaid
services. We are currently evaluating the merit of this lawsuit.
NOTE 6. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings or (loss) per common share is computed as net earnings
attributable 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 attributable to the common stockholders by the
weighted average number of common shares outstanding plus the effect of any
dilutive stock options and other equity instruments.
2005 2004
-------- --------
(In thousands, except
per share amounts)
Net income (loss) available to common stockholders $ (216) $ (903)
-------- --------
Interest related to conversion of secured
convertible promissory note ................... $ -- $ --
-------- --------
Dilutive net income (loss) available to common
stockholders .................................. $ -- $ --
Shares used to compute income (loss) per share:
Weighted-average common shares ................ 93,856 93,856
Dilutive stock equivalents .................... -- --
-------- --------
Dilutive potential common shares .............. 93,856 93,856
======== ========
Net Income (loss) per common share:
Basic ......................................... $ -- $ (0.01)
Diluted ....................................... $ -- $ (0.01)
-------- --------
There were options and warrants outstanding to purchase and 9,798,218
shares of common stock at March 31, 2005 and 2004, respectively, which were
excluded from the earnings per share computation for the three months ended
March 31, 2004, as the exercise price was greater than the average market price
of the common shares. The weighted average exercise price of the outstanding
stock options and common stock warrants at March 31, 2005 and 2004 was $1.84 and
$1.84 respectively.
11
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
NOTE 7. RELATED PARTIES
Amounts receivable from and payable to related parties are as follows:
MARCH 31, DECEMBER 31,
2005 2004
------- -------
(Dollars in thousands)
Receivables from related parties:
Titus TSC ............................... $ 327 $ 327
Titus KK ................................ -- --
Titus Sarl .............................. 18 18
VIE Acquisition Group ................... 20 10
Avalon .................................. 2,025 2,025
Allowance for doubtful accounts ......... (2,370) (2,370)
------- -------
Total ................................... $ 20 $ 10
======= =======
Payables to related parties:
Titus GIE ............................... -- --
------- -------
Total ................................... $ -- $ --
======= =======
DISTRIBUTION AND PUBLISHING AGREEMENTS
ACTIVITIES WITH RELATED PARTIES
It is our policy that related party transactions shall be reviewed and
approved by a majority of our disinterested directors or our Independent
Committee.
Our operations involve significant transactions with our majority
stockholder Titus and its affiliates. We have a major distribution agreement
with Avalon, an affiliate of Titus.
TRANSACTIONS WITH TITUS
Titus presently owns approximately 58 million shares of common stock,
which represents approximately 62% of our outstanding common stock, our only
voting security.
As of March 31, 2005 and December 31, 2004, Titus and its affiliates
excluding Avalon owed us $365,000 and $355,000, respectively. We owed Titus and
its affiliates excluding Avalon $0 and $0 as of March 31, 2005 and December 31,
2004 respectively.
TRANSACTIONS WITH TITUS AFFILIATES
TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS
We had an International Distribution Agreement with Avalon, a wholly
owned subsidiary of Titus. Pursuant to this distribution agreement, Avalon
provided for the exclusive distribution of substantially all of our products in
Europe, Commonwealth of Independent States, Africa and the Middle East for a
seven-year period ending February 2006, cancelable under certain conditions,
subject to termination penalties and costs. Under this agreement, as amended, we
paid Avalon a distribution fee based on net sales, and Avalon provided certain
market preparation, warehousing, sales and fulfillment services on our behalf.
In connection with the International Distribution Agreement with Avalon, we
incurred distribution commission expense of $0 and $1.4.million, for the three
months ended March 31, 2005, and 2004 respectively. This agreement was
terminated as a result of Avalon's liquidation in February 2005.
12
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
TRANSACTIONS WITH TITUS SOFTWARE
In March 2003, we entered into a note receivable with Titus Software
Corp., ("TSC"), a subsidiary of Titus, and advanced TSC $226,000. The note earns
interest at 8% per annum and was due in February 2004. In May 2003, our Board of
Directors rescinded the note receivable and demanded repayment of the $226,000
from TSC. As of the date of this filing the balance on the note with accrued
interest has not been paid. The balance on the note receivable, with accrued
interest, at March 31, 2004 was approximately $254,000. The total receivable due
from TSC is approximately $327,000 as of March 31, 2005. The majority of the
additional approximately $73,000 was due to TSC subletting office space and
miscellaneous other items.
