<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-48473
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERPLAY ENTERTAINMENT CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 33-0102707
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
16815 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92606
(949) 553-6655
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHRISTOPHER J. KILPATRICK, PRESIDENT
INTERPLAY ENTERTAINMENT CORP.
16815 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92606
(949) 553-6655
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
NICK E. YOCCA, ESQ. JEFFREY D. SAPER, ESQ.
K.C. SCHAAF, ESQ. PATRICK J. SCHULTHEIS, ESQ.
STRADLING YOCCA CARLSON & RAUTH, WILSON SONSINI GOODRICH & ROSATI,
A PROFESSIONAL CORPORATION PROFESSIONAL CORPORATION
660 NEWPORT CENTER DRIVE, SUITE 1600 650 PAGE MILL ROAD
NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
(949) 725-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 7, 1998
PROSPECTUS
dated , 1998
6,250,000 Shares
[LOGO OF INTERPLAY]
Common Stock
All of the 6,250,000 shares of Common Stock offered hereby (the "Offering") are
being issued and sold by Interplay Entertainment Corp. ("Interplay" or the
"Company"). A non-management stockholder of the Company (the "Selling
Stockholder") has granted the Underwriters a 30-day option to purchase up to an
additional 937,500 shares of Common Stock. The Company will not receive any
proceeds from the sale of stock by the Selling Stockholder.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
of the Common Stock offered hereby will be between $8.00 and $10.00 per share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
the quotation of the Company's Common Stock on the Nasdaq National Market under
the symbol "IPLY," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.............................. $ $ $
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Total(3)............................... $ $ $
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</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$1,000,000.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase up to an additional 937,500 shares of Common Stock solely to cover
over-allotments, if any, at the Price to Public less the Underwriting
Discount. If all such shares are purchased, the total Price to Public and
Underwriting Discount will be $ and $ , respectively, and the Selling
Stockholder will receive proceeds of $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the certificates representing shares of the Common Stock will
be made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or
about , 1998.
Piper Jaffray inc.
Bear, Stearns & Co. Inc.
UBS Securities
<PAGE>
INTERPLAY
PRODUCTIONS
[ANIMATED DEPICTIONS OF CHARACTERS AND ARTWORK
FROM THE COMPANY'S STAR TREK, REDNECK RAMPAGE,
EARTHWORM JIM, CLAY FIGHTER AND VR SPORTS
POWERBOAT RACING TITLES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
BY GAMERS.
[Title names interspersed with animated
FOR GAMERS. product artwork and pictures of product
packaging]
STRATEGY
--------
FLAT CAT
M.A.X.
------
ACTION CONQUEST OF THE NEW WORLD
- ------
TANTRUM CAESARS PALACE
DESCENT BRIDGE DELUXE II WITH OMAR SHARIF
DESCENT II BATTLE CHESS
STAR TREK: STARFLEET ACADEMY USCF CHESS
CARMAGEDDON BEAT THE HOUSE
REDNECK RAMPAGE
CLAY FIGHTER 63 1/3 ROLE PLAYING
------------
BLACK ISLE STUDIOS
FALLOUT
STONEKEEP
<PAGE>
SHINY
-----
EARTHWORM JIM
MDK
ADVENTURE
---------
TRIBAL DREAMS
OF LIGHT AND DARKNESS -- THE PROPHECY
SPORTS
------
VR SPORTS
VIRTUAL POOL
VIRTUAL POOL 2
VR BASEBALL '97
VR SPORTS POWERBOAT RACING
JIMMY JOHNSON'S VR FOOTBALL '98
[Wording interspersed with animated product artwork and pictures of product
packaging]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Consolidated Financial
Statements and Notes thereto (the "Consolidated Financial Statements") included
elsewhere in this Prospectus. Except as otherwise noted, all information in
this Prospectus, including financial information, share and per share data,
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." Investors should carefully consider the information set forth
under the heading "Risk Factors."
THE COMPANY
Interplay Entertainment Corp. ("Interplay" or the "Company") is a leading
developer, publisher and distributor of interactive entertainment software for
both core gamers and the mass market. The Company, which commenced operations
in 1983, is most widely known for its titles in the action/arcade,
adventure/role-playing game ("RPG"), strategy/puzzle and sports categories, and
has published such hit titles as Descent, Fallout, Stonekeep, Battle Chess and
Virtual Pool. The Company has produced titles for many of the most popular
interactive entertainment software platforms, and currently balances its
development efforts by publishing interactive entertainment software for
personal computers ("PCs") and current generation video game consoles, such as
the PlayStation(R) manufactured by Sony Computer Entertainment ("PlayStation")
and Nintendo 64. Interplay was named Publisher of the Year in 1996 by Computer
& Net Player magazine.
The worldwide market for interactive entertainment software has grown
significantly in recent years. According to the International Development Group
("IDG"), a market research firm, the worldwide market for interactive
entertainment software generated sales of more than 220 million retail units in
1997 and is projected to generate more than 437 million retail units in 1999,
representing a 41% compound annual growth rate. The interactive entertainment
software market is composed primarily of software for PCs and current
generation video game consoles.
The Company seeks to publish interactive entertainment software titles that
are, or have the potential to become, franchise titles that can be leveraged
across several releases and/or platforms, and has published many such
successful franchise titles to date. In addition, the Company secures licenses
to use popular intellectual properties, such as Star Trek, Caesars Palace and
Major League Baseball, for incorporation into certain of its products. Of the
more than 40 titles currently in development by the Company, more than half are
sequels to successful titles or incorporate licensed intellectual properties.
In addition to developing products through its internal product development
group of approximately 290 employees worldwide, the Company seeks to publish
titles from leading third party interactive entertainment software developers.
Through relationships with such developers, the Company believes that it is
able to supplement its internally developed product line with products
developed by talented third party developers while reducing its exposure to
certain of the financial risks associated with internal product development.
The Company believes that one of its core strengths is its developer-friendly
management culture, which the Company believes provides it with a competitive
advantage in forging strategic relationships with successful third party
interactive entertainment software developers. The Company's internal software
producers manage external product development efforts to ensure that externally
developed titles satisfy the Company's product development standards. The
Company also seeks to leverage its investments in existing gameplay
technologies into new titles, while internally and externally developing new
technologies which can be used in multiple future title releases.
The Company has developed a worldwide sales and distribution capability. In
North America, Interplay sells and distributes its products primarily through
its direct sales force and, to a lesser extent, through third party
distribution arrangements. In certain international markets, the Company has
established direct sales and distribution capabilities, while in the majority
of international markets the Company utilizes third party distribution
arrangements. The Company's wholly owned subsidiary, Interplay OEM, Inc.,
distributes both Company-published and third party-published titles to computer
hardware and peripheral device manufacturers for use in bundling arrangements.
In addition, the Company sells its games directly through its web site and
generates royalty-based revenues from use of its games by providers of on-line
gameplay who distribute through popular on-line services, such as America
Online.
The Company was incorporated in the State of California in 1982, and conducts
business under the trade name "Interplay Productions." The Company will be
reincorporated in the State of Delaware prior to the effective date of the
Offering. The principal executive offices of the Company are located at 16815
Von Karman Avenue, Irvine, California 92606, and its telephone number at that
location is (714) 553-6655.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by
the Company............ 6,250,000 shares
Common Stock to be
outstanding after the
Offering............... 18,591,728 shares(1)
Use of Proceeds......... For repayment of indebtedness and for working capital
and other general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol.......... IPLY
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
YEAR ENDED APRIL 30, ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ------------------- ----------------
1993 1994 1995 1996 1997 1996 1997 1997 1998
------- ------- ------- ------- -------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
STATEMENTS OF OPERATIONS DATA(2):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........... $25,355 $52,668 $79,546 $96,952 $ 83,262 $ 50,364 $85,961 $22,410 $40,996
Gross profit........... 11,981 21,445 34,055 47,013 20,782 14,639 41,097 8,902 21,775
Operating income
(loss)................ 3,917 5,296 6,047 (417) (34,684) (22,302) (2,786) (6,850) 4,512
Net income (loss)...... 2,623 3,203 4,249 (744) (27,219) (17,469) (5,059) (5,443) 2,849
Net income (loss) per share(3):
Basic.................. $ 0.32 $ 0.37 $ 0.40 $ (0.07) $ (2.46) $ (1.58) $ (0.45) $ (0.49) $ 0.26
Diluted................ $ 0.29 $ 0.32 $ 0.35 $ (0.07) $ (2.46) $ (1.58) $ (0.45) $ (0.49) $ 0.23
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENTS OF OP-
ERATIONS DATA:
Net revenues.............. $ 22,410 $ 20,502 $ 23,833 $ 53,308 $ 40,996
Gross profit.............. 8,902 6,561 9,680 26,557 21,775
Operating income (loss)... (6,850) (9,327) (4,431) 8,045 4,512
Net income (loss)......... (5,443) (9,990) (5,481) 6,493 2,849
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 17,442 $ 53,616
Total assets........................................... 78,327 98,040
Total long-term debt (including current portion)....... 38,680 225
Stockholders' equity................................... 1,669 61,643
</TABLE>
- -------
(1) Based on shares outstanding at March 31, 1998. Includes 1,388,700 shares of
Common Stock issuable upon the closing of the Offering upon the exercise of
Common Stock Warrants by the cancellation of Subordinated Secured
Promissory Notes at an exercise price of $6.30 per share (based on an
assumed initial public offering price of $9.00 per share). Excludes (i)
2,053,206 shares of Common Stock issuable upon exercise of stock options
outstanding at March 31, 1998, which had a weighted average exercise price
of $4.80 per share, (ii) 1,680,541 shares of Common Stock reserved for
issuance under the Company's 1997 Stock Incentive Plan and (iii) 200,000
shares of Common Stock reserved for issuance under the Company's Employee
Stock Purchase Plan. See "Management--Employee Benefit Plans--Stock
Incentive Plans," "Description of Capital Stock--Common Stock Warrants" and
Notes 6 and 13 of Notes to Consolidated Financial Statements.
(2) Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used in computing net income per share.
(4) As adjusted to reflect the sale by the Company of 6,250,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$9.00 per share and the application of the estimated net proceeds
therefrom, and the exercise of Common Stock Warrants having an aggregate
purchase price of $87,488 by the cancellation of Subordinated Secured
Promissory Notes in the aggregate principal amount of $8,661,320. See "Use
of Proceeds," "Description of Capital Stock--Common Stock Warrants" and
Notes 6 and 13 of Notes to Consolidated Financial Statements.
As used in this Prospectus, references to Interplay or the Company refer to
Interplay Entertainment Corp., a Delaware corporation, its California
predecessor, and its wholly and majority owned subsidiaries. Interplay(TM),
Interplay Productions(R), the Interplay logo(R), By Gamers. For Gamers.(TM),
and certain of the Company's product names and publishing labels referred to
herein are trademarks of the Company. This Prospectus also includes trademarks
of other companies.
