<PAGE>
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, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24363
Interplay Entertainment Corp.
(Exact name of the registrant as specified in its charter)
Delaware 33-0102707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16815 Von Karman Avenue, Irvine, California 92606
(Address of principal executive offices)
(949) 553-6655
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[_] No[X]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Issued and Outstanding at August 7, 1998
----- ----------------------------------------
Common Stock, $0.001 par value 18,225,445
1
<PAGE>
INTERPLAY ENTERTAINMENT CORP.
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
Page Number
-----------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as
of June 30, 1998 (unaudited) and December
31, 1997 3
Unaudited Condensed Consolidated Statements
of Operations for the three-month and
six-month periods ended June 30, 1998
and 1997 4
Unaudited Condensed Consolidated Statements of
Stockholders' Equity (Deficit) as of
June 30, 1998 (unaudited) and December 31,
1997 5
Unaudited Condensed Consolidated Statements of
Cash Flows for the six-month periods ended
June 30, 1998 and 1997 6
Notes to unaudited Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 30
Exhibit Index 31
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------------- --------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 555 $ 1,536
Trade receivables, net of allowances of $10,919 and
$14,461, respectively 48,083 34,684
Inventories 5,537 6,338
Prepaid licenses and royalties 15,550 12,628
Income taxes receivable -- 1,427
Deferred income taxes 7,792 7,792
Other 4,538 4,218
-------------------- --------------------
Total current assets 82,055 68,623
-------------------- --------------------
Property and Equipment, net 6,456 7,026
-------------------- --------------------
Other Assets 1,981 2,172
-------------------- --------------------
$ 90,492 $ 77,821
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable $ 18,381 $ 17,121
Accrued expenses 17,969 22,549
Current portion of long-term debt 16,443 14,767
Income taxes payable 1,287 570
-------------------- --------------------
Total current liabilities 54,080 55,007
-------------------- --------------------
Long-Term Debt, net of current portion 61 23,387
-------------------- --------------------
Deferred Income Taxes 434 434
-------------------- --------------------
Minority Interest 255 260
-------------------- --------------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.001 par value--
Authorized --5,000,000 shares
Issued and outstanding--none -- --
Common stock, $.001 par value--
Authorized 50,000,000 shares
Issued and outstanding--18,225,445 and
10,951,828, respectively 18 11
Paid-in Capital 51,790 18,408
Retained earnings (accumulated deficit) (16,337) (19,877)
Cumulative translation adjustment 191 191
-------------------- --------------------
Total stockholders' equity (deficit) 35,662 (1,267)
-------------------- --------------------
$ 90,492 $ 77,821
==================== ====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------------
1998 1997 1998 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 40,725 $ 20,502 $ 81,721 $ 42,912
Cost of goods sold 20,291 13,941 39,512 27,449
----------- ----------- ----------- -----------
Gross profit 20,434 6,561 42,209 15,463
----------- ----------- ----------- -----------
Operating expenses:
Marketing and sales 9,025 5,954 17,614 13,234
General and administrative 2,922 4,014 5,777 7,102
Product development 6,121 5,920 11,940 11,304
----------- ----------- ----------- -----------
Total operating expenses 18,068 15,888 35,331 31,640
Operating income (loss) 2,366 (9,327) 6,878 (16,177)
Interest and other income (expense) (1,444) (663) (2,862) (1,038)
----------- ----------- ----------- -----------
Income (loss) before income taxes 922 (9,990) 4,016 (17,215)
Provision (benefit) for income taxes 231 -- 476 (1,782)
----------- ----------- ----------- -----------
Net income (loss) $ 691 $ (9,990) $ 3,540 $ (15,433)
=========== =========== =========== ===========
Net income (loss) per share:
Basic $ 0.06 $ (0.90) $ 0.32 $ (1.39)
=========== =========== =========== ===========
Diluted $ 0.06 $ (0.90) $ 0.29 $ (1.39)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding:
Basic 11,512,445 11,122,801 11,233,950 11,123,443
=========== =========== =========== ===========
Diluted 12,276,408 11,122,801 14,181,155 11,123,443
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Retained Cumulative
----------------------- Paid-in Earnings Translation
Shares Amount Capital (Deficit) Adjustment Total
---------- ------- ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 10,951,828 $11 $18,408 $(19,877) $191 $(1,267)
Issuance of common stock 1,200 -- 10 -- -- 10
Compensation for stock options granted -- -- 76 -- -- 76
Net income -- -- -- 2,849 -- 2,849
Translation adjustment -- -- -- -- 1 1
---------- ----- ------- -------- ----- -------
Balance, March 31, 1998 (unaudited) 10,953,028 11 18,494 (17,028) 192 1,669
Issuance of common stock 5,000,000 5 24,673 -- -- 27,500
Compensation for stock options granted -- -- 42 -- -- 42
Exercise of warrants 2,272,417 2 8,581 -- -- 8,583
Net income -- -- -- 691 -- 691
Translation adjustment -- -- -- -- (1) (1)
---------- ----- ------- -------- ----- -------
Balance, June 30, 1998 (unaudited) 18,225,445 $18 $51,790 $(16,337) $191 $35,662
========== ===== ======= ======== ===== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,540 $(15,433)
Adjustments to reconcile net income (loss) to the cash provided
by (used in) operating activities--
Depreciation and amortization 1,699 1,569
Deferred income taxes 2 --
Minority interest in earnings (loss) of subsidiary (7) --
Changes in assets and liabilities:
Trade receivables (13,398) 7,540
Inventories 802 181
Income taxes receivable 1,427 --
Other current assets (320) 195
Other assets -- 250
Prepaid licenses and royalties (2,923) 1,972
Accounts payable 1,260 (6,648)
Accrued expenses (4,581) 6,710
Income taxes payable 717 697
-------- --------
Net cash provided by (used in) operating activities (11,782) (2,967)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (937) (1,096)
-------- --------
Net cash provided by (used in) investing activities (937) (1,096)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit (13,134) 3,494
Issuance of subordinated Secured Promissory Notes and Warrants -- 1,823
Proceeds from exercise of stock options -- 135
Net proceeds from issuance of common stock 24,871 43
-------- --------
Net cash provided by (used in) financing activities 11,737 5,495
-------- --------
Effect of exchange rate changes on cash and cash equivalents 111 --
-------- --------
Net increase (decrease) in cash and cash equivalents (981) 1,433
Cash and cash equivalents, beginning of year 1,536 3,135
-------- --------
Cash and cash equivalents, end of year $ 555 $ 4,568
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 2,875 $ 1,427
======== ========
Income taxes $ -- $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts and disclosures as of June 30, 1998 and 1997 and for
each of the periods then ended are unaudited
(amounts in thousands, except share and per share data)
Note 1. Basis of Presentation
The accompanying interim condensed consolidated financial statements of
Interplay Entertainment Corp. and its subsidiaries (the "Company") are unaudited
and reflect all adjustments (consisting only of normal recurring accruals) 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.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles 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.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
eight month period ended December 31, 1997 included in the Final Prospectus
dated June 19, 1998 which was part of the Company's Registration Statement on
Form S-1 as amended (Registration Number 333-48473) as filed with the Securities
and Exchange Commission.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to classifications used in the current period.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1998, which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Effective January 1,
1998 the Company adopted SFAS No. 130. Comprehensive income for the Company
would include the impact of foreign currency translation adjustments which were
immaterial for the periods reported.
Note 2. Prepaid Licenses and Royalties
Prepaid licenses and royalties consist of payments for intellectual property
rights, payments to celebrities and sports leagues and advanced royalty payments
to outside developers. In addition such costs include certain other outside
production costs generally consisting of film cost and amounts paid for
digitized motion data with alternative future uses. Payments to developers
represent contractual advanced payments made for future royalties. These
payments are contingent upon the successful completion of milestones, which
generally represent specific deliverables. Royalty advances are generally
recoupable against future sales based upon the contractual royalty rate. The
Company amortizes the cost of licenses, prepaid royalties and other outside
production costs to cost of sales over six months commencing with the initial
shipment of the title at a rate based upon the number of units shipped.