In May 2003, we paid TSC $60,000 to cover legal fees in connection with
a lawsuit against Titus. As a result of the payment, our CEO requested that we
credit the $60,000 to amounts we owed to him arising from expenses incurred in
connection with providing services to us. Our Board of Directors is in the
process of investigating the details of the transaction, including independent
counsel review as appropriate, in order to properly record the transaction.
TRANSACTIONS WITH TITUS JAPAN
In June 2003, we began operating under a representation agreement with
Titus Japan K.K. ("Titus Japan"), a majority-controlled subsidiary of Titus,
pursuant to which Titus Japan represents us as an agent in regards to certain
sales transactions in Japan. This representation agreement has not yet been
approved by our Board of Directors and is currently being reviewed by them. Our
Board of Directors has approved the payments of certain amounts to Titus Japan
in connection with certain services already performed by them on our behalf. As
of March 31, 2005 we had a zero balance with Titus Japan. During the three
months ending March 31, 2005 our Japanese subsidiary paid to Titus Japan
approximately $97,000 in commissions, marketing and publishing staff services.
Our Japanese subsidiary had approximately $184,000 in revenue in the three
months ending March 31, 2005.
TRANSACTIONS WITH TITUS SARL
As of March 31, 2005 and March 2004 we have receivables of $18,000 and
$43,000 respectively for product development services that we provided. Titus
SARL was placed into involuntary liquidation in January 2005. These receivables
have been fully reserved.
TRANSACTIONS WITH TITUS GIE
In February 2004, we engaged the services of GIE Titus Interactive
Group, a wholly owned subsidiary of Titus, for a three-month service agreement
pursuant to which GIE Titus or its agents shall provide to us certain foreign
administrative and legal services at a rate of $5,000 per month for three
months. As of March 31, 2005, we had a zero balance with Titus GIE Interactive
Group. Titus GIE was placed into involuntary liquidation in January 2005.
13
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2005
NOTE 8. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one principal business segment, which is
managed primarily from the Company's U.S. headquarters.
Net revenues by geographic regions were as follows:
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2005 2004
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------ ------ ------
(Dollars in thousands)
North America .......... $ 37 5% $ 339 4%
Europe ................. 457 58 6,920 82
Rest of World .......... 240 31 944 11
OEM, royalty
and licensing ........ 59 2 206 2
------ ------ ------ ------
$ 793 96% $8,409 99%
====== ====== ====== ======
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
Interplay Entertainment Corp., which we refer to in this Report as
"we," "us," or "our," is a developer and publisher of interactive entertainment
software for both core gamers and the mass market. The information contained in
this Form 10-Q is intended to update the information contained in our Annual
Report on Form 10-K for the year ended December 31, 2004, as amended, and
presumes that readers have access to, and will have read, the "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information contained in such Form 10-K, as amended.
This Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and such forward-looking statements are
subject to the safe harbors created thereby. For this purpose, any statements
contained in this Form 10-Q, except for historical information, may be deemed to
be forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "should," "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to help identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions. For example, any statements regarding future cash flow,
revenue or expense expectations, including those forward-looking statements in
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations", financing activities, future cash flows, cash constraints, sales
or mergers and cost reduction measures are forward-looking statements and there
can be no assurance that we will effect any or all of these objectives in the
future. Specifically, the forward-looking statements in this Item 2 assume that
we will continue as a going concern. Risks and Uncertainties that may affect our
future results are discussed in more detail in the section titled "Risk Factors"
in Item 7 of our Form 10-K for the year ended December 31, 2004 filed with the
U.S. Securities and Exchange Commission (the "SEC"). Assumptions relating to our
forward-looking statements involve judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, our industry, business
and operations are subject to substantial risks, and the inclusion of such
information should not be regarded as a representation by management that any
particular objective or plans will be achieved. In addition, risks,
uncertainties and assumptions change as events or circumstances change. We
disclaim any obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-Q with the SEC
or otherwise to revise or update any oral or written forward-looking statement
that may be made from time to time by us or on our behalf.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including, among others, those related to revenue recognition,
prepaid licenses and royalties and software development costs. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in preparation of our condensed consolidated financial
statements.
15
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.