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing shares of Common Stock offered by this
Prospectus. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The
cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below, as
well as those discussed elsewhere in this Prospectus.
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 resulting both from demand for
interactive entertainment software for PCs and video game consoles purchased
during the holidays and from continuing demand for titles released in the
preceding fourth 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 the 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
"Risk Factors," 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
5
<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 cancelled or which were
expected to achieve lower unit sales than were originally forecast, an
excessive reliance on development projects 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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, and the Company anticipates that it will experience
such delays 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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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 have accounted for
a substantial
6
<PAGE>
portion of revenues in the industry. Further, publishers with a history of
producing hit titles have enjoyed a significant marketing advantage because of
their heightened brand recognition and customer 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 agreements with the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Product Development."
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, 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 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.
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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'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 products. 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 on 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
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 sales 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.
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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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Products."
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 and 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, includingWal-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 margin than sales to retailers, this would have the effect
of lowering the Company's gross margin. In addition, this trend could increase
the Company's exposure to product returns and expose the Company to greater
risks, any of which could have a 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
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.
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 uncollectable
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.
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The Company is exposed to the risk of product returns and markdown
allowances with respect to its distributors and retailers. The Company allows
distributors and retailers to return defective, shelf-worn and damaged
products in accordance with negotiated terms, and also offers a 90-day limited
warranty to its end users that its products will be free from manufacturing
defects. In addition, the Company provides markdown allowances to its
customers to manage its customers' inventory levels in the distribution
channel. Although the Company maintains a reserve for returns and markdown
allowances, and although the Company's agreements with certain of its
customers place certain limits on product returns and markdown allowances, the
Company could be forced to accept substantial product returns and provide
markdown allowances to maintain its relationships with retailers and its
access to distribution channels. Product returns and markdown allowances that
exceed the Company's reserves could have a material adverse effect on the
Company's business, operating results and financial condition. In this regard,
the Company's results of operations for the 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 resulted in a higher than
expected level of product returns and markdown allowances and consequently
reduced net revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
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 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 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.
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 three months ended March 31, 1998, the eight months ended
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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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the continued
service of its 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 27.4%, 28.7%, 38.4% and 25.4% of
the Company's total net revenues in the three months ended March 31, 1998, the
eight months ended December 31, 1997 and the former fiscal years ended April
30, 1997 and 1996, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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,
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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 primarily 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 countries, 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. In addition, the intellectual property laws are less
clear with respect to such emerging technologies. 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 communication from third parties asserting that
features or content of certain of its products may infringe upon the
intellectual property rights 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. See
"Business--Intellectual Property and Proprietary Rights."
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
presentations consistent with each product's 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
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submits its products to industry-created review boards and publishes their
ratings on its game packaging, the Company believes that mandatory government-
run interactive 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 or 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, or 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 when 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. As a result, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
Year 2000 requirements. 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 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. There
can be no assurance that such upgrades will be provided on a timely basis or
will be free of errors. In addition, there can be no assurance that certain of
the Company's products or the Company's internal computer systems and networks
or those of its key vendors, developers and distributors will not be adversely
affected by Year 2000 issues, which could have a material adverse effect on
the Company's business, operating results and 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
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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 Offering. 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, will, in the aggregate, beneficially own approximately 59.4% of
the Company's outstanding Common Stock following the completion of the
Offering, assuming that the Underwriters' over-allotment option is not
exercised. 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. See "Principal
Stockholders." Certain directors, officers and other affiliates of the Company
will receive a material benefit as a result of the Offering. See "Use of
Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock, including Common Stock issued upon the exercise of
outstanding options, in the public market after the Offering could materially
adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity or equity-related
securities in the future at a time and price that the Company deems
acceptable, or at all. Upon the completion of the Offering, the Company will
have 18,591,728 shares of Common Stock outstanding. Of these shares, the
6,250,000 shares sold in the Offering (7,187,500 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Rule 144"). The remaining
12,341,728 shares of Common Stock held by existing stockholders (11,404,228
shares if the Underwriters' over-allotment option is exercised in full) are
"restricted securities," as that term is defined in Rule 144 and were issued
and sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act. These restricted shares may be sold in the
public market only if registered or pursuant to an exemption from
registration, such as Rule 144. Holders of an aggregate of 12,340,528 shares
of Common Stock following the Offering (11,043,028 shares if the Underwriters'
over-allotment option is exercised in full) and holders of options to purchase
an aggregate of 1,667,228 shares of Common Stock have agreed, pursuant to
certain lock-up agreements with the Representatives that they will not offer,
sell, contract to sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock owned by them or that could
be purchased by them through the exercise of options to purchase Common Stock
of the Company for a period of 180 days after the date of this Prospectus
without prior written consent of Piper Jaffray Inc. Such lock-up agreements
will not apply to the sale of Common Stock by the Selling Stockholder pursuant
to the exercise of the Underwriters' over-allotment option. Upon expiration of
the lock-up agreements, 10,974,249 shares held by existing stockholders
(10,036,749 shares if the Underwriters' over-allotment option is exercised in
full) will be eligible for sale subject to the volume and other restrictions
of Rule 144, and 1,361,279 shares will be eligible for sale without
restriction under Rule 144(k). As of the date hereof, 2,053,206 shares were
subject to outstanding options to purchase
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Common Stock, of which 1,667,228 shares are subject to the lock-up agreements
described above. Following completion of the Offering, holders of 11,719,813
shares (10,782,313 shares if the Underwriters' over-allotment option is
exercised in full) will be entitled to certain demand and piggyback
registration rights upon termination of lock-up agreements. Any exercise of
these registration rights could impair the Company's ability to raise capital
through the sale of its equity securities and, if such registered shares are
sold, could have a material adverse effect on the market price of the Common
Stock. See "Description of Capital Stock--Registration Rights" and "Shares
Eligible for Future Sale."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS
The Company expects to utilize the net proceeds from the Offering to repay
the outstanding portion of its bank line of credit, to repay certain
Subordinated Secured Promissory Notes, to repay an accrued bonus owed to an
officer and director of the Company and other amounts payable to certain
affiliates of the Company, to expand its sales and marketing activities, to
fund product development, and for working capital and general corporate
purposes. The Company may use a portion of the net proceeds for acquisitions
of complementary products, technologies or businesses. However, no commitments
or agreements with respect to any acquisition currently exist. The Company
currently is not able to estimate precisely the allocation of the proceeds
among such uses, and the timing and amount of expenditures will vary depending
upon numerous factors. The Company's management will have broad discretion to
allocate the net proceeds of the Offering and to determine the timing of
expenditures, and there can be no assurance that the net proceeds can or will
be invested to yield a significant return. See "Use of Proceeds," "Certain
Transactions--Transactions with Fargo and Universal" and "--Other
Transactions."
ANTI-TAKEOVER EFFECTS; DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS;
PREFERRED STOCK
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. See "Description of Capital Stock."
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offering will incur immediate and substantial net tangible
book value dilution of $5.79 per share, assuming an initial public offering
price of $9.00 per share. To the extent that options to purchase the Company's
Common Stock are exercised, there will be further dilution. In addition, the
Company may issue additional shares in connection with compensation of
employees, acquisitions of complementary products, technologies or businesses
or strategic relationships. To the extent that such pool is increased or
additional shares are issued, there will be additional dilution. See
"Dilution," "Capitalization" and "Description of Capital Stock."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,250,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$51,312,500 at an assumed initial public offering price of $9.00 per share and
after deducting the estimated underwriting discount and offering expenses. If
the Underwriters' over-allotment option is exercised, the Company will not
receive any proceeds from the sale of Common Stock by the Selling Stockholder.
The Company expects to use approximately $25.4 million of the net proceeds to
repay amounts outstanding under the Company's current bank line of credit,
which terminates in May 1999 and which bears interest at a rate per annum
equal to the London Interbank Offered Rate plus 4.87% (10.56% at March 31,
1998). In addition, the Company expects to use approximately $6.3 million of
the net proceeds to repay Subordinated Secured Promissory Notes, which bear
interest at the rate of 12% per annum and are payable upon the closing of the
Offering, and accrued interest thereon. See "Description of Capital Stock--
Common Stock Warrants." The Company expects to use approximately $1.5 million
of the net proceeds to pay certain amounts due to Universal Interactive
Studios under the terms of an existing distribution agreement. See "Certain
Transactions." The Company expects to use the remainder of the net proceeds of
the Offering for working capital and general corporate purposes, including
increasing the Company's product development and sales and marketing
activities. From time to time, the Company reviews possible strategic
acquisitions of businesses, products or technologies complementary to those of
the Company, and a portion of the net proceeds may also be used for such
acquisitions. The Company is not currently a party to any commitments or
agreements with respect to any acquisitions. Pending such uses, the Company
intends to invest the net proceeds of the Offering in short-term, interest
bearing, investment-grade securities.
