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, 2003
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.)
16815 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92606
(Address of principal executive offices)
(949) 553-6655
(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 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 April 10, 2003
----- ----------------------------------------
Common Stock, $0.001 par value 93,849,176
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2003
TABLE OF CONTENTS
--------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations
for the Three Months ended March 31, 2003 and
2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2003 and 2002
(unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash ........................................ $ 1,027 $ 134
Trade receivables from related parties,
net of allowances of $981 and $231,
respectively ............................ 9,254 2,506
Trade receivables, net of allowances
of $1,110 and $855, respectively ........ 29 170
Inventories ................................. 871 2,029
Prepaid licenses and royalties .............. 1,525 5,129
Other current assets ........................ 989 1,200
--------- ---------
Total current assets .................... 13,695 11,168
Property and equipment, net ...................... 2,872 3,130
--------- ---------
$ 16,567 $ 14,298
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current debt ................................ $ 2,112 $ 2,082
Accounts payable ............................ 9,026 9,241
Accrued royalties ........................... 4,487 4,775
Other accrued liabilities ................... -- 1,039
Advances from distributors and others ....... 111 101
Advances from related parties ............... 4,652 3,550
Payables to related parties ................. 4,530 7,440
--------- ---------
Total current liabilities .............. 24,918 28,228
Commitments and contingencies
Stockholders' Deficit:
Common stock ................................ 94 94
Paid-in capital ............................. 121,639 121,637
Accumulated deficit ......................... (130,217) (135,793)
Accumulated other comprehensive income ...... 133 132
--------- ---------
Total stockholders' deficit ............ (8,351) (13,930)
--------- ---------
$ 16,567 $ 14,298
========= =========
See accompanying notes.
3
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
(In thousands, except per
share amounts)
Net revenues ....................................... $ 571 $ 9,207
Net revenues from related party distributors ....... 18,191 6,168
-------- --------
Total net revenues .............................. 18,762 15,375
Cost of goods sold ................................. 6,985 4,477
-------- --------
Gross profit .................................... 11,777 10,898
Operating expenses:
Marketing and sales ............................. 121 1,654
General and administrative ...................... 2,362 3,016
Product development ............................. 3,678 4,698
-------- --------
Total operating expenses ..................... 6,161 9,368
-------- --------
Operating income ................................... 5,616 1,530
Other income (expense):
Interest expense ................................ (51) (942)
Other ........................................... 11 907
-------- --------
Net income ......................................... $ 5,576 $ 1,495
-------- --------
Cumulative dividend on participating
preferred stock ................................. $ -- $ 133
-------- --------
Net income available to common stockholders ........ $ 5,576 $ 1,362
======== ========
Net income per common share:
Basic ........................................... $ 0.06 $ 0.03
======== ========
Diluted ......................................... $ 0.06 $ 0.02
======== ========
Shares used in calculating net income per
common share:
Basic ........................................... 93,849 54,438
======== ========
Diluted ......................................... 93,849 54,503
======== ========
See accompanying notes.
4
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
------- -------
(In thousands)
Cash flows from operating activities:
Net income .......................................... $ 5,576 $ 1,495
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .................... 350 463
Non-cash interest expense ........................ 30 74
Write-off of prepaid licenses and royalties ...... 1,779 --
Other ............................................ 1 17
Changes in operating assets and liabilities:
Trade receivables from related parties ........ (6,748) 4,189
Trade receivables, net ........................ 141 (133)
Inventories ................................... 1,158 75
Prepaid licenses and royalties ................ 1,825 (158)
Other current assets .......................... 211 487
Accounts payable .............................. (215) 1,806
Accrued royalties ............................. (288) (1,836)
Other accrued liabilities ..................... (1,039) (362)
Payables to related parties ................... (2,910) 437
Additions to restricted cash .................. -- --
Advances ...................................... 1,112 (6,067)
------- -------
Net cash provided by operating
activities .............................. 983 487
------- -------
Cash flows from investing activities:
Purchase of property and equipment .................. (92) (81)
------- -------
Net cash used in investing activities ...... (92) (81)
------- -------
Cash flows from financing activities:
Net payment on line of credit ....................... -- (550)
Net proceeds from issuance of common stock .......... 2 --
Proceeds from exercise of stock options ............. -- 86
------- -------
Net cash provided by (used in)
financing activities .................... 2 (464)
------- -------
Net increase (decrease) in cash .................. 893 (58)
Cash, beginning of period .............................. 134 119
------- -------
Cash, end of period .................................... $ 1,027 $ 61
======= =======
Supplemental cash flow information:
Cash paid for:
Interest ................................... $ 20 $ 106
See accompanying notes.
5
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Interplay Entertainment Corp. and its subsidiaries (the "Company") 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 generally accepted accounting principles in the United
States 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, 2002
has been derived from the audited consolidated financial statements at that
date, but does not include all information and footnotes required by generally
accepted accounting principles in the United States 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, 2002 as filed with the Securities and Exchange Commission.
FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN
The Company has historically incurred substantial operating losses and at
March 31, 2003, had a stockholders' deficit of $8.4 million and a working
capital deficit of $11.2 million. The Company has historically funded its
operations primarily from operations, through the use of lines of credit,
royalty and distribution fee advances, cash generated by the private sale of
securities, and proceeds of its initial public offering.
To reduce its 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, and the
scaling back of certain marketing programs. 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 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. In this regard the Company
completed the sale of the Hunter franchise in February 2003, for $15.0 million.
Additionally, in August 2002, the Company's Board of Directors established a
Special Committee comprised of directors that are independent of the Company's
largest stockholder, Titus Interactive S.A. ("Titus"), to investigate strategic
options, including raising capital from the sale of debt or equity securities
and a sale of the Company.
If the Company's existing cash and operating revenues from future product
releases are not sufficient to fund the Company's operations, 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 may result from
the outcome of this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 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
6
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2003
returns and allowances, cash flows used to evaluate the recoverability of
prepaid licenses and royalties and long-lived assets, and certain accrued
liabilities related to restructuring activities and litigation.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's 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. 101, "Revenue Recognition."
With the signing of the Vivendi distribution agreement in August 2001,
substantially all of the Company's sales are made by two related party
distributors, Vivendi, which owns approximately 5 percent of the outstanding
shares of the Company's common stock, and Virgin Interactive Entertainment
Limited ("Virgin"), a 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 product and may provide markdown
allowances on products unsold by a customer. In accordance with 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.