Commencing in August 2001, substantially all of our sales are made by
two distributors, Vivendi, and Avalon, an affiliate of our majority shareholder
Titus. We recognize revenue from sales by distributors, net of sales
commissions, only as the distributor recognizes sales of our 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, we
recognize revenue at the delivery and acceptance of the product gold master. We
recognize per copy royalties on sales that exceed the guarantee as copies are
sold.
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 provide customer support only via telephone and the Internet.
Customer support costs are not significant and we charge such costs to expenses
as we incur them.
We also engage in the licensing of 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 for the
Company.
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 and 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 amortize 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 non current 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.
We evaluate the recoverability of prepaid licenses and royalties on a
product by product basis. Prepaid royalties for products that are cancelled are
expensed in the period of cancellation to cost of goods sold. In addition, a
charge to cost of sales is recorded when our forecast for a particular game
indicates that un-amortized capitalized costs exceed the net realizable value of
that asset. The net realizable value is the estimated net future proceeds from
our distributors that are reduced by previously capitalized cost and the
estimated future cost of completing the game. If a revised game sales forecast
is less than our current game sales forecast, or if actual game sales are less
than management's forecast, it is possible we could accelerate the amortization
of prepaid licenses and royalties previously capitalized. Once the charge has
been taken, that amount is not expensed in future quarters when the product
shipped.
During the three months ended March 31, 2005 and 2004, we recorded
prepaid licenses and royalties impairment charges to cost of goods sold of $0
million and $0 million respectively. Our prepaid royalty balances at March 31,
2005 was $0, net of reserves of $.869 million.
16
SOFTWARE DEVELOPMENT COSTS
Our internal research and development costs, which consist primarily of
software development costs, are expensed as incurred. SFAS No. 86, "Accounting
for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed",
provides for the capitalization of certain software development costs incurred
after technological feasibility of the software is established or for
development costs that have alternative future uses. Under our current practice
of developing new products, the technological feasibility of the underlying
software is not established until substantially all of the product development
is complete. We have not capitalized any software development costs on internal
development projects, as the eligible costs were determined to be insignificant.
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 Company's 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.
RESULTS OF OPERATIONS
The following table sets forth certain selected consolidated statements
of operations data, segment data and platform data for the periods indicated in
dollars and as a percentage of total net revenues:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2005 2004
------------------ ------------------
% OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES
------- ------- ------- -------
(Dollars in thousands)
Net revenues ........................ $ 793 100 % $ 8,409 100 %
Cost of goods sold .................. 171 22 % 5,083 60 %
------- ------- ------- -------
Gross profit ................... 622 78 % 3,326 40 %
------- ------- ------- -------
Operating expenses:
Marketing and sales ............ 103 13 % 991 12 %
General and administrative ..... 648 82 % 1,206 14 %
Product development ............ 81 10 % 2,007 23 %
------- ------- ------- -------
Total operating expenses ....... 832 105 % 4,204 49 %
------- ------- ------- -------
Operating income (loss) ............. (210) (26)% (878) (10)%
Other expense ....................... (6) (1)% (25) 0 %
------- ------- ------- -------
Net income (loss) ................... $ (216) (26)% $ (903) (11)%
======= ======= ======= =======
Net revenues by geographic region:
North America .................. $ 37 5 % $ 339 4 %
International .................. 697 88 % 7,864 94 %
OEM, royalty and licensing ..... 59 7 % 206 2 %
------- ------- ------- -------
793 100 % 8,409 100 %
======= ======= ======= =======
Net revenues by platform:
Personal computer .............. $ 132 17 % $ 694 8 %
Video game console ............. 602 77 % 7,509 89 %
OEM, royalty and licensing ..... 59 6 % 206 3 %
------- ------- ------- -------
793 100 % 8,409 100 %
======= ======= ======= =======
17
NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES
Geographically, our net revenues for the three months ended March 31,
2005 and 2004 breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
North America ................... $ 37 $ 339 $ (302) (89)%
International ................... 697 7,864 $(7,167) (91)%
OEM, Royalty & Licensing ........ 59 206 $ (147) (72)%
Net Revenues .................... 793 8,409 $(7,616) (91)%
Net revenues for the three months ended March 31, 2005 were $.8
million, a decrease of 91% compared to the same period in 2004. This decrease
resulted from an 89% decrease in North American net revenues and a 72% decrease
in OEM, royalties and licensing revenues International sales decreased 91% net
revenues.
