10-Q 1 fm10q-063008.txt 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24363 INTERPLAY ENTERTAINMENT CORP. (Exact name of the registrant as specified in its charter) DELAWARE 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 N. CRESCENT DRIVE, BEVERLY HILLS, CALIFORNIA 90210 (Address of principal executive offices) (310) 432-1958 (Registrant's telephone number, including area code) 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] Smaller reporting company [ ] Indicate by check mark whether the registrant is a 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 JUNE 30, 2008 ----- --------------------------------------- Common Stock, $0.001 par value 103,855,634 As of June 30, 2008, 103,855,634 shares of Common Stock of the Registrant were issued and outstanding. This includes 2,658,216 shares of Treasury Stock INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q JUNE 30, 2008 TABLE OF CONTENTS -------------- Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007 3 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2008 and 2007 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4T. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 1A. Risk Factors 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits 18 SIGNATURES 19 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, ASSETS 2008 2007 ------------- ------------- Current Assets: (unaudited) Cash $ 22,000 $ 1,138,000 Trade receivables 230,000 26,000 Inventories 1,000 1,000 Deposits 9,000 4,000 Prepaid expenses 6,000 10,000 Other receivables 19,000 13,000 ------------- ------------- Total current assets 287,000 1,192,000 Property and equipment, net 53,000 9,000 ------------- ------------- Total assets $ 340,000 $ 1,201,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Account payable 810,000 911,000 Accrued royalties 0 200,000 Deferred income 808,000 595,000 Notes Payable 1,045,000 1,045,000 Note Payable to officer and directors 577,000 729,000 ------------- ------------- Total current liabilities 3,240,000 3,480,000 ------------- ------------- Commitments and contingencies Stockholders' Deficit: Preferred stock, $0.001 par value 5,000,000 shares authorized; no shares issued or outstanding, Common stock, $0.001 par value 150,000,000 shares authorized; 103,855,634 shares issued and outstanding 106,000 104,000 Paid-in capital 122,187,000 121,976,000 Accumulated deficit (125,184,000) (124,349,000) Accumulated other comprehensive income (loss) (9,000) (10,000) Treasury stock of 2,658,216 shares 0 0 ------------- ------------- Total stockholders' deficit (2,900,000) (2,279,000) ------------- ------------- Total liabilities and stockholders' deficit $ 340,000 $ 1,201,000 ============= =============
See accompanying notes. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2008 2007 2008 2007 ------------- ------------- ------------- ------------- (In thousands, except per share amounts) Revenues $ 40,000 $ 5,812,000 $ 104,000 $ 5,893,000 Cost of goods sold 2,000 2,000 2,000 6,000 ------------- ------------- ------------- ------------- Gross profit 38,000 5,810,000 102,000 5,887,000 ------------- ------------- ------------- ------------- Operating expenses: Marketing and sales -- 95,000 -- 190,000 General and administrative 495,000 332,000 829,000 594,000 Product Development 86,000 -- 161,000 -- ------------- ------------- ------------- ------------- Total operating expenses 581,000 427,000 990,000 784,000 ------------- ------------- ------------- ------------- Operating income (loss) (543,000) 5,383,000 (888,000) 5,103,000 Other income (expense): Interest expense (8,000) (11,000) (17,000) (41,000) Other 59,000 95,000 70,000 635,000 ------------- ------------- ------------- ------------- Income (loss) before benefit for income taxes (492,000) 5,467,000 (835,000) 5,697,000 Income taxes -- -- -- -- ------------- ------------- ------------- ------------- Net income (loss) $ (492,000) $ 5,467,000 $ (835,000) $ 5,697,000 ============= ============= ============= ============= Net income (loss) per common share: Basic $ (0.005) $ 0.055 $ (0.008) $ 0.057 ============= ============= ============= ============= Diluted $ (0.005) $ 0.053 $ (0.008) $ 0.055 ============= ============= ============= ============= Shares used in calculating net income (loss) per common share: Basic 99,197,000 99,197,000 99,197,000 99,197,000 ============= ============= ============= ============= Diluted 99,197,000 102,872,000 99,197,000 102,872,000 ============= ============= ============= =============