Customer support provided by the Company is limited to telephone and
Internet support. These costs are not significant and are charged to expense 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 Emerging Issues Task Force ("EITF") issued EITF 01-09 in November 2001.
The pronouncement codifies and reconciles the consensus reached on EITF 00-14,
00-22 and 00-25, which addresses the recognition, measurement and profit and
loss account classification of certain selling expenses. The adoption of this
issue has resulted in the reclassification of certain selling expenses including
sales incentives, slotting fees, buydowns and distributor payments from cost of
sales and administrative expenses to a reduction in sales. Additionally, prior
period amounts were reclassified to conform to the new requirements. The impact
of this pronouncement did not result in a material reduction of net sales for
the three months ended March 31, 2003 and 2002, respectively. These amounts,
consisting principally of promotional allowances to the Company's retail
customers were previously recorded as sales and marketing expenses; therefore,
there was no impact to net income for any period.
STOCK-BASED COMPENSATION
At March 31, 2003, the Company has three stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The Company did not incur any
stock-based employee compensation cost for the three months ended March 31, 2003
and 2002, respectively. The following table
7
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2003
illustrates the effect on net income and earnings per common share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ ------------
(Dollars in thousands, except
per share amounts)
Net income available to common
stockholders, as reported ............. $ 5,576 $ 1,362
Pro forma compensation expense ........... (31) (58)
------------ ------------
Pro forma net income available to
common stockholders ................... $ 5,545 $ 1,304
============ ============
Earnings per share, as reported
Basic ................................. $ 0.06 $ 0.03
Diluted ............................... $ 0.06 $ 0.02
Earnings per share, pro forma
Basic ................................. $ 0.06 $ 0.02
Diluted ............................... $ 0.06 $ 0.02
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31,
2002 audited financial statements, filed previously with the Securities and
Exchange Commission in Form 10-K, that were required to be adopted during the
year ending December 31, 2003 did not have a significant impact on the Company's
financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
(Dollars in thousands)
Packaged software $ 871 $ 2,029
=========== ===========
NOTE 3. PREPAID LICENSES AND ROYALTIES
Prepaid licenses and royalties consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------ ------
(Dollars in thousands)
Prepaid royalties for titles in
development ............................. $1,470 $4,644
Prepaid royalties for shipped titles,
net of amortization ..................... -- 431
Prepaid licenses and trademarks,
net of amortization ..................... 55 54
------ ------
$1,525 $5,129
====== ======
Amortization of prepaid licenses and royalties is included in cost of goods
sold and totaled $5.4 million and $0.5 million for the three months ended March
31, 2003 and 2002, respectively, and included amounts amortized in connection
with the sale of the Company's Hunter franchise to Vivendi (Note 7). 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 $1.8 million and
zero for the three months ended March 31, 2003 and 2002, respectively.
8
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2003
NOTE 4. ADVANCES FROM DISTRIBUTORS AND OTHERS
Advances from distributors and OEMs consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------ ------
(Dollars in thousands)
Advances for other distribution rights ......... $ 111 $ 101
====== ======
Net advance from Vivendi distribution agreements $4,652 $3,550
====== ======
Other advances from distributors are repayable as products covered by those
agreements are sold.
In April 2002, the Company entered into an agreement with Titus, pursuant
to which, among other things, the Company sold to Titus all right, title and
interest in the games "EarthWorm Jim", "Messiah", "Wild 9", "R/C Stunt Copter",
"Sacrifice", "MDK", "MDK II", and "Kingpin", and Titus licensed from the Company
the right to develop, publish, manufacture and distribute the games "Hunter I",
"Hunter II", "Icewind Dale I", "Icewind Dale II", and "BG: Dark Alliance II"
solely on the Nintendo Advance GameBoy game system for the life of the games. As
consideration for these rights, Titus issued to the Company a promissory note in
the principal amount of $3.5 million, which note bears interest at 6 percent per
annum. The promissory note was due on August 31, 2002, and may be paid, at
Titus' option, in cash or in shares of Titus common stock with a per share value
equal to 90 percent of the average trading price of Titus' common stock over the
5 days immediately preceding the payment date. The Company has provided Titus
with a guarantee under this agreement, which provides that in the event Titus
does not achieve gross sales of at least $3.5 million by June 25, 2003, and the
shortfall is not the result of Titus' failure to use best commercial efforts,
the Company will pay to Titus the difference between $3.5 million and the actual
gross sales achieved by Titus, not to exceed $2.0 million. The Company is in the
later stages of negotiations with Titus to repurchase these assets for a
purchase price payable by canceling the $3.5 million promissory note, and any
unpaid accrued interest thereon. Concurrently, the Company and Titus would
terminate any executory obligations including, without limitation, the Company's
obligation to pay Titus up to a $2 million guarantee in the event Titus does not
achieve gross sales of at least $3.5 million by June 25, 2003. Due to the
likelihood of consummating the repurchase agreement, the accompanying condensed
consolidated financial statements as of March 31, 2003 have been prepared to
reflect as if the repurchase has occurred on March 31, 2003.
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.
On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8
million complaint for damages against both Infogrames, Inc. and the Company's
subsidiary GamesOnline.com, Inc., 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 GamesOnline.com, Inc.
KBK has alleged that GamesOnline.com failed to timely deliver to KBK assets to a
product, and that it improperly disclosed confidential information about KBK to
Infogrames. The Company believes this complaint is without merit and will
vigorously defend its position.
On November 25, 2002, Special Situations Fund III, L.P., Special Situations
Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund (collectively, "Special Situations") filed a summons
and motion for summary judgment in lieu of complaint against the Company.
Special Situations sought summary judgment in the amount of $1,300,000 (later
amended to $1,381,250) because shares of stock they purchased were not
registered for more than thirteen months after the date contemplated for
registration in the Common Stock Subscription Agreement ("Subscription
Agreement") entered into between Special Situations and the Company. The Company
opposed the motion and, by Order filed May 1, 2003, the Court denied Special
Situation's motion in its entirety and ordered Special Situations to serve a
complaint. On May 6, 2003, Special Situations served a three count complaint,
asserting that (i) the Company breached the Subscription Agreement by failing
9
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2003
timely to register the shares Special Situations purchased and so are due
$1,381,250, (ii) there is a "book account stated" between the parties in that
amount, and (iii) Special Situations are entitled to their attorneys fees. The
Company's answer is not yet due, but it intends vigorously to defend the action.
NOTE 6. NET EARNINGS PER SHARE
Basic earnings per 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 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 common
stock warrants.