DIVIDEND POLICY
The Company anticipates that all future earnings will be retained to finance
future growth, and the Company does not anticipate paying any dividends on its
Common Stock in the foreseeable future. The Company's bank line of credit
agreement currently restricts the Company from paying cash dividends without
the prior written consent of the bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
16
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company as of March 31, 1998
was $(328,000) or $(0.03) per share. "Net tangible book value (deficit) per
share" is determined by dividing the number of shares of Common Stock
outstanding into the net tangible book value of the Company (tangible assets
less liabilities). After giving effect to the Offering and use of net proceeds
described herein, and the exercise of certain Common Stock Warrants by the
cancellation of certain Subordinated Secured Promissory Notes, the pro forma
net tangible book value of the Company at March 31, 1998 would have been
approximately $59,646,000 or $3.21 per share based on an assumed initial
public offering price of $9.00 per share. This represents an immediate
increase in the net tangible book value of approximately $3.24 to present
stockholders and an immediate dilution of $5.79 per share to new investors
purchasing shares of Common Stock at the assumed initial public offering
price. The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share: $9.00
Net tangible book value (deficit) before the Offering...... $(0.03)
Increase resulting from the Offering....................... 3.24
------
Pro forma net tangible book value per share after the Offer-
ing......................................................... 3.21
-----
Dilution per share to new investors.......................... $5.79
=====
</TABLE>
The following table summarizes the difference between existing stockholders
and new investors with respect to the number of shares of Common Stock
purchased from the Company, the total cash consideration paid and the average
price paid per share (before deducting the estimated underwriting discount and
offering expenses):
<TABLE>
<CAPTION>
SHARES OF COMMON AVERAGE
STOCK PURCHASED TOTAL CONSIDERATION PRICE
------------------ ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)........ 12,341,728 66.4% $24,393,000 30.2% $1.98
New Investors................... 6,250,000 33.6 56,250,000 69.8 9.00
---------- ----- ----------- -----
Total......................... 18,591,728 100.0% $80,643,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Based on shares outstanding at March 31, 1998. Includes 1,388,700 shares
of Common Stock issuable upon the closing of the Offering upon the
exercise of Common Stock Warrants by the cancellation of Subordinated
Secured Promissory Notes at an exercise price of $6.30 per share (based on
an assumed initial public offering price of $9.00 per share). Excludes (i)
2,053,206 shares of Common Stock issuable upon exercise of stock options
outstanding at March 31, 1998, which had a weighted average exercise price
of $4.80 per share, (ii) 1,680,541 shares reserved for issuance pursuant
to future option grants under the Company's 1997 Stock Incentive Plan and
(iii) 200,000 shares of Common Stock reserved for issuance under the
Company's Employee Stock Purchase Plan. See "Management--Employee Benefit
Plans--Stock Incentive Plans," "Description of Capital Stock--Common Stock
Warrants" and Notes 6 and 13 of Notes to Consolidated Financial
Statements.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, and as adjusted to give effect to (i) the sale of 6,250,000 shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price of $9.00 per share and the application of the net proceeds
after deducting the estimated underwriting discount and offering expenses
payable by the Company, and (ii) the issuance of 1,388,700 shares of Common
Stock upon the closing of the Offering upon the exercise of Common Stock
Warrants at an exercise price of $6.30 per share by the cancellation of
Subordinated Secured Promissory Notes. This table should be read in
conjunction with "Use of Proceeds," "Selected Consolidated Financial
Information" and the Consolidated Financial Statements included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current Portion of Long-Term Debt......................... $ 14,825 $ 170
======== ========
Accrued Expenses.......................................... $ 22,231 $ 20,425
======== ========
Long-Term Debt:
Bank line of credit..................................... $ 23,800 $ --
Other long-term debt.................................... 55 55
-------- --------
Total long-term debt, net of current portion.......... 23,855 55
-------- --------
Stockholders' Equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding, actual
and as adjusted........................................ -- --
Common Stock, $.001 par value, 50,000,000 shares autho-
rized; 10,953,028 and 18,591,728 shares issued and out-
standing, actual and as adjusted(1).................... 11 19
Paid-in capital......................................... 18,494 78,460
Accumulated deficit..................................... (17,028) (17,028)
Cumulative translation adjustment....................... 192 192
-------- --------
Total stockholders' equity.............................. 1,669 61,643
-------- --------
Total capitalization (including long-term debt)......... $ 25,524 $ 61,698
======== ========
</TABLE>
- --------
(1) Based on shares outstanding at March 31, 1998. Includes 1,388,700 shares
of Common Stock issuable upon the closing of the Offering upon the
exercise of Common Stock Warrants by the cancellation of Subordinated
Secured Promissory Notes at an exercise price of $6.30 per share (based on
an assumed initial public offering price of $9.00 per share). Excludes (i)
2,053,206 shares of Common Stock issuable upon exercise of stock options
outstanding at such date, which had a weighted average exercise price of
$4.80 per share, (ii) 1,680,541 shares reserved for issuance pursuant to
future option grants under the Company's 1997 Stock Incentive Plan and
(iii) 200,000 shares of Common Stock reserved for issuance under the
Company's Employee Stock Purchase Plan. See "Management--Employee Benefit
Plans--Stock Incentive Plans" and "Description of Capital Stock--Common
Stock Warrants" and Notes 6 and 13 of Notes to Consolidated Financial
Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated statements of operations data for the former
fiscal years ended April 30, 1995, 1996 and 1997 and the eight months ended
December 31, 1997, and the selected consolidated balance sheets data as of
April 30, 1996 and 1997 and as of December 31, 1997 are derived from the
Company's audited consolidated financial statements included elsewhere in this
Prospectus. The selected consolidated statements of operations data for the
three months ended March 31, 1998 and 1997 and the consolidated balance sheets
data as of March 31, 1998 are unaudited and are derived from the Company's
consolidated financial statements included elsewhere in this Prospectus. The
selected consolidated statements of operations data for the years ended
April 30, 1993 and 1994, and the selected consolidated balance sheets data as
of April 30, 1993, 1994, and 1995 are derived from the Company's audited
consolidated financial statements not included in this Prospectus. The
selected consolidated statements of operations data for the eight months ended
December 31, 1996 is derived from the Company's unaudited consolidated
financial statements. The unaudited pro forma income (loss) per share is
derived from the unaudited pro forma data included elsewhere in this
Prospectus. The Company's historical results are not necessarily indicative of
the results that may be achieved for any other period. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED APRIL 30, DECEMBER 31, MARCH 31,
----------------------------------------- -------------------- --------------------
1993 1994 1995 1996 1997 1996 1997 1997 1998
------- ------- ------- ------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1):
Net revenues............ $25,355 $52,668 $79,546 $96,952 $ 83,262 $ 50,364 $ 85,961 $ 22,410 $ 40,996
Cost of goods sold...... 13,374 31,223 45,491 49,939 62,480 35,725 44,864 13,508 19,221
------- ------- ------- ------- -------- --------- -------- --------- ---------
Gross profit............ 11,981 21,445 34,055 47,013 20,782 14,639 41,097 8,902 21,775
------- ------- ------- ------- -------- --------- -------- --------- ---------
Operating expenses:
Marketing and sales.... 4,421 7,698 14,280 23,285 24,627 15,747 20,603 7,280 8,589
General and administra-
tive.................. 1,589 4,805 5,528 9,025 9,408 8,730 8,989 3,088 2,855
Product development.... 2,054 3,646 8,200 15,120 21,431 12,464 14,291 5,384 5,819
------- ------- ------- ------- -------- --------- -------- --------- ---------
Total operating ex-
penses................ 8,064 16,149 28,008 47,430 55,466 36,941 43,883 15,752 17,263
------- ------- ------- ------- -------- --------- -------- --------- ---------
Operating income
(loss)................. 3,917 5,296 6,047 (417) (34,684) (22,302) (2,786) (6,850) 4,512
Other income (expense).. 112 68 1,046 (807) (1,600) (1,085) (2,273) (375) (1,418)
------- ------- ------- ------- -------- --------- -------- --------- ---------
Income (loss) before in-
come taxes............. 4,029 5,364 7,093 (1,224) (36,284) (23,387) (5,059) (7,225) 3,094
Provision (benefit) for
income taxes........... 1,406 2,161 2,844 (480) (9,065) (5,918) -- (1,782) 245
------- ------- ------- ------- -------- --------- -------- --------- ---------
Net income (loss)....... $ 2,623 $ 3,203 $ 4,249 $ (744) $(27,219) $ (17,469) $ (5,059) $ (5,443) $ 2,849
======= ======= ======= ======= ======== ========= ======== ========= =========
Net income (loss) per
share(2):
Basic.................. $ 0.32 $ 0.37 $ 0.40 $ (0.07) $ (2.46) $ (1.58) $ (0.45) $ (0.49) $ 0.26
======= ======= ======= ======= ======== ========= ======== ========= =========
Diluted................ $ 0.29 $ 0.32 $ 0.35 $ (0.07) $ (2.46) $ (1.58) $ (0.45) $ (0.49) $ 0.23
======= ======= ======= ======= ======== ========= ======== ========= =========
Pro forma (unaudited).. $ (1.78) $ (0.17) $ 0.25
======== ======== =========
SELECTED OPERATING DATA:
Net revenues by segment:
North America.......... $19,436 $41,752 $51,892 $54,702 $ 38,606 $ 27,755 $ 51,833 $ 9,562 $ 23,516
International.......... 2,919 569 13,829 24,579 32,006 13,935 24,642 10,333 11,223
OEM, royalty and li-
censing............... 3,000 10,347 13,825 17,671 12,650 8,674 9,486 2,515 6,257
Net revenues by plat-
form:
Personal computer...... $14,978 $20,314 $36,804 $60,254 $ 45,192 $ 25,639 $ 42,520 $ 14,623 $ 21,191
Video game console..... 7,377 22,007 28,917 19,027 25,420 16,051 33,955 5,272 13,548
<CAPTION>
APRIL 30,
----------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 DECEMBER 31, 1997 1998
------- ------- ------- ------- -------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Working capital......... $ 5,546 $22,775 $25,227 $18,485 $ 7,890 $13,616 $17,442
Total assets............ 10,073 35,450 44,226 68,511 69,005 77,821 78,327
Total long-term debt
(including current por-
tion).................. 469 384 262 108 14,970 38,154 38,680
Stockholders' equity
(deficit).............. 5,953 25,053 30,069 30,195 3,401 (1,267) 1,669
</TABLE>
- --------
(1) Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31.
(2) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the number of shares used in computing net income (loss)
per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
International net revenues accounted for approximately 27.4%, 28.7%, 38.4% and
25.4% of the Company's net revenues during the three months ended March 31,
1998, the eight months ended December 31, 1997 and the former fiscal years
ended April 30, 1997 and April 30, 1996, respectively.
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 and through channels which are outside the Company's
primary focus. OEM, royalty and licensing net revenues accounted for 15.2%,
11.0% and 15.2% of the Company's total net revenues for the three months ended
March 31, 1998, the eight months ended December 31, 1997 and the former fiscal
year ended April 30, 1997, respectively. OEM, royalty and licensing net
revenues generally are incremental net revenues and do not have significant
additional product development or sales and marketing costs, and accordingly
have a more significant impact on the Company's operating results. 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 game console net revenues
represents the manufacturing and related costs of interactive entertainment
software products, including costs of media, manuals, duplication, packaging
materials, assembly, freight and royalties paid to developers, licensors and
hardware manufacturers. Cost of goods sold related to royalty-based net
revenues primarily represents third party licensing fees and royalties paid by
the Company. Typically, cost of goods sold as a percentage of net revenues for
video game console products
20
<PAGE>
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.
The Company's net loss for the former fiscal year ended April 30, 1997
increased to $27.2 million from $0.7 million in the comparable 1996 period.
