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, 2004
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 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 APRIL 28, 2004
----- ----------------------------------------
Common Stock, $0.001 par value 93,855,634
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2004
TABLE OF CONTENTS
--------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations
for the Three Months ended March 31, 2004 and 2003
(unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2004 and 2003
(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 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 3. Defaults Upon Senior Securities 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
- ------ --------- ---------
Current Assets:
Cash .......................................... $ 28 $ 1,171
Trade receivables from related parties,
net of allowances of $344 and $691,
respectively .............................. 269 564
Trade receivables, net of allowances
of $34 .................................... 10 6
Inventories ................................... 234 146
Prepaid licenses and royalties ................ 299 209
Deposits ...................................... 74 600
Prepaid expenses .............................. 1,750 673
Other current assets .......................... -- 3
--------- ---------
Total current assets ....................... 2,664 3,372
Property and equipment, net ........................ 1,836 2,114
--------- ---------
$ 4,500 $ 5,486
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current Liabilities:
Current debt .................................. $ 322 $ 837
Accounts payable .............................. 9,607 7,093
Accrued royalties ............................. 5,272 5,067
Advances from distributors and others ......... 2,830 5,125
Payables to related parties ................... 10 --
--------- ---------
Total current liabilities ................ 18,041 18,122
--------- ---------
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, respectively .................. 94 94
Paid-in capital ............................... 121,640 121,640
Accumulated deficit ........................... (135,384) (134,481)
Accumulated other comprehensive income ........ 109 111
--------- ---------
Total stockholders' deficit .............. (13,541) (12,636)
--------- ---------
$ 4,500 $ 5,486
========= =========
See accompanying notes.
3
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------
(In thousands, except
per share amounts)
Net revenues ....................................... $ 6,917 $ 571
Net revenues from related party distributors ....... 1,492 18,191
-------- --------
Total net revenues .............................. 8,409 18,762
Cost of goods sold ................................. 5,083 6,985
-------- --------
Gross profit .................................... 3,326 11,777
Operating expenses:
Marketing and sales ............................. 991 121
General and administrative ...................... 1,206 2,362
Product development ............................. 2,007 3,678
-------- --------
Total operating expenses ..................... 4,204 6,161
-------- --------
Operating (loss) income ............................ (878) 5,616
Other income (expense):
Interest expense ............................... (14) (51)
Other .......................................... (11) 11
-------- --------
Income before benefit for income taxes ............. (903) 5,576
Benefit for income taxes ........................... -- --
-------- --------
Net (loss) income .................................. (903) 5,576
-------- --------
Cumulative dividend on participating preferred
stock .......................................... -- --
-------- --------
Net (loss) income available to common stockholders . $ (903) $ 5,576
======== ========
Net (loss) income per common share:
Basic .......................................... $ (0.01) $ 0.06
======== ========
Diluted ........................................ $ (0.01) $ 0.06
======== ========
Shares used in calculating net (loss) income per
common share:
Basic .......................................... 93,856 93,849
======== ========
Diluted ........................................ 93,856 93,849
======== ========
See accompanying notes.
4
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2004 2003
------- -------
Cash flows from operating activities: (in thousands)
Net (loss) income ................................... $ (903) $ 5,576
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization .................... 283 350
Non-cash interest expense ........................ -- 30
Write-off of prepaid licenses and royalties ...... -- 1,779
Changes in operating assets and liabilities:
Trade receivables from related parties ........ 295 (6,748)
Trade receivables, net ........................ (4) 141
Inventories ................................... (88) 1,158
Prepaid licenses and royalties ................ (90) 1,825
Other current assets, net ..................... (548) 211
Accounts payable .............................. 2,514 (215)
Accrued royalties ............................. 205 (288)
Other accrued liabilities ..................... -- (1,039)
Payables to related parties ................... 10 (2,910)
Additions to resticted cash ................... -- --
Advances ...................................... (2,295) 1,112
------- -------
Net cash provided by (used in)
operating activities .................... (621) 982
------- -------
Cash flows from investing activities:
Purchase of property and equipment .................. (5) (92)
------- -------
Net cash used in investing activities ...... (5) (92)
------- -------
Cash flows from financing activities:
Repayment of current debt ........................... (515) --
Net proceeds from issuance of common stock .......... -- 2
------- -------
Net cash provided by (used in)
financing activities .................... (515) 2
------- -------
Effect of exchange rate changes on cash .......... (2) 1
Net increase (decrease) in cash .................. (1,143) 893
Cash, beginning of period .............................. 1,171 134
------- -------
Cash, end of period .................................... $ 28 $ 1,027
======= =======
Supplemental cash flow information:
Cash paid for:
Interest ................................... $ 6 $ 20
See accompanying notes.
5
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
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, 2003 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, 2003 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, 2003
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 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 August 2002, the Company entered into a new three-year North American
distribution agreement (the "2002 Agreement") with Vivendi Universal Games, Inc.
("Vivendi"), which substantially replaces the August 2001 agreement with
Vivendi. Under the 2002 agreement, the Company receives cash payments from
Vivendi for distributed products sooner than under the Company's August 2001
agreement with Vivendi. The Company has amended its agreement with Vivendi to
increase the number of territories in which Vivendi can distribute the Company's
products. In return, the Company has received additional advances from Vivendi
for these additional rights.