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
------- -------
(In thousands, except
per share amounts)
Net income (loss) available to common
stockholders ................................ $ 5,576 $ 1,495
------- -------
Shares used to compute net income
(loss) per share:
Weighted-average common shares .............. 93,849 54,438
Dilutive stock equivalents .................. -- 65
------- -------
Dilutive potential common shares ............ 93,849 54,503
======= =======
Net income per share:
Basic ....................................... $ 0.06 $ 0.03
Diluted ..................................... $ 0.06 $ 0.02
------- -------
There were options and warrants outstanding to purchase 10,415,352 and
13,126,865 shares of common stock at March 31, 2003 and 2002, respectively,
which were excluded from the earnings per share computation for the three months
ended March 31, 2003 and 2002, 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, 2003 and
2002 was $1.93 and $2.16, respectively.
NOTE 7. RELATED PARTIES
Amounts receivable from and payable to related parties are as follows:
MARCH 31, DECEMBER 31,
2003 2002
------- -------
(Dollars in thousands)
Receivables from related parties:
Virgin .............................. $ 1,323 $ 2,050
Vivendi ............................. 8,471 487
Titus ............................... 441 200
Return allowance .................... (981) (231)
------- -------
Total ............................... $ 9,254 $ 2,506
======= =======
Payables to related parties:
Virgin .............................. $ 357 $ 1,797
Vivendi ............................. 3,993 5,322
Titus ............................... 180 321
------- -------
Total ............................... $ 4,530 $ 7,440
======= =======
10
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2003
DISTRIBUTION AND PUBLISHING AGREEMENTS
TITUS INTERACTIVE S.A.
In connection with the equity investments by Titus, the Company performs
distribution services on behalf of Titus for a fee. In connection with such
distribution services, the Company recognized fee income of $5,000 and zero for
the three months ended March 31, 2003 and 2002, respectively.
Amounts due to Titus at March 31, 2003 and December 31, 2002 consisted
primarily of trade payables.
In March 2003, the Company's board of directors approved a loan to Titus
Software Corp. ("TSC"), a subsidiary of Titus, subject to certain conditions.
Following such approval, the Company entered into a note receivable with TSC for
$226,000. The note earns interest at 8 percent per annum and is due in February
2004. The note is secured by (i) 4 million shares of our common stock held by
Titus, (ii) TSC's rights in and to a note receivable due from the President of
Interplay and (iii) rights in and to TSC's most current video game title
releases during 2003 and 2004. In May 2003, the note receivable was rescinded by
the Company's board of directors and it demanded repayment of the 226,000 by
TSC.
In April 2003, the Company paid Europlay I, LLC ("Europlay"), a financial
advisor originally retained by Titus, and subsequently retained by the Company,
$448,000 in connection with prior services provided by Europlay to the Company.
In May 2003, pursuant to the instructions of the Company's Chief Executive
Officer, the Company paid TSC $60,000 to cover legal fees in connection with a
lawsuit against Titus. The Chief Executive Officer claimed that the $60,000 in
legal fees was owed to him personally by the Company in accordance with an
indemnification agreement with the Company because it had delayed consummation
of a $500,000 loan to Titus, which such $500,000 loan to Titus had subsequently
been rescinded by the Company's board of directors. The Company's management is
in the process of investigating details of the transaction, including
independent counsel review, in order to properly record the transaction in the
second quarter of 2003.
VIRGIN INTERACTIVE ENTERTAINMENT LIMITED
Under an International Distribution Agreement with Virgin, Virgin provides
for the exclusive distribution of substantially all of the Company's products in
Europe, Commonwealth of Independent States, Africa and the Middle East for a
seven-year period, cancelable under certain conditions, subject to termination
penalties and costs. Under the Agreement, the Company pays Virgin a distribution
fee based on net sales, and Virgin provides certain market preparation,
warehousing, sales and fulfillment services on behalf of the Company.
In connection with the International Distribution Agreement, the Company
incurred distribution commission expense of $48,000 and $300,000 for the three
months ended March 31, 2003 and 2001, respectively. In addition, the Company
recognized overhead fees of zero dollars and $0.2 million for the three months
ended March 31, 2003 and 2002, respectively.
Under a Product Publishing Agreement with Virgin, as amended, the Company
has an exclusive license to publish and distribute one future product release
within North America, Latin America and South America for a royalty based on net
sales. In connection with the Product Publishing Agreement with Virgin, the
Company did not perform any publishing and distribution services on behalf of
Virgin for the three months ended March 31, 2003 and 2002, respectively.
In connection with the International Distribution Agreement, the Company
subleases office space from Virgin. Rent expense paid to Virgin was $27,000 and
$27,000 for the three months ended March 31, 2003 and 2002, respectively.
In June 1997, the Company entered into a Development and Publishing
Agreement with Confounding Factor in which it agreed to commission the
development of the game "Galleon" in exchange for an exclusive worldwide license
to fully exploit the game and all derivates including all publishing and
distribution rights. Subsequently, in March 2002, the Company entered into a
Term Sheet with Virgin, pursuant to which Virgin assumed all responsibility for
future milestone payments to Confounding Factor to complete development of
"Galleon" and Virgin acquired exclusive rights to ship the game in certain
territories. Virgin paid an initial $511,000 to Confounding Factor, but then
ceased making the required payments. Subsequently, Virgin proposed that the
11
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2003
Company refund the $511,000 to Virgin and void the Term Sheet (except with
respect to Virgin's rights to publish Galleon in Japan), which the Independent
Committee of the Company's Board of Directors rejected. While reserving its
rights vis-a-vis Virgin, the Company then resumed making payments to Confounding
Factor to protect its interests in "Galleon." The Company is currently
negotiating a settlement with Virgin regarding "Galleon" publishing rights.
In January 2003, the Company entered into a waiver with Virgin related to
the distribution of a video game title in which it sold its European
distribution rights to Vivendi. In consideration for Virgin relinquishing its
rights, the Company agreed to pay Virgin $650,000 and will pay Virgin 50 percent
of all proceeds in excess of the advance received from Vivendi.