The Company's results of operations for the former fiscal year ended April 30,
1997 were adversely affected by a number of factors, including 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 a sharp decline in the market for titles for the Macintosh and
Sega Saturn platforms, both of which resulted in a higher than expected level
of product returns and markdown allowances. According to PC Data, a market
research firm, from 1996 to 1997, the U.S. market for Macintosh titles
declined approximately 66% and Sega Saturn's share of the U.S. market for
interactive entertainment software declined from 14.9% to 9.3% during such
period, according to The TRST Report, published by NPD Group, a market
research firm. Operating results for the period were also negatively affected
by (i) 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 cancelled or which were expected to achieve lower unit sales than
were originally forecast, (ii) an excessive reliance on development projects
utilizing new technologies in the face of increasing development costs, (iii)
slower than expected growth in sales in the Japanese market, and
(iv) investments in new product lines in the sports and edutainment
categories. The Company has taken a number of steps to address these issues,
both strategically and operationally. During the second half of 1997, the
Company restructured its internal development organization into five
divisions, each of which is dedicated to the production and development of
products for a particular product category. The Company believes that this
divisional approach will enable the Company to better manage its internal and
external development processes and to obtain greater efficiency and
predictability in its product development process. The Company is also in the
process of restructuring its product development pipeline such that a
significant number of the products under development will be utilizing
existing core technologies or other game content in order to reduce the
development costs and development time for such products. In addition, in July
1997 the Company closed its Japanese office, and initiated a licensing
strategy in Japan in order to avoid the high costs of conducting operations
there. The Company also discontinued and absorbed the cost of approximately 20
Macintosh and Sega Saturn development projects, and, due to lower than
expected sales growth and intense competition in the edutainment product
category, the Company suspended its product development plans for its
edutainment product line. In March 1998, the Company granted a third party
exclusive distribution rights for certain titles in such product line.
Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31. Accordingly, the discussion of financial results set forth
below compares the eight months ending December 31, 1997 to the comparable
1996 period, and compares the Company's previous fiscal years ended April 30,
1997, 1996 and 1995.
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 securities
analysts or investors. See "Risk Factors--Fluctuations in Operating Results;
Uncertainty of Future Results; Seasonality."
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operations
data and segment and platform data for the periods indicated expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED APRIL 30, DECEMBER 31, MARCH 31,
----------------------- ------------------ ------------------
1995 1996 1997 1996 1997 1997 1998
------ ------ ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 57.2 51.5 75.0 70.9 52.2 60.3 46.9
------ ------ ------ --------- --------- --------- ---------
Gross profit........ 42.8 48.5 25.0 29.1 47.8 39.7 53.1
------ ------ ------ --------- --------- --------- ---------
Operating expenses:
Marketing and sales... 18.0 24.0 29.6 31.3 24.0 32.5 21.0
General and adminis-
trative.............. 6.9 9.3 11.3 17.3 10.5 13.8 7.0
Product development... 10.3 15.6 25.7 24.8 16.6 24.0 14.2
------ ------ ------ --------- --------- --------- ---------
Total operating ex-
penses............. 35.2 48.9 66.6 73.4 51.1 70.3 42.2
------ ------ ------ --------- --------- --------- ---------
Operating income
(loss)................. 7.6 (0.4) (41.6) (44.3) (3.3) (30.6) 10.9
Other income (expense).. 1.3 (0.9) (1.9) (2.2) (2.6) (1.7) (3.4)
------ ------ ------ --------- --------- --------- ---------
Income (loss) before in-
come taxes............. 8.9 (1.3) (43.5) (46.5) (5.9) (32.3) 7.5
Provision (benefit) for
income taxes........... 3.6 (0.5) (10.9) (11.8) -- (8.0) 0.6
------ ------ ------ --------- --------- --------- ---------
Net income (loss)... 5.3% (0.8)% (32.6)% (34.7)% (5.9)% (24.3)% 6.9%
====== ====== ====== ========= ========= ========= =========
SELECTED OPERATING DATA:
Net revenues by segment:
North America......... 65.2% 56.4% 46.4% 55.1% 60.3% 42.7% 57.4%
International......... 17.4 25.4 38.4 27.7 28.7 46.1 27.4
OEM, royalty and li-
censing.............. 17.4 18.2 15.2 17.2 11.0 11.2 15.2
------ ------ ------ --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ========= ========= ========= =========
Net revenues by plat-
form:
Personal computer..... 46.3% 62.2% 54.3% 50.9% 49.5% 65.3% 51.7%
Video game console.... 36.3 19.6 30.5 31.9 39.5 23.5 33.1
OEM, royalty and li-
censing.............. 17.4 18.2 15.2 17.2 11.0 11.2 15.2
------ ------ ------ --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Net Revenues
Net revenues for the three months ended March 31, 1998 increased 82.9% to
$41.0 million from $22.4 million in the comparable 1997 period. North American
net revenues increased to $23.5 million from $9.6 million in the 1997 period,
and international net revenues increased to $11.2 million from $10.3 million
in the 1997 period. The increase in net revenues in the 1998 period was
primarily due to increased title releases and unit sales volumes, including
significant new video game console title releases, such as VR Sports Powerboat
Racing and Die By The Sword and a higher than expected level of product
returns and markdowns recorded during the 1997 period. OEM, royalty and
licensing net revenues increased to $6.3 million, or 15.2% of net revenues, in
the 1998 period from $2.5 million, or 11.2% of net revenues, in the 1997
period, primarily attributable to increased OEM bundling transactions and
licensing revenues on edutainment products. 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.
22
<PAGE>
Cost of Goods Sold; Gross Margin
Cost of goods sold increased 42.3% in the three months ended March 31, 1998
to $19.2 million, or 46.9% of net revenues, from $13.5 million, or 60.3% of
net revenues in the comparable 1997 period. Gross margin increased to 53.1% of
net revenues from 39.7% of net revenues in the 1997 period. The increase in
gross margin was primarily attributable to lower costs of PC product sales
offset in part by greater manufacturing costs attributable to an increased
number of video game console products sold during the 1998 period. The
improvement in gross margin was also attributable to changes in the product
mix of internally and externally developed products, reductions in costs of
increased affiliate product revenues and increased OEM, royalty and licensing
net revenues. The 1997 period also included the effects of additional write-
offs of prepaid royalties relating to titles or platform versions of titles
which had been cancelled or which were expected to achieve lower unit sales
than were originally anticipated.
Operating Expenses
Total operating expenses increased 9.6% to $17.3 million, or 42.2% of net
revenues, in the three months ended March 31, 1998 from $15.8 million, or
70.3% 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 18.0% to $8.6 million, or 21.0% of net
revenues, for the three months ended March 31, 1998 from $7.3 million, or
32.5% of net revenues for the comparable 1997 period. The increase in absolute
dollars was primarily attributable to increased advertising and other
marketing costs associated with the increase in 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
expense 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 March 31, 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 7.5% to $2.9 million, or 7.0% of net revenues, in the three months
ended March 31, 1998 from $3.1 million, or 13.8% 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 revenue 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 8.1% to $5.8 million, or 14.2% of net
revenues, in the three month period ended March 31, 1998 from $5.4 million or
24.0% 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) primarily includes 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
23
<PAGE>
March 31, 1998 from $0.4 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, which were issued from
October 1996 through February 1997 and were outstanding throughout the 1998
period.
Provision (Benefit) for Income Taxes
The Company recorded a tax provision of $0.2 million in the three months
ended March 31, 1998 compared to a tax benefit of $1.8 million for the
comparable 1997 period. No tax benefit was recorded in the 1998 period due to
the uncertainty of realization in future periods.
EIGHT MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1996
Net Revenues
Net revenues for the eight months ended December 31, 1997 increased 70.7% to
$86.0 million from $50.4 million in the comparable 1996 period. North American
net revenues increased to $51.8 million from $27.8 million in the 1996 period,
and international net revenues increased to $24.6 million from $13.9 million
in the 1996 period. The increase in net revenues in the 1997 period was
primarily due to increased title releases across multiple platforms in the
eight months ended December 31, 1997 as compared with the eight months ended
December 31, 1996, including significant video game console title releases,
such as Clay Fighter and Star Trek: Starfleet Academy, in the calendar fourth
quarter of 1997, and a higher than expected level of product returns and
markdowns recorded during the 1996 period. OEM, royalty and licensing net
revenues decreased to 11.0% of net revenues in the 1997 period from 17.2% in
the 1996 period.
Cost of Goods Sold; Gross Margin
Cost of goods sold increased 25.6% in the eight months ended December 31,
1997 to $44.9 million, or 52.2% of net revenues, from $35.7 million, or 70.9%
of net revenues, in the comparable 1996 period. Gross margin increased to
47.8% in the 1997 period from 29.1% in the 1996 period. The increase in gross
margin was primarily due to reductions in sales by the Company on an affiliate
label basis of titles published by third parties, reductions in OEM royalty
expenses as a percentage of net revenues, and changes in the product mix of
externally developed products released during the periods, offset in part by
greater manufacturing costs attributable to an increased number of video game
console products released during the 1997 period. The 1996 period also
included the effects of additional write-offs of prepaid royalties relating to
titles or platform versions of titles which had been cancelled or which were
expected to achieve lower unit sales than were originally forecast.
Operating Expenses
Total operating expenses increased 18.8% to $43.9 million, or 51.1% of net
revenues, in the eight months ended December 31, 1997 from $36.9 million, or
73.4% of net revenues, for the comparable 1996 period.
Marketing and Sales. Marketing and sales expenses increased 30.8% to $20.6
million, or 24.0% of net revenues, for the eight months ended December 31,
1997 from $15.7 million, or 31.3% of net revenues, for the comparable 1996
period. The increase in absolute dollars was primarily due to advertising and
other marketing costs associated with the increase in products launched during
the period. The decrease as a percentage of net revenues was primarily
attributable to operating efficiencies gained as a result of an increased net
revenues base.
General and Administrative. General and administrative expenses increased
3.0% to $9.0 million, or 10.5% of net revenues, in the eight months ended
December 31, 1997 from $8.7 million, or 17.3% of net revenues, in the
comparable 1996 period. The increase in absolute dollars was primarily
attributable to increased personnel and operations and facilities costs both
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.
24
<PAGE>
Product Development. Product development expenses increased 14.7% to
$14.3 million, or 16.6% of net revenues, in the eight months ended December
31, 1997 from $12.5 million, or 24.8% of net revenues, in the comparable 1996
period. The increase in absolute dollars was primarily due to the addition of
personnel in the Company's product development group, an increase in the
number of products under development and the initiation of European and OEM
product development in the 1997 period. The decrease as a percentage of net
revenues primarily reflected operating efficiencies gained as a result of
increased net revenues.
Other Income (Expense)
Other expense increased to $2.3 million in the eight months ended December
31, 1997 from $1.1 million in the comparable 1996 period. This increase was
primarily due to increased borrowings under the Company's line of credit to
support increased working capital requirements in the 1997 period and interest
on the Subordinated Secured Promissory Notes, which were issued from October
1996 through February 1997 and were outstanding throughout the 1997 period.
Provision (Benefit) for Income Taxes
The Company recorded no tax provision in the eight months ended December 31,
1997, compared to a tax benefit of $5.9 million in the comparable 1996 period.
No tax benefit was recorded in the 1997 period due to the uncertainty of
realization in future periods.