See accompanying notes. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------- 2008 2007 ----------- ----------- Cash flows from operating activities: Net (loss) income $ (835,000) $ 5,697,000 Adjustments to reconcile net (loss) income to cash (used) provided by operating activities: Depreciation and amortization 4,000 2,000 Additional paid in capital - option and warrant expense 158,000 3,000 Reversal of prior years recorded liabilities -- (515,000) Changes in operating assets and liabilities: Trade receivables, net (204,000) (1,600,000) Deposits (5,000) -- Prepaid expenses 4,000 -- Other current assets, net (6,000) 3,000 Accounts payable (103,000) (190,000) Accrued royalties (200,000) 29,000 Note Payable Officers and Directors (96,000) -- Note Payable -- (366,000) Advances from distributors 213,000 (45,000) Accumulated other compensation income (1,000) (76,000) ----------- ----------- Net cash provided by (used in) operating activities (1,071,000) 2,942,000 ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (45,000) -- ----------- ----------- Net cash used in investing activities (45,000) -- ----------- ----------- Cash flows from financing activities: ----------- ----------- Net cash provided by (used in) financing activities -- -- ----------- ----------- Net increase (decrease) in cash (1,116,000) 2,942,000 ----------- ----------- Cash, beginning of period 1,138,000 50,000 ----------- ----------- Cash, end of period $ 22,000 $ 2,992,000 =========== =========== Supplemental cash flow information: Cash paid for: Interest $ 0 $ 0 =========== =========== Non Cash Transaction Issuance of common stock for partial reduction of Note Payable officer $ 56,000 $ 0 =========== ===========
See accompanying notes. 5 INTERPLAY ENTERTAINMENT AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2008 (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, 2007 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, 2007 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, 2007 consolidated financial statements which were prepared assuming that the Company will continue as a going concern. The Company continues to seek external sources of funding including, but not limited to, a private placement or public offering of the Company's capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve the Company's long-term strategic objectives. Although the Company has had some success in licensing certain of its products in the past, no assurance can be given that the Company will do so in the future. The Company expects that it will need to obtain additional financing or income. However, no assurance can be given that alternative sources of funding can be obtained on acceptable terms, or at all. These conditions, combined with the Company's historical operating losses and its deficits in stockholders' equity and working capital, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the condensed consolidated financial statements include, among others, sales returns and allowances, cash flows used to evaluate the recoverability of prepaid licenses and royalties, channel exposure and long-lived assets. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay Productions Limited (U.K.), Interplay OEM, Inc., Interplay Co., Ltd., (Japan) the business of which was closed during the 4th quarter 2006 (immaterial to consolidated results) and Games On-line. All significant inter-company accounts and transactions have been eliminated. 6 NOTE 2. NOTE PAYABLE The Company issued to Atari Interactive, Inc. ("Atari") on August 19, 2004 a Promissory Note bearing no interest, due December 31, 2006, in the principal amount of $2.0 million ("the Note") in connection with Atari entering into tri-party agreements with the Company and its then main distributors, Vivendi and Avalon. On March 28, 2007 both parties agreed to extend the option period of the promissory note until March 31, 2008 when the note became due and went into default. On July 24th 2008, the Company and Atari entered into an Option Exercise Agreement (the "Agreement"). Under the Agreement, Atari and the Company settled all outstanding disputes among them including in connection with the Note and intellectual property rights developed by the Company in connection with the Dungeons & Dragons games (the "D&D IP"). Pursuant to the Agreement, Atari exercised an existing option to purchase, and purchased, from the Company the D&D IP and the balance of all amounts due from the Company to Atari under the Note of approximately $1,050,000.00 was cancelled and terminated ( See Note 7). NOTE 3. NOTE PAYABLE TO OFFICER AND DIRECTORS The Company issued on October 2, 2006 to the following officer and directors Herve Caen, Eric Caen and Michel Welter conditional demand notes which have since become demand notes (due to the change in control resulting from Financial Planning and Development SA's acquisition of approximately 56% of the