-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RXfoIRtMF/5ItQpk9RglJBnoM8BaqnMJPFVMJJSVajjTSkrcYxul5koPXtopwSxV QItti59TBOADumLC/Y9E9A== 0001170918-06-001055.txt : 20061120 0001170918-06-001055.hdr.sgml : 20061120 20061120171324 ACCESSION NUMBER: 0001170918-06-001055 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061120 DATE AS OF CHANGE: 20061120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPLAY ENTERTAINMENT CORP CENTRAL INDEX KEY: 0001057232 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330102707 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24363 FILM NUMBER: 061230699 BUSINESS ADDRESS: STREET 1: 1682 LANGLEY AVE CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 3104321958 MAIL ADDRESS: STREET 1: 1682 LANGLEY AVE CITY: IRVINE STATE: CA ZIP: 92614 10-Q/A 1 fm10qa-093006.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Amendment No. 1) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24363 INTERPLAY ENTERTAINMENT CORP. (Exact name of the registrant as specified in its charter) DELAWARE 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 N. CRESCENT DRIVE, BEVERLY HILLS, CALIFORNIA 90210 (Address of principal executive offices) (310) 432-1958 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [_] Accelerated filer [_] Non- accelerated filer [X] Indicate by check mark whether the registrant is shell company ( as defined in Rule 12b-2 of the Exchange Act) Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS ISSUED AND OUTSTANDING AT SEPTEMBER 30, 2006 - ------------------------------ -------------------------------------------- Common Stock, $0.001 par value 103,855,634 This amendment is being filed to correct an omission of footnote 5. INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q/A SEPTEMBER 30, 2006 TABLE OF CONTENTS -------------- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 3 Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2006 and 2005 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2006 and 2005 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 1A. Risk Factors 20 Item 3. Defaults Upon Senior Securities 28 Item 6. Exhibits 28 SIGNATURES 29 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ------------- ASSETS (unaudited) Current Assets: Cash ......................................................... $ 25,000 $ 122,000 Trade receivables, net of allowances of $ 0 and $94,000 respectively .......................... 138,000 445,000 Inventories .................................................. 8,000 8,000 Deposits ..................................................... 4,000 8,000 Prepaid expenses ............................................. 8,000 60,000 Other receivables ............................................ 13,000 8,000 ------------- ------------- Total current assets ..................................... 196,000 651,000 Property and equipment, net ....................................... 4,000 7,000 Other assets ...................................................... 8,000 15,000 ------------- ------------- Total assets ............................................. $ 208,000 $ 673,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Current debt ................................................. $ 1,564,000 $ 1,549,000 Accounts payable ............................................. 5,992,000 9,560,000 Accrued royalties ............................................ 167,000 949,000 Advances from distributors and others ........................ 499,000 105,000 ------------- ------------- Total current liabilities ................................ 8,222,000 12,163,000 ------------- ------------- 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; 103,855,634 shares issued and outstanding ................. 104,000 94,000 Paid-in capital .............................................. 121,926,000 121,640,000 Accumulated deficit .......................................... (130,121,000) (133,284,000) Accumulated other comprehensive income ....................... 77,000 60,000 Treasury stock of 4,658,216 shares of common stock ........... 0 0 ------------- ------------- Total stockholders' deficit ...................... (8,014,000) (11,490,000) ------------- ------------- Total liabilities and stockholders' deficit ...... $ 208,000 $ 673,000 ============= =============
See accompanying notes. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 2006 2005 2006 2005 ------------- ------------- ------------- ------------- (in thousands, except per share amounts) Net revenues ............................... $ 335,000 $ 426,000 $ 643,000 $ 1,352,000 Net revenues from related party distributors -- 3,842,000 38,000 4,178,000 ------------- ------------- ------------- ------------- Total net revenues ...................... 335,000 4,268,000 681,000 5,530,000 Cost of goods sold ......................... 5,000 13,000 157,000 281,000 ------------- ------------- ------------- ------------- Gross profit ............................ 330,000 4,255,000 524,000 5,249,000 Operating expenses: Marketing and sales ..................... 55,000 29,000 418,000 169,000 General and administrative .............. 438,000 622,000 1,189,000 1,896,000 Product development ..................... -- 35,000 -- 169,000 ------------- ------------- ------------- ------------- Total operating expenses ............. 493,000 686,000 1,607,000 2,234,000 ------------- ------------- ------------- ------------- Operating income (loss) .................... (163,000) 3,569,000 (1,083,000) 3,015,000 Other income (expense): Interest expense ..................... (29,000) (10,000) (81,000) (23,000) Other (Reversal of certain prior years accruals and accounts payable- 2006 ................................. 1,825,000 1,142,000 4,327,000 2,125,000 ------------- ------------- ------------- ------------- Income before benefit for income taxes ..... 1,633,000 4,701,000 3,163,000 5,117,000 Income taxes ............................... -- (1,000) -- (2,000) ------------- ------------- ------------- ------------- Net income ................................. $ 1,633,000 $ 4,700,000 $ 3,163,000 $ 5,115,000 ============= ============= ============= ============= Net income per common share: Basic ................................ $ 0.02 $ 0.05 $ 0.03 $ 0.05 ============= ============= ============= ============= Diluted .............................. $ 0.02 $ 0.05 $ 0.03 $ 0.05 ============= ============= ============= ============= Shares used in calculating net income per common share: Basic ................................ 103,855,635 93,855,000 99,350,000 93,855,000 ============= ============= ============= ============= Diluted .............................. 103,855,635 93,855,000 99,350,000 93,855,000 ============= ============= ============= =============
See accompanying notes. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPT 30, -------------------------- 2006 2005 ----------- ----------- Cash flows from operating activities: Net income .............................................. $ 3,163,000 $ 5,115,000 Adjustments to reconcile net (loss) income to cash (used) provided by operating activities: Depreciation and amortization ........................ 3,000 141,000 Write-off of fixed assets ............................ -- 247,000 Changes in operating assets and liabilities: Trade receivables, net ................................ 307,000 59,000 Inventories ........................................... -- 10,000 Deposits .............................................. 4,000 (10,000) Prepaid expenses ...................................... 52,000 (97,000) Other current assets, net ............................. (5,000) 129,000 Other assets .......................................... 7,000 (25,000) Accounts payable ...................................... (3,552,000) 803,000 Accrued royalties ..................................... (782,000) (2,632,000) Payables to former related parties .................... -- (3,509,000) Deferred Income (3rd Party) ........................... -- (252,000) Restricted cash ....................................... -- 2,000 Advances from distributors ............................ 394,000 -- Accumulated other compensation income ................. 16,000 (2,000) ----------- ----------- Net cash provided by (used in) operating activities (393,000) (21,000) ----------- ----------- Cash Flow from investing activities: Purchase of property and equipment ...................... -- -- ----------- ----------- Net cash used in investing activities ............. -- -- ----------- ----------- Cash flows from financing activities: Repayment of current debt Issuance of stock to reduce debt ........................ 296,000 -- ----------- ----------- Net cash provided by (used in) financing activities 296,000 -- ----------- ----------- Effect of exchange rate changes on cash Net increase (decrease) in cash ............................ (97,000) (21,000) Cash, beginning of period .................................. 122,000 29,000 ----------- ----------- Cash, end of period ........................................ $ 25,000 $ 8,000 =========== =========== Supplemental cash flow information: Cash paid for: Interest .......................................... $ 0 $ 23,000 =========== ===========