Management evaluates the future realization of such costs quarterly and charges
to cost of goods sold any amounts that management deems unlikely to be fully
realized through future sales. Such costs are classified as current and
noncurrent assets based upon estimated net product sales.
7
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts and disclosures as of June 30, 1998 and 1997 and for
each of the periods then ended are unaudited
(amounts in thousands, except share and per share data)
Note 3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Packaged software $2,531 $4,171
CD-ROMs, cartridges, manuals, packaging and supplies 3,005 2,167
-------- ------------
$5,537 $6,338
======== ============
</TABLE>
Note 4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Subordinated Secured Promissory Notes $ 6,331 $ 14,655
Loan Agreement 10,112 23,246
Other 61 253
-------- ------------
16,504 38,154
Less--current portion (16,443) (14,767)
-------- ------------
$ 61 $ 23,387
======== ============
</TABLE>
Subordinated Secured Promissory Notes
The Company issued $14,803 in Subordinated Secured Promissory Notes ("Notes")
and nondetachable Warrants to purchase Common Stock, of which employees,
officers, and directors of the Company hold $2,600 of the total Notes
outstanding. The principal amount of the Notes was $14,655 and the purchase
price of the Warrants was $148. The amount paid for the Warrants approximates
management's estimate of the fair market value of the Warrants at the date of
issuance and is included in paid-in capital in the accompanying condensed
consolidated balance sheets. The Notes provided for interest at a rate of 12.0
percent per year, payable quarterly, beginning May 1, 1997. Interest expense
related to the Notes was $866 for the six months ended June 30, 1998.
Each Warrant holder had the right to purchase from the Company the number of
shares of Common Stock equal to the investor's aggregate investment (including
Notes and Warrants) divided by the product of 0.70 multiplied by (a) the initial
public offering ("IPO") price per share or (b) in the event of a Sales
Transaction, the fair market value per share as determined in the Sales
Transaction.
In accordance with the terms of the Notes, the Company requested that each
holder elect to either convert the outstanding principal amount to Common Stock
upon the closing of the IPO or receive full payment in cash from the proceeds of
the IPO. At the IPO completion, the holders of approximately $8,748 of Notes
and Warrants elected to exercise their Warrants by converting their Notes to
Common Stock. Remaining Note holders with a balance of approximately $6,331
have requested payment in cash inclusive of interest of $277 (See Note 7).
8
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts and disclosures as of June 30, 1998 and 1997 and for
each of the periods then ended are unaudited
(amounts in thousands, except share and per share data)
Loan Agreement
In June 1997, the Company entered into a Loan and Security Agreement (Loan
Agreement) with a financial institution which was amended in February 1998.
Borrowings under the Loan Agreement bear interest at LIBOR (5.72 percent at
December 31, 1997 and 5.69 percent at June 30, 1998) plus 4.87 percent (10.59
percent at December 31, 1997 and 10.56 percent at June 30, 1998). The agreement
provides for a line of credit based in part on qualified receivables and
inventory. Combined borrowings under this Loan Agreement may be up to a maximum
of $35,000 through August 30, 1998; $30,000 from August 31 to December 30, 1998;
and $25,000 thereafter. Within the total credit limits, the Company may borrow
up to $10,000 in excess of its borrowing base through August 1998 and up to
$5,000 in excess of its borrowing base thereafter through December 30, 1998. The
line of credit is secured by cash, accounts receivable and inventory and by a
security interest in certain of the Company's assets and expires May 31, 1999.
The line of credit became a current liability in June 1998.
Note 5. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income (loss) per share is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding plus the effect of any dilutive stock options and Common
Stock Warrants using the treasury stock method. The following table summarizes
the computation of Basic and Diluted net income (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic EPS Computation:
Net income (loss) $ 691 $ (9,990) $ 3,540 $ (15,433)
Weighted average common shares outstanding 11,512,445 11,122,801 11,233,950 11,123,443
Basic net income (loss) per share $ 0.06 $ (0.90) $ 0.32 $ (1.39)
Diluted EPS Computation:
Net income (loss) $ 691 $ (9,990) $ 3,540 $ (15,433)
Adjustments to net income -- $ -- $ 502 $ --
---------- ----------- ----------- -----------
Diluted net income (loss) $ 691 $ (9,990) $ 4,042 $ (15,433)
Weighted average common shares outstanding 11,512,445 11,122,801 11,233,950 11,123,443
Stock Options, Subordinated Notes and Warrants 763,963 -- 2,947,205 --
---------- ----------- ----------- -----------
Diluted common shares outstanding 12,276,408 11,122,801 14,181,155 11,123,443
Diluted net income (loss) per share $ 0.06 $ (0.90) $ 0.29 $ (1.39)
</TABLE>
The effect of the Warrants prior to their conversion into Common Stock at the
closing of the initial public offering ("IPO") has been excluded from the
calculation of diluted earnings per share ("EPS") for the three months ended
June 30, 1998 as their impact is anti-dilutive for that period.
9
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts and disclosures as of June 30, 1998 and 1997 and for
each of the periods then ended are unaudited
(amounts in thousands, except share and per share data)
Note 6. Initial Public Offering
The Company effected a registration with the Securities and Exchange
Commission on From S-1, Registration No. 333-48473 (the "Registration
Statement"), whereby the Company registered up to 5,750,000 shares of its Common
Stock. On June 18, 1998 the Registration Statement was declared effective by
the Securities and Exchange Commission. On June 24, 1998, the Company completed
its initial public offering of 5,000,000 shares of Common Stock, at $5.50 per
share, that raised approximately $24,575, net of expenses of $2,925. In
addition, in connection with the offering, 750,000 shares of Common Stock of the
Company were sold by a selling stockholder at $5.50 per share, for which the
company received no proceeds.
Note 7. Subsequent Event
As of August 14, 1998 the Company had repaid in cash $6,306 for Note holders
that elected to receive full payment.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Cautionary Statement
This Form 10-Q contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934 and such forward-looking statements be 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,"
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
assumptions including that the Company will not incur delays in the completion
of products, that the products released will have expected consumer appeal and
acceptance, the Company will not lose a significant customer or customers or
experience increased fluctuations of demand or rescheduling of orders, that the
Company's markets will continue to grow, that the Company's products will remain
accepted within their respective markets, that competitive conditions within the
Company's markets will not change materially or adversely, that the Company will
retain key development and management personnel, that the Company's forecasts
will accurately anticipate market demand, that there will be no material adverse
change in the Company's operations or business. Additional factors that may
affect future operating results are discussed in more detail in "Certain Factors
that May Affect the Company's Business and Future Results," below as well as the
final Prospectus dated June 19, 1998 which is included in the Company's
Registration Statement on Form S-1 as amended (Registration Number 333-48473) on
file with the Securities and Exchange Commission. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, the
business and operations of the Company are subject to substantial risks that
increase the uncertainty inherent in the forward-looking statements, and the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved. The Company disclaims any obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of this Form
10-Q with the SEC or otherwise to revise or update any oral or written forward-
looking statement that may be made from time to time by or on behalf of the
Company.
The information contained in this Form 10-Q is not a complete description of
the Company's business or the risks associated with an investment in the
Company. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Report and in the Company's other
filings with the SEC, including its Final Prospectus, that attempt to advise
interested parties of certain risks, uncertainties and other factors that may
affect the Company's business.
General
The Company commenced operations in 1983, and operated as an independent
development studio until 1988, creating interactive entertainment software games
for publishers such as Electronic Arts and
11
<PAGE>
Activision. In 1988, the Company began publishing software through an affiliate
label relationship with Activision, pursuant to which Activision distributed the
Company's software in North America. The Company began publishing and
distributing its own interactive entertainment software for both PCs and video
game consoles in 1992 and has continued to build its publishing and distribution
infrastructure since that date. In addition to developing products through its
internal product development group, the Company publishes titles developed by
third party interactive entertainment software developers.
The Company derives net revenues primarily from direct sales of interactive
entertainment software for PCs and video game consoles to retailers and mass
merchants, from indirect sales to software distributors in North America and
internationally, from the distribution by the Company on an affiliate label
basis of titles published by third parties, and from direct sales to end-users
through the Company's catalogs and the Internet. The Company also derives
royalty-based revenues from licensing arrangements, from the sale of products by
third party distributors in international markets, and from OEM bundling
transactions.