Company's outstanding stock) bearing a 5% annual interest rate. The demand notes were issued for the earned but unpaid directors' fees to Herve Caen for $50,000, to Eric Caen for $50,000, to Michel Welter for $85,000, and for earned but unpaid salary to Herve Caen in the amount of $500,000. A total of $577,000 in principal and interest remains outstanding under the demand notes as of June 30, 2008. Interest accrued on the demand notes as of June 30, 2008 was $17,000. NOTE 4. ADVANCES FROM DISTRIBUTORS AND LICENSEES WHICH ARE CONSIDERED DEFERRED INCOME Non refundable advances received for future distribution and license rights as of June 30, 2008 amounted to $808,000. During the quarter ended June 30, 2008 the Company entered into a licensing agreement which resulted in a non-refundable advance of $200,000 being allocated to deferred income. NOTE 5. 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, exclusive of the "Fallout" intellectual property sale during 2007, by geographic regions were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------------------- ---------------------------------------- 2008 2007 2008 2007 ------------------ ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) North America .. $ 0 0% $ 2 3% $ 0 0% $ 4 3% International .. 40 100% 60 97% 104 100% 139 97% OEM, royalty and licensing ... 0 0% 0 0% 0 0% 0 0% ------- ------- ------- ------- ------- ------- ------- ------- $ 40 100% $ 62 100% $ 104 100% $ 143 100% ======= ======= ======= ======= ======= ======= ======= =======
7 NOTE 6. EMPLOYEE STOCK OPTIONS STOCK-BASED COMPENSATION The Company utilizes SFAS No. 123(R), "SHARE-BASED PAYMENT" ("SFAS 123R"), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. At June 30, 2008, the Company has one stock-based employee compensation plan. Stock options and warrants were granted during the six months ended June 30, 2008. 800,000 options were granted on May 20, 2008 to Eric Caen and Michel Welter respectively as Directors. Each was granted 250,000 options in lieu of cash compensation for directors fees and 150,000 options for Directors fees. Such options have an exercise price of $0.175 and are exercisable consistently with the Company's stock option plan. On May 20, 2008 various employees received a total of 950,000 stock incentive options. Such options have an exercise price of $0.175 and are exercisable consistently with the Company's stock option plan. 5,000,000 10 year warrants were issued on May 20, 2008 at an exercise price of $0.175 to Herve Caen, the Chief Executive Officer and Interim Chief Financial Officer, to reduce his compensation to $250,000 through May 15, 2009. Stock-based employee compensation cost approximated $158,000 as reflected in net loss for the quarter ended June 30, 2008. Herve Caen, Chief Executive Officer and Interim Chief Financial Officer, exercised 2,000,000 warrants issued in 2006 at an exercise price of 0.0279. These shares were paid for by reducing the balance due from the Company to Herve Caen including accrued interest (see Note 3). NOTE 7. SUBSEQUENT EVENT On July 24, 2008, the Company entered into an Option Exercise Agreement (the "Agreement") with Atari Interactive, Inc. ("Atari Interactive"). Under the Agreement, Atari Interactive and the Company settled outstanding disputes among them, including in connection with an existing Promissory Note dated August 19, 2004 of the Company in favor of Atari Interactive (the "Note"). Pursuant to the Agreement, Atari Interactive exercised an existing option to purchase, and purchased, from the Company intellectual property rights developed by the Company in connection with the Dungeons & Dragons games and the balance of all amounts due from the Company to Atari Interactive under the Note of approximately $1,050,000.00 was cancelled and terminated. The Company will recognize approximately $1,050,000 of revenue during the quarter ending September 30, 2008. 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 is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2007, as amended, and presumes that readers have access to, and will have read, the "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-K, as amended. This Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and such forward-looking statements are subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to help identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, as well as on certain assumptions. For example, any statements regarding future cash flow, revenue or expense expectations, including those forward-looking statements in "Item 2. Management's Discussion and Analysis of Financial Condition and Results 8 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 I of our Form 10-K. Assumptions relating to our forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, our industry, business and operations are subject to substantial risks, and the inclusion of such information should not be regarded as a representation by management that any particular objective or plans will be achieved. In addition, risks, uncertainties and assumptions change as events or circumstances change. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC or otherwise to revise or update any oral or written forward-looking statement that may be made from time to time by us or on our behalf. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including, among others, those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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: 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 --------------------------------------------- --------------------------------------------- 2008 2007 2008 2007 --------------------- -------------------- --------------------- -------------------- (Dollars in thousands) % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues -------- -------- -------- -------- -------- -------- -------- -------- Revenues $ 40 100% $ 5,812 100% $ 104 100% $ 5,893 100% Cost of goods sold 2 5% 2 0% 2 2% 6 0% -------- -------- -------- -------- -------- -------- -------- -------- Gross Profit 38 95% 5,810 100% $ 102 98% 5,887 56% Operating Expenses: Marketing and sales 0 0% 95 2% 0 0% 190 3% Product Development 86 215% 0 0% 161 155% 0 0% General and administrative 495 1,238% 332 6% 829 797% 594 10% -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses 581 1,453% 427 7% 990 952% 784 13% -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss) (543) -1,358% 5,383 93% $ (888) -854% 5,103 87% Other income (expenses): Other income (expenses) 51 128% 84 1% 53 51% 594 10% Income taxes 0 0% 0 0% 0 0% 0 0% -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) (492) -1,230% $ 5,467 94% $ (835) -803% $ 5,697 97% ======== ======== ======== ======== ======== ======== ======== ======== Geographic Region - Net revenue excluding the sale of the "Fallout" Intellectual Property during 2007 North America 0 0% 2 3% 0 0% 4 3% International 40 100% 60 97% 104 100% 139 97% OEM, royalty and licensing 0 0% -- 0% 0 0% -- 0% -------- -------- -------- -------- -------- -------- -------- -------- $ 40 100% $ 62 100% $ 104 100% $ 143 100% ======== ======== ======== ======== ======== ======== ======== ======== Platform - Net revenue excluding the sale of the "Fallout" Intellectual Property during 2007 Personal computers $ 39 98% 56 90% 98 94% 128 90% Video game console $ 1 3% 6 10% 6 6% 15 10% OEM, royalty and licensing 0 0% 0 0% 0 0% -- 0% -------- -------- -------- -------- -------- -------- -------- -------- $ 40 100% $ 62 100% $ 104 100% $ 143 100% ======== ======== ======== ======== ======== ======== ======== ========
10 NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES EXCLUSIVE OF THE SALE OF "FALLOUT". Geographically, our net revenues, exclusive of the sale of Fallout, for the three and six months ended June 30, 2008 and 2007 break down as follows: (in thousands) THREE MONTHS ENDED JUNE 30 2008 2007 Change % Change -------- -------- -------- --------- North America $ 0 $ 2 $ (2) (100%) International 40 60 (20) (33%) OEM, Royalty & Licensing 0 0 0 0% Net Revenues $ 40 $ 62 $ (22) (35%) SIX MONTHS ENDED JUNE 30 2008 2007 Change % Change -------- -------- -------- --------- North America $ 0 $ 4 $ (4) (100%) International 104 139 (35) (25%) OEM, Royalty & Licensing 0 0 0 0% Net Revenues $ 104 $ 143 $ (39) (27%) Net revenues for the three months ended June 30, 2008 were $40,000, a decrease of 35% compared to the same period in 2007. This decrease resulted from a 100% decrease in North American net revenues, and a 33% decrease in International net revenues. Net revenues for the six months ended June 30, 2008 were $104,000, a decrease of 27% compared to the same period in 2007 due to the decrease in back catalog sales. This decrease resulted from a 100% decrease in North American net revenues, Royalty and licensing revenues and a 25% decrease in International net revenues due to the decrease in back catalog sales. North American net revenues for the three months ended June 30, 2008 were $0. The decrease in North American net revenues in 2008 was mainly due to a 100% decrease in back catalog sales. North American net revenues for the six months ended June 30, 2008 were $0. There was no significant change in North American net revenue in 2008. International net revenues for the three months ended June 30, 2008 were $40,000. The decrease in International net revenues for the three months ended June 30, 2008 was mainly