See accompanying notes. 5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Interplay Entertainment Corp. (which we refer to as the "Company" in these Notes) and its subsidiaries reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. The balance sheet at December 31, 2005 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, 2005 as filed with the U.S. Securities and Exchange Commission ("SEC"). FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN STATUS The Company's independent public accountant included a "going concern" explanatory paragraph in his audit report on the December 31, 2005 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. All costs incurred and expected to be incurred associated with the restructuring activities of the Company are considered insignificant. Management will continue to pursue various alternatives to improve future operating results, and further expense reductions, some of which may have a long-term adverse impact on the Company's ability to generate successful future business activities. In addition, the Company continues to seek and expects to require external sources of funding, including but not limited to, a sale or merger of the Company, a private placement of the Company's securities, the sale of selected assets, the licensing of certain product rights, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve the Company's long-term strategic objectives. The Company expects that it will need to substantially reduce its working capital needs and/or raise additional capital. However, no assurance can be given that alternative sources of funding could be obtained on acceptable terms, or at all. These conditions, combined with the Company's historical operating losses and its deficits in stockholders' equity and working capital, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty. 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, long-lived assets, and certain accrued liabilities related to litigation. 6 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 Co., Ltd., (Japan) and Games On-line.com, Inc. All significant intercompany transactions have been eliminated. NOTE 2. 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, or results of operations. On November 25, 2002, Special Situations Fund III, Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special Situations Technology Fund, L.P. (collectively, "Special Situations") initiated legal proceedings against the Company seeking damages of approximately $1.3 million, alleging, among other things, that we failed to secure a timely effective date for a Registration Statement for its shares purchased by Special Situations under a common stock subscription agreement dated March 29, 2001 and that the Company therefore, liable to pay Special Situations $1.3 million. Special Situations entered into a settlement agreement with the Company in December, 2003 contemplating payments over time, which the Company later defaulted. In August, 2004 the Company entered into a stipulation of settlement on which it later defaulted. On January 12, 2005 a judgment of approximately $776,000 was entered in the State of New York and on February 4, 2005 a judgment reflecting the January 12, 2005 judgment was entered in the State of California. On May 3, 2006 the Company entered into a Stipulation of Settlement. Under this Stipulation of Settlement, the Company issued a total of 10,000,000 shares of its unregistered common stock and made a payment in the amount of approximately $239,000. Following the issuance of such shares, and in consideration of such issuance and such payment, satisfaction of judgments in the amount of approximately $776,000 were filed. Such shares were issued in a private placement pursuant to section 4(2) of the Securities Act of 1933 and were issued at a price of $.0296 per share, using a value based on the then current market price of shares of common stock discounted by such newly issued shares. On October 24, 2002, Synnex Information Technologies Inc ("Synnex") initiated legal proceedings against the Company for various claims related to a breach of a distributorship agreement. Synnex obtained a $172,000 judgment against the Company. 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 sum of $2.0 million. At the time the suit was filed, the current remaining principal sum due under the note was $1.4 million in principal including interest. The Company owes a remaining balance of approximately $377,000 payable in one remaining installment. The Company is currently in default of the settlement agreement. In April 2004, Arden Realty Finance IV LLC ("Arden") filed an unlawful detainer action against the Company in the Superior Court for the State of California, County of Orange, alleging the Company's default under its corporate lease agreement. At the time the suit was filed, the alleged outstanding rent totaled $432,000. The Company was unable to pay the rent, and vacated the office space during the month of June 2004. On June 3, 2004, Arden obtained a judgment of approximately $588,000 exclusive of interest. In addition the Company has another claim from the landlord in the approximate amount of $148,000, exclusive of interest. The Company has negotiated a forbearance agreement whereby Arden agreed to accept payments commencing in January 2005 in the amount of $60,000 per month until the full amount is paid. The Company has not accrued any amount for any remaining lease obligation, should such obligation exist. The Company is currently in default of the forbearance agreement. 7 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 $886,000 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 its business. In August 2003, Reflexive Entertainment, Inc. filed an action against the Company, for failure to pay development fees, in the Orange County Superior Court that was settled in July 2004. The Company was unable to make the payments and Reflexive sought, and obtained, judgment against the company for approximately $110,000. On March 27, 2003, KDG France SAS ("KDG") filed an action against Interplay OEM, Inc. and Herve Caen for failure to pay royalties. On December 29, 2003 a settlement agreement was entered into whereby Herve Caen was dismissed from the action. Further, the settlement was entered into with Interplay OEM only in the amount of $170,000; however, KDG reserved its rights to proceed against the Company if the settlement payment was not made. As of this date the settlement payment has not been made. The Company received notice from the Internal Revenue Service ("IRS") that it owes approximately $110,000 pursuant to section 166 and section 186 of the Internal Revenue Code in payroll tax penalties, and interest for late filing and late payment of payroll taxes. Approximately $110,000 was accrued as of December 31, 2005 but remains unpaid. The Company received notice from the Employment Development Department (EDD) that it owes approximately $105,000 in payroll taxes owed for the periods ending 2004 and 2003, which was accrued for December 31, 2005. The Company was unable to meet certain 2004 payroll obligations to its employees; as a result, several employees filed claims with the State of California Labor Board ("Labor Board"). The Labor Board has fined the Company approximately $10,000 for failure to meet its payroll obligations and obtained in August 2005 judgments totaling $118,000 in favor of former employees of the Company. Since this time $55,000 of the claims have been settled, leaving a balance of $63,000 unpaid. The Labor Board fined the Company approximately $79,000 for having lost workers' compensation insurance for a period of time. The Company is appealing the Labor Board fine. The Company received notice from the California State Board of Equalization of a balance due in the amount of $75,000 for a prior year audit. The Company is in the process of appealing the prior year audit calculations. On September 14, 2005, Network Commercial Service, Inc. ("NCS") filed an action against the Company alleging breach of contract relating to the provision of copying equipment and that the balance due is $140,000 to NCS. The Company is evaluating the merit of the lawsuit. On April 22, 2005, Mark Strecker filed a request for judgment to be entered against the Company for various claims alleging unpaid services in the amount of $35,000. The Company is evaluating the merit of the lawsuit. On May 19, 2005 DZN, The Design Group, Inc. filed an action against the Company for various advertising services in the amount of $38,000. The Company is evaluating the merit of the lawsuit. On February 2, 2006 Michael Sigel filed an action against the Company for unauthorized use of image. The Company is evaluating the merit of the lawsuit. On March 7, 2006 Parallax Software Corp. entered a judgment against the Company for a material breach of a settlement agreement related to royalties owed in the amount of $219,000. The Company has recorded an estimate for the liabilities related to the aforementioned litigation. If any of the creditors execute their judgments against the Company, the results will negatively affect the Company's cash flow, which could restrict the Company's operations and cause material restraints to its business. 8 NOTE 3. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- ---------------------------------------- 2006 2005 2006 2005 ------------------ ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) North America .. $ 156 47% $ 1,895 45% $ 200 29% $ 1,940 35% International .. 164 49% 2,316 54% 379 56% 3,419 62% OEM, royalty and licensing ... 15 4% 57 1% 102 15% 171 3% ------- ------- ------- ------- ------- ------- ------- ------- $ 335 100% $ 4,268 100% $ 681 100% $ 5,530 100% ======= ======= ======= ======= ======= ======= ======= =======