The Company anticipates its current cash reserves, plus its expected
generation of cash from existing operations, will not be sufficient to fund its
anticipated expenditures through the second quarter of fiscal 2004.
Consequently, 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 Notes 5 and 7 for additional factors relating to the Company's going
concern status.
6
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
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.
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. 101, Revenue Recognition.
With the signing of a distribution agreement with Vivendi in August 2001,
substantially all of the Company's sales are made by two distributors: Vivendi
and Avalon Interactive Group Ltd. ("Avalon"), a wholly owned subsidiary of Titus
Interactive S.A., our majority stockholder ("Titus") which is a related party.
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.
Customer support provided by the Company is limited to email 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 for the Company.
7
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
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
pronouncement has resulted in the reclassification of certain selling expenses
including sales incentives, slotting fees, buy downs and distributor payments
from cost of sales and administrative expenses to a reduction in sales. 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 on results of operations for any period.
STOCK-BASED EMPLOYEE COMPENSATION
At March 31, 2004, 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, 2004 and 2003. 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.
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
------------------------
(Dollars in thousands,
except per share
amounts)
Net income (loss) available to common
stockholders, as reported ....................... $ (903) $ 5,576
Pro forma compensation expense
(16) (31)
--------- ----------
Pro forma net income (loss) available
to common stockholders .......................... $ (919) $ 5,545
========= ==========
Earnings (loss) per common share, as reported
Basic ........................................... $ (0.01) $ 0.06
Diluted ......................................... $ (0.01) $ 0.06
Earnings per common share, pro forma
Basic ........................................... $ (0.01) $ 0.06
Diluted ......................................... $ (0.01) $ 0.06
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the notes to the December 31,
2003 audited financial statements, filed previously with the SEC in Form 10-K,
that were required to be adopted during the period ended March 31, 2004 did not
have a significant impact on the Company's financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
----------------- ----------------
(Dollars in thousands)
Packaged software $ 234 $ 146
================= ================
NOTE 3. PREPAID LICENSES AND ROYALTIES
Prepaid licenses and royalties consist of the following:
8
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
MARCH 31, DECEMBER 31,
2004 2003
--------------------------
(Dollars in thousands)
Prepaid royalties for titles in development ...... $ 193 $ 100
Prepaid licenses and trademarks, net of
amortization .................................. 106 109
------- -------
$ 299 $ 209
======= =======
Amortization of prepaid licenses and royalties is included in cost of goods
sold and totaled $0 million and $5.4 million for the three months ended March
31, 2004 and 2003, 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 million and $1.8 million for the three
months ended March 31, 2004 and 2003, respectively.
NOTE 4. ADVANCES FROM DISTRIBUTORS AND OTHERS
Advances from distributors and original equipment manufacturers ("OEMs") consist
of the following:
MARCH 31, DECEMBER 31,
2004 2003
--------------------------
(Dollars in thousands)
Advances for other distribution rights ........... $ 632 $ 629
====== ======
Net advance from Vivendi distribution agreements . $2,198 $2,862
====== ======
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 certain Atari Interactive affiliates as well
as 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 Atari. KBK amended its complaint to add
the Company as a separate defendant. The Company counterclaimed against KBK and
Atari Interactive for breach of contract, among other claims. The Company
believes this complaint is without merit and will vigorously defend its
position.
On September 19, 2003, the Company commenced a wrongful termination and
breach of contract action against Atari Interactive, Inc. and Atari, Inc. in New
York State Supreme Court, New York County. The Company sought, among other
things, a judgment declaring that a computer game license agreement between the
Company and Atari Interactive continues to be in full force and effect. On
September 23, 2003, the Company obtained a preliminary injunction that prevented
termination of the computer game license agreement. Atari Interactive answered
the complaint, denying all claims, asserting several affirmative defenses and
counterclaims for breach of contract and one counterclaim for a judgment
declaring the computer game license agreement terminated. Both sides sought
damages in an amount to be determined at trial. The Company, Atari Interactive
and Atari, Inc. reached an agreement with respect to the scope and terms of the
computer game license agreement. The parties filed with the
9
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
court a Stipulation of Dismissal, dated December 22, 2003. The court ordered
dismissal of the matter on January 6, 2004.
On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner")
filed suit against the Company 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 of $2.0 million. At the time the suit was filed, the amount
due under the note was $1.4 million including interest. Subsequently, the
Company entered into a settlement agreement with Warner. The Company is
currently in default of the settlement agreement with Warner and has entered
into a payment plan, of which the Company is in default, for the balance of the
$0.32 million owed payable in one remaining installment.
In March 2004, the Company 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 the
Company tentatively titled AIRBORNE: LIBERATION. The Company's complaint alleges
that Battleborne repudiated the Company's contract with it and subsequently
renamed the product and entered into a development agreement with a different
publisher. The Company is currently seeking a declaration from the court that it
retain rights to the product or receive damages.
On or about April 16, 2004, Arden Realty Finance IV LLC 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 satisfy this obligation and reach an
agreement with its landlord, the Company subseqently forfeited its lease, and is
in the process of locating another building for its operations. This suit and
interruption of our operations could cause substantial harm to our business.
On or about April 19, 2004, Bioware Corporation filed a breach of contract
action against the Company in the Superior Court for the State of California,
County of Orange, alleging failure to pay royalties when due. At the time of
filing, Bioware alleged that it was owed approximately $156,000 under various
agreements for which it secured a writ of attachment over the Company's assets.