The Company recognizes net revenues from the sale of its products upon
shipment. Subject to certain limitations, the Company permits customers to
obtain exchanges within certain specified periods and provides price protection
on certain unsold merchandise. Net revenues from product sales are reflected
after deducting an allowance for returns and price protection. With respect to
license agreements which provide customers the right to multiple copies in
exchange for guaranteed amounts, net revenues are recognized upon delivery of
the product master or the first copy. Per copy royalties on sales which exceed
the guarantee are recognized as earned.
In order to expand the Company's distribution channels and engage in software
development in overseas markets, in 1995 the Company established operations in
the United Kingdom and in Japan. In July 1997, the Company initiated a
licensing strategy in Japan and terminated its operations there.
In January 1997, the Company formed a wholly owned subsidiary, Interplay OEM,
Inc. ("Interplay OEM"), which had previously operated as a division of the
Company. Interplay OEM distributes the Company's interactive entertainment
software titles, as well as those of other software publishers, to computer
hardware and peripheral device manufacturers for use in bundling arrangements.
The Company also derives net revenues from the licensing of certain of its
intellectual properties and certain of its products to third parties for
distribution in markets through channels which are outside the Company's primary
focus. The Company expects that OEM, royalty and licensing net revenues may
decline, both in dollars and as a percentage of net revenues, as a larger
proportion of OEM, royalty and licensing net revenues are generated from
royalty-based licensing transactions, as opposed to the shipment of finished
goods, and as the OEM channel of distribution becomes more competitive.
Cost of goods sold related to PC and video games 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 represent third party licensing fees and royalties paid by
the Company. Typically, cost of goods sold as a percentage of net revenues for
video game console products and affiliate label products are 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 these
products. Also included in the cost of goods sold is the amortization of
prepaid royalty and license fees paid to third party software developers.
Prepaid royalties are expensed over a period of six months from initial
shipment. The Company evaluates the likelihood of future realization of prepaid
royalties quarterly, on a product by product basis, and charges cost of goods
sold for any amounts that it deems unlikely to be realized through future
product sales.
12
<PAGE>
Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31.
The Company's operating results have fluctuated significantly in the past and
will likely fluctuate significantly in the future, both on a quarterly and an
annual basis. A number of factors may cause or contribute to such fluctuations,
and many of such factors are beyond the Company's control. There can be no
assurance that the Company will be profitable in any particular period. It is
likely that the Company's operating results in one or more future periods will
fail to meet or exceed the expectations of security analysts or investors.
Results of Operations
The following table sets forth certain selected condensed consolidated
statements of operations data, segment data and platform data for the periods
indicated in dollars and as a percentage of total net revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------ ------------------ ------------------ -------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
------- -------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $40,725 100.0% $20,502 100.0% $81,721 100.0% $ 42,912 100.0%
Cost of goods sold 20,291 49.8% 13,941 68.0% 39,512 48.3% 27,449 64.0%
------- ----- ------- ----- ------- ----- -------- -----
Gross profit 20,434 50.2% 6,561 32.0% 42,209 51.7% 15,463 36.0%
------- ----- ------- ----- ------- ----- -------- -----
Operating expenses:
Marketing and sales 9,025 22.2% 5,954 29.0% 17,614 21.6% 13,234 30.8%
General and administrative 2,922 7.2% 4,014 19.6% 5,777 7.1% 7,102 16.6%
Product development 6,121 15.0% 5,920 28.9% 11,940 14.6% 11,304 26.3%
------- ----- ------- ----- ------- ----- -------- -----
Total Operating expenses 18,068 44.4% 15,888 77.5% 35,331 43.3% 31,640 73.7%
------- ----- ------- ----- ------- ----- -------- -----
Operating income (loss) 2,366 5.8% (9,327) (45.5%) 6,878 8.4% (16,177) (37.7%)
Interest and other income (expense) (1,444) (3.5%) (663) (3.2%) (2,862) (3.5%) (1,038) (2.4%)
------- ----- ------- ----- ------- ----- -------- -----
Income (loss) before income taxes 922 2.3% (9,990) (48.7%) 4,016 4.9% (17,215) (40.1%)
Provision (benefit) for income taxes 231 0.6% 0 0.0% 476 0.6% (1,782) (4.2%)
------- ----- ------- ----- ------- ----- -------- -----
Net income (loss) $ 691 1.7% $(9,990) (48.7%) $ 3,540 4.3% $(15,433) (35.9%)
======= ===== ======= ===== ======= ===== ======== =====
Net revenues by segment:
North America $26,244 64.4% $ 7,474 36.5% $47,907 58.6% $ 17,036 39.7%
International 9,004 22.1% 9,687 47.2% 21,302 26.1% 20,020 46.7%
OEM, royalty and licensing 5,477 13.5% 3,341 16.3% 12,512 15.3% 5,856 13.6%
------- ----- ------- ----- ------- ----- -------- -----
$40,725 100.0% $20,502 100.0% $81,721 100.0% $ 42,912 100.0%
======= ===== ======= ===== ======= ===== ======== =====
Net revenues by platform:
Personal computer $23,969 58.8% $11,498 56.1% $44,986 55.1% $ 25,939 60.5%
Video game console 11,279 27.7% 5,663 27.6% 24,223 29.6% 11,117 25.9%
OEM, royalty and licensing 5,477 13.5% 3,341 16.3% 12,512 15.3% 5,856 13.6%
------- ----- ------- ----- ------- ----- -------- -----
$40,725 100.0% $20,502 100.0% $81,721 100.0% $ 42,912 100.0%
======= ===== ======= ===== ======= ===== ======== =====
</TABLE>
Net Revenues
Net revenues for the three months ended June 30, 1998 increased 98.6% to $40.7
million from $20.5 million in the comparable 1997 quarter. North America net
revenues increased to $26.2 million, or
13
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64.4% of net revenues, from $7.5 million, or 36.5% of net revenues, in the 1997
quarter. International net revenues decreased to $9.0 million, or 22.1% of net
revenues, from $9.7 million, or 47.2% of net revenues in the 1997 quarter. OEM,
royalty and licensing net revenues increased to $5.5 million, or 13.5% of net
revenues, in the 1998 quarter from $3.3 million, or 16.3% of net revenues, in
the 1997 quarter, primarily attributable to increased OEM bundling transactions
and licensing revenues.
Net revenues for the six months ended June 30, 1998 increased 90.4% to $81.7
million from $42.9 million in the comparable 1997 period. North American net
revenues increased to $47.9 million, or 58.6% of net revenues from $17.0
million, or 39.7% of net revenues, in the 1997 period. International net
revenues increased to $21.3 million, or 26.1% of net revenues, from $20.0
million, or 46.7% of net revenues, in the 1997 period. OEM, royalty and
licensing net revenues increased to $12.5 million, or 15.3% of net revenues, in
the 1998 period from $5.9 million, or 13.6% of net revenues, in the 1997 period.
The overall increase in net revenues and the increase in net revenues in the
specific territories for the three months and six months ended June 30, 1998
were primarily due to increased title releases across multiple platforms and
resulting increases in unit sales volume in the 1998 periods, including
significant title releases, such as Crime Killer (PlayStation(TM)), Die By The
Sword (PC), Descent: Freespace The Great War (PC), VR Sports Powerboat Racing
(PC and PlayStation(TM)), Redneck Rides Again (PC), and VR Baseball `99
(PlayStation(TM)), and a high level of product returns and markdowns recorded
during the 1997 period. The decrease in international net revenues in the
quarter ended June 30, 1998 from the comparable 1997 period was primarily
attributable to difficulties selling products in certain Asian countries as a
result of economic instability in such countries. The Company expects that OEM,
royalty and licensing revenues may decline, both in dollars and as a percentage
of net revenues, on a comparative quarterly basis during the remainder of 1998
as a larger proportion of OEM, royalty and licensing net revenues are generated
from royalty-based licensing transactions, as opposed to the shipment of
finished goods, and as such distribution channels become more competitive.