North American net revenues for the three months ended March 31, 2005
were $0.4 million. The decrease in North American net revenues in 2005 was
mainly due to an 89% decrease in back catalog sales.
International net revenues for the three months ended March 31, 2005
were $.697 million. The decrease in International net revenues for the three
months ended March 31, 2005 was mainly due to releasing BALDUR'S GATE: DARK
ALLIANCE II and FALLOUT: BROTHERHOOD OF STEEL in Europe in 2004. Overall, we had
a $7.6 million decrease in revenue compared to the 2004 period.
OEM, royalty and licensing net revenues for the three months ended
March 31, 2005 were $0.59 million, a decrease of $.147 million as compared to
the same period in 2004.
PLATFORM NET REVENUES
Our platform net revenues for the three months ended March 31, 2005 and
2004 breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
Personal Computer ............... $ 132 $ 694 $ (562) (81)%
Video Game Console .............. 602 7,509 $(6,907) (92)%
OEM, Royalty & Licensing ........ 59 206 $ (147) (72)%
Net Revenues .................... 793 8,409 $(7,916) (95)%
PC net revenues for the three months ended March 31, 2005 were $0.13
million, a decrease of 81% compared to the same period in 2004. The decrease in
PC net revenues in 2005 was primarily due to lower back catalog sales. Video
game console net revenues were $.602 million, a decrease of 92% for the three
months ended March 31, 2005 compared to the same period in 2004, due to
releasing BALDUR'S GATE: DARK ALLIANCE II and FALLOUT: BROTHERHOOD OF STEEL in
Europe in 2004.
COST OF GOODS SOLD; GROSS PROFIT MARGIN
Our net revenues, cost of goods sold and gross margin for the three
months ended March 31, 2005 and 2004 breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
Net Revenues ................ $ 793 $ 8,409 $(7,616) (90)%
Cost of Goods Sold .......... 171 5,083 (4,912) (96)%
Gross Profit Margin ......... 622 3,326 (2,704) (81)%
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. For sales of titles under the new 2002 distribution
arrangement with Vivendi, our cost of goods consists of royalties paid to
developers. Cost of goods sold related to royalty-based net revenues primarily
represents third party licensing
18
fees and royalties paid by us. Typically, cost of goods sold as a percentage of
net revenues for video game console products is higher than cost of goods sold
as a percentage of net revenues for PC based products due to the relatively
higher manufacturing and royalty costs associated with video game console and
affiliate label products. We also include in the cost of goods sold the
amortization of prepaid royalty and license fees paid to third party software
developers. We expense prepaid royalties over a period of six months commencing
with the initial shipment of the title at a rate based upon the number of units
shipped. We evaluate the likelihood of future realization of prepaid royalties
and license fees quarterly, on a product-by-product basis, and charge the cost
of goods sold for any amounts that we deem unlikely to realize through future
product sales.
Our cost of goods sold decreased 96% to $.171 million in the three
months ended March 31, 2005 compared to the same period in 2004. The decrease
was due to no amortization of prepaid royalties on externally developed products
in the three months ended March 31, 2005 as compared to the 2004 period, as
revenue was generated from non-licensed products or products with no unrecouped
prepaid royalties.
Our gross margin increased to 79% for the 2005 period from 40% in the
2004 period. This was primarily due to the 2005 period having a higher
percentage of licensing revenue compared to distribution revenue.
MARKETING AND SALES
Our marketing and sales expense for the three months ended March 31,
2005 and 2004 breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
Marketing and Sales ......... $ 103 $ 991 $ (888) (90)%
Marketing and sales expenses primarily consist of advertising and
retail marketing support, sales commissions, marketing and sales personnel,
customer support services and other related operating expenses. Marketing and
sales expenses for the three months ended March 31, 2005 were $103,000, a 90%
decrease as compared to the 2004 period. The decrease in marketing and sales
expenses is due to a $888,000 decrease in advertising and retail marketing
support expenditures due to releasing BALDUR'S GATE: DARK ALLIANCE II and
FALLOUT: BROTHERHOOD OF STEEL in Europe in 2004 and not having released any
products in 2005.
GENERAL AND ADMINISTRATIVE
Our general and administrative expense for the three months ended March
31, 2005 and 2004 breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
General and Administrative .. $ 648 $ 1,206 $ (558) (47)%
General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses for the
three months ended March 31, 2005 were $648,000, a 47% decrease as compared to
the same period in 2004. The decrease is mainly due to a $558,000 decrease in
personnel costs and general expenses.