If Bioware executes the writ, it will negatively affect the Company's cash flow,
which could further restrict its operations and cause material harm to our
business.
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.
We have received notice from the Internal Revenue Service ("IRS") that we
owe approximately $70,000 in payroll tax penalties. We estimate that we owe an
additional $30,000, which we have accrued in penalties for nonpayment of
approximately $100,000, $102,000 and $99,000 in Federal and State payroll taxes,
which were due on April 30, April 15, and March 31, 2004, and is still
outstanding. We were unable to meet our May 15, May 31, and June 15, 2004
payroll obligations to our employees. The labor board has fined us approximately
$10,000 for failure to meet our payroll obligations. Our property, general
liability, auto, fiduciary liability, and employment practices liability, have
been cancelled. Our workers compensation insurance was cancelled but we have
mananaged to reinstate the policy. The labor board fined us approximately
$79,000 for not having workmans compensation insurance. Our health insurance was
also cancelled but we have had the policy reinstated.
NOTE 6. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings or (loss) per commonshare 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.
10
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
2004 2003
--------- ---------
(In thousands, except per
share amounts)
Net income (loss) available to common stockholders $ (903) $ 5,576
--------- ---------
Interest related to conversion of secured
convertible promissory note ................... -- $ 30
--------- ---------
Dilutive net income (loss) available to common
stockholders .................................. -- $ 5,606
Shares used to compute income (loss) per share:
Weighted-average common shares ................ 93,856 93,849
Dilutive stock equivalents .................... -- 18,600
--------- ---------
Dilutive potential common shares .............. 93,856 112,449
========= =========
Net income (loss) per common share:
Basic ......................................... $ (0.01) $ 0.06
Diluted ....................................... $ (0.01) $ 0.05
--------- ---------
There were options and warrants outstanding to purchase 9,966,052 and
10,415,352 shares of common stock at March 31, 2004 and 2003, respectively,
which were excluded from the earnings per share computation for the three months
ended March 31, 2003, 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 $1.84 and $1.93, respectively.
NOTE 7. RELATED PARTIES
Amounts receivable from and payable to related parties are as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------- ------------
(Dollars in thousands)
Receivables from related parties:
Titus TSC $ 320 $ 313
Titus KK -- 6
Titus Sarl 43 43
Avalon 613 893
Reserve allowance (706) (691)
------------- ------------
Total $ 270 $ 564
============= ============
Payables to related parties:
Titus GIE 10 -
------------- -----------
Total $ 10 $ -
============= ===========
11
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
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.
The Company performs certain distribution services on behalf of Titus for a
fee. In connection with such distribution services, the Company recognized fee
income of $0 and $5,000 for the three months ended March 31, 2004, and 2003,
respectively.
As of March 31, 2004 and December 31, 2003, Titus and its affiliates
excluding Avalon owed the Company $363,000 and $362,000, respectively. The
Company owed Titus and its affiliates excluding Avalon $10,000 and $0.00 as of
March 31, 2004 and December 31, 2003 respectively. Amounts the Company owed to
Titus and its affiliates excluding Avalon at March 31, 2004 consisted primarily
of trade payables.
TRANSACTIONS WITH TITUS AFFILIATES
TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS
The Company has an International Distribution Agreement with Avalon, a
wholly owned subsidiary of Titus. Pursuant to this distribution agreement,
Avalon 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 ending February 2006, cancelable under
certain conditions, subject to termination penalties and costs. Under this
agreement, as amended, we pay Avalon a distribution fee based on net sales, and
Avalon provides certain market preparation, warehousing, sales and fulfillment
services on its behalf. In connection with the International Distribution
Agreement with Avalon, we incurred distribution commission expense of $1.4
million and $48,000, for the three months ended March 31, 2004, and 2003,
respectively. In addition, the Company recognized no overhead fees for the three
months ended March 31, 2004, and 2003. Also in connection with this
International Distribution Agreement, the Company subleased office space from
Avalon. Rent expense paid to Avalon was $0 and $27,000, for the three months
ended March 31, 2004, and 2003 respectively. As of April 2003, the Company no
longer subleased office from Avalon.
In January 2003, the Company entered into a waiver with Avalon related to
the distribution of a video game title in which the Company sold the European
distribution rights to Vivendi. In consideration for Avalon relinquishing its
rights, the Company paid Avalon a $650,000 cash consideration and will pay
Avalon 50% of all proceeds in excess of the advance received from Vivendi. As of
March 31, 2004, Vivendi has not reported sales exceeding the minimum guarantee.
In May 2003, Avalon filed for a CVA, a process of reorganization in the
United Kingdom, in which the Company participated in, and was approved as a
creditor of Avalon. As part of the Avalon CVA process, the Company submitted its
creditor's claim. The Company has received approximately $555,000 due to it as a
creditor under the terms of the Avalon CVA plan. The Company continues to
evaluate and adjust as appropriate its claims against Avalon in the CVA process.
However, the effects of the approval of the Avalon CVA on its ability to collect
amounts due from Avalon are uncertain. As a result, the Company cannot guarantee
its ability to collect fully the debts it believes are due and owed to it from
Avalon. However, timely payments have been made through March 31, 2004 for
amounts due under the CVA. If Avalon is not able to continue to operate under
the new CVA, we expect Avalon to cease operations and liquidate, in which event
the Company will most likely not receive in full the
12
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
amounts presently due it by Avalon. The Company may also have to appoint another
distributor or become its own distributor in Europe and the other territories in
which Avalon presently distributes its products.