Cost of Goods Sold; Gross Margin
Cost of goods sold increased 45.5% in the three months ended June 30, 1998 to
$20.3 million, or 49.8% of net revenues, from $13.9 million, or 68.0% of net
revenues in the comparable 1997 quarter. Gross margin increased to 50.2% in the
1998 quarter from 32.0% in the 1997 quarter.
Cost of goods sold increased 43.9% in the six months ended June 30, 1998 to
$39.5 million, or 48.3% of net revenues, from $27.4 million, or 64.0% of net
revenues, in the comparable 1997 period. Gross margin increased to 51.7% in the
1998 period from 36.0% in the 1997 period.
The increases in gross profit during the three months ended June 30, 1998 and
the six months ended June 30, 1998 were primarily attributable to increased
sales of certain high margin PC products during the period, offset in part by a
greater overall proportion of video game console products, which generally have
lower margins. The improvement in gross margin was also attributable to
increased OEM, royalty and licensing net revenues, which generally have higher
margins, during the 1998 periods. The 1997 periods also included the effects of
additional write-offs of prepaid royalties relating to titles or platform
versions of titles which had been canceled or which were expected to achieve
lower unit sales than were originally anticipated.
Operating Expenses
Total operating expenses increased 13.7% to $18.1 million, or 44.4% of net
revenues, in the three months ended June 30, 1998 from $15.9 million, or 77.5%
of net revenues, for the comparable 1997 quarter. Total operating expenses
increased 11.7% to $35.3 million, or 43.3% of net revenues, in the six
14
<PAGE>
months ended June 30, 1998 from $31.6 million, or 73.7% of net revenues, for the
comparable 1997 period.
Marketing and Sales. Marketing and sales expenses primarily include
advertising and retail marketing support, sales commissions, marketing and sales
personnel, customer support services, fulfillment and other costs. Marketing
and sales expenses increased 51.6% to $9.0 million, or 22.2% of net revenues,
for the three months ended June 30, 1998 from $6.0 million, or 29.0% of net
revenues for the comparable 1997 quarter and increased 33.1% to $17.6 million,
or 21.6% of net revenues, for the six months ended June 30, 1998 from $13.2
million, or 30.8% of net revenues, for the comparable 1997 period. The
increases in absolute dollars were primarily attributable to increased
advertising and other marketing costs associated with the increase in major
titles launched and products sold during the 1998 period. The decrease as a
percentage of net revenues was primarily attributable to operating efficiencies
achieved as a result of the increased net revenues base. The Company expects
that marketing and sales expenses in future periods may increase both in
absolute dollars and as a percentage of net revenues from the levels experienced
in the three months ended June 30, 1998 as the Company increases its marketing
and sales operations.
General and Administrative. General and administrative expenses primarily
include administrative personnel expenses, facilities costs, professional
expenses and other overhead charges. General and administrative expenses
decreased 27.2% to $2.9 million, or 7.2% of net revenues, in the three months
ended June 30, 1998 from $4.0 million, or 19.6% of net revenues in the
comparable 1997 quarter and decreased 18.7% to $5.8 million, or 7.1% of net
revenues, in the six months ended June 30, 1998 from $7.1 million, or 16.6% of
net revenues, in the comparable 1997 period. The decrease in absolute dollars
was primarily attributable to lower overhead costs offset in part by increased
personnel and operations costs and facilities charges in North America and
Europe in support of increased net revenues. The decrease as a percentage of
net revenues was primarily attributable to operating efficiencies gained as a
result of an increased net revenues base. The Company expects that in future
periods general and administrative expenses will increase in absolute dollars,
but may vary as a percentage of net revenues.
Product Development. Product development expenses, which primarily include
personnel and support costs, are charged to operations in the period incurred.
Product development expenses increased 3.4% to $6.1 million, or 15.0% of net
revenues, in the three month period ended June 30, 1998 from $5.9 million, or
28.9% of net revenues, in the comparable 1997 quarter and increased 5.6% to
$12.0 million, or 14.6% of net revenues, in the six months ended June 30, 1998
from $11.3 million, or 26.3% of net revenues, in the comparable 1997 period.
The increase in absolute dollars was primarily due to the increase in the number
of products under development, offset in part by cost efficiencies achieved as a
result of the reorganization of the development process. The decrease as a
percentage of net revenues primarily reflected cost savings and operating
efficiencies gained as a result of increased net revenues. The Company expects
that in future periods product development expenses will increase in absolute
dollars, but may vary as a percentage of net revenues.
Other Income (Expense)
Other income (expense) for the three- and six-month periods ended June 30,
1998 primarily included interest expense on the Company's bank line of credit
and Subordinated Secured Promissory Notes. Other expense increased to $1.4
million in the three months ended June 30, 1998 from $0.7 million in the
comparable 1997 quarter and increased to $2.9 million in the six months ended
June 30, 1998 from $1.0 million in the comparable 1997 period. This increase
was primarily due to increased borrowings under the Company's line of credit to
support increased working capital requirements in the 1998 period and interest
on the Subordinated Secured Promissory Notes.
15
<PAGE>
Provision (Benefit) for Income Taxes
The Company recorded a tax provision of $0.2 million in the three months ended
June 30, 1998 which is less than the statutory rate primarily due to the
utilization of net operating losses. No tax benefit was recorded in the 1997
quarter due to the uncertainty of realization in future periods. The Company
recorded a tax provision of $0.5 million in the six months ended June 30, 1998,
compared to a tax benefit of $1.8 million in the comparable 1997 period.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through the use of
bank lines of credit and equipment leases, through cash generated by the private
sale of securities and from the proceeds from the initial public offering. As
of June 30, 1998 the Company's principal sources of liquidity included cash and
short term investments of approximately $0.6 million and the Company's bank line
of credit bearing interest at the London Interbank Offered Rate plus 4.87%
(10.56% as of June 30, 1998), expiring May 31, 1999. Under the terms of the
bank line of credit, the Company has available borrowings up to $35.0 million
through August 30, 1998, $30.0 million through December 30, 1998 and $25.0
million through May 31, 1999. As of June 30, 1998 the Company's balance on the
bank line of credit was $10.1 million (does not reflect repayment of $6.3
million for Note holders that elected to receive full payment which will be
repaid in cash). The Company is currently in compliance with all terms of its
credit agreement.
The Company's primary capital needs have historically been to fund working
capital requirements necessitated by its sales growth, the development and
introduction of products and related technologies and the acquisition or lease
of equipment and other assets used in the product development process. The
Company's operating activities used cash of $11.8 million during the six months
ended June 30, 1998 and used $3.0 million during the six months ended June 30,
1997. The cash used by operating activities in the six months ended June 30,
1998 was primarily attributable to increased trade receivables, offset in part
by net income during the period and increased accounts payable and accrued
expenses.
Cash provided by financing activities of $11.7 million in the six months ended
June 30, 1998 resulted primarily from the proceeds from the Company's initial
public offering offset by reductions in borrowings under the Company's bank line
of credit. Cash provided by financing activities of $5.5 million in the six
months ended June 30, 1997 resulted primarily from borrowings under the
Company's bank line of credit. On June 24, 1998 the Company completed its
initial public offering of 5,000,000 shares of Common Stock at $5.50 per share
which raised approximately $24.6 million, net of expenses. In connection with
the offering, an additional 750,000 shares of Common Stock of the Company were
sold by a selling stockholder at $5.50 per share, for which the company received
no proceeds. In connection with the offering, $8.7 million of Notes and Warrants
were converted to Common Stock and $6.3 million will be repaid in cash.
Cash used in investing activities of $0.9 million in the six months ended June
30, 1998 consisted of capital expenditures, primarily for office and computer
equipment used in Company operations. Cash used in investing activities was
$1.1 million in the six months ended June 30, 1997 consisted of capital
expenditures, primarily for office and computer equipment used in Company
operations. The Company does not currently have any material commitments with
respect to any capital expenditures.