NOTE 4. REVERSAL OF CERTAIN PRIOR YEAR ACCRUALS AND ACCOUNTS PAYABLES During the quarter, the Company has reversed certain accruals and accounts payables of approximately $1,823,000. It is the Company's policy to reverse outstanding accruals and accounts payables that have been outstanding for over 3 years and no effort has been made by the vendor or claimant for that period of time to collect the outstanding balances. NOTE 5. OPTIONS AND WARRANTS AGREED TO BE ISSUED SUBSEQUENT TO SEPTEMBER 30, 2006. On October 2, 2006 the Board of Directors of the Company approved the restructuring of certain compensatory arrangements of Herve Caen, the Chief Executive Officer and Interim Chief Financial Officer of the Company. Under the restructuring $500,000 of Mr. Caen's earned but unpaid salary was converted to a conditional demand note (such note to be exercisable only if the tangible net worth of the Company exceeds $1 million or in a case of change in control) bearing a 5% annual interest rate and issued 1,000,000 10-year warrants to purchase common stock which are immediately exercisable. The pricing of such warrants was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such warrants shall have an exercise price of $.0279. The Board of Directors also approved the conversion of $50,000 of his earned but yet unpaid director's cash compensation to a conditional demand note (such note to be exercisable only if the tangible net worth of the Company exceeds $1 million or in a case of change in control) bearing a 5% annual interest rate and issued 100,000 10-year warrants to purchase common stock which are immediately exercisable. The pricing of such warrants was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such warrants shall have an exercise price of $.0279. The Board of Directors on October 2, 2006 reduced Mr. Herve Caen's CEO/Interim CFO salary to $250,000 per year and issued 5,000,000 10-year warrants to purchase common stock which are immediately exercisable. The pricing of such warrants was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such warrants shall have an exercise price of $.0279 . On October 2, 2006 the Board of Directors converted Michel Welter's $85,000 earned but unpaid director's fees to a conditional demand note (such note to be exercisable only if the tangible net worth of the Company exceeds $1 million or in a case of change in control) bearing a 5% annual interest rate and issued 170,000 10-year warrants to purchase common stock which are immediately exercisable. The pricing of such warrants was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such warrants shall have an exercise price of $.0279. 9 On October 2, 2006 the Board of Directors converted Eric Caen's $50,000 earned but unpaid director's fees to a conditional demand note (such note to be exercisable only if the tangible net worth of the Company exceeds $1 million or in a case of change in control) bearing a 5% annual interest rate and issued 100,000 10-year warrants to purchase common stock which are immediately exercisable. The pricing of such warrants was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such warrants shall have an exercise price of $.0279. On October 2, 2006 the Board of Directors issued 15,000 stock options to Michel Welter and Eric Caen for unpaid director's compensation for 2004, 2005 and 2006 tenure as directors. The pricing of such options was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such options shall have an exercise price of $.0279 and shall be exercisable consistently with the Company's common stock option plan as amended. On October 2, 2006 the Board of Directors also suspended the cash compensation for director's fees to Michel Welter, Eric Caen and Herve Caen through September 2007 and issued 20,000 options per director instead of cash compensation. The pricing of such options was not to be determined until 2 business days after the filing of the Company's 10Q, and on November 15, 2006 the Board determined that such options shall have an exercise price of $.0279 and shall be exercisable consistently with the Company's common stock option plan as amended. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT Interplay Entertainment Corp., which we refer to in this Report as "we," "us," or "our," is a developer, publisher and licensor of interactive entertainment software and intellectual properties for both core gamers and the mass market. The information contained in this Form 10-Q/A is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2005, 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. This Report on Form 10-Q/A contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and such forward-looking statements are subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to help identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, as well as on certain assumptions. For example, any statements regarding future cash flow, revenue or expense expectations, including those forward-looking statements in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations", financing activities, future cash flows, cash constraints, sales or mergers and cost reduction measures are forward-looking statements and there can be no assurance that we will effect any or all of these objectives in the future. Specifically, the forward-looking statements in this Item 2 assume that we will continue as a going concern. Risks and Uncertainties that may affect our future results are discussed in more detail in the section titled "Risk Factors" in Item 1A of part II of this Form 10-Q/A. 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 11 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/A with the SEC or otherwise to revise or update any oral or written forward-looking statement that may be made from time to time by us or on our behalf. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including, among others, those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues: 12 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended September 30, Nine months ended September 30, ------------------------------------------ ------------------------------------------ 2006 2005 2006 2005 ------------------- ------------------- ------------------- ------------------- (Dollars in thousands) % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues ------- ------- ------- ------- ------- ------- ------- ------- Net Revenues ................. $ 335 100% $ 4,268 100% $ 681 100% $ 5,530 100% Cost of goods sold ........... 5 1% 13 -- 157 23% 281 5% ------- ------- ------- ------- ------- ------- ------- ------- Gross Profit ............ 330 99% 4,255 100% 524 77% $ 5,249 95% Operating Expenses: Marketing and sales ....... 55 16% 29 1% 418 61% 169 3% General and administrative 438 131% 622 15% 1,189 175% 1,896 34% Product Development ....... -- 0% 35 1% -- 0% 169 3% ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses 493 147% 686 17% 1,607 236% 2,234 40% ------- ------- ------- ------- ------- ------- ------- ------- Operating income (loss) ...... (163) -49% 3,569 83% (1,083) -159% $ 3,015 55% Other income (expenses): Other income .............. 1,796 536% 1,132 27% 4,246 623% 2,102 38% Income taxes .............. -- -- (1) 0% -- -- (2) 0% ------- ------- ------- ------- ------- ------- ------- ------- Net income ................ $ 1,633 487% $ 4,700 110% $ 3,163 464% $ 5,115 93% ======= ======= ======= ======= ======= ======= ======= ======= Net income by geographic region: North America ................ 156 47% $ 1,895 44% 200 29% $ 1,940 35% International ................ 164 49% 2,316 54% 379 56% 3,419 62% Oem, royalty and licensing ... 15 4% 57 1% 102 15% 171 3% ------- ------- ------- ------- ------- ------- ------- ------- $ 335 100% $ 4,268 100% $ 681 100% $ 5,530 100% ======= ======= ======= ======= ======= ======= ======= ======= Net income by platform: Personal computers ........... 106 32% $ 994 23% 210 31% $ 1,333 24% Video game console ........... 214 64% 3,217 75% 369 54% 4,026 73% OEM, royalty and licensing ... 15 4% 57 1% 102 15% 171 3% ------- ------- ------- ------- ------- ------- ------- ------- $ 335 100% $ 4,268 100% $ 681 100% $ 5,530 100% ======= ======= ======= ======= ======= ======= ======= =======
13 NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES Geographically, our net revenues for the three and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) Three Months Ended September 30, 2006 2005 Change % Change - --------------------------------- ------- ------- ------- ------- North America ................... $ 156 $ 1,895 $(1,739) (92%) International ................... 164 2,316 (2,152) (93%) OEM, Royalty & Licensing ........ 15 57 (42) (74%) Net Revenues .................... 335 4,268 (3,933) (92%) Nine Months Ended September 30, 2006 2005 Change % Change - --------------------------------- ------- ------- ------- ------- North America ................... $ 200 $ 1,940 $(1,740) (90%) International ................... 379 3,419 (3,040) (89%) OEM, Royalty & Licensing ........ 102 171 (69) (40%) Net Revenues .................... 681 5,530 (4,849) (88%) Net revenues for the three months ended September 30, 2006 were $335,000, a decrease of 92% compared to the same period in 2005. This decrease resulted from a 92% decrease in North American net revenues, a 74% decrease in OEM, royalty and licensing net revenues, and a 93% decrease in International net revenues. Net revenues for the nine months ended September 30, 2006 were $681,000, a decrease of 88% compared to the same period in 2005 due to the decrease in back catalog sales. This decrease resulted from a 90% decrease in North America net revenues and 40% decrease in OEM, Royalty and licensing revenues and a 89% decrease in International net revenues due to the decrease in back catalog sales. North American net revenues for the three months ended September 30, 2006 were $156,000. The decrease in North American net revenues in 2006 was mainly due to a 92% decrease in back catalog sales. North America net revenues for the nine months ended September 30, 2006 were $200,000. The decrease in North American net revenues in 2006 was mainly due to a 90% decrease in back catalog sales. International net revenues for the three months ended September 30, 2006 were $164,000. The decrease in International net revenues for the three months ended September 30, 2006 was mainly due to a 93% decrease in back catalog sales. International net revenues for the nine months ended September 30, 2006 were $379,000. The decrease in International net revenue for the nine months ended September 30, 2006 was mainly due to an 89% decrease in back catalog sales. OEM, royalty and licensing net revenues for the three months ended September 30, 2006 were $15,000, a decrease of 74% as compared to the same period in 2005 due to a decrease in back catalog sales. OEM, royalty and licensing net revenues for the nine months ended September 30, 2006 were $102,000, a decrease of 40% as compared to the same period in 2005 due to a decrease in back catalog sales. 