In February 2003, Virgin Interactive Entertainment (Europe) Limited
("Virgin Europe"), the operating subsidiary of Virgin filed for a Company
Voluntary Arrangement, or CVA, a process of reorganization in the United Kingdom
which must be approved by Virgin's creditors. Virgin owed the Company
approximately $1.8 million under the International Distribution Agreement at
December 31, 2002. Virgin Europe's creditors rejected the CVA. On May 9, 2003,
the Company received a new proposed CVA filed by Virgin to be voted on for
approval by Virgin's creditors on May 19, 2003. The Company voted in favor of
the proposed CVA. On May 19, 2003, Virgin's creditors approved the CVA. Virgin
Europe submitted a new proposed CVA to be voted on for approval by Virgin
Europe's creditors. The Company does not know what effect approval or
disapproval of the Virgin Europe CVA will have on its ability to collect amounts
Virgin owes it. If the new Virgin Europe CVA is not approved, the Company
expects Virgin to cease operations and liquidate, in which event it will most
likely not receive any amounts presently due it by Virgin, and will not have a
distributor for its products in Europe and the other territories in which Virgin
presently distributes its products.
In March 2003, the Company made a settlement payment of approximately
$320,000 to a third-party on behalf of Virgin Europe to protect the validity of
certain of its license rights and to avoid potential third-party liability from
various licensors of its products, and incurred legal fees in the amount of
approximately $80,000 in connection therewith. Consequently, Virgin owes the
Company approximately $400,000 pursuant to the indemnification provisions of the
International Distribution Agreement.
VIVENDI UNIVERSAL GAMES, INC.
In February 2003, the Company has sold to Vivendi, all future interactive
entertainment publishing rights to the "Hunter: The Reckoning" franchise for $15
million, payable in installments. At March 2003, Vivendi owed the Company $8.0
million in connection with this sale. The Company retains the rights to the
previously published "Hunter: The Reckoning" titles on Microsoft Xbox and
Nintendo GameCube.
In connection with the distribution agreements with Vivendi, the Company
incurred distribution commission expense of $1.3 million and $0.9 million for
the three months ended March 31, 2003 and March 31, 2002, respectively.
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,
------------------------------------------------
2003 2002
----------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ---------- ---------
(Dollars in thousands)
North America $ 1,879 10% $ 4,502 29%
Europe 1,620 9% 1,403 9%
Rest of World 87 - 11 -
OEM, royalty and licensing 15,176 81% 9,459 62%
----------- --------- ---------- ---------
$ 18,762 100% $ 15,375 100%
=========== ========= ========== =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
The information contained in this Form 10-Q is intended to update the
information contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and presumes that readers have access to, and will have
read, the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information contained in such Form 10-K.
This 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 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 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 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,
financing activities and cost reduction measures are forward-looking statements
and there can be no assurance that the Company will achieve its operating plans
or generate positive cash flow in the future, arrange adequate financing or
complete strategic transactions on satisfactory terms, if at all, or that any
cost reductions effected by the Company will be sufficient to offset any
negative cash flow from operations. Additional risks and uncertainties include
possible delays in the completion of products, the possible lack of consumer
appeal and acceptance of products released by the Company, fluctuations in
demand for the Company's products, lost sales because of the rescheduling of
products launched or orders delivered, failure of the Company's markets to
continue to grow, that the Company's products will remain accepted within their
respective markets, that competitive conditions within the Company's markets
will not change materially or adversely, that the Company will retain key
development and management personnel, that the Company's forecasts will
accurately anticipate market demand and that there will be no material adverse
change in the Company's operations or business. Additional factors that may
affect future operating results are discussed in more detail in "Factors
Affecting Future Performance" below as well as the Company's Annual Report on
Form 10-K on file with the Securities and Exchange Commission. Assumptions
relating to the foregoing 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 the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, the business and operations of the Company are subject to
substantial risks that increase the uncertainty inherent in the forward-looking
statements, and the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. In addition, risks, uncertainties and
assumptions change as events or circumstances change. The Company disclaims 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 or on behalf of the Company.
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 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
13
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. 101, Revenue Recognition. Commencing in August
2001, substantially all of our sales are made by two related party distributors,
Vivendi Universal Games, Inc. and Virgin Interactive Entertainment Ltd.. 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 master. We recognize per copy royalties
on sales that exceed the guarantee as copies are duplicated.
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 product 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 condensed 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 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. Revenue is
recognized 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 amortize these amounts at a rate based upon the actual number of units
shipped with a minimum amortization of 75 percent in the first month of release
and a minimum of 5 percent for each of the next five months after release. This
minimum amortization rate reflects our typical product life cycle. We evaluate
the future realization of such costs quarterly and charge to cost of goods sold
any amounts that we deem unlikely to be fully realized through future sales.
Such costs are classified as current and noncurrent assets based upon estimated
product release date.
SOFTWARE DEVELOPMENT COSTS
Our internal research and development costs, which consist primarily of
software development costs, are expensed as incurred. Statement of Financial
Accounting Standards ("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. As a result, we have not capitalized any software development costs
on internal development projects, as the eligible costs were determined to be
insignificant.
14
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.
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,
--------------------------------------------
2003 2002
-------------------- --------------------
% OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- --------
(Dollars in thousands)
Net revenues ................... $ 18,762 100% $ 15,375 100%
Cost of goods sold ............. 6,985 37% 4,477 29%
-------- -------- -------- --------
Gross profit .............. 11,777 63% 10,898 71%
-------- -------- -------- --------
Operating expenses:
Marketing and sales ....... 121 1% 1,654 11%
General and administrative 2,362 13% 3,016 20%
Product development ....... 3,678 20% 4,698 30%
-------- -------- -------- --------
Total operating expenses .. 6,161 34% 9,368 61%
-------- -------- -------- --------
Operating income ............... 5,616 29% 1,530 10%
Other expense .................. (40) 0% (35) 0%
-------- -------- -------- --------
Net income ..................... $ 5,576 29% $ 1,495 10%
======== ======== ======== ========
Net revenues by geographic
region:
North America ............. $ 1,879 10% $ 4,502 29%
International ............. 1,707 9% 1,414 9%
OEM, royalty and licensing 15,176 81% 9,459 62%
Net revenues by platform:
Personal computer ......... $ 648 3% $ 4,200 27%
Video game console ........ 2,938 16% 1,716 11%
OEM, royalty and licensing 15,176 81% 9,459 62%
NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES
Net revenues for the three months ended March 31, 2003 were $18.8 million,
an increase of 22 percent compared to the same period in 2002. This increase
resulted from a 21 percent increase in International net revenues and a 60
percent increase in OEM, royalties and licensing revenues offset by a 58 percent
decrease in North American net revenues.