We expect our general and administrative expenses to decrease in 2005
compared to 2004.
PRODUCT DEVELOPMENT
Our product development expense for the three months ended March 31,
2005 and 2004 breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
Product Development ......... $ 81 $ 2,007 $(1,926) (96)%
Product development expenses for the three months ended March 31, 2005
were approximately $81,000, a 96% decrease as compared to the same period in
2004. This decrease is due to a $1,9 million decrease in personnel costs as a
result of a reduction in product development personnel during 2005 as compared
to 2004.
19
We expect our product development expenses to decrease in 2005 compared
to 2004 as a result of reductions in product development personnel during 2005.
OTHER EXPENSE, NET
Our other expense for the three months ended March 31, 2005 and 2004
breakdown as follows: (in thousands)
2005 2004 CHANGE % CHANGE
------- ------- ------- -------
Other Expense .............. $ 6 $ 25 $ 19 (76)%
Other expense consists primarily of interest expense on our debt and
foreign currency exchange transaction gains and losses. Other expense for the
three months ended March 31, 2005 was $6,000, a 76% decrease as compared to the
same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had a working capital deficit of approximately
$18 million, and our cash balance was approximately $.04 million. We currently
have no cash reserves and are unable to pay current liabilities. We cannot
continue in our current form without obtaining additional financing or income.
On April 16, 2004, Arden Realty, our landlord filed an unlawful
detainer action against us alleging unpaid rent of approximately $432,000. We
were unable to pay our rent, and vacated the office space during the month of
June 2004. On June 3, 2004, our Landlord obtained a judgment of approximately
$588,000 exclusive of interest. We also owe an additional approximately $148,000
on a prior settlement with the Landlord. We negotiated a forbearance agreement
whereby Arden has agreed to accept payments commencing in January 2005 in the
amount of $60,000 per month until the full amount is paid. We are currently in
default of this agreement.
We have received notice from the Internal Revenue Service ("IRS") that
we owe approximately $117,000 in payroll tax penalties for late payment of
payroll taxes in the 3rd and 4th quarters of 2003 and the 1st and 2nd quarters
of 2004. Such amount has been accrued at December 31, 2004. We have received
notice from the California Employment Development Department that we owe payroll
taxes and penalties of approximately $101,000. We have received notice from the
State Board of Equalization that we owe approximately $64,000 in State Use Tax.
We have also received notice from the Orange County Treasurer that we owe
approximately $28,000 in property taxes. Such amounts have been accrued at March
31, 2005.
We were unable to meet certain 2004 payroll obligations to our
employees as a result several employees filed claims with the State of
California Labor Board ("Labor Board"). The Labor Board has fined us
approximately $10,000 for failure to meet our payroll obligations and set trial
dates for August 2005.
Since we were having difficulty meeting our payroll obligations on a
timely basis to our employees a large number of our employees stopped reporting
to work in late May and early June 2004. We were subsequently evicted from our
building at 16815 Von Karman Avenue in Irvine, California in mid June 2004. We
had a core group of approximately 5 employees on payroll on March 31, 2005. All
employees have not been paid for the period August through December 31, 2004.
Since we have been unable to pay the employees we have continuing liability to
them.
Our property, general liability, auto, fiduciary liability, workers
compensation, directors and officers, and employment practices liability
insurance policies, have been cancelled. We obtained a new workers' compensation
insurance policy. The Labor Board fined us approximately $79,000 for not having
worker's compensation coverage for a period of time. Our health insurance was
also cancelled but was subsequently reinstated. We are appealing the Labor Board
fines.
We entered into tri-party agreements with Atari Interactive, Inc. and
Vivendi and Avalon that allows Vivendi to resume North American distribution,
and Avalon to resume International distribution pursuant to their pre-existing
agreements with us of certain Dungeons & Dragons games, including BALDUR'S GATE:
DARK ALLIANCE II. Vivendi has paid Atari approximately $853,000 as of March 31,
2005.
20
Interplay licensed to Bethesda Softworks LLC, "Bethesda" the rights to
develop FALLOUT 3 on all platforms for $1.175 million minimum guaranteed advance
against royalties. Bethesda also has an option to develop two sequels FALLOUT 4,
and FALLOUT 5 for $1.0 million minimum guaranteed advance against royalties per
sequel. Interplay retained the rights to develop a massively multiplayer online
game using the Fallout Trademark.