14 PLATFORM NET REVENUES Our platform net revenues for the three and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) Three Months Ended September 30, 2006 2005 Change % Change - --------------------------------- ------- ------- ------- ------- Personal Computer ............... $ 106 $ 994 (888) (89%) Video Game Console .............. 214 3,217 (3,003) (93%) OEM, Royalty & Licensing ........ 15 57 (42) (74%) Net Revenues .................... 335 4,268 (3,933) (92%) Nine Months Ended September 30, 2006 2005 Change % Change - --------------------------------- ------- ------- ------- ------- Personal Computer ............... $ 210 $ 1,333 $(1,123) (84%) Video Game Console .............. 369 4,026 (3,657) (91%) OEM, Royalty & Licensing ........ 102 171 (69) (40%) Net Revenues .................... 681 5,530 (4,849) (88%) PC net revenues for the three months ended September 30, 2006 were $106,000, a decrease of 89% compared to the same period in 2005. The decrease in PC net revenues in 2006 was primarily due to lower back catalog sales. Video game console net revenues were $214,000, a decrease of 93% for the three months ended September 30, 2006 compared to the same period in 2005, mainly due to lower back catalog sales. PC net revenues for the nine months ended September 30, 2006 were $210,000, a decrease of 84% compared to the same period in 2005. The decrease in PC net revenues in the nine months ended September 30, 2006 was primarily due to lower back catalog sales. Video Game console net revenues were $369,000, a decrease of 91% for the nine months ended September 30, 2006 compared to the same period in 2005, mainly due to lower back catalog sales. COST OF GOODS SOLD; GROSS PROFIT MARGIN Our net revenues, cost of goods sold and gross margin for the three and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) Three Months Ended September 30, 2006 2005 Change % Change - --------------------------------- ------- ------- ------- ------- Net Revenues .................... $ 335 $ 4,268 $(3,933) (92%) Cost of Goods Sold .............. 5 13 (8) (62%) Gross Profit Margin ............. 330 4,255 (3,925) (92%) Nine Months Ended September 30, 2006 2005 Change % Change - --------------------------------- ------- ------- ------- ------- Net Revenues .................... $ 681 $ 5,530 (4,849) (88%) Cost of Goods Sold .............. 157 281 (124) (44%) Gross Profit Margin ............. 524 5,249 (4,725) (90%) Three Months Ended September 30, 2006 2005 Change - --------------------------------- -------- ------- ------- Net Revenues .................... 100% 100% 0% Cost of Goods Sold .............. 1% 1% 0% Gross Profit Margin ............. 99% 99% 0% Nine Months Ended September 30, 2006 2005 Change - --------------------------------- -------- ------- ------- Net Revenues .................... 100% 100% 0% Cost of Goods Sold .............. 23% 5% 18% Gross Profit Margin ............. 77% 95% (18%) Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers. Cost of goods sold related to royalty-based net revenues 15 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 62% to $5,000 in the three months ended September 30, 2006 compared to the same period in 2005. Our cost of goods sold decreased 44% to $157,000 in the nine months ended September 30, 2006 compared to the same period in 2005. Our gross margin was unchanged for the three months ended September 30, 2006 . Our gross margin decreased to 77% for the nine months ended September 30, 2005 period from 95% in the comparable 2005 period. MARKETING AND SALES Our marketing and sales expense for the three months and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) Marketing and Sales 2006 2005 Change % Change - ----------------------------------- -------- -------- -------- -------- Three Months Ended September 30, .. $ 55 $ 29 $ 26 90% Nine Months Ended September 30, ... 418 169 $ 249 147% Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses. Marketing and sales expenses for the three months ended September 30, 2006 were $55,000, a 90% decrease as compared to the 2005 period. Marketing and sales expenses for the nine months ended September 30, 2006 were $418,000 a 147% increase as compared to the same period during 2005 The increase is due to certain expenses being classified as marketing and sales in 2006 compared to the prior year classification into general and administration and a continued effort to sell back catalog products.. GENERAL AND ADMINISTRATIVE Our general and administrative expense for the three and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) General and Administrative 2006 2005 Change % Change - ----------------------------------- -------- -------- -------- -------- Three Months Ended September 30, .. $ 438 $ 622 $ (184) (30%) Nine Months Ended September 30, ... 1,189 1,869 (680) (36%) General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, bad debt expenses and other related operating expenses. General and administrative expenses for the three months ended September 30, 2006 were $438,000, a 30% decrease as compared to the same period in 2005. The decrease is mainly due to decreases in personnel costs and general expenses. General and administrative expenses for the nine months ended September 30, 2006 were $1,189,000 a 36% decrease as compared to the same period in 2005. The decrease is mainly due to decreases in personnel costs and general expenses as a result of a reduction in administrative personnel during 2006. 16 PRODUCT DEVELOPMENT Our product development expense for the three and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) Product Development 2006 2005 Change % Change - ----------------------------------- -------- -------- -------- -------- Three Months Ended September 30, .. $ 0 $ 35 $ (35) (100%) Nine Months Ended September 30, ... 0 169 (169) (100%) The Company has suspended all product development during 2006 due to the Companies current financial conditions and therefore no expenses were incurred. OTHER EXPENSE (INCOME), NET Our other expense (income) for the three months and nine months ended September 30, 2006 and 2005 break down as follows: (in thousands) Other (Income) Expenses 2006 2005 Change % Change - ----------------------------------- -------- -------- -------- -------- Three Months Ended September 30, .. $ (1,796) $ (1,131) $ 665 59% Nine Months Ended September 30, .. (4,246) (2,102) 2,144 102% Other income for the three months ended September 30, 2006 consists primarily of reversals of prior years accruals in the amount of $790,000, and reversal of certain prior years payables in the amount of $1,033,000, foreign currency exchange transactions gains and losses, and interest expense on debt. Other income for the nine months ended was $4,246,000 as compared to $2,102,000 of income in the same period in 2005. The increase is mainly attributable to a settlement in 2006 and reversal of certain prior years accruals. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2006, we had a working capital deficit of approximately $8.2 million, and our cash balance was approximately $25,000. We currently have no cash reserves and are unable to pay current liabilities. We cannot continue in our current form without obtaining additional financing or income or reducing expenditures. We have substantially reduced our operating expenses. We need to reduce our continuing liabilities. We have to raise additional capital or financing. If we do not receive sufficient financing we may (i) liquidate assets, (ii) sell the company (iii) seek protection from our creditors including the filing of voluntary bankruptcy or being the subject of involuntary bankruptcy, and/or (iv) continue operations, but incur material harm to our business, operations or financial conditions. These conditions, combined with our historical operating losses and our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern. During the quarter ending September 30, 2006 the Company reversed approximately $790,000 of certain prior year accruals and approximately $1,033,000 of prior years accounts payables. It is the Company's policy to reverse outstanding accruals and accounts payables that have been outstanding for over 3 years and no effort has been made by the vendor or claimant for that period of time to collect the outstanding balances. Additionally, we have reduced in 2006 our fixed overhead commitments, and cancelled or suspended development on future titles. Management will continue to pursue various alternatives to improve future operating results. We continue to seek external sources of funding, including but not limited to, incurring debt, the sale of assets or stock, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve our long-term strategic objectives. 