due to a 33% decrease in back catalog sales. International net revenues for the six months ended June 30, 2008 were $104,000. The decrease in International net revenue for the six months ended June 30,2008 was mainly due to a 25% decrease in back catalog sales. PLATFORM NET REVENUES EXCLUSIVE OF THE SALE OF "FALLOUT". Our platform net revenues, exclusive of the sale of "Fallout," for the three and six months ended June 30, 2008 and 2007 break down as follows: (in thousands) THREE MONTHS ENDED JUNE 30 2008 2007 Change % Change -------- -------- -------- --------- Personal Computer $ 39 $ 56 $ (17) (30%) Video Game Console 1 6 (5) (83%) OEM, Royalty & Licensing 0 0 0 (100%) Net Revenues $ 40 $ 62 $ (22) (35%) SIX MONTHS ENDED JUNE 30 2008 2007 Change % Change -------- -------- -------- --------- Personal Computer $ 98 $ 128 $ (30) (23%) Video Game Console 6 15 (9) (60%) OEM, Royalty & Licensing 0 0 0 (100%) Net Revenues $ 104 $ 143 $ (39) (27%) 11 PC net revenues for the three months ended June 30, 2008 were $39,000, a decrease of 30% compared to the same period in 2007. The decrease in PC net revenues in 2008 was primarily due to lower back catalog sales. Video game console net revenues were $1,000, a decrease of 83% for the three months ended June 30, 2008 compared to the same period in 2007, mainly due to lower back catalog sales. PC net revenues for the six months ended June 30, 2008 were $98,000, a decrease of 23% compared to the same period in 2007. The decrease in PC net revenues in the six months ended June 30, 2008 was primarily due to lower back catalog sales. Video Game console net revenues were $6,000, a decrease of 60% for the six months ended June 30, 2008 compared to the same period in 2007, mainly due to lower back catalog sales. COST OF GOODS SOLD; GROSS PROFIT MARGIN EXCLUSIVE OF THE SALE OF "FALLOUT". Our net revenues exclusive of the sale of " Fallout" , cost of goods sold and gross margin for the three and six months ended June 30, 2008 and 2007 breakdown as follows: (in thousands) THREE MONTHS ENDED JUNE 30 2008 2007 Change % Change -------- -------- -------- --------- Net Revenues $ 40 $ 62 $ (22) (35%) Cost of Goods Sold 2 2 (0) (0%) Gross Profit Margin $ 38 $ 60 $ (22) (37%) SIX MONTHS ENDED JUNE 30 2008 2007 Change % Change -------- -------- -------- --------- Net Revenues $ 104 $ 143 $ (39) (27%) Cost of Goods Sold 2 6 (4) (67%) Gross Profit Margin $ 102 $ 137 $ (35) (26%) 12 THREE MONTHS ENDED JUNE 30 2008 2007 Change ------ ------ ------ Net Revenues 100% 100% 0% Cost of Goods Sold 5% 3% 2% Gross Profit Margin 95% 97% (2%) SIX MONTHS ENDED JUNE 30 2008 2007 Change ------ ------ ------ Net Revenues 100% 100% 0% Cost of Goods Sold 2% 4% (2%) Gross Profit Margin 98% 96% 2% Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers. Cost of goods sold related to royalty-based net revenues primarily represents third party licensing fees and royalties paid by us. Typically, cost of goods sold as a percentage of net revenues for video game console products 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 2% at $2,000 in the three months ended June 30, 2008 compared to the same period in 2007. Our cost of goods sold decreased 67% to $2,000 in the six months ended June 30, 2008 compared to the same period in 2007. The decrease was mainly due to lower back catalog sales Our gross margin decreased to 95% for the three months ended June 30, 2008 from 97% in the comparable period in 2007. Our gross margin increased to 98% for the six months ended June 30, 2008 period from 96% in the comparable 2007 period. MARKETING AND SALES Our marketing and sales expense for the three months ended June 30, 2008 and 2007 breakdown as follows: (in thousands) MARKETING AND SALES 2008 2007 Change % Change -------- -------- -------- -------- Three Months Ended June 30 $ 0 $ 95 $ (95) (100%) Six Months Ended June 30 $ 0 $ 190 $ (190) (100%) Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses. Marketing and sales expenses for the three months ended June 30, 2008 were $0, a 100% decrease as compared to the 2007 period. Marketing and sales expenses for the six months ended June 30, 2008 were $0 a 100% decrease as compared to the same period during 2007. 