We have substantially reduced our operating expenses. We need to reduce
our continuing liabilities. We have to raise additional capital or financing. If
we do not receive sufficient financing 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.
Additionally, we have reduced our fixed overhead commitments, and
cancelled or suspended development on future titles which management believes do
not meet sufficient projected profit margins, and scaled back certain marketing
programs associated with the cancelled projects. Management will continue to
pursue various alternatives to improve future operating results.
We continue to seek external sources of funding, including but not
limited to, incurring debt, the sale of assets or stock, 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 our long-term strategic objectives.
We have been operating without a credit facility since October 2001,
which has adversely affected cash flow. We continue to face difficulties in
paying our vendors, and employees, and have pending lawsuits as a result of our
continuing cash flow difficulties. We expect these difficulties to continue
during 2005.
Historically, we have funded our operations primarily through the use
of lines of credit, cash flow from operations, including royalty and
distribution fee advances, cash generated by the sale of securities, and the
sale of assets.
Our primary capital needs have historically been working capital
requirements necessary to fund our operations, the development and introduction
of products and related technologies and the acquisition or lease of equipment
and other assets used in the product development process. Our operating
activities generated cash of $.014 million during the three months ended March
31, 2005.
Avalon distributed our products in Europe, the commonwealth of
Independent States, Africa and the Middle East. Our distribution agreement with
Avalon was terminated following Avalon's involuntary judicial liquidation in
February 2005. In March 2005 we appointed our wholly owned subsidiary, Interplay
Productions Ltd, as our distributor in Europe and other selected territories. As
a result, we cannot guarantee our ability to collect fully the debts we believe
are due and owed to us from Avalon. We subsequently fully reserved the Avalon
receivable.
Currently there is no internal development of new titles going on.
If operating revenues from product releases are not sufficient to fund
our operations, no assurance can be given that alternative sources of funding
could be obtained 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. The accompanying
condensed consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets and liabilities that may result from the outcome of this uncertainty.
There can be no guarantee that we will be able to meet all contractual
obligations or liabilities in the future, including payroll obligations.
21
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements under which we have
obligations under a guaranteed contract that has any of the characteristics
identified in paragraph 3 of FASB Interpretation No. 45 "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". We do not have any retained or contingent interest in
assets transferred to an unconsolidated entity or similar arrangement that
serves as credit, liquidity or market risk support to such entity for such
assets. We also do not have any obligation, including a contingent obligation,
under a contract that would be accounted for as a derivative instrument. We have
no obligations, including a contingent obligation arising out of a variable
interest (as referenced in FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, as amended) in an unconsolidated entity that is held by, and
material to, us, where such entity provides financing, liquidity, market risk or
credit risk support to, or engages in leasing, hedging or research and
development services with us.
CONTRACTUAL OBLIGATIONS
The following table summarizes certain of our contractual obligations
under non-cancelable contracts and other commitments at March 31, 2005, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods: (in thousands)
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- --------------------------------- --------- -------- --------- ---------- ---------
Developer License Commitments (1) $ 4,694 $ 3,051 $ 1,643
Lease Commitments (2) $ 737 $ 737 $ -
Payroll Taxes (3) $ 310 $ 310 $ -
Other Commitments (4) $ 1,476 $ 970 $ 506
Total $ 7,217 $ 5,068 $ 2,149
We will need to substantially reduce our working capital needs,
continue to consummate certain sales of assets and/or raise additional financing
to meet our contractual obligations.
(1) Developer/Licensee Commitments: The products produced by us are
designed and created by our employee designers and artists and by non-employee
software developers ("independent developers"). We typically advance development
funds to the independent developers during development of our games, usually in
installment payments made upon the completion of specified development
milestones, which payments are considered advances against subsequent royalties
based on the sales of the products. These terms are typically set forth-in
written agreements entered into with the independent developers. In addition we
have content license contracts that contain minimum guarantee payments and
marketing commitments that are not dependent on any deliverables. These
developer and content license commitments represent the sum of (1) minimum
marketing commitments under royalty bearing licensing agreements, and (2)
minimum payments and advances against royalties due under royalty-bearing
licenses and developer agreements.