North American net revenues for the three months ended March 31, 2003 were
$1.9 million. The decrease in North American net revenues in 2003 was mainly due
to a 76 percent decrease in back catalog sales compared to 2002 offset by
delivering one gold master to one title in 2003 compared to releasing zero
titles in 2002, resulting in a decrease in North American sales of $3.8 million
and a decrease in product returns and price concessions of $1.2 million as
compared to the 2002 period. Our back catalog sales decrease is due to having
fewer titles to replace titles
15
that have exhausted their useful commercial lives. Furthermore, we have lost the
rights to certain titles that were a part of our back catalog and have not
obtained new titles to replaces those titles. The decrease in product returns
and price concessions in 2003 as compared to 2002 is due to the terms of the new
distribution agreement, whereby Vivendi pays us a lower per unit rate and in
return assumes all credit, product return and price concession risks.
We expect that our North American publishing net revenues will decrease in
fiscal 2003 compared to fiscal 2002, mainly due to decreased unit sales and
releasing all new titles under the terms of the August 2002 distribution
agreement with Vivendi.
International net revenues for the three months ended March 31, 2003 were
$1.7 million. The increase in International net revenues for the three months
ended March 31, 2003 was mainly due to releasing three gold masters to three
titles to Vivendi under a one-time distribution agreement for the three titles
in Europe with terms similar to the distribution arrangement in North America.
Virgin remains our main distributor in Europe and will distribute our future
releases in Europe under the terms of the International Distribution Agreement,
as amended. The increase in International net revenues was offset by a 75
percent reduction in back catalog sales. Our back catalog sales decrease is due
to having fewer titles to replace titles that have exhausted their useful
commercial lives. Furthermore, our titles distributed by Virgin had lower sales
due to Virgin's financial difficulties, which resulted in Virgin filing a
Company Voluntary Arrangement or CVA, a process of reorganization in the United
Kingdom. Overall, we had a $0.1 million decrease in revenue offset by a decrease
in product returns and price concessions of $0.4 million compared to the 2002
period.
We expect that our International publishing net revenues will increase in
fiscal 2003 as compared to fiscal 2002, mainly due to increased unit sales.
However, if Virgin is not able to reorganize and liquidates, we may need to
obtain a new European distributor in a short amount of time. If we are not able
to engage a new distributor, it could have a material negative impact on our
European sales.
OEM, royalty and licensing net revenues for the three months ended March
31, 2003 were $15.2 million, an increase of $5.7 million as compared to the same
period in 2002. OEM net revenues decreased by $1.2 million as compared to the
2002 period and licensing net revenues increased by $6.9 million as compared to
the 2002 period. The decrease in OEM net revenues is a result of our efforts to
focus on our core business of developing and publishing video game titles for
distribution directly to the end users and our continued focus on video game
console titles, which typically are not bundled with other products. The three
months ended March 31, 2003 also included revenue related to the sale of all
future interactive entertainment publishing rights to the "Hunter: The
Reckoning" franchise for $15 million. We retain the rights to the previously
published "Hunter: The Reckoning" titles on Microsoft Xbox and Nintendo
GameCube. Our 2002 licensing net revenues included revenues related to the sale
of publishing rights for one of our products and the recognition of deferred
revenue for a licensing transaction. In January 2002, we sold the publishing
rights to this title to the distributor in connection with a settlement
agreement entered into with the third party developer. The settlement agreement
provided, among other things, that we assign our rights and obligations under
the product agreement to the third party distributor. As a result, we recorded
net revenues of $5.6 million in the nine months ended September 30, 2002. In
February 2002, a licensing transaction we entered into in 1999 expired and we
recognized revenue of $1.2 million, the unearned portion of the minimum
guarantee.
We expect that OEM, royalty and licensing net revenues in fiscal 2003 will
increase compared to fiscal 2002 as a result of recording the $15 million in
revenue resulting from the sale of the Hunter video game franchise in February
2003.
PLATFORM NET REVENUES
PC net revenues for the three months ended March 31, 2003 were $0.6
million, a decrease of 85 percent compared to the same period in 2002. The
decrease in PC net revenues in 2003 was primarily due to lower back catalog
sales. Video game console net revenues were $2.9 million, an increase of 71
percent for the three months ended March 31, 2003 compared to the same period in
2002, due to delivering the gold master for one title, Run Like Hell (Xbox), to
Vivendi, as well as continued sales of previously released console titles in
2003 as compared zero titles in 2002.
16
We expect our PC net revenues to decrease in fiscal 2003 as compared to
fiscal 2002 as we expect to release one new title during the rest of 2003 as we
continue to focus more on console products. We anticipate releasing four to five
new console titles during the rest of 2003 and accordingly, expect net revenues
to increase in fiscal 2003.
COST OF GOODS SOLD; GROSS PROFIT MARGIN
Our cost of goods sold increased 56 percent to $7.0 million in the three
months ended March 31, 2003 compared to the same period in 2002. The increase
was due to higher amortization of prepaid royalties on externally developed
products in the three months ended March 31, 2003 as compared to the 2002
period. Specifically, we incurred $2.9 million in amortization of prepaid
royalties associated with the sale of the Hunter video game franchise and $1.8
million in write-offs of development projects that were impaired because these
titles were not expected to meet our desired profit requirements. The increase
in cost of goods sold was offset by a decrease in manufacturing costs due to
lower unit sales and our new distribution agreement with Vivendi, where the only
cost of goods element we incur is royalty expense. Under this new agreement,
Vivendi pays us a lower per unit rate and in return is responsible for all
manufacturing, marketing and distribution expenditures. Our gross margin
decreased to 63 percent for the 2003 period from 71 percent in the 2002 period.
This was primarily due to the 2003 period having write-offs of prepaid royalties
on externally developed products compared to none in the 2002 period. In
addition, we incurred lower cost of goods in the 2003 period as the only cost of
goods we incur under the new North American distribution agreement with Vivendi
are expenses related to royalties due to third parties offset by higher royalty
expense associated with our licensing net revenues.
We expect our gross profit margin and gross profit to increase in fiscal
2003 as compared to fiscal 2002 due to lower cost of goods in fiscal 2003
resulting from our new North American distribution agreement with Vivendi, and
the absence in fiscal 2003 of significant, unusual product returns and price
concessions and additional write-offs of prepaid royalties.
MARKETING AND SALES
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, 2003 were $0.1 million, a 93
percent decrease as compared to the 2002 period. The decrease in marketing and
sales expenses is due to a $0.5 million reduction in advertising and retail
marketing support expenditures due to releasing one title in the 2003 period
under the terms of the new distribution agreement whereby Vivendi pays us a
lower per unit rate and in return assumes all marketing expenditures, and a $0.8
million decrease in personnel costs and general expenses due in part to our
shift from a direct sales force for North America to a distribution arrangement
with Vivendi. The decrease in marketing and sales expenses also reflected a $0.2
million decrease in overhead fees paid to Virgin under our April 2001 settlement
with Virgin.