YEAR ENDED APRIL 30, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Net Revenues
Net revenues in the year ended April 30, 1997 decreased 14.1% to $83.3
million from $97.0 million in the comparable 1996 period. North American net
revenues decreased to $38.6 million in the 1997 period from $54.7 million in
the 1996 period and international net revenues increased to $32.0 million in
the 1997 period from $24.6 million in the 1996 period. OEM, royalty and
licensing net revenues accounted for 15.2% of total net revenues for the 1997
period, compared to 18.2% for the 1996 period. The decrease in net revenues
for the 1997 period was primarily due to a decreased number of title releases
resulting from certain product delays across multiple platforms, lower unit
sales of the titles released during the period and a higher than expected
level of product returns and markdowns recorded during the period.
Cost of Goods Sold; Gross Margin
Cost of goods sold increased 25.1% to $62.5 million, or 75.0% of net
revenues, in the year ended April 30, 1997 from $49.9 million, or 51.5% of net
revenues, in the comparable 1996 period. Gross margin decreased to 25.0% in
the 1997 period from 48.5% in the 1996 period. The decrease in gross margin in
the 1997 period was primarily due to an increase in royalty expenses
attributable to the write-off of $5.9 million in prepaid royalties relating to
titles or platform versions of titles which had been cancelled or which were
expected to achieve lower unit sales than originally forecast, increased sales
of video game console titles and affiliate label products and disproportionate
returns and markdowns in the 1997 period, offset in part by increased OEM
volumes.
Operating Expenses
Total operating expenses increased 16.9% to $55.5 million, or 66.6% of net
revenues, in the year ended April 30, 1997 from $47.4 million, or 48.9% of net
revenues, in the comparable 1996 period.
Marketing and Sales. Marketing and sales expenses increased 5.8% to $24.6
million, or 29.6% of net revenues, in the 1997 period from $23.3 million, or
24.0% of net revenues, in the 1996 period. The increase in absolute dollars
was primarily due to increased commissions expense on European sales offset in
part by lower marketing and advertising expenses due to a decrease in titles
released during the period.
25
<PAGE>
General and Administrative. General and administrative expenses increased
4.2% to $9.4 million, or 11.3% of net revenues, in the 1997 period from $9.0
million, or 9.3% of net revenues, in the 1996 period. The increase in absolute
dollars was primarily attributable to increased personnel and facilities costs
in North America, Europe and Japan.
Product Development. Product development expenses increased 41.7% to $21.4
million, or 25.7% of net revenues, in the 1997 period from $15.1 million, or
15.6% of net revenues, in the 1996 period. The increase in absolute dollars
was primarily attributable to an increase in the number of products under
development, the inclusion of a full year of operations of Shiny, an
interactive entertainment software developer in which the Company acquired a
91% interest in 1995, localization and development costs in Japan, initiation
of European and OEM product development and increased product development
personnel and facilities costs.
Other Income (Expense)
Other expense increased to $1.6 million in the 1997 period from $0.8 million
in the 1996 period. The increase was primarily due to interest expense related
to borrowings under the Company's bank line of credit to support increased
working capital requirements and interest on the Subordinated Secured
Promissory Notes which were issued from October 1996 through February 1997.
Provision (Benefit) for Income Taxes
The Company's income tax benefit in the 1997 period was $9.1 million,
compared to an income tax benefit of $0.5 million in the 1996 period. The
benefit for income taxes as a percentage of pre-tax income declined from 39.2%
to 25.0% due to the recording of a valuation allowance of $2.9 million in the
1997 period.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Net Revenues
Net revenues in the year ended April 30, 1996 increased 21.9% to $97.0
million from $79.5 million in the comparable 1995 period. North American net
revenues increased to $54.7 million and international net revenues increased
to $24.6 million in the 1996 period from $51.9 million and $13.8 million,
respectively, in the 1995 period. OEM, royalty and licensing net revenues were
18.2% of net revenues for the 1996 period, compared to 17.4% for the 1995
period. The increase in net revenues in the 1996 period was primarily due to
an increase in the number of title releases across multiple platforms with
increased individual title successes, including Stonekeep and Descent II,
which resulted in increased international net revenues, particularly in
Europe, and increased net revenues from retailers and resellers. The increase
was also due to increases in OEM, royalty and licensing net revenues. These
increases were offset in part by reduced affiliate label sales and increased
product returns and markdowns.
Cost of Goods Sold; Gross Margin
Cost of goods sold increased 9.8% to $49.9 million, or 51.5% of net
revenues, in the year ended April 30, 1996 from $45.5 million, or 57.2% of net
revenues, in the comparable 1995 period. Gross margin was 48.5% in the 1996
period, as compared to 42.8% in the 1995 period. The increase in gross margin
was primarily attributable to the increase in overall product sales, a product
mix emphasizing higher margin PC titles and reductions in affiliate label net
revenues.
Operating Expenses
Total operating expenses increased 69.3% to $47.4 million, or 48.9% of net
revenues, in the year ended April 30, 1996 from $28.0 million, or 35.2% of net
revenues, in the comparable 1995 period.
Marketing and Sales. Marketing and sales expenses increased 63.1% to $23.3
million, or 24.0% of net revenues, in the 1996 period from $14.3 million, or
18.0% of net revenues, in the comparable 1995 period. The
26
<PAGE>
increase for the 1996 period both in absolute dollars and as a percentage of
net revenues was primarily attributable to increased advertising and marketing
costs in support of increased product releases, promotional programs,
commissions on international sales and personnel and overhead.
General and Administrative. General and administrative expenses increased
63.3% to $9.0 million, or 9.3% of net revenues, in the 1996 period from $5.5
million, or 6.9% of net revenues in the 1995 period. The increase in both
absolute dollars and as a percentage of net revenues was primarily
attributable to increased personnel and operating and facilities costs in
North America, Europe and Japan.
Product Development. Product development expenses increased 84.4% to $15.1
million, or 15.6% of net revenues, in the 1996 period from $8.2 million, or
10.3% of net revenues, in the 1995 period. The increase in product development
expenses in both absolute dollars and as a percentage of net revenues was
primarily attributable to an increase in the number and complexity of products
in development, the expansion of the Company's internal development
capabilities (including the acquisition of Shiny), the initiation of
localization and development in Japan and increased facilities costs and
overhead requirements.
Other Income (Expense)
Other expense increased $1.8 million to $0.8 million in the year ended April
30, 1996, compared to other income of $1.0 million in the comparable 1995
period. The increase was primarily due to interest expense in the 1996 period
related to borrowings under the Company's bank line of credit to support
operations, while the Company earned income on cash balances during the 1995
period.
Provision (Benefit) for Income Taxes
The Company's income tax benefit in the year ended April 30, 1996 was $0.5
million, compared to an income tax provision of $2.8 million in the comparable
1995 period.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data for each of the eight calendar quarters in the period ended
March 31, 1998, as well as the percentage of the Company's net revenues
represented by each item. This information was derived from the Company's
unaudited consolidated financial statements that include, in the opinion of
the Company, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation when read in conjunction with the
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............ $18,574 $13,669 $29,038 $22,410 $20,502 $23,833 $53,308 $40,996
Cost of goods sold...... 10,210 10,459 20,952 13,508 13,941 14,153 26,751 19,221
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,364 3,210 8,086 8,902 6,561 9,680 26,557 21,775
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Marketing and sales.... 4,898 4,744 8,052 7,280 5,954 5,851 9,358 8,589
General and administra-
tive.................. 3,311 2,766 3,395 3,088 4,014 2,948 3,453 2,855
Product development.... 4,353 4,648 4,851 5,384 5,920 5,312 5,701 5,819
------- ------- ------- ------- ------- ------- ------- -------
Total operating ex-
penses................ 12,562 12,158 16,298 15,752 15,888 14,111 18,512 17,263
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. (4,198) (8,948) (8,212) (6,850) (9,327) (4,431) 8,045 4,512
Other income (expense).. (260) (294) (875) (375) (663) (1,050) (1,552) (1,418)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before in-
come taxes............. (4,458) (9,242) (9,087) (7,225) (9,990) (5,481) 6,493 3,094
Provision (benefit) for
income taxes........... (1,739) (2,311) (2,272) (1,782) 0 0 0 245
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(2,719) $(6,931) $(6,815) $(5,443) $(9,990) $(5,481) $ 6,493 $ 2,849
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share:
Basic.................. $ (0.25) $ (0.62) $ (0.61) $ (0.49) $ (0.90) $ (0.49) $ 0.65 $ 0.26
======= ======= ======= ======= ======= ======= ======= =======
Diluted................ $ (0.25) $ (0.62) $ (0.61) $ (0.49) $ (0.90) $ (0.49) $ 0.54 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF NET REVE-
NUES:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 55.0 76.5 72.2 60.3 68.0 59.4 50.2 46.9
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 45.0 23.5 27.8 39.7 32.0 40.6 49.8 53.1
Operating expenses:
Marketing and sales.... 26.4 34.7 27.7 32.5 29.0 24.5 17.6 21.0
General and administra-
tive.................. 17.8 20.2 11.7 13.8 19.6 12.4 6.5 7.0
Product development.... 23.4 34.0 16.7 24.0 28.9 22.3 10.7 14.2
----- ----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses................ 67.6 88.9 56.1 70.3 77.5 59.2 34.8 42.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss)................. (22.6) (65.4) (28.3) (30.6) (45.5) (18.6) 15.0 10.9
Other income (expense).. (1.4) (2.2) (3.0) (1.7) (3.2) (4.4) (2.9) (3.4)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before in-
come taxes............. (24.0) (67.6) (31.3) (32.3) (48.7) (23.0) 12.1 7.5
Provision (benefit) for
income taxes........... (9.4) (16.9) (7.8) (8.0) 0.0 0.0 0.0 0.6
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (14.6)% (50.7)% (23.5)% (24.3)% (48.7)% (23.0)% 12.1% 6.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Net revenues for the three months ended December 31, 1997 and March 31, 1998
were $53.3 million and $41.0 million, respectively. The increase for such
three month periods reflected the market's seasonality, together with the
Company's successful introduction of a number of new product titles. Net
revenues of $18.6 million, $13.7 million and $29.0 million for the three
months ended June 30, 1996, September 30, 1996 and December 31, 1996,
respectively, reflected lower net revenues arising from product delays during
those periods and the resulting introduction of fewer titles than in other
periods and a higher than expected level of product returns and markdown
allowances.
28
<PAGE>
Cost of goods sold for the three month periods ended September 30, 1996,
December 31, 1996, March 31, 1997 and June 30, 1997 included the effects of
additional write-offs of prepaid royalties relating to titles or platform
versions of titles which had been cancelled or which were expected to achieve
lower unit sales than were originally forecast, which, combined with the lower
net revenues, resulted in lower gross margin during such periods.
Interest expense has increased on a comparative basis over the periods
presented, reflecting debt service on the Company's $14.7 million in
Subordinated Secured Promissory Notes issued from October 1996 through
February 1997 together with increased borrowings on the Company's bank line of
credit.