17 We have been operating without a credit facility since October 2001, which has adversely affected cash flow. We continue to face difficulties in paying our vendors, and employees, and have pending lawsuits as a result of our continuing cash flow difficulties. We expect these difficulties to continue during 2006. Historically, we have funded our operations primarily through cash flow from operations, including royalty and distribution fee advances. Our primary capital needs have historically been working capital requirements necessary to fund our operations. Our operating activities used cash of $393,000 during the three months ended September 30, 2006. The Company had approximately $500,000 of deferred income and approximately $681,000 in royalty and licensing revenue in the nine months ended September 30, 2006. However, the Company does not expect material income from the recognition of deferred income or other income during the remainder of 2006. We entered into various licensing and distribution agreements resulting in advance payments for the Company during the nine months ended September 30, 2006. We expect that if cash flow from operations is to be generated during the remainder of 2006 the Company will do so, if it can, through similar license and distribution agreements. Currently the Company has no internal development of new titles. If operating revenues are not sufficient to fund our operations, no assurance can be given that alternative sources of funding could be obtained on acceptable terms, or at all. These conditions, combined with our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. There can be no guarantee that we will be able to meet all contractual obligations or liabilities in the future, including payroll obligations. OFF BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements under which we have obligations under a guaranteed contract that has any of the characteristics identified in paragraph 3 of FASB Interpretation No. 45 "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". We do not have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets. We also do not have any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument. We have no obligations, including a contingent obligation arising out of a variable interest (as referenced in FASB Interpretation No. 46, Consolidation of Variable Interest Entities, as amended) in an unconsolidated entity that is held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. CONTRACTUAL OBLIGATIONS The following table summarizes certain of our contractual obligations under non-cancelable contracts and other commitments at September 30, 2006, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands). - -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 - 3 3 - 5 MORE THAN 1 YEAR YEARS YEARS 5 YEARS - -------------------------------------------------------------------------------- Lease Commitments (1) 184,000 114,000 70,000 - -------------------------------------------------------------------------------- Total 184,000 114,000 70,000 - -------------------------------------------------------------------------------- (1) We have a lease commitment at the Beverly Hills office through April 2008. We closed our location in Irvine, California. Our current cash reserves plus our expected cash from existing operations will only be sufficient to fund our anticipated expenditures to December 31, 2006. We will need to substantially reduce our working capital needs, continue to consummate certain licensing of intellectual properties or sales of assets and/or raise additional financing to meet our contractual obligations. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have any derivative financial instruments as of September 30, 2006. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations. INTEREST RATE RISK Currently, we do not have a line of credit, but we anticipate we may establish a line of credit in the future. FOREIGN CURRENCY RISK Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables. We recognized net gains of $1,000 and $5,000 during the nine months ended September 30, 2006 and 2005 respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable which have been from Interplay Productions Ltd. ITEM 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 were effective, at the reasonable assurance level, in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and in timely alerting him to material information required to be included in this report. There were no changes made in our internal controls over financial reporting that occurred during the quarter ended September 30, 2006 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, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no can provide only reasonable, not absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate. 19 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 2. Commitments and Contingencies" to our condensed consolidated financial statements located in Item 1, Part 1 of this Report. ITEM 1A. RISK FACTORS RISK FACTORS Our future operating results depend upon many factors and are subject to various risks and uncertainties. These major risks and uncertainties are discussed below. There may be additional risks and uncertainties which we do not believe are currently material or are not yet known to us but which may become such in the future. Some of the risks and uncertainties which may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results are as follows: RISKS RELATED TO OUR FINANCIAL RESULTS WE CURRENTLY HAVE A NUMBER OF OBLIGATIONS THAT WE ARE UNABLE TO MEET WITHOUT GENERATING ADDITIONAL INCOME OR RAISING ADDITIONAL CAPITAL. IF WE CANNOT GENERATE ADDITIONAL INCOME OR RAISE ADDITIONAL CAPITAL IN THE NEAR FUTURE, WE MAY BECOME INSOLVENT AND/OR BE MADE BANKRUPT AND/OR OUR MAY BECOME ILLIQUID OR WORTHLESS. As of September 30, 2006, our cash balance was approximately $25,000 and our outstanding accounts payable and current liabilities totaled approximately $8.2 million. In particular, we have some significant creditors that comprise a substantial proportion of outstanding obligations, including many that have obtained judgments against us, that we might not be able to satisfy. During 2006 we have entered into various licensing and distribution agreements resulting in advance payments, which have generated cash for our operations, and we may not be able to enter into similar license and distribution arrangements in the future. If we do not receive sufficient financing or sufficient funds from our operations we may (i) liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue operations, but incur material harm to our business, operations or financial condition. These measures could have a material adverse effect on our ability to continue as a going concern. Additionally, because of our financial condition, our Board of Directors has a duty to our creditors that may conflict with the interests of our stockholders. When a Delaware corporation is operating in the vicinity of insolvency, the Delaware courts have imposed upon the corporation's directors a fiduciary duty to the corporation's creditors. Our Board of Directors may be required to make decisions that favor the interests of creditors at the expense of our stockholders to fulfill its fiduciary duty. For instance, we may be required to preserve our assets to maximize the repayment of debts versus employing the assets to further grow our business and increase shareholder value. If we cannot generate enough income from our operations or are unable to locate additional funds through financing, we will not have sufficient resources to continue operations. WE HAVE A HISTORY OF LOSSES, AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY CURTAILING FUTURE OPERATIONS TO CONTINUE AS A BUSINESS. For the nine months ended September 30, 2006, our net income from operations was $3.2 million and for the year ended December 31, 2005, our net income from operations was $5.9 million. We have had net income because of the reversal of deferred income items or reversal of prior accruals and accounts payables or income from settlements. We have incurred significant net losses in previous years from operations. As of September 30, 2006, we have an accumulated deficit of $130 million. Our ability to fund our capital requirements out of our available cash and cash generated from our operations depends on a number of factors. Some of these factors include the progress of our product distributions and licensing, the rate of growth of our business, and our products' commercial success. If we cannot generate positive cash flow from operations, we will have to continue to reduce our costs and raise working capital from other sources. These measures could include selling or consolidating certain operations or assets, and delaying, canceling or scaling back product development and marketing programs. These measures could materially and adversely affect our ability to publish successful titles, and may not be enough to permit us to operate profitability, or at all. 20 OUR ABILITY TO EFFECT A FINANCING TRANSACTION TO FUND OUR OPERATIONS COULD ADVERSELY AFFECT THE VALUE OF YOUR STOCK. If we are not able to raise additional sources of funding, including by sale or license of our assets, we may need to consummate a financing transaction to receive additional liquidity. This additional financing may take the form of raising additional capital through public or private equity offerings or debt financing. To the extent we raise additional capital by issuing equity securities, we cannot be certain that additional capital will be available to us on favorable terms and our stockholders will likely experience substantial dilution. Our certificate of incorporation provides for the issuance of preferred