In March 2003, the Company made a settlement payment of approximately $320,000
to a third-party on behalf of Avalon 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, Avalon owes the
Company $400,000 pursuant to the indemnification provisions of the International
Distribution Agreement. This amount was included in the Company's claims against
Avalon in the Avalon CVA process.
The Company has also entered into a Product Publishing Agreement with
Avalon, which provides it with an exclusive license to publish and distribute
substantially all of Avalon's products within North America, Latin America and
South America for a royalty based on net sales. As part of terms of an April
2001 settlement between Avalon and the Company, the Product Publishing Agreement
was amended to provide for the Company to publish only one future title
developed by Avalon. In connection with this Product Publishing Agreement with
Avalon, the Company did not perform any publishing and distribution services on
behalf of Avalon for the three months ended March 31, 2004 and 2003.
TRANSACTIONS WITH TITUS SOFTWARE
In March 2003, the Company 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,
the Company's 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 $245,000.
The total receivable due from TSC is approximately $320,000 as of March 31,
2004. The majority of the additional $75,000 was due to TSC subletting office
space and miscellaneous other items.
In May 2003, the Company paid TSC $60,000 to cover legal fees in connection
with a lawsuit against Titus. As a result of the payment, the Company's CEO
requested that we credit the $60,000 to amounts we owed to him arising from
expenses incurred in connection with providing services to the Company. The
Company's 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, the Company 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 the Company as an agent in
regard to certain sales transactions in Japan. This representation agreement has
not yet been approved by the Company's Board of Directors and is currently being
reviewed by them. The Company's Board of Directors has approved the payments of
certain amounts to Titus Japan in connection with certain services already
performed by them on the Company's behalf. As of December 31, 2003, the Company
has received approximately $225,000 in revenues and incurred approximately
$57,000 in commission fees pursuant to this agreement. As of March 31, 2004 the
Company had a zero balance with Titus Japan.
TRANSACTIONS WITH TITUS INTERACTIVE STUDIO
In September 2003, the Company engaged the translation services of Titus
Interactive Studio, pursuant to which (i) the Company will first request a quote
from Titus Interactive Studio for each service needed and only if such quote
compares favorably with quotes from other companies for identical work will
Titus Interactive Studio be used, (ii) such services shall be based on work
orders submitted by the Company and (iii) each work order can not have a rate
exceeding $0.20/word (excluding voice over) without receiving additional prior
Board of Directors approval. We have paid approximately $11,000 to date under
this agreement. We have a zero balance with Titus Interactive Studio as of the
date of this filing.
13
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
MARCH 31, 2004
TRANSACTIONS WITH TITUS SARL
As of March 31, 2004 the Company has a receivable of approximately
$43,000 for product development services that the Company provided.
TRANSACTIONS WITH TITUS GIE
In February 2004, the Company engaged the services of GIE Titus Interactive
Group, a wholly owned subsidiary of Titus, for a three-month agreement pursuant
to which GIE Titus or its agents shall provide to the Company certain foreign
administrative and legal services at a rate of $5,000 per month. As of March 31,
2004 the Company had a payable of $10,000,
TRANSACTIONS WITH EDGE LLC
In September 2003, the Company's Board of Directors approved the engagement
of Edge LLC to provide recommendations regarding the operation of the Company's
legal department and strategies as well as interim executive functions. Mr.
Michel Vulpillat, a member of our Board of Directors, is a managing member of
Edge LLC. As of March 31, 2004, the Company has incurred an aggregate expense of
approximately $150,000 and had a payable of approximately $50,400 to Edge LLC.
As of April 30, 2004, we have incurred an additional expense of approximately
$16,800. Consequently, the Company has a payable of approximately $67,200 to
Edge LLC.
In April 2004, the Company entered into a Bridge Financing Agreement with
Edge LLC pursuant to which Edge LLC loaned the Company $60,000 at an interest
rate of 10% per annum and is due as soon as sufficient funds other than the
funds received pursuant to this agreement become available, but in no event
later than May 31, 2004. The Company also incurred a $2,000 transaction fee as a
part of this financing. As of the date of this filing the Company has paid Edge
LLC $35,000 pursuant to this agreement and consequently still owes approximately
$25,000 plus the transaction fee and interest. This balance due is in addition
to the approximately $67,200 in payables due to Edge LLC described above.
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,
-------------------------------------------------
2004 2003
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- --------- --------- ---------
(Dollars in thousands)
North America $ 339 4 % $ 1,879 10 %
Europe 6,920 82 1,620 9
Rest of World 944 12 87 --
OEM, royalty
and licensing 206 2 15,176 81
---------- --------- --------- ---------
$ 8,409 100 % $ 18,762 100 %
========== ========= ========= =========
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, 2003, 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, 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 assumes 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, 2003 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.