We expect our marketing and sales expenses to decrease in fiscal 2003
compared to fiscal 2002, due to lower personnel costs from our reduced
headcount, a reduction in overhead fees paid to Virgin pursuant to the April
2001 settlement and releasing titles under the terms of the new distribution
agreement whereby Vivendi pays us a lower per unit rate and in return assumes
all marketing expenditures.
GENERAL AND ADMINISTRATIVE
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, 2003 were $2.4 million, a 22 percent decrease as
compared to the same period in 2002. The decrease is due to a $0.7 million
decrease in personnel costs and general expenses.
We expect our general and administrative expenses to remain relatively
constant in fiscal 2003 compared to fiscal 2002.
17
PRODUCT DEVELOPMENT
Product development expenses for the three months ended March 31, 2003 were
$3.7 million, a 22 percent decrease as compared to the same period in 2002. This
decrease is due to a $1.0 million decrease in personnel costs as a result of a
reduction in headcount and the sale of Shiny Entertainment, Inc. in April 2002.
We expect our product development expenses to remain relatively constant in
fiscal 2003 compared to fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the use of
borrowings, royalty and distribution fee advances, cash generated by the private
sale of securities, proceeds of the initial public offering, the sale of assets
and from results of operations.
As of March 31, 2003, we had a working capital deficit of $11.2 million,
and our cash balance was approximately $1.0 million. We anticipate our current
cash reserves, plus our expected generation of cash from existing operations,
will only be sufficient to fund our anticipated expenditures into the second
quarter of fiscal 2003. Consequently, we expect that we will need to
substantially reduce our working capital needs and/or raise additional
financing. Along these lines, we have entered into a new distribution agreement
with Vivendi, which accelerates cash collections through non-refundable minimum
guarantees. If we do not receive sufficient financing we may (i) liquidate
assets, (ii) sell the company (iii) seek protection from our creditors, and/or
(iv) continue operations, but incur material harm to our business, operations or
financial conditions.
Our primary capital needs have historically been to fund working capital
requirements necessary to fund our net losses, 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 provided cash of $1.0 million during the three months ended March 31,
2003, primarily attributable to reductions of inventory and prepaid royalties
and advances received from Vivendi. These cash proceeds from operating
activities were partially offset by increases in receivables from related
parties and an increase in payables to related parties.
Net cash used by financing activities was $2,000 for the three months ended
March 31, 2003. Cash used in investing activities of $0.1 million for the three
months ended March 31, 2003 consisted of normal capital expenditures, primarily
for office and computer equipment used in our operations. We do not currently
have any material commitments with respect to any future capital expenditures.
The following summarizes our contractual obligations under non-cancelable
operating leases and other borrowings at March 31, 2003, and the effect such
obligations are expected to have on our liquidity and cash flow in future
periods.
Less Than 1 - 3 After
Total 1 Year Years 3 Years
------ ------ ------ ------
(In thousands)
Contractual cash obligations -
Non-cancelable operating
lease obligations ........... $4,869 $1,423 $3,064 $ 382
====== ====== ====== ======
Our main source of capital is from the release of new titles. Historically,
we have had some delays in the release of new titles and we anticipate that we
may continue to incur delays in the release of future titles. These delays can
have a negative impact on our short-term liquidity, but should not affect our
overall liquidity.
To reduce our working capital needs, we have 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, and the scaling back
of certain marketing programs associated with the cancelled projects. 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
18
impact on our ability to generate successful future business activities. In
addition, we continue to seek external sources of funding, including but not
limited to, a sale or merger of the company, a private placement of our 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
our long-term strategic objectives. In this regard, we completed the sale of the
Hunter franchise in February 2003, for $15.0 million. Additionally, in August
2002, our Board of Directors established a Special Committee comprised of
directors that are independent of our largest stockholder, Titus Interactive
S.A., to investigate strategic options, including raising capital from the sale
of debt or equity securities and a sale of the company.
In order to improve our cash flow, in August 2002, we entered into a new
distribution arrangement with Vivendi, whereby, Vivendi will distribute
substantially all of our products in North America for a period of three years
as a whole and two years with respect to each product giving a potential maximum
term of five years. Under the August 2002 agreement, Vivendi will pay us sales
proceeds less amounts for distribution fees, price concessions and returns.
Vivendi is responsible for all manufacturing, marketing and distribution
expenditures, and bears all credit, price concessions and inventory risk,
including product returns. Upon our delivery of a gold master to Vivendi,
Vivendi will pay us, as a minimum guarantee, a specified percent of the
projected amount due to us based on projected initial shipment sales, which are
established by Vivendi in accordance with the terms of the agreement. The
remaining amounts are due upon shipment of the titles to Vivendi's customers.
Payments for future sales that exceed the projected initial shipment sales are
paid on a monthly basis. We expect this new arrangement to improve our
short-term liquidity, but should not impact our overall liquidity.
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
historical operating losses and deficits in stockholders' equity and working
capital, raise substantial doubt about our 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 may result from the outcome of
this uncertainty.
ACTIVITIES WITH RELATED PARTIES
Our operations involve significant transactions with Titus, our majority
stockholder, Virgin, a wholly-owned subsidiary of Titus, and Vivendi, an
indirect owner of 5 percent of our common stock. In addition, we previously
obtained financing from the former Chairman of the company.
TRANSACTIONS WITH TITUS
In connection with the equity investments by Titus, we perform distribution
services on behalf of Titus for a fee. In connection with such distribution
services, we recognized fee income of $5,000 and zero dollars for the three
months ended March 31, 2003 and 2002, respectively.
As of March 31, 2003 and December 31, 2002, Titus owed us $0.4 million and
$0.2 million, respectively, and we owed Titus $0.2 million and $0.3 million,
respectively. Amounts due from Titus at March 31, 2003 and December 31, 2002
consist of receivables. Amounts due to Titus at March 31, 2003 and December 31,
2002 consist of payables.