The Company expects that its working capital requirements will increase
significantly in the future as it increases its product development and sales
and marketing programs, primarily due to increased headcount in these areas,
increased advance royalty payments to third party developers and increased sales
and marketing expenses. The Company believes that funds available under its bank
line of credit, the net proceeds from the Company's Initial Public Offering and
anticipated funds from operations will be sufficient to satisfy the Company's
projected working capital, capital expenditure requirements and debt obligations
in the normal course of business at least through the expiration of its bank
line of credit on May 31, 1999. The Company believes that it will be able to
renew its bank line of credit or obtain alternate financing on reasonable terms,
however, there can be no
16
<PAGE>
assurances that the Company will not be required to raise additional debt or
equity financing during such period, nor that if the Company is required to
raise additional financing during such period it will be able to do so on
commercially reasonable terms.
Certain Factors That May Affect the Company's Business and Future Results
In future periods the Company's business, financial condition and results of
operations may be affected in a material and adverse manner by many factors,
including, but not limited to, the following:
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality
The Company's operating results have fluctuated significantly in the past and
will likely fluctuate significantly in the future, both on a quarterly and an
annual basis. A number of factors may cause or contribute to such fluctuations,
and many of such factors are beyond the Company's control. Such factors
include, but are not limited to, demand for the Company's and its competitors'
products, the size and rate of growth of the market for interactive
entertainment software, changes in computing platforms, the number of new
products and product enhancements released by the Company and its competitors
during the period, changes in product mix, product returns, the timing of orders
placed by distributors and dealers, delays in shipment, the timing of
development and marketing expenditures, price competition and the level of the
Company's international and OEM, royalty and licensing net revenues. The
uncertainties associated with the interactive entertainment software development
process, lengthy manufacturing lead times for Nintendo-compatible products,
possible production delays, and the approval process for products compatible
with the Sony Computer Entertainment, Nintendo and Sega video game consoles, as
well as approvals required from other licensors, make it difficult to accurately
predict the quarter in which shipments will occur. Because of the limited
number of products introduced by the Company in any particular quarter, a delay
in the introduction of a product may materially adversely affect the Company's
operating results for that quarter. A significant portion of the Company's
operating expenses is relatively fixed, and planned expenditures are based
primarily on sales forecasts. If net revenues do not meet the Company's
expectations in any given quarter, operating results may be materially adversely
affected. The interactive entertainment software industry is highly seasonal,
with the highest levels of consumer demand occurring during the year-end holiday
buying season, followed by demand during the first calendar quarter. As a
result, net revenues, gross profits and operating income for the Company have
historically been highest during the fourth and the following first calendar
quarters, and have declined from those levels in subsequent second and third
calendar quarters.
The failure or inability of the Company to introduce products on a timely
basis to meet such seasonal increases in demand may have a material adverse
effect on the Company's business, operating results and financial condition.
The Company may over time become increasingly affected by the industry's
seasonal patterns. Although the Company seeks to reduce the effect of such
seasonal patterns on its business by distributing its product release dates more
evenly throughout the year, there can be no assurance that such efforts will be
successful. There can be no assurance that the Company will be profitable in
any particular period given the uncertainties associated with software
development, manufacturing, distribution and the impact of the industry's
seasonal patterns on the Company's net revenues.
As a result of the foregoing factors and the other factors discussed in
"Certain Factors that May Affect the Company's Business and Future Results," it
is likely that the Company's operating results in one or more future periods
will fail to meet or exceed the expectations of securities analysts or
investors. In such event, the trading price of the Common Stock would likely be
materially adversely affected.
17
<PAGE>
Recent Losses
The Company has experienced significant losses in recent periods, including
losses of $5.1 million and $27.2 million, respectively, in the eight months
ended December 31, 1997 and in the Company's former fiscal year ended April 30,
1997. The losses resulted primarily from delays in the completion of certain
products, which led the Company to release alternative titles developed by third
parties which did not achieve broad market acceptance, and the sharp decline in
the market for titles for the Macintosh and Sega Saturn platforms, both of which
resulted in a high level of product returns and markdowns which reduced net
revenues. Operating results for the year ended April 30, 1997, were also
negatively affected by the Company's decision to write-off $5.9 million in
prepayments to third party developers relating to titles or platform versions of
titles which had been canceled or which were utilizing new technologies in the
face of increasing development costs, slower than expected growth in sales in
the Japanese market, and investments in new product lines in the sports and
edutainment categories. There can be no assurance that the Company will not
experience similar problems in current or future periods or that the Company
will be able to generate sufficient net revenues to attain or sustain
profitability in the future.
Dependence on New Product Introductions; Risk of Product Delays and Product
Defects
The Company's products typically have short life cycles, and the Company
depends on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously
released products to additional platforms, to generate net revenues to fund
operations and to replace declining net revenues from older products. In the
Company's former fiscal year ended April 30, 1997, the Company's results of
operations were adversely affected by a number of factors, including delays in
the completion of certain new products which led the Company to release
alternative titles developed by third parties that did not achieve broad market
acceptance. If in the future for any reason net revenues from new products
were to fail to replace declining net revenues from existing products, the
Company's business, operating results and financial condition could be
materially adversely affected. The timing and success of new interactive
entertainment software product releases remains unpredictable due to the
complexity of product development, including the uncertainty associated with new
technology. The development cycle of new products is difficult to predict but
typically ranges from 12 to 24 months and another six to 12 months for the
porting of a product to a different technology platform. In the past, the
Company has repeatedly experienced significant delays in the introduction of
certain new products, including certain products currently under development, in
the future. Because net revenues associated with the initial shipments of a new
product generally constitute a high percentage of the total net revenues
associated with a product, any delay in the introduction of, or the presence of
a defect in, one or more new products expected in a period could have a material
adverse effect on the ultimate success of such products and on the Company's
business, operating results and financial condition. The costs of developing
and marketing new interactive entertainment software have increased in recent
years due to such factors as the increasing complexity and content of
interactive entertainment software, increasing sophistication of hardware
technology and consumer tastes and increasing costs of obtaining licenses for
intellectual properties, and the Company expects this trend to continue. There
can be no assurance that new products will be introduced on schedule, if at all,
or that, if introduced, they will achieve significant market acceptance or
generate significant net revenues. In addition, software products as complex as
those offered by the Company may contain undetected errors when first introduced
or when new versions are released. There can be no assurance that, despite
testing by the Company, errors will not be found in new products or releases
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Uncertainty of Market Acceptance; Dependence on Hit Titles
Consumer preferences for interactive entertainment software are continually
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved sustained market acceptance.
Rather, a limited number of releases have become "hits" and
18
<PAGE>
have accounted for a substantial portion of revenues in the industry. Further,
publishers with a history of producing hit tittles have enjoyed a significant
marketing advantage because of their heightened brand recognition and consumer
loyalty. The Company expects the importance of introducing hit titles to
increase in the future. There can be no assurance that new products introduced
by the Company will achieve significant market acceptance, that such acceptance,
if achieved, will be sustainable for any significant period, or that product
life cycles will be sufficient to permit the Company to recover development and
other associated costs. Most of the Company's products have a relatively short
life cycle and sell for a limited period of time after their initial release,
usually less than one year. The Company believes that these trends will continue
and that the Company's future revenue will continue to be dependent on the
successful production of hit titles on a continuous basis. Because the Company
introduces a relatively limited number of new products in a given period, the
failure of one or more of such products to achieve market acceptance could have
a material adverse effect on the Company's business, operating results and
financial condition. Further, if market acceptance is not achieved, the Company
could be forced to accept substantial product returns or grant significant
markdown allowances to maintain its relationship with retailers and its access
to distribution channels. In the event that the Company is forced to accept
significant product returns or grant significant markdown allowances, its
business, operating results and financial condition could be materially
adversely affected.