REVENUE RECOGNITION
We record revenues when we deliver products to customers in accordance with
Statement of Position
15
("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
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 sale of licensing rights on certain products. The
terms of the licensing rights differ, but normally include the right to develop
and distribute a product on a specific video game platform. We recognize revenue
when the rights have been transferred and no other obligations exist 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, 2004 and 2003, we recorded prepaid
licenses and royalties impairment charges to cost of goods sold of $0 million
and $1.8 million respectively. Our prepaid royalty balances at March 31, 2004
$.30 million, net of reserves of $.25 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,
---------------------------------------------
2004 2003
--------------------- --------------------
% OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- --------
(Dollars in thousands)
Net revenues .................. $ 8,409 100% $ 18,762 100%
Cost of goods sold ............ 5,083 60% 6,985 37%
-------- -------- -------- --------
Gross profit ............... 3,326 40% 11,777 63%
-------- -------- -------- --------
Operating expenses:
Marketing and sales ........ 991 12% 121 1%
General and administrative . 1,206 14% 2,362 13%
Product development ........ 2,007 24% 3,678 19%
-------- -------- -------- --------
Total operating expenses ... 4,204 50% 6,161 33%
-------- -------- -------- --------
Operating income (loss) ....... (878) (10%) 5,616 30%
Other expense ................. (25) 0% (40) 0%
-------- -------- -------- --------
Net income (loss) ............. $ (903) (10%) $ 5,576 30%
======== ======== ======== ========
Net revenues by geographic
region:
North America .............. $ 339 4% $ 1,879 10%
International .............. 7,864 94% 1,707 9%
OEM, royalty and licensing . 206 2% 15,176 81%
Net revenues by platform:
Personal computer .......... $ 694 8% $ 648 3%
Video game console ......... 7,509 90% 2,938 16%
OEM, royalty and licensing . 206 2% 15,176 81%
NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES
Geographically, our net revenues for the three months ended March 31, 2004
and 2003 breakdown as follows: (in thousands)
2004 2003 Change % Change
-------- -------- -------- --------
North America ................... $ 339 $ 1,879 $ (1,540) (82%)
International ................... 7,864 1,707 6,157 361%
OEM, Royalty & Licensing ........ 206 15,176 (14,970) (99%)
Net Revenues .................... 8,409 18,762 (10,353) (55%)
17
Net revenues for the three months ended March 31, 2004 were $8.4 million, a
decrease of 55% compared to the same period in 2003. This decrease resulted from
an 82% decrease in North American net revenues and a 99% decrease in OEM,
royalties and licensing revenues offset by a 361% increase in International net
revenues.
North American net revenues for the three months ended March 31, 2004 were
$0.3 million. The decrease in North American net revenues in 2004 was mainly due
to a 72% decrease in back catalog sales compared to 2003 and by delivering one
product gold master to one title in 2003 compared to delivering zero product
gold masters in 2004, resulting in a decrease in North American sales of $1.7
million and a decrease in product returns and price concessions of $0.2 million
as compared to the 2003 period. Our back catalog sales decrease is due to having
fewer titles to replace titles that have exhausted their useful commercial lives
and the expiration of our prior distribution agreement we entered into with
Vivendi in 2001.
International net revenues for the three months ended March 31, 2004 were
$7.9 million. The increase in International net revenues for the three months
ended March 31, 2004 was mainly due to releasing BALDUR'S GATE: DARK ALLIANCE II
and FALLOUT: BROTHERHOOD OF STEEL in Europe. Overall, we had a $7.0 million
increase in revenue offset by an increase in product returns and price
concessions of $0.8 million compared to the 2003 period.
Avalon, our primary international distributor is current on their post-CVA
payments to us. (please see Note 7. Related Parties to our Condensed
Consolidated Financial Statements). However, if Avalon is not able to continue
its reorganization 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 International
sales.
OEM, royalty and licensing net revenues for the three months ended March
31, 2004 were $0.2 million, a decrease of $15.0 million as compared to the same
period in 2003. OEM net revenues decreased by $0.1 million as compared to the
2003 period and licensing net revenues decreased by $14.9 million as compared to
the 2003 period. The decrease in licensing net revenues in 2004 was due to the
fact that in 2003, we recorded $15.0 million in revenue related to the sale of
the HUNTER: THE RECKONING video game license and did not have a comparable
transaction in the first quarter of 2004.
We expect that OEM, royalty and licensing net revenues in 2004 will
decrease compared to 2003 as a result of not having a comparable transaction as
the sale of HUNTER: THE RECKONING license.
PLATFORM NET REVENUES
Our platform net revenues for the three months ended March 31, 2004 and
2003 breakdown as follows: (in thousands)
2004 2003 Change % Change
-------- -------- -------- --------
Personal Computer ............... $ 694 $ 648 $ 46 7%
Video Game Console .............. 7,509 2,938 4,571 156%
OEM, Royalty & Licensing ........ 206 15,176 (14,970) (99%)
Net Revenues .................... 8,409 18,762 (10,353) (55%)
PC net revenues for the three months ended March 31, 2004 were $0.7
million, a decrease of 7% compared to the same period in 2003. The decrease in
PC net revenues in 2004 was primarily due to lower back catalog sales. Video
game console net revenues were $7.5 million, an increase of 156% for the three
months ended March 31, 2004 compared to the same period in 2003, due to
releasing BALDUR'S GATE: DARK ALLIANCE II and FALLOUT: BROTHERHOOD OF STEEL in
Europe in 2004, offset by delivering zero product gold masters in 2004 as
compared to one product gold master, RUN LIKE HELL (Xbox), in 2003 to Vivendi in
North America.
We expect our PC net revenues to decrease in 2004 as compared to 2003 as we
expect to continue to focus on video game console products.