stock however we currently do not have any preferred stock issued and outstanding. Any new equity securities issued may have greater rights, preferences or privileges than our existing common stock. Material shortage of capital will require us to take drastic steps such as reducing our level of operations, disposing of selected assets, effecting financings on less than favorable terms or seeking protection under federal bankruptcy laws. RISKS RELATED TO OUR BUSINESS TITUS INTERACTIVE SA (PLACED IN INVOLUNTARY BANKRUPTCY IN JANUARY, 2005) CONTROLS A MAJORITY OF OUR VOTING STOCK AND CAN ELECT A MAJORITY OF OUR BOARD OF DIRECTORS AND PREVENT AN ACQUISITION OF US THAT IS FAVORABLE TO OUR OTHER STOCKHOLDERS. ALTERNATIVELY, TITUS CAN ALSO CAUSE A SALE OF CONTROL OF OUR COMPANY THAT MAY NOT BE FAVORABLE TO OUR OTHER STOCKHOLDERS. Titus owns approximately 58 million shares of common stock. As a consequence, Titus can control substantially all matters requiring stockholder approval, including the election of directors, subject to our stockholders' cumulative voting rights, and the approval of mergers or other business combination transactions. At our 2003 and 2002 annual stockholders meetings, Titus exercised its voting power to elect a majority of our Board of Directors. Currently, our Chief Executive Officer and interim Chief Financial Officer Herve Caen is a director of various Titus affiliates. This concentration of voting power could discourage or prevent a change in control that otherwise could result in a premium in the price of our common stock. Further, Titus' bankruptcy could lead to a sale by its liquidator or other representative in bankruptcy, of shares Titus holds in us, and/or a sale of Titus itself which would result in a sale of control of our Company and such a sale may not be favorable to our other stockholders. Such a sale, including if it involves a dispersion of shares to multiple stockholders, further could have the effect of making any business combination, or a sale of all of our shares as a whole, more difficult. THE LACK OF ANY CREDIT AGREEMENT HAS RESULTED IN A SUBSTANTIAL REDUCTION IN THE CASH AVAILABLE TO FINANCE OUR OPERATIONS. We are currently operating without a credit agreement or credit facility. The lack of a credit agreement or credit facility has significantly impeded our ability to fund our operations and has caused material harm to our business. There can be no assurance that we will be able to enter into a new credit agreement or that if we do enter into a new credit agreement, it will be on terms favorable to us. A SIGNIFICANT PERCENTAGE OF OUR REVENUES HISTORICALLY DEPENDED ON OUR DISTRIBUTORS' DILIGENT SALES EFFORTS. Avalon was the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. Our agreement with Avalon was terminated following the liquidation of Avalon in February 2005. We subsequently appointed our wholly owned subsidiary Interplay Productions Ltd as our distributor for Europe. Vivendi had exclusive rights to distribute our products in North America and selected International territories. Our agreement with Vivendi expired in August 2005 and December 2005 for most of our products. Our revenues and cash flows could fall even further and our business and financial results could suffer material harm if: o We fail to replace Vivendi as our distributor; or o Interplay Productions Ltd our wholly owned subsidiary fails to effectively distribute our products. 21 We typically sell to distributors and retailers on unsecured credit, with terms that vary depending upon the customer and the nature of the product. We confront the risk of non-payment from our customers, whether due to their financial inability to pay us, or otherwise. In addition, while we maintain an allowance for uncollectible receivables, the allowance may not be sufficient in every circumstance. As a result, a payment default by a significant customer could cause material harm to our business. WE CONTINUE TO OPERATE WITHOUT A CHIEF FINANCIAL OFFICER, WHICH MAY AFFECT OUR ABILITY TO MANAGE OUR FINANCIAL OPERATIONS. We are presently without a CFO, and Mr. Caen has assumed the position of interim-CFO and continues as CFO to date until a replacement can be found. OUR BUSINESS AND INDUSTRY IS BOTH SEASONAL AND CYCLICAL. IF WE FAIL TO DELIVER OUR PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER. Our business is highly seasonal, with the highest levels of consumer demand occurring in the fourth quarter. Our industry is also cyclical. The timing of hardware platform introduction is often tied to the year-end season and is not within our control. As new platforms are being introduced into our industry, consumers often choose to defer game software purchases until such new platforms are available, which would cause sales of our products on current platforms to decline. This decline may not be offset by increased sales of products for the new platform. THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE TO REMAIN DEPRESSED OR TO DECLINE FURTHER. Our operating results have fluctuated in the past and may fluctuate in the future due to several factors, some of which are beyond our control. These factors include: o demand for our products and our competitors' products; o the size and rate of growth of the market for interactive entertainment software; o changes in personal computer and video game console platforms; o the timing of announcements of new products by us and our competitors and the number of new products and product enhancements released by us and our competitors; o changes in our product mix; o the number of our products that are returned; and o the level of our international and original equipment manufacturer royalty and licensing net revenues. Many factors make it difficult to accurately predict the quarter in which we will ship our products. Some of these factors include: o the uncertainties associated with the interactive entertainment software development process; o approvals required from content and technology licensors; and o the timing of the release and market penetration of new game hardware platforms. THERE ARE HIGH FIXED COSTS TO DEVELOPING OUR PRODUCTS. IF OUR REVENUES DECLINE BECAUSE OF DELAYS IN THE INTRODUCTION OF OUR PRODUCTS, OR IF THERE ARE SIGNIFICANT DEFECTS OR DISSATISFACTION WITH OUR PRODUCTS, OUR BUSINESS COULD BE HARMED. We have incurred significant net losses prior to 2005. Our losses in the past stemmed partly from the significant costs we incurred to develop our entertainment software products, product returns and price concessions. Moreover, a significant portion of our operating expenses is relatively fixed, with planned expenditures based largely on sales forecasts. At the same time, most of our products have a relatively short life cycle and sell for a limited period of time after their initial release, usually less than one year. 22 Relatively fixed costs and short windows in which to earn revenues mean that sales of new products are important in enabling us to recover our development costs, to fund operations and to replace declining net revenues from older products. Our failure to accurately assess the commercial success of our new products, and our delays in releasing new products could reduce our net revenues and our ability to recoup development and operational costs. IF OUR PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR BUSINESS COULD BE HARMED SIGNIFICANTLY. Consumer preferences for interactive entertainment software are always changing and are extremely difficult to predict. Historically, few interactive entertainment software products have achieved continued market acceptance. Instead, a limited number of releases have become "hits" and have accounted for a substantial portion of revenues in our industry. Further, publishers with a history of producing hit titles have enjoyed a significant marketing advantage because of their heightened brand recognition and consumer loyalty. We expect the importance of introducing hit titles to increase in the future. We cannot assure you that our new products will achieve significant market acceptance, or that we will be able to sustain this acceptance for a significant length of time if we achieve it. At this time the Company has suspended its product development division. We believe that our future revenue will continue to depend on successful distribution deals of back catalog properties. Further, if our products do not achieve market acceptance, we could be forced to accept substantial product returns or grant significant pricing concessions to maintain our relationship with distributors. If we are forced to accept significant product returns or grant significant pricing concessions, our business and financial results could suffer material harm. OUR RELIANCE ON THIRD PARTY SOFTWARE DEVELOPERS SUBJECTS US TO THE RISKS THAT THESE DEVELOPERS WILL NOT SUPPLY US WITH HIGH QUALITY PRODUCTS IN A TIMELY MANNER OR ON ACCEPTABLE TERMS. Third party interactive entertainment software developers develop many of our software products. Since we depend on these developers in the aggregate, we remain subject to the following risks: o limited financial resources may force developers out of business prior to their completion of projects for us or require us to fund additional costs; and o the possibility that developers could demand that we renegotiate our arrangements with them to include new terms less favorable to us. Increased competition for skilled third party software developers also has compelled us to agree to make advance payments on royalties and to guarantee minimum royalty payments to intellectual property licensors and game developers. Moreover, if the products subject to these arrangements, are not delivered timely, or with acceptable quality, or do not generate sufficient sales volumes to recover these royalty advances and guaranteed payments, we would have to write-off unrecovered portions of these payments, which could cause material harm to our business and financial results. We compete with a number of companies that have substantially greater financial, marketing and product development resources than we do. The greater resources of our competitors permit them to pay higher fees than we can to licensors of desirable motion picture, television, sports and character properties and to third party software developers. We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant competitors include Electronic Arts Inc. and Activision, Inc. Many of these competitors have substantially greater financial, technical resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo, and Microsoft Corporation compete directly with us in the development of software titles for their respective platforms and they have generally discretionary approval authority over the products we develop for their platforms. Large diversified entertainment companies, such as The Walt Disney Company, and Time Warner Inc. many of which own substantial libraries of available content and have substantially greater financial resources, may decide to compete directly with us or to enter into exclusive relationships with our competitors. 