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 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 generally highly
seasonal, with the highest levels of consumer demand occurring during the
year-end holiday buying season, followed by demand during the calendar first
quarter resulting both from demand for interactive entertainment software for
PC's and video game consoles acquired during the holidays and from continuing
demand for titles released in the preceding fourth 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 these levels in the 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 throughout the year, particularly during the quarters ending June 30 and
September 30, 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 "Risk Factors," 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. See "Risk Factors--Fluctuations in Operating Results;
Uncertainty of Future Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through the use of
bank lines of credit and equipment leases, and through cash generated by the
sale of securities. As of March 31, 1998, the Company's principal sources of
liquidity included cash and short term investments of approximately $1.9
million and the
29
<PAGE>
Company's bank line of credit bearing interest at the London Interbank Offered
Rate plus 4.87% (10.56% at March 31, 1998), expiring May 31, 1999. The
Company's bank line of credit balance was $23.8 million at March 31, 1998.
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, based in part on
qualifying receivables and inventory. Within the overall credit limit of
$35.0 million is the Company's ability to draw down up to $10.0 million in
excess of its borrowing base through August 30, 1998, and up to $5.0 million
in excess of its borrowing base through December 30, 1998. 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 $0.2 million during the three
months ended March 31, 1998, used cash of $15.3 million during the eight
months ended December 31, 1997, used cash of $17.0 million during the year
ended April 30, 1997, provided cash of $2.5 million in the year ended April
30, 1996 and used cash of $8.7 million in the year ended April 30, 1995. The
cash used by operating activities in the three months ended March 31, 1998 was
primarily attributable to increased trade receivables, offset in part by net
income during the period and increased accounts payable and accrued expenses.
The cash used by operating activities in the eight months ended December 31,
1997 was primarily attributable to increased trade receivables, particularly
in the year-end holiday selling season, together with a net loss of $5.1
million. The increase in cash used by operating activities in the year ended
April 30, 1997 was primarily due to a net loss of $27.2 million, offset in
part by increased liabilities and accrued expenses. Cash provided by
operations in the year ended April 30, 1996 primarily resulted from increases
in liabilities, and the use of operating cash in the year ended April 30, 1995
primarily resulted from increased royalty advances and receivables, offset by
net income during the period.
Cash provided by financing activities of $0.9 million in the three months
ended March 31, 1998 and $12.2 million in the eight months ended December 31,
1997, resulted primarily from borrowings under the Company's bank line of
credit. Cash provided by financing activities of $20.7 million in the year
ended April 30, 1997, resulted primarily from the issuance of Subordinated
Secured Promissory Notes and borrowings under the Company's bank line of
credit. Cash provided by financing activities of $5.5 million in the year
ended April 30, 1996, resulted primarily from borrowings under the Company's
bank line of credit, and cash provided by financing activities of $0.6 million
in the year ended April 30, 1995 resulted primarily from a tax benefit due to
the exercise of stock options.
Cash used in investing activities was $0.3 million, $0.8 million and $3.5
million in the three months ended March 31, 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997, respectively, which
consisted of capital expenditures, primarily for office and computer equipment
used in Company operations. Cash used in investing activities of $7.5 million
in the year ended April 30, 1996 resulted primarily from $4.6 million in
capital expenditures and $3.2 million used in the acquisition of Shiny
Entertainment. Cash provided by investing activities of $11.7 million in the
year ended April 30, 1995 resulted primarily from $15.0 million in proceeds
from the sale of marketable securities, offset in part by $3.3 million in
capital expenditures. The Company does not currently have any material
commitments with respect to any capital expenditures.
The Company expects that its capital requirements will increase
significantly in the future as it increases its product development and sales
and marketing programs. The Company believes that funds available under its
bank line of credit, the net proceeds from the 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 for at least the next twelve months. See "Use of Proceeds."
There can be no assurances, however, 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. See "Risk Factors--Future
Capital Requirements."
30
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." In addition, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" and SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SFAS Nos. 130 and
131 and SOP 97-2 are effective for fiscal years beginning after December 15,
1997. SOP 98-1 is effective for fiscal years beginning after December 15,
1998. The Company does not believe that adoption of these standards will have
a material impact on the Company's results of operations.
YEAR 2000 ISSUE
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 continues to
assess the impact of the Year 2000 issue on its reporting systems and
operations.
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 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 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. See "Risk Factors--Year 2000
Compliance."
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BUSINESS
Interplay is a leading developer, publisher and distributor of interactive
entertainment software for both core gamers and the mass market. The Company,
which commenced operations in 1983, is most widely known for its titles in the
action/arcade, adventure/RPG, strategy/puzzle and sports categories, and has
published such hit titles as Descent, Fallout, Stonekeep, Battle Chess and
Virtual Pool. The Company has produced titles for many of the most popular
interactive entertainment software platforms, and currently balances its
development efforts by publishing interactive entertainment software for PCs
and current generation video game consoles, such as the PlayStation and
Nintendo 64. Interplay was named Publisher of the Year in 1996 by Computer &
Net Player magazine.
The Company seeks to publish interactive entertainment software titles that
are, or have the potential to become, franchise software titles that can be
leveraged across several releases and/or platforms, and has published many
such successful franchise titles to date. In addition, the Company secures
licenses to use popular intellectual properties, such as Star Trek, Caesars
Palace and Major League Baseball, for incorporation into certain of its
products. Of the more than 40 titles currently in development by the Company,
more than half are sequels to successful titles or incorporate licensed
intellectual properties.
INDUSTRY BACKGROUND
The worldwide market for interactive entertainment software has grown
significantly in recent years. According to IDG, the worldwide market for
interactive entertainment software generated sales of more than 220 million
retail units in 1997, and is projected to generate more than 437 million
retail units in 1999, representing a 41% compound annual growth rate. The
interactive entertainment software market is composed primarily of software
for PC platforms and video game consoles.
This market growth has been driven by the significant growth in the
worldwide installed base of PCs and video game consoles, the emergence of a
strong international market for interactive entertainment software,
particularly in Western Europe, and the emergence of powerful software
distribution channels capable of reaching a broad consumer base.
According to IDG, U.S. retail sales of PC interactive entertainment software
exceeded 45 million units in 1997 and are projected to grow 27% annually to
more than 73 million units in 1999. Also, according to IDG, approximately 43
million units of interactive entertainment software for PlayStation and
Nintendo 64 video game consoles were sold in the U.S. in 1997, and these unit
sales are expected to grow 56% annually to approximately 106 million in 1999.
The international market for PC interactive entertainment software is
growing rapidly as well. According to IDG, international sales of interactive
entertainment software for PCs were 53 million units in 1997 and are projected
to grow 27% annually to 85 million units in 1999. Similarly, growth in the
video game console installed base outside of the U.S. has driven an increase
in international sales of interactive entertainment software for video game
consoles, with 77 million units sold outside of the U.S. in 1997 and 171
million units projected to be sold in 1999, representing a compound annual
growth rate of 48%, according to IDG.
The distribution channels for interactive entertainment software have
changed significantly in recent years and have become increasingly
competitive. During the 1980s, consumer software was typically sold through
specialty stores. Today, mass merchants and consumer electronics stores such
as Wal-Mart, Best Buy, Price-Costco, Kmart, CompUSA and Target are the most
important distribution channels for retail sales of consumer software.
Competition for shelf space has intensified due to the fact that these high
volume retailers generally only stock a limited number of titles which are
expected to sell large numbers of units. This trend has increased the
importance of developing well-known brands and publishing labels with a
history of successful sales.
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Today, a limited number of titles capture a majority of the sales in the
interactive entertainment software market. According to PC Data, in 1997 the
top 100 PC titles released (approximately nine percent of the titles released)
generated 67% of the industry's overall revenues. This hit-driven market has
led to higher production budgets for titles as well as more complex
development and production processes and longer development cycles. Publishers
with a history of producing hit titles have enjoyed a significant marketing
advantage because of their heightened brand recognition and customer loyalty.
The importance of the timely release of hit titles, as well as the increased
scope and complexity of the product development and production process, have
increased the need for disciplined product development processes that limit
cost and schedule overruns. This in turn has increased the importance of
leveraging the technologies, characters or storylines of such hit titles into
additional interactive entertainment software products in order to spread
development costs among multiple products.
The Internet and on-line services represent an emerging segment of the
interactive entertainment software market. While competing with interactive
entertainment software as an alternative use of the home PC, the Internet and
on-line services also present a new platform on which publishers and
distributors can market, advertise and distribute their products, whether
through direct sales from web sites or through sponsoring multi-player on-line
tournaments featuring their games. The ability for users to compete on-line
provides an additional product feature which may increase demand for
interactive entertainment software products.
As interactive entertainment software continues to gain mass market
acceptance, it will become increasingly important for publishers of such
software (i) to achieve brand name recognition for their products among both
core gamers and the mass market by offering innovative products with
captivating gameplay across multiple platforms, (ii) to secure relationships
with third party interactive entertainment software developers with proven
track records of developing hit titles, (iii) to identify and address the
technical, creative and marketing risks before committing significant
development resources to a title, (iv) to aggressively market and sell these
products through traditional and emerging distribution channels and (v) to
leverage their existing software technology, and the brand recognition
associated with it, by producing sequel and add-on titles.
BUSINESS STRATEGY
The Company's objective is to enhance its position as a leading developer,
publisher and distributor of interactive entertainment software for both core
gamers and the mass market. The key elements of the Company's business
strategy are as follows:
Maximize Franchise and Brand Value. The Company seeks to publish hit titles
whose strong consumer appeal and resulting consumer loyalty create franchise
titles for the Company. Further, the Company seeks to leverage its franchise
titles into recurring sources of revenue by publishing sequels and add-ons and
by pursuing merchandising opportunities as they arise. To date, the Company
has published many successful franchise titles, including Descent, Virtual
Pool, Clay Fighter and Stonekeep, and believes that many of its products
slated for release in 1998 may become additional franchise titles. In
addition, the Company has developed or is developing products based on popular
intellectual properties licensed to the Company, such as Star Trek, Caesars
Palace and Major League Baseball. The Company believes that the exposure and
name recognition of these properties, combined with well-designed gameplay,
may create franchise titles for the Company. The Company currently publishes
titles under the Interplay, Shiny, VR Sports and Signature Series labels. To
create franchise value within specific product genres, the Company plans to
introduce genre-specific labels over time, including its Tantrum, Tribal
Dreams, Flat Cat and Black Isle Studios labels.
Secure Relationships with Proven Hit Developers. In order to maintain its
competitive position in its hit-driven industry, the Company devotes
significant resources to securing relationships with third party interactive
entertainment software developers with proven track records of developing hit
titles. The Company believes that its developer-friendly culture, distribution
capability and success as a publisher of well-known titles has enabled it to
attract and retain proven hit developers. Relationships such as these have led
to the release of such franchise titles as the Descent series, Virtual Pool
and Redneck Rampage. In furtherance of this strategy, in 1995 the Company
acquired a 91% interest in Shiny Entertainment, Inc. ("Shiny"), the developer
of the hit Earthworm Jim title.