13 PRODUCT DEVELOPMENT Our Product Development expense for the three months ended June 30, 2008 and 2007 breakdown as follows: (in thousands) PRODUCT DEVELOPMENT 2008 2007 Change % Change -------- -------- -------- -------- Three Months Ended June 30 $ 86 $ 0 $ 86 (100%) Six Months Ended June 30 $ 161 $ 0 $ 161 (100%) Product development expenses increased 100% to $86,000, an increase of 100% in the three months ended June 30, 2008 compared to the same period in 2007. This increase was mainly due to the hiring of a software development team in the first quarter of 2008. Our product development increased to 100% to $161,000 for the six months ended June 30, 2008 period compared to the same period in 2007. This increase was mainly due to the hiring of a software development team in the first quarter of 2008. GENERAL AND ADMINISTRATIVE Our general and administrative expense for the three and six months ended June 30, 2008 and 2007 breakdown as follows: (in thousands) GENERAL AND ADMINISTRATIVE 2008 2007 Change % Change -------- -------- -------- -------- Three Months Ended June 30 $ 495 $ 332 $ 163 49% Six Months Ended June 30 $ 829 $ 594 $ 235 40% General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, stock option compensation , bad debt expenses and other related operating expenses. General and administrative expenses for the three months ended June 30, 2008 were $495,000, a 49% increase as compared to the same period in 2007. The increase results from stock option compensation of $157,000. General and administrative expenses for the six months ended June 30, 2008 were $829,000 a 40% increase as compared to the same period in 2007. The significant component of the increase results from additional annual proxy statement expenditures of $30,000 and stock option compensation of $158,000. OTHER EXPENSE (INCOME), NET Our other expense (income) for the three months ended June 30, 2008 and 2007 breakdown as follows: (in thousands) OTHER (INCOME) EXPENSES 2008 2007 Change % Change -------- -------- -------- -------- Three Months Ended June 30 $ (51) $ (84) $ (33) (39%) Six Months Ended June 30 $ (53) $ (594) $ (541) (91%) Other expenses for the three months ended June 30, 2008 consists primarily, reversal of bad debts ($38,000) interest expense on debt in the amount of $8,000, foreign currency exchange transactions gains and losses and additional miscellaneous write offs ($15,000), and rental income in the amount of ($6,000). Other expenses for the six months ended June 30, 2008 was $53,000, of which approximately , reversal of bad debts ($38,000), interest expense on debt in the amount of $17,000, foreign currency exchange transactions gains and losses and additional miscellaneous write offs ($20,000) and rental income in the amount of ($12,000) The decrease is attributable to various settlements in 2007 and no reversal during 2008. 14 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2008, we had a working capital deficit of approximately $3.0 million, and our cash balance was approximately $22,000. We cannot continue to fund our current operations without obtaining additional financing or income. We have sold "Fallout" to a third party and have obtained the License Back to allow us to create, develop and exploit "Fallout" MMOG. We are planning to exploit the License Back of "Fallout" MMOG and are reviewing the avenues for securing financing of at least $30 million to fund its production. We are now focused on a two-pronged growth strategy. While we are working to secure funding for the development of a MMOG based on the popular "Fallout" franchise, we are at the same time exploring ways to leverage our portfolio of gaming properties through sequels and various development and publishing arrangements. We are planning, to develop sequels to some of the most successful games, including Earthworm Jim, Dark Alliance, Descent and MDK. We have reinitiated our in-house game development studio, and have hired game developers. Initial funding for these steps will mainly derive from license arrangements or other financing that we may enter into. We have entered into a Game Production Agreement with Interactive Game Group which provides for the financing of the development of games under certain conditions. We continue to seek external sources of funding, including but not limited to, private and public securities offerings, incurring debt, the selling of assets , licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and achieve our long-term strategic objectives. Historically, we have funded our operations primarily from the sale of, or royalties generated by licensing of, our intellectual property rights and distribution fee advances of our products. Our operating activities used cash of $1.1 million during the six months ended June 30, 2008. We expect in the remainder of 2008 to enter into license arrangements and to seek funding for the development of games. No assurance can be given that funding can be obtained by us on acceptable terms, or at all. These conditions, combined with our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern. OFF BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements under which we have obligations under a guaranteed contract that has any of the characteristics identified in paragraph 3 of FASB Interpretation 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. 15 CONTRACTUAL OBLIGATIONS The following table summarizes certain of our contractual obligations under non-cancelable contracts and other commitments at June 30, 2008, and the effect such obligations are expected to have on our liquidity and cash flow in future periods: (in thousands)