23 WE HAVE A LIMITED NUMBER OF KEY MANAGEMENT AND OTHER PERSONNEL. THE LOSS OF ANY SINGLE MEMBER OF MANAGEMENT OR KEY PERSON OR THE FAILURE TO HIRE AND INTEGRATE CAPABLE NEW KEY PERSONNEL COULD HARM OUR BUSINESS. Our business requires extensive time and creative effort to produce and market. Our future success also will depend upon our ability to attract, motivate and retain qualified employees and contractors, particularly software design and development personnel. Competition for highly skilled employees is intense, and we may fail to attract and retain such personnel. Alternatively, we may incur increased costs in order to attract and retain skilled employees. Our executive management team currently consists of CEO and interim CFO Herve Caen. Our failure to recruit or retain the services of key personnel, including competent executive management, or to attract and retain additional qualified employees could cause material harm to our business. OUR INTERNATIONAL SALES EXPOSE US TO RISKS OF UNSTABLE FOREIGN ECONOMIES, DIFFICULTIES IN COLLECTION OF REVENUES, INCREASED COSTS OF ADMINISTERING INTERNATIONAL BUSINESS TRANSACTIONS AND FLUCTUATIONS IN EXCHANGE RATES. Our net revenues from international sales accounted for approximately 57% and 75% of our total net revenues for years ended December 31, 2005 and 2004, respectively. Most of these revenues came from our distribution relationship with Vivendi , pursuant to which Vivendi became the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East and a recognition of revenue from international expiration of contracts during 2005. To the extent our resources allow, we intend to continue to expand our direct and indirect sales, marketing and product localization activities worldwide. Our international sales are subject to a number of inherent risks, including the following: o recessions in foreign economies may reduce purchases of our products; o translating and localizing products for international markets is time consuming and expensive; o accounts receivable are more difficult to collect and when they are collectible, they may take longer to collect; o regulatory requirements may change unexpectedly; o it is difficult and costly to staff and manage foreign operations; o fluctuations in foreign currency exchange rates; o political and economic instability; and o delays in market penetration of new platforms in foreign territories. These factors may cause material declines in our future international net revenues and, consequently, could cause material harm to our business. A significant, continuing risk we face from our international sales and operations stems from currency exchange rate fluctuations. Because we do not engage in currency hedging activities, fluctuations in currency exchange rates have caused significant reductions in our net revenues from international sales and licensing due to the loss in value upon conversion into U.S. Dollars. We may suffer similar losses in the future. OUR CUSTOMERS HAVE THE ABILITY TO RETURN OUR PRODUCTS OR TO RECEIVE PRICING CONCESSIONS AND SUCH RETURNS AND CONCESSIONS COULD REDUCE OUR NET REVENUES AND RESULTS OF OPERATIONS. We are exposed to the risk of product returns and pricing concessions with respect to our distributors. Our distributors allow retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms, and also offer a 90-day limited warranty to our end users that our products will be free from manufacturing defects. In addition, our distributors provide pricing concessions to our customers to manage our customers' inventory levels in the distribution channel. Our distributors could be forced to accept substantial product returns and provide pricing concessions to maintain our relationships with retailers and their access to distribution channels. We have mitigated this risk in North America under our current distribution arrangement with Vivendi, as sales will be guaranteed with no offset for product returns and price concessions. 24 WE DEPEND UPON THIRD PARTY LICENSES OF CONTENT FOR MANY OF OUR PRODUCTS. Many of our current and planned products are lines based on original ideas or intellectual properties licensed from other parties. From time to time we may not be in compliance with certain terms of these license agreements, and our ability to market products based on these licenses may be negatively impacted. Moreover, disputes regarding these license agreements may also negatively impact our ability to market products based on these licenses. Additionally, we may not be able to obtain new licenses, or maintain or renew existing licenses, on commercially reasonable terms, if at all. If we are unable to maintain current licenses or obtain new licenses for the underlying content that we believe offers the greatest consumer appeal, we would either have to seek alternative, potentially less appealing licenses, or release products without the desired underlying content, either of which could limit our commercial success and cause material harm to our business. OUR LICENSORS ARE ALSO OFTEN OUR COMPETITORS. WE MAY FAIL TO MAINTAIN EXISTING LICENSES, OR OBTAIN NEW LICENSES FROM PLATFORM COMPANIES ON ACCEPTABLE TERMS OR TO OBTAIN RENEWALS OF EXISTING OR FUTURE LICENSES FROM LICENSORS. We are required to obtain a license to develop and distribute software for each of the video game console platforms for which we develop products, including a separate license for each of North America, Japan and Europe. We have obtained licenses to develop software for the Sony PlayStation and PlayStation 2, as well as video game platforms from Nintendo and Microsoft, who are also our competitors. Each of these companies has the right to approve the technical functionality and content of our products for their platforms prior to distribution. Typically, such license agreements give broad control to the licensor over the approval, manufacturing and shipment of products on their platform. Due to the competitive nature of the approval process, we typically must make significant product development expenditures on a particular product prior to the time we seek these approvals. Our inability to obtain these approvals or to obtain them on a timely basis could cause material harm to our business. OUR SALES VOLUME AND THE SUCCESS OF OUR PRODUCTS DEPEND IN PART UPON THE NUMBER OF PRODUCT TITLES DISTRIBUTED BY HARDWARE COMPANIES FOR USE WITH THEIR VIDEO GAME PLATFORMS. Even after we have obtained licenses to develop and distribute software, we depend upon hardware companies such as Sony Computer Entertainment, Nintendo and Microsoft, or their designated licensees, to manufacture the CD-ROM or DVD-ROM media discs that contain our software. These discs are then run on the companies' video game consoles. This process subjects us to the following risks: o we are required to submit and pay for minimum numbers of discs we want produced containing our software, regardless of whether these discs are sold, shifting onto us the financial risk associated with poor sales of the software developed by us; and o reorders of discs are expensive, reducing the gross margin we receive from software releases that have stronger sales than initially anticipated and that require the production of additional discs. As a result, video game console hardware licensors can shift onto us the risk that if actual retailer and consumer demand for our interactive entertainment software differs from our forecasts, we must either bear the loss from overproduction or the lower per-unit revenues associated with producing additional discs. Either situation could lead to material reductions in our net revenues and operating results. RISKS RELATED TO OUR INDUSTRY Inadequate intellectual property protections could prevent us from enforcing or defending our proprietary technology. We regard our software as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various copyrights and trademarks, and hold the rights to one patent application related to one of our titles. While we provide "shrink-wrap" license agreements or limitations on use with our software, it is uncertain to what extent these agreements and limitations are enforceable. We are aware that some unauthorized copying occurs within the computer software industry, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, it could cause material harm to our business and financial results. 