In April 2002, we entered into an agreement with Titus, pursuant to which,
among other things, we sold to Titus all right, title and interest in the games
"EarthWorm Jim", "Messiah", "Wild 9", "R/C Stunt Copter", "Sacrifice", "MDK",
"MDK II", and "Kingpin", and Titus licensed from us the right to develop,
publish, manufacture and distribute the games "Hunter I", "Hunter II", "Icewind
Dale I", "Icewind Dale II", and "BG: Dark Alliance II" solely on Nintendo
Advance GameBoy game system for the life of the games. As consideration for
these rights, Titus issued to us a promissory note in the principal amount of
$3.5 million, which note bears interest at 6 percent per annum. The promissory
note was due on August 31, 2002, and may be paid, at Titus' option, in cash or
in shares of Titus common stock with a per share value equal to 90 percent of
the average trading price of Titus' common stock over the 5 days immediately
preceding the payment date. Pursuant to our April 26, 2002 agreement with Titus,
on or before July 25, 2002, we had the right to solicit offers from and
negotiate with third parties to sell the rights and licenses granted under the
April 26, 2002 agreement. If we had entered into a binding agreement with a
third party to sell these rights and licenses for an amount in excess $3.5
million, we would have rescinded the April 26, 2002 agreement with Titus and
recovered all rights granted and released Titus from all obligations thereunder.
The
19
Company's efforts to enter into a binding agreement with a third party were
unsuccessful. Moreover, we have provided Titus with a guarantee under this
agreement, which provides that in the event Titus does not achieve gross sales
of at least $3.5 million by June 25, 2003, and the shortfall is not the result
of Titus' failure to use best commercial efforts, we will pay to Titus the
difference between $3.5 million and the actual gross sales achieved by Titus,
not to exceed $2 million. We are in the later stages of negotiations with Titus
to repurchase these assets for a purchase price payable by canceling the $3.5
million promissory note, and any unpaid accrued interest thereon. Concurrently,
Titus and us would terminate any executory obligations including, without
limitation, our obligation to pay Titus up to a $2 million guarantee in the
event Titus does not achieve gross sales of at least $3.5 million by June 25,
2003. Due to the likelihood of consummating the repurchase agreement, the
accompanying condensed consolidated financial statements as of March 31, 2003
have been prepared to reflect as if the repurchase has occurred on March 31,
2003.
In March 2003, our board of directors approved a loan to Titus Software
Corp. ("TSC"), a subsidiary of Titus, subject to certain conditions. Following
such approval, we entered into a note receivable with TSC for $226,000. The note
earns interest at 8 percent per annum and is due in February 2004. The note is
secured by (i) 4 million shares of our common stock held by Titus, (ii) TSC's
rights in and to a note receivable due from the President of Interplay and (iii)
rights in and to TSC's most current video game title releases during 2003 and
2004. In May 2003, the note receivable was rescinded by our board of directors
and it demanded repayment of the $226,000 from TSC.
In April 2003, we paid Europlay I, LLC ("Europlay"), a financial advisor
originally retained by Titus, and subsequently retained by us, $448,000 in
connection with prior services provided by Europlay to us.
In May 2003, pursuant to the instructions of our Chief Executive Officer,
we paid TSC $60,000 to cover legal fees in connection with a lawsuit against
Titus. Our Chief Executive Officer claimed that the $60,000 in legal fees was
owed to him personally by us in accordance with an indemnification agreement
with us because we had delayed consummation of a $500,000 loan to Titus, which
such $500,000 loan to Titus had subsequently been rescinded by our board of
directors. We are in the process of investigating details of the transaction,
including independent counsel review, in order to properly record the
transaction in the second quarter of 2003.
TRANSACTIONS WITH VIRGIN, A WHOLLY OWNED SUBSIDIARY OF TITUS
Under an International Distribution Agreement with Virgin, Virgin provides
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, cancelable under certain conditions, subject to termination penalties
and costs. Under this agreement, as amended, we pay Virgin a distribution fee
based on net sales, and Virgin provides certain market preparation, warehousing,
sales and fulfillment services on our behalf.
In connection with the International Distribution Agreement, we incurred
distribution commission expense of $48,000 and $300,000 for the three months
ended March 31, 2003 and 2002, respectively. In addition, we recognized overhead
fees of zero dollars and $0.3 million for the three months ended March 31, 2003
and 2002, respectively.
Under a Product Publishing Agreement with Virgin, as amended, we have an
exclusive license to publish and distribute one future product release within
North America, Latin America and South America for a royalty based on net sales.
In connection with the Product Publishing Agreement with Virgin, we did not
perform any publishing and distribution services on behalf of Virgin for the
three months ended March 31, 2003 and 2002.
In connection with the International Distribution Agreement, we sublease
office space from Virgin. Rent expense paid to Virgin was $27,000 and $27,000
for the three months ended March 31, 2003 and 2002, respectively.
In June 1997, we entered into a Development and Publishing Agreement with
Confounding Factor in which we agreed to commission the development of the game
"Galleon" in exchange for an exclusive worldwide license to fully exploit the
game and all derivates including all publishing and distribution rights.
Subsequently, in March 2002, we entered into a Term Sheet with Virgin, pursuant
to which Virgin assumed all responsibility for future milestone payments to
Confounding Factor to complete development of "Galleon" and Virgin acquired
exclusive rights to ship the game in certain territories. Virgin paid an initial
$511,000 to Confounding Factor, but then ceased making the required payments.
Subsequently, Virgin proposed that Interplay refund the $511,000 to Virgin and
void the Term Sheet (except with respect to Virgin's rights to publish Galleon
in Japan), which the Independent Committee of our Board of Directors rejected.
While reserving our rights vis-a-vis Virgin, we then resumed making payments to
Confounding Factor to protect our interests in "Galleon." We are currently
negotiating a settlement with Virgin regarding "Galleon" publishing rights.
20
In January 2003, we entered into a waiver with Virgin related to the
distribution of a video game title in which we sold the European distribution
rights to Vivendi. In consideration for Virgin relinquishing its rights, we
agreed to pay Virgin $650,000 and will pay Virgin 50 percent of all proceeds in
excess of the advance received from Vivendi. As of December 31, 2002 the Company
had paid Virgin $220,000 of the $650,000 due under the waiver agreement. We paid
the remaining balance of $430,000 in January 2003.
In February 2003, Virgin Interactive Entertainment (Europe) Limited
("Virgin Europe"), the operating subsidiary of Virgin filed for a Company
Voluntary Arrangement, or CVA, a process of reorganization in the United Kingdom
which must be approved by Virgin's creditors. Virgin owed us approximately $1.8
million under our International Distribution Agreement at December 31, 2002. The
CVA was rejected by Virgin Europe's creditors. On May 9, 2003, we received a new
proposed CVA filed by Virgin to be voted on for approval by Virgin's creditors
on May 19, 2003. We voted in favor of the proposed CVA. On May 19, 2003,
Virgin's creditors approved the CVA. Virgin Europe submitted a new proposed CVA
to be voted on for approval by Virgin Europe's creditors. We do not know what
effect approval or disapproval of the Virgin Europe CVA will have on our ability
to collect amounts Virgin owes us. If the new Virgin Europe CVA is not approved,
we expect Virgin to cease operations and liquidate, in which event we will most
likely not receive any amounts presently due us by Virgin, and will not have a
distributor for our products in Europe and the other territories in which Virgin
presently distributes our products.