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Manage Product Development Process. In order to limit cost and schedule
overruns while maintaining a creative and entrepreneurial environment for its
development group, the Company has implemented a divisional product
development and production process, based on product genres. The Company
believes that breaking down the development function into divisions enables it
to improve its software design capabilities, to better manage its internal and
external development processes and to enhance its software development tools
and techniques, thereby allowing for greater efficiency and improved
predictability in the software development process.
Leverage and Expand Distribution Channels. The Company seeks to leverage and
expand its channels of distribution in order to reach a larger number of
consumers in the retail, direct, budget and on-line markets, both domestically
and internationally. The Company has also established Interplay OEM, which
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. In 1995, the Company
established a European subsidiary ("Interplay Europe") to focus on
distribution to the European markets, both directly and through third-party
distributors and joint ventures. The Company also plans to increase its
presence in other international markets by licensing its titles to publishers
in such markets, by entering into distribution arrangements and by
establishing direct distribution capabilities. Finally, the Company seeks to
leverage and expand its capabilities to distribute its products over the
Internet both through direct on-line marketing and sales efforts and through
the use of certain of its games by providers of on-line gameplay who
distribute through popular on-line services, such as America Online.
Develop and Leverage Advanced Technology. The Company seeks to leverage its
investments in existing game technologies while internally and externally
developing new technologies which can be used in multiple future titles. The
Company develops proprietary engines, development tools and related technology
which enable it to develop advanced 3D games on a timely and cost-effective
basis and with reduced technology risk. For example, the Company is
incorporating the advanced proprietary human motion and depth perception
technology developed by Shiny into certain of the Company's sports titles.
PRODUCTS
The Company develops, publishes and distributes interactive entertainment
software titles that provide immersive game experiences by combining advanced
technology with engaging content, vivid graphics and rich sound. The Company
utilizes the experience and judgment of the avid gamers in its product
development group to select and produce the products it publishes. This has
resulted in the publication of a wide variety of games that have received
numerous awards, including the Academy of Interactive Arts & Sciences' Best
Title, Computer Game Review's Gold and Platinum Triads and PC Entertainment's
Editor's Choice Awards.
The Company's strategy is to develop products for those platforms, whether
PC or video game console, that have or will have sufficient installed bases
for such development to be economically viable. The Company currently
publishes products for multiple PC platforms, including Windows 95, and for
the current generation of video game consoles, including the PlayStation and
Nintendo 64. The Company assesses the potential acceptance and success of
emerging platforms and the anticipated continued viability of existing
platforms based on many factors, including the number of competing titles, the
ratio of software sales to hardware sales with respect to such platform, the
installed base of the platform, the change in the rate of sales of the
platform and the cost and timing of development for the platform. The Company
has entered into license agreements with Sony Computer Entertainment and
Nintendo pursuant to which the Company is granted the right to develop,
sublicense and distribute products for such platforms in specified
territories, which products are manufactured by the licensor for the Company.
The Company pays the licensor a royalty and/or manufacturing fee in exchange
for such license and manufacturing services. Such agreements grant the
licensor certain approval rights over the products developed for such
platforms, as well as over the packaging and marketing materials for such
products. There can be no assurance that the Company will be able to obtain
future licenses from hardware companies on acceptable terms or that any
existing or future licenses will be renewed by the licensors. 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. See "Risk
Factors--Dependence on Licenses from and Manufacturing by Hardware Companies."
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The interactive entertainment software market can generally be divided into
five major categories or product genres: action/arcade, adventure/RPG,
strategy/puzzle, sports and simulation. From January 1, 1995 to March 31,
1998, the Company released 65 titles, and currently has more than 40 titles in
various stages of development. Below are two tables, the first highlighting
selected Company releases since 1995 which the Company believes are, or will
become, franchise titles, and the second listing selected titles currently
scheduled for release in the next twelve months which are either sequels to
franchise titles or which the Company believes present franchise title
opportunities.
SELECTED TITLES RELEASED SINCE 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TITLE GENRE PLATFORM DEVELOPER
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Carmageddon Action/Arcade PC Third party
- -------------------------------------------------------------------------------
Clay Fighter 63 1/3 Action/Arcade N64 Interplay
- -------------------------------------------------------------------------------
Descent Action/Arcade PC, PlayStation, Mac Third party
- -------------------------------------------------------------------------------
Descent II Action/Arcade PC, PlayStation, Mac Third party
- -------------------------------------------------------------------------------
Die By the Sword Action/Arcade PC Third party
- -------------------------------------------------------------------------------
MDK Action/Arcade PC, PlayStation Shiny
- -------------------------------------------------------------------------------
Redneck Rampage Action/Arcade PC Third party
- -------------------------------------------------------------------------------
Star Trek: Starfleet Academy Action/Arcade PC, Mac Interplay
- -------------------------------------------------------------------------------
Fallout Adventure/RPG PC, Mac Interplay
- -------------------------------------------------------------------------------
Stonekeep Adventure/RPG PC Interplay
- -------------------------------------------------------------------------------
Caesars Palace Strategy/Puzzle PC, PlayStation Third party
- -------------------------------------------------------------------------------
M.A.X. Strategy/Puzzle PC Interplay
- -------------------------------------------------------------------------------
Jimmy Johnson's VR Football
'98 Sports PlayStation Third party
- -------------------------------------------------------------------------------
Virtual Pool Sports PC, PlayStation, Mac Third party
- -------------------------------------------------------------------------------
Virtual Pool 2 Sports PC Third party
- -------------------------------------------------------------------------------
VR Baseball '97 Sports PC, PlayStation Interplay
- -------------------------------------------------------------------------------
VR Sports Powerboat Racing Sports PC, PlayStation Third party
<CAPTION>
SELECTED TITLES SCHEDULED TO BE RELEASED IN THE NEXT TWELVE MONTHS
- --------------------------------------------------------------------------------
TITLE GENRE PLATFORM DEVELOPER
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Crime Killer Action/Arcade PlayStation Third party
- -------------------------------------------------------------------------------
Descent III Action/Arcade PC Third party
- -------------------------------------------------------------------------------
Descent: Freespace The Great
War Action/Arcade PC Third party
- -------------------------------------------------------------------------------
Earthworm Jim 3D Action/Arcade PC, PlayStation, N64 Third party
- -------------------------------------------------------------------------------
Messiah Action/Arcade PC, PlayStation Shiny
- -------------------------------------------------------------------------------
Wild 9 Action/Arcade PlayStation Shiny
- -------------------------------------------------------------------------------
Redneck Rampage Rides Again Action/Arcade PC Third party
- -------------------------------------------------------------------------------
Baldur's Gate Adventure/RPG PC Third party
- -------------------------------------------------------------------------------
Fallout 2 Adventure/RPG PC Interplay
- -------------------------------------------------------------------------------
Star Trek: Secret of Vulcan
Fury Adventure/RPG PC Interplay
- -------------------------------------------------------------------------------
Caesars Palace VIP Series Strategy/Puzzle PC Third party
- -------------------------------------------------------------------------------
M.A.X. 2 Strategy/Puzzle PC Interplay
- -------------------------------------------------------------------------------
VR Football '99 Sports PlayStation Third party
- -------------------------------------------------------------------------------
VR Baseball '99 Sports PC, PlayStation Interplay
</TABLE>
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Although the Company anticipates that it will release the titles listed in
the table immediately above in the next twelve months, 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 can typically range from 12 to 24 months,
and there can be no assurance that such titles will be released in the next
twelve months or at all. There also can be no assurance that, if introduced,
such new titles will become franchise titles, achieve market acceptance or
generate any significant revenues. While the level of sales required for a
title to be profitable varies depending on the costs associated with such
title, in general, the Company considers titles to be hit titles if they sell
more than 100,000 units. A significant delay in the introduction of, or the
presence of a defect in, one or more of such titles or other new products, or
the failure of one or more of such titles to generate significant net
revenues, could have a material adverse effect on the success of such products
and on the Company's business, operating results and financial condition. See
"Risk Factors--Dependence on New Product Introductions; Risk of Product Delays
and Product Defects" and "--Uncertainty of Market Acceptance; Dependence on
Hit Titles."
The Company has the right to distribute certain of the titles listed in the
above tables only in specified territories. For example, the Company only has
the right to distribute Carmageddon in North America. In addition, the
Company's right to distribute certain of its sports titles, such as VR
Baseball '99, in a given international territory varies depending upon the
relevant sports league's approvals obtained by the Company.
As part of its strategy to develop franchises, the Company has recently
adopted a separate publishing label for each of its five major product
categories: Tantrum, for the action/arcade division; Tribal Dreams, for the
adventure division; Black Isle Studios, for the RPG division; Flat Cat, for
the strategy/puzzle division, and VR Sports, for the sports division. The
Company also releases titles under the Shiny label. The length of time
required to attract consumer awareness of each of these product labels will
vary based on a number of factors, including the number of commercially
successful titles released by the particular development group. Below is a
partial summary of the Company's internally and externally developed titles
that have been released previously or are being developed for release in the
next twelve months in the various product categories.
TANTRUM--ACTION/ARCADE TITLES
The Descent Series. Developed by Parallax and originally published in
February 1995, Descent and its sequel have sold more than 1.1 million retail
units worldwide. Descent has also earned critical acclaim, winning Best
Computer Game of 1995 and Best Title of 1995 from the Academy of Interactive
Arts and Sciences and Golden Triad honors from Computer Game Review. Descent:
FreeSpace The Great War, which Parallax is currently developing for release in
1998, will be a 3D space simulator featuring large-scale dog-fights and huge
capital ships as "landscapes" for the environments, and includes an on-line,
multi-player option which allows up to 12 users to join a game. Parallax is
also currently developing Descent III, which incorporates a new advanced
proprietary engine, for release by the Company in the next twelve months.
Star Trek: Starfleet Academy. Developed internally by the Company and based
on Paramount's original Star Trek television and motion picture series, Star
Trek: Starfleet Academy combines real-time 3D action with strategic game play.
The game includes full motion video of actors, including three members of the
original cast, William Shatner as Captain Kirk, Walter Koenig as Ensign Chekov
and George Takei as Lieutenant Sulu. Released in September 1997, the game has
sold in excess of 350,000 retail units worldwide.
Die By The Sword. Developed for the Company by Treyarch Invention, Die By
The Sword includes advanced technology that allows full motion control of the
game's characters, which engage in hand-to-hand combat. The proprietary
graphics engine includes a four person multi-player mode and allows players to
attack and defend themselves in a 360(degrees) environment featuring realistic
combat graphics and gameplay.