Dependence on Third Party Software Developers
The Company relies on third party interactive entertainment software
developers for the development of a significant number of its interactive
entertainment software products. As reputable and competent third party
developers continue to be in high demand, there can be no assurance that third
party software developers that have developed products for the Company in the
past will continue to be available to develop products for the Company in the
future. Many third party software developers have limited financial resources,
which could expose the Company to the risk that such developers may go out of
business prior to completing a project. In addition, due to the limited control
that the Company exercises over third party software developers, there can be no
assurance that such developers will complete products for the Company on a
timely basis or within acceptable quality standards, if at all. Increased
competition for skilled third party software developers has required the Company
to enter into agreements with licensors of intellectual property and developers
of games that involve advance payments by the Company of royalties and
guaranteed minimum royalty payments, and the Company expects to continue to
enter into such arrangements. If the sales volumes of products subject to such
arrangements are not sufficient to recover such royalty advances and guarantees,
the Company would be required to write-off unrecovered portions of such
payments, which could have a material adverse effect on its business, operating
results and financial condition. Further, there can be no assurance that third
party developers will not demand renegotiation of their arrangements with the
Company.
Rapidly Changing Technology; Platform Risks
The interactive entertainment software industry is subject to rapid
technological change. The introduction of new technologies, including operating
systems such as Microsoft Windows 95 and 98, technologies that support multi-
player games, new media formats such as on-line delivery and digital video disks
("DVDs") and as yet unreleased video game platforms could render the Company's
current products or products in development obsolete or unmarketable. The
Company 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, the Company is required to make
substantial product development and other investments in a particular platform
well in advance of introduction of the platform. If the platforms for which the
Company develops software are not released on a timely basis or do not attain
significant market penetration, the Company's business, operating results and
financial condition could be materially adversely affected. Alternatively, if
the Company fails to develop products
19
<PAGE>
for a platform that does achieve significant market penetration, then the
Company's business, operating results and financial condition could also be
materially adversely affected.
The emergence of new interactive entertainment software platforms and
technologies and the increased popularity of new products and technologies may
materially and adversely affect the demand for products based on older
technologies. In this regard, the Company's results of operations in its former
fiscal year ended April 30, 1997 were adversely affected by a sharp decline in
the market for titles for the Macintosh and Sega Saturn platforms, which
declines resulted in a high level of product returns and markdown allowances.
The broad range of competing and incompatible emerging technologies may lead
consumers to postpone buying decisions with respect to products until one or
more of such technologies gain widespread acceptance. Such postponement could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company is currently actively developing products for
the Microsoft Windows 95 and 98, PlayStation and Nintendo 64 platforms. The
Company's success will depend in part on its ability to anticipate technological
changes and to adapt its products to emerging game platforms. There can be no
assurance that the Company will be able to anticipate future technological
changes, to obtain licenses to develop products for those platforms on terms
favorable to the Company or to create software for those new platforms, and any
failure to do so could have a material adverse effect on the Company's business,
operating results and financial condition.
Industry Competition; Competition for Shelf Space
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new interactive entertainment
software platforms and software platforms. The Company's competitors vary in
size from small companies to very large corporations with significantly greater
financial, marketing and product development resources than those of the
Company. Due to these greater resources, certain of the Company's competitors
are able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies, pay higher fees to licensors of desirable motion picture,
television, sports and character properties and pay more to third party software
developers than the Company. The Company believes that the principal
competitive factors in the interactive entertainment software industry include
product features, brand name recognition, access to distribution channels,
quality, ease of use, price, marketing support and quality of customer service.
The Company competes primarily with other publishers of PC and video game
console interactive entertainment software. Significant competitors include
Electronic Arts, GT Interactive Software Corp., Cendant Corporation, Activision,
Inc., Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc.,
Acclaim Entertainment Inc., Microprose (Spectrum Holobyte), Virgin Interactive
Entertainment, Inc. and Hasbro Inc. In addition, integrated video game console
hardware/software companies such as Sony Computer Entertainment, Nintendo and
Sega compete directly with the Company in the development of software titles for
their respective platforms. Large diversified entertainment companies, such as
The Walt Disney Company, many of which own substantial libraries of available
content and have substantially greater financial resources than the Company, may
decide to compete directly with the Company or to enter into exclusive
relationships with competitors of the Company. The Company also believes that
the overall growth in the use of the Internet and on-line services by consumers
may pose a competitive threat if customers and potential customers spend less of
their available home PC time using interactive entertainment software and more
of the Internet and on-line services.
Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among consumer
software producers, and in particular interactive entertainment software
products, for high quality retail shelf space and promotional support
20
<PAGE>
from retailers. To the extent that the number of consumer software products and
computer platforms increases, competition for shelf space may intensify and may
require the Company to increase its marketing expenditures. Due to increased
competition for limited shelf space, retailers and distributors are in an
increasingly better position to negotiate favorable terms of sale, including
price discounts, price protection, marketing and display fees and product return
policies. The Company's products constitute a relatively small percentage of any
retailer's sale volume, and there can be no assurance that retailers will
continue to purchase the Company's products or to provide the Company's products
with adequate levels of shelf space and promotional support, and a prolonged
failure in this regard may have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence Upon Third Party Licenses
Many of the Company's products, such as its Star Trek, Major League Baseball
and Caesars Palace titles, are based on original ideas or intellectual
properties licensed from third parties. There can be no assurance that the
Company will be able to obtain new licenses, or renew existing licenses, on
commercially reasonable terms, if at all. Should the Company be unable to
obtain licenses for the underlying content that it believes offers the greatest
consumer appeal, the Company would either have to seek alternative, potentially
less appealing licenses, or release the products without the desired underlying
content, either of which events could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that acquired properties will enhance the market acceptance of the
Company's products based on such properties, that the Company's new product
offerings will generate net revenues in excess of their costs of development and
marketing or minimum royalty obligations, or that net revenues from new product
sales will meet or exceed net revenues from existing product sales.
Dependence on Distribution Channels; Risk of Customer Business Failures; Product
Returns
The Company currently sells its products directly through its own sales force
to mass merchants, warehouse club stores, large computer and software specialty
chains and through catalogs in the U.S. and Canada, as well as to certain
distributors. Outside North America, the Company generally sells to third party
distributors. The Company's sales are made primarily on a purchase order basis,
without long-term agreements. The loss of, or significant reduction in sales
to, any of the Company's principal retail customers or distributors could
materially adversely affect the Company's business, operating results and
financial condition.
The distribution channels through which consumer software products are sold
are characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retailers such as warehouse chains, mass merchants and
computer superstores. As more consumers own PCs, the distribution channels for
interactive entertainment software have changed are expected to continue to
change. Mass merchants have become the most important distribution channels for
retail sales of interactive entertainment software. A number of these mass
merchants, including Wal-Mart, have entered into exclusive buying arrangements
with other software developers or distributors, which arrangements prevent the
Company from selling certain of its products directly to that mass merchant. If
the number of mass merchants entering into exclusive buying arrangements with
software distributors other than the Company were to increase, the Company's
ability to sell to such merchants would be restricted to selling through the
exclusive distributor. Because sales to distributors typically have a lower
gross profit than sales to retailers, this would have the effect of lowering the
Company's gross profit. In addition, this trend could increase the material
adverse impact on the Company's business, operating results and financial
condition. In addition, emerging methods of distribution, such as the Internet
and on-line services, may become more important in the future, and it will be
important for the Company to maintain access to these channels of distribution.
There can be no assurance that the Company will maintain such access or that the
Company's access will allow the Company to maintain its historical levels of
sales volume.
21
<PAGE>
Distributors and retailers in the computer industry have from time to time
experienced significant fluctuations in their businesses, and there have been a
number of business failures among these entities. The insolvency or business
failure of any significant distributor or retailer of the Company's products
could have a material adverse effect on the Company's business, operating
results and financial condition. Sales are typically made on unsecured credit,
with terms that vary depending upon the customer and the nature of the product.
Although the Company has obtained insolvency risk insurance to protect against
any bankruptcy, insolvency or liquidation that may occur involving its
customers, such insurance contains a significant deductible and a co-payment
obligation, and the policy does not cover all instances of non-payment. In
addition, while the Company maintains a reserve for uncollectible receivables,
the actual reserve may not be sufficient in every circumstance. As a result, a
payment default by a significant customer could have a material adverse effect
on the Company's business, operating results and financial condition.