COST OF GOODS SOLD; GROSS PROFIT MARGIN
Our net revenues, cost of goods sold and gross margin for the three months
ended March 31, 2004 and 2003 breakdown as follows: (in thousands)
18
2004 2003 Change % Change
-------- -------- -------- --------
Net Revenues ................ $ 8,409 $ 18,762 $(10,353) (55%)
Cost of Goods Sold .......... 5,083 6,985 (1,902) (27%)
Gross Profit Margin ......... 3,326 11,777 8,451 (72%)
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 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 27% to $5.1 million in the three months
ended March 31, 2004 compared to the same period in 2003. The decrease was due
to lower amortization of prepaid royalties on externally developed products in
the three months ended March 31, 2004 as compared to the 2003 period. In 2003,
we incurred $2.9 million in amortization of prepaid royalties associated with
the sale of the HUNTER: THE RECKONING license 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 decrease in cost of goods sold was
partially offset by an increase in manufacturing costs due to higher unit sales
in Europe.
Our gross margin decreased to 40% for the 2004 period from 63% in the 2003
period. This was primarily due to the 2004 period not having a comparable
transaction such as the sale of the HUNTER: THE RECKONING license, which yielded
approximately an 80% profit margin.
We expect our gross profit margin percentage to decrease in 2004 as
compared to 2003 mainly due to the fact that we do not anticipate having a
comparable transaction such as the sale of HUNTER: THE RECKONING license, offset
by the fact that we do not expect to incur any unusual product returns and price
concessions or any write-offs of prepaid royalties in 2004.
MARKETING AND SALES
Our marketing and sales expense for the three months ended March 31, 2004
and 2003 breakdown as follows: (in thousands)
2004 2003 Change % Change
-------- -------- -------- --------
Marketing and Sales $991 $121 $870 719%
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, 2004 were $1.0 million, a 719%
increase as compared to the 2003 period. The increase in marketing and sales
expenses is due to a $0.9 million increase in advertising and retail marketing
support expenditures due to releasing BALDUR'S GATE: DARK ALLIANCE II and
FALLOUT: BROTHERHOOD OF STEEL in Europe.
19
GENERAL AND ADMINISTRATIVE
Our general and administrative expense for the three months ended March 31,
2004 and 2003 breakdown as follows: (in thousands)
2004 2003 Change % Change
-------- -------- -------- --------
General and Administrative $1,206 $2,362 $(1,156) (49%)
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, 2004 were $1.2 million, a 49% decrease as compared
to the same period in 2003. The decrease is mainly due to a $1.2 million
decrease in personnel costs and general expenses.
We expect our general and administrative expenses to decrease in 2004
compared to 2003.
PRODUCT DEVELOPMENT
Our product development expense for the three months ended March 31, 2004
and 2003 breakdown as follows: (in thousands)
2004 2003 Change % Change
-------- -------- -------- --------
Product Development $2,007 $3,678 $(1,671) (45%)
Product development expenses for the three months ended March 31, 2004 were
$2.0 million, a 45% decrease as compared to the same period in 2003. This
decrease is due to a $1.7 million decrease in personnel costs as a result of a
reduction in product development personnel during 2003.
We expect our product development expenses to decrease in 2004 compared to
2003 as a result of reductions in product development personnel during 2003.
OTHER EXPENSE, NET
Our other expense for the three months ended March 31, 2004 and 2003
breakdown as follows: (in thousands)
2004 2003 Change % Change
-------- -------- -------- --------
Other Expense $(25) $(40) $(15) (38%)
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, 2004 was $0.025 million, a 37% decrease as compared
to the same period in 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had a working capital deficit of $15 million,
and our cash balance was $28,000. We currently have no cash reserves and are
unable to pay current liabilities. The Company cannot continue in its current
form without at this time obtaining additional financing.
On April 16, 2004, our lessor filed an unlawful detainer action against
us alleging unpaid rent of approximately $432,000. Since that filing, we also
failed to pay the May and June 2004 rent, which increased the total debt to
Arden by approximately $140,000 to $150,000 per month. We were unable to pay our
rent, and vacated the office space during the month of June 2004. We are in the
process of locating another office space to house our operations.
We have received notice from the Internal Revenue Service ("IRS") that
we owe approximately $70,000 in payroll tax penalties. We estimate that we owe
an additional $30,000, which we have accrued in penalties for nonpayment of
approximately $100,000, $102,000 and $99,000 in Federal and State payroll taxes,
which were due on April 30, April 15, and March 31, 2004, and is still
outstanding. We were unable to meet our May 15, May 31, and June 15, 2004
payroll obligations to our employees. The labor board has fined us approximately
$10,000 for failure to meet our payroll obligations. We need to have met our
payroll obligations otherwise there will be additional penalties.
20
Our property, general liability, auto, fiduciary liability, and employment
practices liability, have been cancelled. Our workers compensation insurance was
cancelled but we have mananaged to reinstate the policy. The labor board fined
us approximately $79,000 for not having workmans compensation insurance. Our
health insurance was also cancelled but we have had the policy reinstated. There
can be no guarantee that we will be able to meet all contractual obligations or
liabilities in the future, including payroll obligations.
We expect that we will need to substantially reduce our working capital
needs and/or raise additional 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. In
April 2004, we engaged an investment bank to assist us in locating and
evaluating strategic transactions. However, no assurance can be given that any
strategic transaction will be consummated or any alternative sources of funding
can be obtained on acceptable terms, or at all. 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.