(2) Lease Commitments: Our headquarters were located in Irvine,
California where we leased approximately 81,000 square feet of office space.
This lease would have expired in June 2006. On or about April 16, 2004, Arden
Realty Finance IV LLC filed an unlawful detainer action against us in the
Superior Court for the State of California, County of Orange, alleging our
default under our corporate lease agreement. At the time the suit was filed, the
alleged outstanding rent totaled $431,823. We were unable to satisfy this
obligation and reach an agreement with our landlord, the we subsequently
forfeited our lease and vacated the building. Arden Realty obtained a judgment
for approximately $588,000 exclusive of interest. We also owe an additional
approximate $149,000 making a total owed to Arden of approximately $737,000. We
negotiated a forbearance agreement whereby Arden has agreed to accept payments
commencing in January 2005 in the amount of $60,000 per month until the full
amount is paid we have been unable to make any of the $60,000 per month
payments. We have monthly rental agreements in Irvine, CA and Beverly Hills,
California for our operations.
(3) We have received notice from the Internal Revenue Service ("IRS")
that we owe approximately $117,000 in payroll tax penalties for late payment of
payroll taxes in the 3rd and 4th quarters of 2003 and the 1st and 2nd quarters
of 2004. Such amount has been accrued at March 31, 2005. We have received notice
from the California Unemployment Development Department that we owe payroll
taxes and penalties of approximately
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$101,000. We have received notice from the State Board of Equalization that we
owe approximately $64,000 in State Use Tax. We have also received notice from
the Orange County Treasurer that we owe approximately $28,000 in property taxes.
Such amounts have been accrued at March 31, 2005.
(4) Other Commitments: Consist of payment plans entered into with
various creditors.
ACTIVITIES WITH RELATED PARTIES
Incorporated by reference to Note 7 to the Condensed Consolidated
Financial Statements as of March 31, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of March 31,
2005. However, we are exposed to certain market risks arising from transactions
in the normal course of business, principally the risk associated with foreign
currency fluctuations. We do not hedge our interest rate risk, or our risk
associated with foreign currency fluctuations.
INTEREST RATE RISK
Currently, we do not have a line of credit, but we anticipate we may
establish a line of credit in the future.
FOREIGN CURRENCY RISK
Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our foreign receivables.
We recognized gains of $0 and $150 during the three months ended March
31, 2005 and 2004 respectively, primarily in connection with foreign exchange
fluctuations in the timing of payments received on accounts receivable which
have been from Avalon. Avalon was liquidated in February 2005. The receivables
were fully reserved.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and interim Chief Financial Officer of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
this evaluation, our Chief Executive Officer and interim Chief Financial Officer
concluded that our disclosure controls and procedures are effective, at the
reasonable assurance level, 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 March 31, 2005 that have
materially affected or are 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, 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 there can be no absolute assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls may
become
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inadequate because of changes in circumstances, and/or the degree of
compliance with the policies and procedures may deteriorate.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required in this Item 1 is incorporated herein by
reference to the information in "Note 5. Commitments and Contingencies" to our
condensed consolidated financial statements located in Item 1, Part 1 of this
Report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We have received several notices of default on payment on principal and
interest from Warner Bros. Entertainment Inc. on an Amended and Restated Secured
Convertible Promissory Note, dated April 30, 2002, with an original principal
sum of $2,000,000. Subsequently, we entered into a payment plan with Warner
Bros., of which we are currently in default. As of the date of this filing, the
balance of the amount due under the note by us is $0.34 million payable in one
remaining installment.
ITEM 6. EXHIBITS
(a) Exhibits - The following exhibits, other than Exhibit 32.1
which is being furnished herewith, are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------- --------------------------------------------------------------
31.1 Certificate of Herve Caen, Chief Executive Officer of
Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of
the Securities and Exchange Act of 1934, as amended.
31.2 Certificate of Herve Caen, Interim Chief Financial Officer of
Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of
the Securities and Exchange Act of 1934, as amended.
32.1 Certificate of Herve Caen, Chief Executive Officer and Interim
Chief Financial Officer of Interplay Entertainment Corp.
pursuant to Rule 13a-14(b) of the Securities and Exchange Act
of 1934, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERPLAY ENTERTAINMENT CORP.
Date: June 21, 2005 By: /s/ Herve Caen
-------------------------------------
Herve Caen,
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)
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