Dependence on Licenses from and Manufacturing by Hardware Companies
The Company is required to obtain a license to develop and distribute software
for each of the video game console platforms for which the Company develops
products, including a separate license for each of North America, Japan and
Europe. The Company has obtained licenses to develop software for the
PlayStation(TM) in North America and Japan and is currently negotiating
agreements covering additional territories. In addition, the Company has
obtained a license to develop software for the Nintendo 64 in North America and
is currently negotiating with Nintendo for licenses covering additional
territories. There can be no assurance that the Company will be able to obtain
licenses from hardware companies on acceptable terms or that any existing or
future licenses will be renewed by the licensors. In addition, each of Sony
Computer Entertainment, Nintendo and Sega have the right to approve the
technical functionality and content of the Company's products for such platform
prior to distribution. Due to the nature of the approval process, the Company
must make significant product development expenditures on a particular product
prior to the time it seeks such approvals. The inability of the Company to
obtain such approvals could have a material adverse effect on the Company's
business, operating results and financial condition.
Hardware companies such as Sony Computer Entertainment, Nintendo and Sega may
impose upon their licensees a restrictive selection and product approval
process, such that licensees are restricted in the number of titles that will be
approved for distribution on the particular platform. While the Company has
prepared its future product release plans taking this competitive approval
process into consideration, if the Company has incorrectly predicted the impact
of this restrictive approval process, and as a result the Company fails to
obtain approvals for all products in the Company's development plans, such
failure could have a material adverse effect on the Company's business,
operating results and financial condition. The Company depends upon Sony
Computer Entertainment and Nintendo for the manufacture of the Company's
products that are compatible with their respective video game consoles. As a
result, Sony and Nintendo have the ability to raise prices for supplying such
products at any time and effectively control the timing of the Company's release
of new titles for those platforms. PlayStation(TM) products consist of CD-ROMs
and are typically delivered by Sony Computer Entertainment within a relatively
short lead time. Manufacturers of Nintendo and other video game cartridges
typically deliver software to the Company within 45 to 60 days after receipt of
a purchase order. If the Company experiences unanticipated delays in the
delivery of video game console products from Sony Computer Entertainment or
Nintendo, or if actual retailer and consumer demand for its interactive
entertainment software differs from that forecast by the Company, its business,
operating results and financial condition could be materially adversely
affected.
22
<PAGE>
Future Capital Requirements
The Company expects that its capital requirements will increase significantly
in the future. The Company did not generate cash flow from operations in the
six months ended June 30, 1998, the eight months ended December 31, 1997 and the
former fiscal year ended April 30, 1997. There can be no assurance that the
Company will ever generate cash flow from operations. The Company's ability to
fund its capital requirements out of available cash, its bank line of credit and
cash generated from operations will depend on numerous factors, including the
progress of the Company's product development programs, the rate of growth of
the Company's business, and the commercial success of the Company's products.
The Company will likely be required to seek additional funds through debt or
equity financing. The issuance of additional equity securities by the Company
could result in substantial dilution to stockholders. If adequate funds are not
available on acceptable terms, the Company would be required to delay or scale
back its product development and marketing programs, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Key Personnel
The Company's success depends to a significant extent on the continued service
of it key product design, development, sales, marketing and management
personnel, and in particular on the leadership, strategic vision and industry
reputation of its founder and Chief Executive Officer, Brian Fargo. The
Company's future success will also depend upon the Company's ability to continue
to attract, motivate and retain highly qualified employees and contractors,
particularly key software design and development personnel. Competition for
highly skilled employees is intense, and there can be no assurance that the
Company will be successful in attracting and retaining such personnel.
Specifically, the Company may experience increased costs in order to attract and
retain skilled employees. The Company's failure to retain the services of Brian
Fargo or its other key personnel or to attract and retain additional qualified
employees could have a material adverse effect on the Company's business,
operating results and financial condition.
Risks Associated with International Operations; Currency Fluctuations
International net revenues accounted for 26.1% and 22.1% of the Company's
total net revenues in the six months ended June 30, 1998 and the three months
ended June 30, 1998, respectively. The Company intends to continue to expand
its direct and indirect sales, marketing and product localization activities
worldwide. Such expansion will require significant management time and
attention and financial resources in order to develop improved international
sales and support channels. There can be no assurance, however, that the
Company will be able to maintain or increase international market demand for its
products. International sales and operations are subject to a number of
inherent risks, including the impact of possible recessionary environments in
economies outside the U.S., the time and financial costs associated with
translating and localizing products for foreign markets, longer accounts
receivable collection periods and greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements, difficulties and
costs of staffing and managing foreign operations, and political and economic
instability. For example, the Company has recently experienced difficulties
selling products in certain Asian countries as a result of economic instability
in such countries, and there can be no assurance that such difficulties will not
continue or occur in other countries in the future. There can be no assurance
that the foregoing factors will not have a material adverse effect on the
Company's future international net revenues and, consequently, on the Company's
business, operating results and financial condition. The Company currently does
not engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse effect on net revenues from international sales and licensing, and thus
on the Company's business, operating results and financial condition.
23
<PAGE>
Management of Growth
The Company has recently undergone a period of rapid growth that has placed a
significant strain on the Company's financial, management and other resources.
The Company's ability to manage its growth effectively, should it continue, will
require it to continue to improve its operational, financial and management
information systems and to attract, train, motivate, manage and retain key
employees. If the Company's executives are unable to manage growth effectively,
the Company's business, operating results and financial condition could be
materially adversely affected.
Protection of Proprietary Rights
The Company regards its software as proprietary and relies on a combination of
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect its proprietary rights.
The Company owns or licenses various copyrights and trademarks. While the
Company provides "shrinkwrap" license agreements or limitations on use with its
software, the enforceability of such agreements or limitations is uncertain.
The Company is aware that unauthorized copying occurs within the computer
software industry, and if a significantly greater amount of unauthorized copying
of the Company's interactive entertainment software products were to occur, the
Company's operating results could be materially adversely affected. While the
Company does not copy protect its products, it does not provide source code to
third parties unless they have signed nondisclosure agreements with respect
thereto.
The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such counties, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-line
services, the ability of the Company to protect its intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. There can be no assurance that existing intellectual
property laws will provide adequate protection to the Company's products in
connection with such emerging technologies.
As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although the Company makes reasonable efforts to ensure that its products do not
violate the intellectual property rights of others, there can be no assurance
that claims of infringement will not be made. Any such claims, with or without
merit, can be time consuming and expensive to defend. From time to time, the
Company has received communications from third parties of such parties. There
can be no assurance that existing or future infringement claims against the
Company will not result in costly litigation or require the Company to license
the intellectual property rights of third parties, either of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Entertainment Software Rating System; Governmental Restrictions
Legislation is periodically introduced at the state and federal levels in the
U.S. 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. Such a system would include
procedures with which interactive entertainment software publishers would be
expected to comply by identifying particular products within defined rating
categories and communicating such ratings to consumers through appropriate
package labeling and through advertising and marketing
24
<PAGE>
presentations consistent with each products' rating. In addition, many foreign
countries have laws which permit governmental entities to censor the content of
certain works, including interactive entertainment software. In certain
instances, the Company may be required to modify its products to comply with the
requirements of such governmental entities, which could delay the release of
those products in such countries. Such delays could have a material adverse
effect on the Company's business, operating results and financial condition.
While the Company currently voluntarily submits its products to industry-created
review boards and publishes their ratings on its game packaging, the Company
believes that mandatory government-run integrative entertainment software
products rating systems eventually will be adopted in many countries which
represent significant markets or potential markets for the Company. Due to the
uncertainties inherent in the implementation of such a rating system, confusion
in the marketplace may occur, and the Company is unable to predict what effect,
if any, such a rating system would have on the Company's business. In addition
to such regulations, certain retailers have in the past declined to stock
certain of the Company's 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 such actions have not had a material adverse effect on the
Company's business, operating results or financial condition, there can be no
assurance that similar actions by the Company's distributors or retailers in the
future would not have a material adverse effect on the Company's business,
operating results and financial condition.
Development of Internet/On-Line Services or Products
The Company seeks to establish an on-line presence by creating and supporting
sites on the Internet. The Company's future plans envision conducting and
supporting on-line product offerings through these sites or others. The ability
of the Company to successfully establish an on-line presence and to offer on-
line products will depend on several factors that are outside the Company's
control, including the emergence of a robust on-line industry and infrastructure
and the development and implementation of technological advancements to the
Internet to increase bandwidth and the speed of responsiveness to the point that
will allow the Company to conduct and support on-line product offerings.