During 2003, we continued to operate under limited cash flow from
operations. To improve our operating results, we have reduced our personnel by
96, from 203 in March 2003 to 107 in March 2004 by both involuntary termination
and attrition. The number of employees continues to reduce through voluntary
termination and attrition.. Operations are continuing at a substantially reduced
basis. We have also reviewed other operational costs and have made reductions in
expenditures in areas throughout the company.
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 and further expense
reductions.
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, employees, and have pending lawsuits as a result of our continuing cash
flow difficulties. We expect these difficulties to continue during the balance
of 2004.
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 used cash of $0.62 million during the three months ended March 31,
2004, primarily attributable to fees incurred for lawsuits, and other
liabilities, and recoupment of advances received by distributors.
Cash used by investing activities of $5,000 for the three months ended
March 31, 2004 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. Net cash
used by financing activities of $.5 million for the three months ended March 31,
2004, consisted primarily of repayments of our note payable to Warner Brothers
Entertainment, Inc.
In May 2003, Avalon filed for a CVA, a process of reorganization in the
United Kingdom. As part of the Avalon CVA process, we submitted our creditor's
claim. We have received the payments of approximately $555,000 due to us as a
creditor under the terms of the Avalon CVA plan. We continue to operate under a
distribution agreement with Avalon. Avalon distributes substantially all of our
titles in Europe, the Commonwealth of
21
Independent States, Africa, the Middle East, and certain other select countries.
Avalon is current on their post-CVA payments to us. Our distribution agreement
with Avalon ends in February 2006. We continue to evaluate and adjust as
appropriate our claims against Avalon in the CVA process. However, the effects
of the approval of the Avalon CVA on our ability to collect amounts due from
Avalon are uncertain. As a result, we cannot guarantee our ability to collect
fully the debts we believe are due and owed to us from Avalon. If Avalon is not
able to continue to operate under the new CVA, we expect Avalon to cease
operations and liquidate, in which event we will most likely not receive in full
the amounts presently due us by Avalon. We may also have to appoint another
distributor or become our own distributor in Europe and the other territories in
which Avalon presently distributes our products.
In April 2002, we entered into a settlement agreement with the landlord of
an office facility in the United Kingdom, whereby we returned the property to
the landlord and were released from any further lease obligations. This
settlement reduced our total contractual cash obligations by $1.3 million
through fiscal 2005.
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.
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 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.
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, 2004, and the effect
such obligations are expected to have on our liquidity and cash flow in future
periods: (in thousands)
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- --------- -------- -------- -------- ---------
Developer License
Commitments (1) $ 4,314 $ 2,671 $ 1,643
Lease Commitments (2) $ 3,387 $ 1,533 $ 1,854
Payroll Taxes (3) $ 292 $ 292
Current Debt $ 322 $ 322
Other Commitments (4) $ 1,856 $ 1,350 $ 506
Total $ 10,171 $ 6,168 $ 4,003
We currently have no cash reserves. 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.
22
(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 (a) minimum
marketing commitments under royalty bearing licensing agreements, and (b)
minimum payments and advances against royalties due under royalty-bearing
licenses and developer agreements.
(2) Lease Commitments: We lease certain of our current facilities and
equipment under non-cancelable operating lease agreements. We are required to
pay property taxes, insurance and normal maintenance costs for certain of our
facilities and will be required to pay any increases over the base year of these
expenses on the remainder of our facilities.
Our headquarters were located in Irvine, California as of March 31, 2004,
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 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
satisfy this obligation and reach an agreement with its landlord, the Company
subseqently forfeited its lease, and is in the process of locating another
building for its operations. This suit and interruption of our operations could
cause substantial harm to our business.
(3) Payroll Taxes: At March 31, 2004, we have an accrual of approximately
$81,000 for past due interest and penalties on late payment of our Federal and
state payroll taxes. We also have accrued approximately $99,000 in unpaid state
and federal payroll taxes due March 31, 2004. We estimate that we owe
approximately an additional $20,000, which we have accrued in penalties for
nonpayment of approximately $100,000 and $102,000 in Federal and State payroll
taxes, which were due on April 30, and April 15, 2004 and are still outstanding.
(4) Other Commitments: Consist of payment plans entered into with various
creditors and the amounts due under our insurance policies.
ACTIVITIES WITH RELATED PARTIES
It is our policy that related party transactions will 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.
We perform certain distribution services on behalf of Titus for a fee. In
connection with such distribution services, we recognized fee income of $0 and
$5,000 for the three months ended March 31, 2004, and 2003, respectively.
As of March 31, 2004 and December 31, 2003, Titus and its affiliates
excluding Avalon owed us $363,000 and $362,000, respectively. We owed Titus and
its affiliates excluding Avalon $10,000 and $0.00 as of March 31, 2004 and
December 31, 2003 respectively. Amounts we owed to Titus and its affiliates
excluding Avalon at March 31, 2004, consisted primarily of trade payables.
23
TRANSACTIONS WITH TITUS AFFILIATES
TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS
We have an International Distribution Agreement with Avalon, a wholly owned
subsidiary of Titus. Pursuant to this distribution agreement, Avalon 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 ending February 2006, cancelable under certain conditions, subject to
termination penalties and costs. Under this agreement, as amended, we pay Avalon
a distribution fee based on net sales, and Avalon provides 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 $1.4 million and $48,000, for the
three months ended March 31, 2004, and 2003, respectively. In addition, we
recognized no overhead fees for the three months ended March 31, 2004, and 2003.