25 Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or are weakly enforced. Legal protection of our rights may be ineffective in such countries, and as we leverage our software products using emerging technologies such as the Internet and online services, our ability to protect our intellectual property rights and to avoid infringing others' intellectual property rights may diminish. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies. WE MAY UNINTENTIONALLY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH COULD EXPOSE US TO SUBSTANTIAL DAMAGES OR RESTRICT OUR OPERATIONS. As the number of interactive entertainment software products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Intellectual property litigation or claims could force us to do one or more of the following: o cease selling, incorporating or using products or services that incorporate the challenged intellectual property; o obtain a license from the holder of the infringed intellectual property, which license, if available at all, may not be available on commercially favorable terms; or o redesign our interactive entertainment software products, possibly in a manner that reduces their commercial appeal. Any of these actions may cause material harm to our business and financial results. OUR BUSINESS IS INTENSELY COMPETITIVE AND PROFITABILITY IS INCREASINGLY DRIVEN BY A FEW KEY TITLE RELEASES. IF WE ARE UNABLE TO DELIVER KEY TITLES, OUR BUSINESS MAY BE HARMED. Competition in our industry is intense. New videogame products are regularly introduced. Increasingly, profits and revenues in our industry are dominated by certain key product releases and are increasingly produced in conjunction with the latest consumer and media trends. Many of our competitors may have more finances and other resources for the development of product titles than we do. If our competitors develop more successful products, or if we do not continue to develop consistently high-quality products, our revenue will decline. IF WE FAIL TO ANTICIPATE CHANGES IN VIDEO GAME PLATFORMS AND TECHNOLOGY, OUR BUSINESS MAY BE HARMED. The interactive entertainment software industry is subject to rapid technological change. New technologies could render our current products or products in development obsolete or unmarketable. Some of these new technologies include: o operating systems such as Microsoft Vista; o new media formats o releases of new video game consoles; o new video game systems by Sony, Microsoft, Nintendo and others. We must continually anticipate and assess the emergence of, and market acceptance of, new interactive entertainment software platforms well in advance of the time the platform is introduced to consumers. Because product development cycles are difficult to predict, we must make substantial product development and other investments in a particular platform well in advance of introduction of the platform. If the platforms for which we develop new software products or modify existing products are not released on a timely basis or do not attain significant market penetration, or if we develop products for a delayed or unsuccessful platform, our business and financial results could suffer material harm. 26 New interactive entertainment software platforms and technologies also may undermine demand for products based on older technologies. Our success will depend in part on our ability to adapt our products to those emerging game platforms that gain widespread consumer acceptance. Our business and financial results may suffer material harm if we fail to: o anticipate future technologies and platforms and the rate of market penetration of those technologies and platforms; o obtain licenses to develop products for those platforms on favorable terms; or o create software for those new platforms on a timely basis. OUR SOFTWARE MAY BE SUBJECT TO GOVERNMENTAL RESTRICTIONS OR RATING SYSTEMS. Legislation is periodically introduced at the state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. In addition, many foreign countries have laws that permit governmental entities to censor the content of interactive entertainment software. We believe that mandatory government-run rating systems eventually will be adopted in many countries that are significant markets or potential markets for our products. We may be required to modify our products to comply with new regulations, which could delay the release of our products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business. In addition to such regulations, certain retailers have in the past declined to stock some of our products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date these actions have not caused material harm to our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business. RISKS RELATED TO OUR STOCK SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT OUR ABILITY TO RECEIVE A PREMIUM PRICE FOR YOUR SHARES. Our Certificate of Incorporation, as amended, provides for 5,000,000 authorized shares of Preferred Stock. Our Board of Directors has the authority, without any action by the stockholders, to issue up to 4,280,576 shares of preferred stock and to fix the rights and preferences of such shares. 719,424 shares of Series A Preferred Stock was issued to Titus in the past, which amount has been fully converted into our common stock. In addition, our certificate of incorporation and bylaws contain provisions that: o eliminate the ability of stockholders to act by written consent and to call a special meeting of stockholders; and o require stockholders to give advance notice if they wish to nominate directors or submit proposals for stockholder approval. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. OUR COMMON STOCK MAY BE SUBJECT TO THE "PENNY STOCK" RULES WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. 27 "Penny stocks" generally include equity securities with a price of less than $5.00 per share, which are not traded on a national stock exchange or on Nasdaq, and are issued by a company that has tangible net assets of less than $2,000,000 if the company has been operating for at least three years. The "penny stock" rules require, among other things, broker dealers to satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser's written consent prior to any transaction. In addition, additional disclosure in connection with trades in the common stock are required, including the delivery of a disclosure schedule prescribed by the SEC relating to the "penny stock" market. These additional burdens imposed on broker-dealers may discourage them from effecting transactions in our common stock, which may make it more difficult for an investor to sell their shares and adversely affect the market price of our common stock. OUR STOCK IS VOLATILE The trading price of our common stock has previously fluctuated and could continue to fluctuate in response to factors that are largely beyond our control, and which may not be directly related to the actual operating performance of our business, including: o general conditions in the computer, software, entertainment, media or electronics industries; o changes in earnings estimates or buy/sell recommendations by analysts; o investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers; and o price and trading volume volatility of the broader public markets, particularly the high technology sections of the market. ITEM 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 $377,000 payable in one remaining installment. ITEM 6. EXHIBITS (a) Exhibits - The following exhibits, other than exhibit 32.1 which is being furnished herewith, are filed as part of this report: EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 31.1 Certificate of Herve Caen, Chief Executive Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended. 31.2 Certificate of Herve Caen, Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended. 32.1 Certificate of Herve Caen, Chief Executive Officer and Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERPLAY ENTERTAINMENT CORP. Date: November 20, 2006 By: /S/ HERVE CAEN -------------------------------------- Herve Caen, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive and Financial and Accounting Officer) 29 EX-31 2 ex31-1k.txt EX 31-1 EXHIBIT 31.1 Certification of CEO Pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-14(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Herve Caen, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Interplay Entertainment Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 20, 2006 /S/ HERVE CAEN ---------------------------------- Herve Caen Chief Executive Officer EX-31 3 ex31-2k.txt EX 31-2 EXHIBIT 31.2 Certification of Interim CFO Pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Herve Caen, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Interplay Entertainment Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 20, 2006 /S/ HERVE CAEN ---------------------------------- Herve Caen Interim Chief Financial Officer EX-32 4 ex32-1k.txt EX 32-1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(b) AND 15d-14(b) AS ADOPTED PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officer of Interplay Entertainment Corp., a Delaware corporation (the "Company"), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q/A for the quarter ended September 30, 2006 as filed with the U.S. Securities and Exchange Commission (the "10-Q Report") that, to the best of the undersigned's knowledge: (1) the 10-Q Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 20, 2006 /S/ HERVE CAEN ---------------------------------- Herve Caen Chief Executive Officer and Interim Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----