Because global commerce and the exchange of information on the Internet and
other similar open, wide area networks are relatively new and evolving, there
can be no assurance that a viable commercial marketplace on the Internet will
emerge from the developing industry infrastructure, that the appropriate
complementary products for providing and carrying Internet traffic and commerce
will be developed, that the Company will be able to create or develop a
sustainable or profitable on-line presence or that the Company will be able to
generate any significant revenue from On-Line product offerings in the near
future, it at all. If the Internet does not become a viable commercial
marketplace, or if such development occurs but is insufficient to meet the
Company's needs or if such development is delayed beyond the point where the
Company plans to have established an On-Line service, the Company's business,
operating results and financial condition could be materially adversely
affected.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This inability to recognize or properly treat the Year 2000
may cause the Company's systems and applications to process critical financial
and operational information incorrectly. The Company believes that its
products, which are self-contained software programs that run independently of
external chronology, will not be significantly affected by Year 2000 problems.
The Company is currently in the process of investigating whether its internal
accounting systems and other operational systems are Year 2000 compliant. The
Company has been informed by the vendor of its internal accounting software that
upgrades that will bring such software into Year 2000 compliance
25
<PAGE>
will be provided to the Company under its existing software maintenance
agreement in the third quarter of 1998. The Company expects to effect the
conversion of its internal accounting system to such upgraded software by the
end of 1998. The Company believes that necessary conversions of other
operational systems can also be accomplished through vendor upgrades and
enhancements as provided under its system of maintenance agreements currently in
effect. The Company does not anticipate significant costs associated with any
necessary conversions. However, there can be no assurance that certain of the
Company's internal computer systems or networks or those of its key vendors and
distributors will not be adversely affected by such Year 2000 issues, which
could have a material adverse effect on the Company's business, operating
results or financial condition.
Risks Associated with Acquisitions
As part of its strategy to enhance distribution and product development
capabilities, the Company intends to pursue acquisitions of complementary
businesses, products and technologies. Some of these acquisitions could be
material in size and scope. While the Company will continue to search for
appropriate acquisition opportunities, there can be no assurance that the
Company will be successful in identifying suitable acquisition opportunities.
If any potential acquisition opportunity is identified, there can be no
assurance that the Company will consummate such acquisition, and if such
acquisition does occur, there can be no assurance that it will be successful in
enhancing the Company's business or will be accretive to the Company's earnings.
As the interactive entertainment software industry continues to consolidate, the
Company may face increased competition for acquisition opportunities, which may
inhibit its ability to complete suitable transactions or increase the cost
thereof. Future acquisitions could also divert substantial management time,
could result in short term reductions in earnings or special transaction or
other charges and may be difficult to integrate with existing operations or
assets.
The Company may, in the future, issue additional shares of Common Stock in
connection with one or more acquisitions, which may dilute its stockholders,
including investors in the IPO. Additionally, with respect to future
acquisitions, the Company's stockholders may not have an opportunity to review
the financial statements of the entity being acquired or to vote on such
acquisitions.
Control by Directors and Officers
The Company's directors and officers and Universal Studios, Inc.
("Universal"), which currently has two representatives on the Company's Board of
Directors, in the aggregate, beneficially own approximately 58.1% of the
Company's outstanding Common Stock (excluding outstanding options). These
stockholders, if acting together, would be able to control substantially all
matters requiring approval by the stockholders of the Company, including the
election of directors (subject to the cumulative voting rights of the Company's
stockholders) and the approval of mergers or other business combination
transactions. Such concentration of ownership could discourage or prevent a
change in control of the Company.
Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws, as well as Delaware
corporate law, contain certain provisions that could have the effect of
delaying, deferring or preventing a change in control of the Company and could
materially adversely affect the prevailing market price of the Common Stock.
Certain of such provisions impose various procedural and other requirements that
could make it more difficult for stockholders to effect certain corporate
actions.
Stock Price Volatility
The trading price of the Company's Common Stock has been and could continue to
be subject to wide fluctuations in response to quarter to quarter variations in
results of operations, announcements of new products by the Company or its
competitors, product development or release schedule, general
26
<PAGE>
conditions in the computer, software, entertainment, media or electronics
industries, changes in earnings estimates or buy/sell recommendations by
analysts, investor perceptions and expectations regarding the products, plans
and strategic position of the Company, its competitors and its customers, or
other events or factors. In addition, the public stock markets have experienced
extreme price and trading volume volatility, particularly in high technology
sectors of the market. This volatility has significantly affected the market
prices of securities of many technology companies for reasons frequently
unrelated to the operating performance of the specific companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
27
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
-----------------
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 such routine claims will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
The Company effected a registration with the Securities and Exchange
Commission on Form S-1, Registration No. 333-48473 (the "Registration
Statement"), whereby the Company registered up to 5,750,000 shares of its Common
Stock. On June 18, 1998, the Registration Statement was declared effective by
the Securities and Exchange Commission. On June 24, 1998, the Company completed
its initial public offering of Common Stock (the "IPO") by consummating the sale
of 5,000,000 shares of its Common Stock to the underwriters identified in the
Registration Statement, Piper Jaffray Inc., Bear, Stearns & Co. and UBS
Securities serving as the representatives thereof. The price of the Company's
Common Stock was $5.50 per share, less underwriting discounts and commissions of
$0.385 per share. The Company received net proceeds of $25.6 million from the
sale of such Common Stock before deducting offering expenses. Effective upon
the closing of the IPO, certain Common Stock Warrants were exercised by the
surrender of associated Subordinated Secured Promissory Notes for an aggregate
of 2,272,417 shares of the Company's Common Stock.
On July 22, 1998, the underwriters of the Company's IPO exercised their option
to purchase an additional 750,000 shares of Common Stock from a stockholder of
the Company at a price of $5.50 per share, less underwriting discounts and
commissions of $0.385 per share. The Company did not receive any proceeds from
the sale of the Common Stock pursuant to the exercise of such option.
In conjunction with completing the IPO, the Company incurred total direct
offering expenses of approximately $1,038,500, all of which were payable to
third parties. Total net proceeds to the Company from the IPO and the exercise
of the over-allotment option, after deducting underwriting discounts and
commissions and total direct offering expenses, was $24.6 million.
The Company has used approximately $16.8 million to repay amounts outstanding
under the Company's bank line of credit with an unaffiliated third party,
approximately $6.3 million to repay certain of the Company's Subordinated
Secured Promissory Notes (which amounts were paid to unaffiliated third parties,
except that approximately $100,000 was repaid to Chuck Camps, an officer of the
Company) and approximately $1.5 million to pay certain amounts due to Universal
Interactive Studios (a subsidiary of Universal Studios, Inc., a holder of more
than 10% of the Company's Common Stock) under the terms of an existing
distribution agreement.
28
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - The following exhibits are filed as part of this report:
--------
Exhibit
- -------
Number Exhibit Title Page
- ------ ------------- ----
27.1 Financial data schedule for the
six month period ended June 30, 1998 30
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
29
<PAGE>
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 14, 1998 By: /s/ James C. Wilson
-------------------
James C. Wilson,
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized
Officer)
30
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
Number Exhibit Title Page
- ------ ------------- ----
27.1 Financial data schedule for the six month period
ended June 30, 1998 30
31
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 555
<SECURITIES> 0
<RECEIVABLES> 59,002
<ALLOWANCES> 10,919
<INVENTORY> 5,537
<CURRENT-ASSETS> 82,055
<PP&E> 14,919
<DEPRECIATION> 8,463
<TOTAL-ASSETS> 90,492
<CURRENT-LIABILITIES> 54,080
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 90,492
<SALES> 81,721
<TOTAL-REVENUES> 81,721
<CGS> 39,512
<TOTAL-COSTS> 35,331
<OTHER-EXPENSES> 2,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,786
<INCOME-PRETAX> 4,016
<INCOME-TAX> 476
<INCOME-CONTINUING> 4,016
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<EXTRAORDINARY> 0
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