Also in connection with this International Distribution Agreement, we subleased
office space from Avalon. Rent expense paid to Avalon was $0 and $27,000, for
the three months ended March 31, 2004, and 2003 respectively. As of April 2003,
we no longer subleased office from Avalon.
In January 2003, we entered into a waiver with Avalon related to the
distribution of a video game title in which we sold the European distribution
rights to Vivendi. In consideration for Avalon relinquishing its rights, we paid
Avalon a $650,000 cash consideration and will pay Avalon 50% of all proceeds in
excess of the advance received from Vivendi. As of March 31, 2004 , Vivendi has
not reported sales exceeding the minimum guarantee.
In May 2003, Avalon filed for a CVA, a process of reorganization in the
United Kingdom, in which we participated in, and were approved as a creditor of
Avalon. As part of the Avalon CVA process, we submitted our creditor's claim. We
have received the payments of approximately $555,000 due to us as a creditor
under the terms of the Avalon CVA plan. We continue to evaluate and adjust as
appropriate our claims against Avalon in the CVA process. However, the effects
of the approval of the Avalon CVA on our ability to collect amounts due from
Avalon are uncertain. As a result, we cannot guarantee our ability to collect
fully the debts we believe are due and owed to us from Avalon. If Avalon is not
able to continue to operate under the new CVA, we expect Avalon to cease
operations and liquidate, in which event we will most likely not receive in full
the amounts presently due us by Avalon. We may also have to appoint another
distributor or become our own distributor in Europe and the other territories in
which Avalon presently distributes our products.
In March 2003, we made a settlement payment of approximately $320,000 to a
third-party on behalf of Avalon 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, Avalon owes us
$400,000 pursuant to the indemnification provisions of the International
Distribution Agreement. This amount was included in our claims against Avalon in
the Avalon CVA process. We have also entered into a Product Publishing Agreement
with Avalon, which provides us with an exclusive license to publish and
distribute substantially all of Avalon's products within North America, Latin
America and South America for a royalty based on net sales. As part of terms of
an April 2001 settlement between Avalon and us, the Product Publishing Agreement
was amended to provide for us to publish only one future title developed by
Avalon. In connection with this Product Publishing Agreement with Avalon, we did
not perform any publishing and distribution services on behalf of Avalon for the
three months ended March 31, 2004 and 2003 respectively.
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 $245,000. The total receivable due
from TSC is approximately $320,000 as of March 31, 2004. The majority of the
additional approximately $75,000 was due to TSC subletting office space and
miscellaneous other items.
24
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 have approved the payments of certain amounts to Titus Japan
in connection with certain services already performed by them on our behalf. As
of December 31, 2003, we have received approximately $225,000 in revenues and
incurred approximately $57,000 in commission fees pursuant to this agreement. As
of March 31, 2004 we had a zero balance with Titus Japan.
TRANSACTIONS WITH TITUS INTERACTIVE STUDIO
In September 2003, we engaged the translation services of Titus Interactive
Studio, pursuant to which (i) we will first request a quote from Titus
Interactive Studio for each service needed and only if such quote compares
favorably with quotes from other companies for identical work will Titus
Interactive Studio be used, (ii) such services shall be based on work orders
submitted by us and (iii) each work order can not have a rate exceeding
$0.20/word (excluding voice over) without receiving additional prior Board of
Directors approval. We have paid approximately $11,000 to date under this
agreement. We have a $0.00 balance with Titus Interactive Studio as of the date
of this filing.
TRANSACTIONS WITH TITUS SARL
As of March 31, 2004, we have a receivable of $43,000 for product
development services that we provided.
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. As of March 31,
2004 we had a payable of $10,000,
TRANSACTIONS WITH EDGE LLC
In September 2003, our Board of Directors ratified and approved our
engagement of Edge LLC to provide recommendations regarding the operation of our
legal department and strategies as well as interim executive functions. Mr.
Michel Vulpillat, a member of our Board of Directors, is a managing member for
Edge LLC. As of March 31, 2004, we have incurred an aggregate expense of
approximately $150,000 and had a payable of approximately $50,400 to Edge LLC.
As of April 30, 2004, we have incurred an additional aggregate expense of
approximately $16,800. Consequently, we have a payable of approximately $67,200
to Edge LLC.
In April 2004, we entered into a Bridge Financing Agreement with Edge LLC
pursuant to which Edge LLC loaned us $60,000 at an interest rate of 10% per
annum and is due as soon as sufficient funds other than the funds received
pursuant to this agreement become available, but in no event later than May 31,
2004. We also incurred a $2,000 transaction fee as a part of this financing. As
of the date of this filing we have paid Edge LLC $35,000 pursuant to this
agreement and consequently still owe approximately $25,000 plus the transaction
fee and 10% interest. This balance due is in addition to the approximately
$67,200 in payables due to Edge LLC above.
WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
While we have never paid dividends in the past, we may decide to do in the
foreseeable future.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of March 31, 2004.
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, primarily from Avalon.
We recognized gains of $150 and $17,000 during the three months ended March
31,2004 and 2003 respectively, primarily in connection with foreign exchange
fluctuations in the timing of payments received on accounts receivable from
Avalon.
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, 2004 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 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.
26
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 $0.32 million payable in one
remaining installment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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.
27
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 25 2004 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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