In March 2003, we made a settlement payment of approximately $320,000 to a
third-party on behalf of Virgin Europe to protect the validity of certain of our
license rights and to avoid potential third-party liability from various
licensors of our products, and incurred legal fees in the amount of
approximately $80,000 in connection therewith. Consequently, Virgin owes us
approximately $400,000 pursuant to the indemnification provisions of the
International Distribution Agreement.
As of March 31, 2003 and December 31, 2002, Virgin owed us $1.3 million and
$2.1 million, and we owed Virgin $0.4 million and $1.8 million, respectively.
TRANSACTIONS WITH VIVENDI
In February 2003, we sold to Vivendi, all future interactive entertainment
publishing rights to the "Hunter: The Reckoning" franchise for $15.0 million,
payable in installments. We retain the rights to the previously published
"Hunter: The Reckoning" titles on Microsoft Xbox and Nintendo GameCube.
In connection with the August 2001 distribution agreements with Vivendi, we
incurred distribution commission expense of $1.3 million and $0.9 million for
the three months ended March 31, 2003 and 2002, respectively. As of March 31,
2003 and December 31, 2002, Vivendi owed us $0.5 million and $0.5 million,
respectively, under the distribution agreements and an additional $8.0 million
at March 31, 2003 in connection with the sale of the Hunter franchise.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31,
2002 audited financial statements, filed previously with the Securities and
Exchange Commission in Form 10-K, that were required to be adopted during the
year ending December 31, 2003 did not have a significant impact on our financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of March 31, 2003.
However, we are exposed to certain market risks arising from transactions in the
normal course of business, principally the risk associated with interest rate
fluctuations on any revolving line of credit agreement we maintain, and 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
Our interest rate risk is due to our working capital lines of credit
typically having an interest rate based on either the bank's prime rate or
LIBOR. Currently, we do not have a line of credit, but we anticipate
establishing a line of credit in the future. A change in interest rates would
not have an effect on our interest expense on the Secured Convertible Promissory
Note because this instrument bears a fixed rate of interest.
21
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, primarily from Virgin. We
recognized gains of $17,000 and $65,000 during the three months ended March 31,
2003 and 2002, respectively, primarily in connection with foreign exchange
fluctuations in the timing of payments received on accounts receivable from
Virgin.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, our Chief
Executive Officer and interim Chief Financial Officer, Herve Caen, with the
participation of our management, carried out an evaluation of the effectiveness
of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, Mr. Caen believes that, as of the date of the
evaluation, our disclosure controls and procedures are effective in making known
to him material information relating to us (including our consolidated
subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls, known to Mr. Caen,
subsequent to the date of the evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are 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 our business, financial condition or results of operations.
On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8
million complaint for damages against both Infogrames, Inc. and our subsidiary
GamesOnline.com, Inc., 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 GamesOnline.com, Inc. KBK has
alleged that GamesOnline.com, Inc. failed to timely deliver to KBK assets to a
product, and that it improperly disclosed confidential information about KBK to
Infogrames. We believe this complaint is without merit and will vigorously
defend our position.
On November 25, 2002, Special Situations Fund III, L.P., Special Situations
Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund (collectively, "Special Situations") filed a summons
and motion for summary judgment in lieu of complaint against the Company.
Special Situations sought summary judgment in the amount of $1,300,000 (later
amended to $1,381,250) because shares of stock they purchased were not
registered for more than thirteen months after the date contemplated for
registration in the Common Stock Subscription Agreement ("Subscription
Agreement") entered into between Special Situations and the Company. The Company
opposed the motion and, by Order filed May 1, 2003, the Court denied Special
Situation's motion in its entirety and ordered Special Situations to serve a
complaint. On May 6, 2003, Special Situations served a three count complaint,
asserting that (i) the Company breached the Subscription Agreement by failing
timely to register the shares Special Situations purchased and so are due
$1,381,250, (ii) there is a "book account stated" between the parties in that
amount, and (iii) Special Situations are entitled to their attorneys fees. The
Company's answer is not yet due, but it intends vigorously to defend the action.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Title
------ -------------
10.1 Purchase & Sale Agreement by and between Vivendi Universal
Games, Inc. and Interplay Entertainment Corp. dated
February 26, 2003.
99.1 Management's certification of financial statements.
* Certain portions of this agreement have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for an order
granting confidential treatment pursuant to Rule 406 of the General Rules and
Regulations under the Securities Act of 1933, as amended.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on February 25,
2003, reporting that the Company informed Ernst and Young LLP that it
would no longer be engaged as the Company's independent public
accountants, and that the Company's audit committee of the board of
directors approved and authorized the engagement of Squar, Milner,
Reehl & Williamson, LLP as the Company's independent public
accountants.
The Company filed a Current Report on Form 8-K/A on February 25,
2003, which amended the Current Report on Form 8-K filed by the
Company on February 25, 2003, reporting that the Company informed
Ernst and Young LLP that it would no longer be engaged as the
Company's independent public accountants, and that the Company's
audit committee of the board of directors approved and authorized the
engagement of Squar, Milner, Reehl & Williamson, LLP as the Company's
independent public accountants.
The Company filed a Current Report on Form 8-K on March 31,
2003, reporting that the Company issued a press release on March 14,
2003 announcing that the Company consummated the sale to Vivendi
Universal Games all future interactive entertainment publishing
rights to "Hunter: The Reckoning" franchise.
The Company filed a Current Report on Form 8-K on April 7, 2003,
reporting that the Company issued a press release on April 1, 2003
regarding results for the fourth quarter and year ended December 31,
2002.
23
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: March 20, 2003 By: /s/ HERVE CAEN
----------------------------------
Herve Caen,
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)
24
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Herve Caen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interplay
Entertainment Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this periodic report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Herve Caen
---------------------------
Herve Caen
Chief Executive Officer
25
Certification of Interim CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Herve Caen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interplay
Entertainment Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Herve Caen
-------------------------------
Herve Caen
Interim Chief Financial Officer
26