LESS THAN 1 - 3 3 - 5 MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS --------- --------- --------- --------- --------- Lease Commitments (1) 49 34 15 -- -- Total 49 34 15 -- --
(1) We have a lease commitment at our Beverly Hills office through April 2008. The Company is presently in negotiations to extend that lease but no commitments have been made. We also have a lease commitment in Irvine for our new development offices through May 31, 2009. We also have a lease commitment at our French representation office through February 28, 2011 with an option for an additional 3 years. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have any derivative financial instruments as of June 30, 2008. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations. INTEREST RATE RISK Currently, we do not have a line of credit, but we anticipate we may establish a line of credit in the future. FOREIGN CURRENCY RISK Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables. We recognized gains of $4,000 and $40,000 during the six months ended June 30, 2008 and 2007 respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable. ITEM 4T. 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 June 30, 2008 that have materially affected or are reasonably likely to materially affect these controls. Our management, including the Chief Executive Officer and Interim Chief Financial Officer, 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. 16 PART II - OTHER INFORMATION There have been no material changes to the risk factors disclosed in Item 1A to Part 1 of our Form 10-K for the fiscal year ended December 31, 2007. ITEM 1. LEGAL PROCEEDINGS On or about April 8, 2008 Glutton Creeper Games (GCG) filed a complaint against the Company in the Los Angeles Superior Court seeking damages in excess of $400,000 in connection with a non exclusive license agreement granting rights to GCG to develop a Pen and Paper game based on the pre-existing Fallout games. Such complaint arose as a result of Bethesda and Zenimax sending cease and desist notices to GCG and the Company following their acquisition of the Fallout property from the Company in 2007. On or about June 12, 2008, the Company filed a cross-complaint against Bethesda and Zenimax alleging causes of action for Tortious Interference with an Existing Contract and Implied Indemnity. The Company claims that Bethesda and Zenimax improperly interfered with the Company's license agreement with GCG and are therefore liable for any and all damages that might be awarded to GCG. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company issued various warrants in private placements exempt from registration pursuant to section 4(2) of the Securities Act of 1933 as described in Forms 8-K filed on May 28, 2008 and July 3, 2008, which are incorporated herein by reference. ITEM 3. DEFAULT UPON SENIOR SECURITIES See Note 2 to the Financial Information in Part I, which is incorporated herin by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the stockholders of the Company was held on June 30, 2008. The following resolutions were passed: (1) Amendment to the Certificate of Incorporation to decrease the minimum number of directors from seven (7) to three (3), effective as of the date on which the number of directors first fell below seven (7). For 71,183,696 Against 210,094 Abstain 1,126 (2) Election of each director listed below: FOR WITHHELD --- -------- Herve Caen 70,693,030 701,886 Eric Caen 70,934,237 460,679 Michel Welter 70,939,489 455,427 Xavier De Portal 70,797,942 596,974 Alberto Haddad 70,939,489 455,427 (3) Amendment to Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 to 300,000,000. For 70,092,441 Against 1,301,349 Abstain 1,126 17 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 ------- ------------- 3.2 Amended and Restated Bylaws 10.07 Form of warrant agreement for directors and employees of the Company; (incorporated herein by reference to Exhibit 4.1 of the Company's S-8 filed on May 2, 2008). 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. 18 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: August 8, 2008 By: /S/ HERVE CAEN ---------------------------------- Herve Caen, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive and Financial and Accounting Officer) 19