TRIBAL DREAMS--ADVENTURE TITLES
Star Trek: Secret of Vulcan Fury (under development). Star Trek: Secret of
Vulcan Fury is the third in a series of original Star Trek adventure games
developed internally by the Company. The game is expected to combine
proprietary motion-capture animation technology with original Star Trek
episodes written by one of the
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original Star Trek television writers. The game will feature the voices of
certain members of the original cast, challenging story-based puzzles and the
opportunity for players to assume the roles of six Star Trek characters:
Captain Kirk, Mr. Spock, Doctor McCoy, Lieutenant Sulu, Ensign Chekov and
Chief Engineer Scott.
BLACK ISLE STUDIOS--RPG TITLES
Stonekeep. The Company internally developed Stonekeep, an RPG that takes
place in a subterranean labyrinth and features 3D rendered dungeons and
creatures, a rich soundtrack and vivid special effects. Stonekeep has sold in
excess of 300,000 retail units worldwide since its release in November 1995.
Stonekeep was named Best RPG of 1995 by Computer Player and Editor's Choice
for Best RPG by PC Entertainment. The Company is currently developing a sequel
to Stonekeep.
Fallout 2 (under development). The Company is currently developing Fallout 2
as the sequel to Fallout: A Post Nuclear Role Playing Game, an RPG set in the
aftermath of a catastrophic nuclear war, which has sold in excess of 100,000
retail units worldwide since its release in October 1997. The original Fallout
won numerous industry awards including the Editor's Choice Award and RPG of
the Year 1997 by PC Gamer and the CG Choice Award and RPG of the Year 1997 by
Computer Gaming World. Fallout 2 will combine the original Fallout's gameplay
with new scenarios and characters.
FLAT CAT--STRATEGY/PUZZLE TITLES
M.A.X. Mechanized Assault & Exploration ("M.A.X."). Developed internally by
the Company, M.A.X., which allows players to lead a modern military unit into
various combat scenarios, has sold in excess of 150,000 retail units worldwide
since its release in January 1997. M.A.X. includes both real-time and turn-
based strategy elements. The Company is currently developing M.A.X. 2, which
will include three gameplay modes including real-time gameplay, simultaneous
turn-based gameplay and classic turn-based gameplay.
The Caesars Palace VIP Series. The Company is internally developing a series
of simulated gambling products based on its license to use the Caesars Palace
brand. The Company is releasing Caesars Palace VIP Series, which will include
individual products for blackjack, craps and video poker, each of which
include casino sound effects, official tutorials and authenticated odds. In
1997 the Company released Caesars Palace for the PC and PlayStation.
VR SPORTS--SPORTS TITLES
VR Baseball. Developed internally by the Company, VR Baseball '97 is
licensed by the Major League Baseball Players Association and Major League
Baseball Properties, Inc. and delivers real-time, 360(degrees), 3D
professional baseball that allows players to view and play from any angle or
position. VR Baseball '97 has sold more than 100,000 retail units worldwide
since its release in March 1997. The Company is currently developing VR
Baseball '99, which will incorporate the advanced proprietary human motion and
depth perception technology developed by Shiny.
Virtual Pool. Developed by Celeris, Virtual Pool, the Company's first sports
title, is a realistic billiards simulation that has sold more than 250,000
retail units worldwide and has won a number of awards, including Best
Simulation of 1995 from the Academy of Interactive Arts & Sciences, Best
Sports Game of 1995 from PC Gamer magazine and Best VR Game of 1995 from
Computer Player magazine. The Company has also published Celeris' Virtual
Snooker and Virtual Pool 2 titles.
VR Sports Powerboat Racing. Developed by East Point for the PC and
PlayStation, VR Sports Powerboat Racing allows the user to race powerboats on
up to eight different watertracks against computer opponents or up to eight
Internet or networked players. The player's perspective can be either from the
driver's seat or from behind the boat, and races can take place during the day
or at night.
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<PAGE>
SHINY
Shiny development teams have created games in the action/arcade and
adventure categories. Shiny titles include the following:
MDK. MDK, a futuristic 3D fighting game released in March 1997, was the
first title released by Shiny after its acquisition by Interplay in 1995 and
has sold in excess of 400,000 retail units worldwide. The game was published
by Shiny and Interplay internationally and by Playmates Interactive
Entertainment, Inc. in North America. The Company is currently developing a
sequel to MDK for which it will have worldwide distribution rights.
Messiah (under development). Messiah will be a surrealistic 3D action game
centered on the player's ability to invade the bodies of game characters and
take possession of their actions. The game includes advanced proprietary human
motion and depth perception technology that creates realistic skin texture and
movement. Though still under development, the game has received significant
market exposure, including an appearance on the cover of Next Generation
magazine.
PRODUCT DEVELOPMENT
The Company develops or acquires its products from a variety of sources,
including its five internal development divisions, Shiny, Interplay Europe and
publishing relationships with leading independent developers.
The Development Process. The Company develops original products both
internally, using its in-house development staff, and externally, using third
party software developers working under contract with the Company. Producers
on the Company's internal staff monitor the work of both inside and third
party development teams through design review, progress evaluation, milestone
review and quality assurance. In particular, each milestone submission is
thoroughly evaluated by the Company's product development staff to ensure
compliance with the product's design specifications. The Company enters into
consulting or development agreements with third party developers which are
generally on a flat-fee, work-for-hire basis or on a royalty basis, whereby
advances are paid based on the achievement of milestones. In royalty
arrangements, the Company ultimately pays continuation royalties to developers
once the Company's advances have been recouped. In addition, in certain cases,
the Company will utilize third party developers to port products to new
platforms.
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 existing products. The
development cycle of new products is difficult to predict, and involves a
number of risks. See "Risk Factors--Dependence on New Product Introductions;
Risk of Product Delays and Product Defects."
INTERNAL PRODUCT DEVELOPMENT
U.S. Product Development. The Company's U.S. internal product development
group (excluding Shiny's development group) presently consists of
approximately 250 people. Once a design is selected by the Company, a
production team, development schedule and budget are established. The
Company's internal development process includes initial design and concept
layout, computer graphic design, 2D and 3D artwork, programming, prototype
testing, sound engineering and quality control. The development process for an
original, internally developed product typically takes from 12 to 24 months,
and another six to 12 months for the porting of a product to a different
technology platform. The Company utilizes a variety of advanced hardware and
software development tools, including animation, sound compression utilities,
clay modeling and video compression for the production and development of its
interactive entertainment software titles. The Company recently restructured
its internal development organization into five divisions, each dedicated to
the production and
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development of products for a particular product category. Within each
division, development teams are assigned to a particular project. These teams
are generally led by a producer or associate producer and include game
designers, software programmers, artists, product managers and sound
technicians. The Company believes that this divisional approach promotes the
creative and entrepreneurial environment necessary to develop innovative and
successful titles. In addition, the Company believes that breaking down the
development function into divisions enables it to improve its software design
capabilities, to better manage its internal and external development processes
and to create and enhance its software development tools and techniques,
thereby enabling the Company to obtain greater efficiency and improved
predictability in the software development process.
Shiny. In 1995, in order to supplement its development capabilities and to
obtain innovative software development talent, particularly in the development
of software for video game consoles, the Company acquired a 91% interest in
Shiny. Prior to the acquisition, David Perry, Shiny's President and founder,
produced a number of highly successful interactive entertainment software
titles, including CoolSpot, Aladdin, Earthworm Jim and Earthworm Jim II. Shiny
recently completed MDK and currently has three original titles under
development including Wild 9 and Messiah, which will be distributed worldwide
by the Company under the Shiny label. Shiny's development group presently
consists of approximately 25 people.
International Development. The Company is building international development
resources through Interplay Europe, whose software producers manage the
efforts of local third party developers in European countries. Historically,
the Company's international product development efforts have consisted
primarily of the localization of existing Company products. The Company
currently has several original products, including Earthworm Jim 3D and Crime
Killer, under development through Interplay Europe. Interplay Europe's
development group presently consists of approximately 20 people.
EXTERNAL PRODUCT DEVELOPMENT
In order to expand its product offerings to include hit titles created by
third party developers, and to leverage its sales and distribution
capabilities, the Company enters into publishing arrangements with third party
developers, including foreign developers and publishers who wish to utilize
the Company's sales and distribution network in North America. In the eight
months ended December 31, 1997, nine of the Company's 17 new products released
were developed by third party developers. In the three months ended March 31,
1998, six of the Company's seven new products released were developed by third
party developers. The Company expects that the proportion of its new products
which are developed externally may vary significantly from period to period as
different products are released. The Company's focus in obtaining publishing
products is to select titles that combine advanced technologies with creative
game design. The publishing agreements usually provide the Company with the
exclusive right to distribute a product on a worldwide basis (however, in
certain instances the agreement provides for a specified territory). The
Company typically funds external development through the payment of advances
upon the completion of milestones, which advances are credited against
royalties based on sales of the products. Further, the Company's publishing
arrangements typically provide the Company with ownership of the trademarks
relating to the product as well as exclusive rights to sequels to the product.
The Company manages the production of external development projects by
appointing a producer from one of its internal product development divisions
to oversee the product's development and work with the third party developer
to design, develop and test the game. The Company believes this strategy of
cultivating relationships with talented third party developers, such as the
developers of Descent and TombRaider, provides an excellent source of quality
products, and a number of the Company's commercially successful products have
been developed under this strategy. However, the Company's reliance on third
party software developers for the development of a significant number of its
interactive software entertainment products involves a number of risks. See
"Risk Factors--Dependence on Third Party Software Developers."
SALES AND DISTRIBUTION
The Company's sales and distribution efforts are designed to broaden product
distribution and to increase the penetration of the Company's products in
domestic and international markets. The Company supplements its
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direct distribution efforts in North America with third party distributors and
affiliate label relationships. Over the past several years, the Company has
increased its sales and distribution efforts in international markets through
the formation of Interplay Europe and through licensing and third party
distribution strategies elsewhere. The Company also distributes its software
products through Interplay OEM in bundling transactions with hardware and
peripheral companies and through on-line services.
North America. In North America, the Company sells its products primarily to
mass merchants, warehouse club stores, large computer and software specialty
retail chains and through catalogs. A majority of the Company's North American
retail sales are to direct accounts, and a lesser percentage are to third
party distributors. The Company's principal direct retail accounts include
CompUSA, Best Buy, Electronics Boutique, Toys "R" Us, Wal-Mart and Kmart. The
Company's principal distributors in North America include GT Interactive,
Ingram Micro, Beam Scope and Merisel. The Company also distributes product
catalogs and related promotional material to end-users who can order products
by direct mail, by using a toll-free number, or by accessing the Company's web
site. See "Risk Factors--Dependence on Distribution Channels; Risk of Customer
Business Failures; Product Returns."
The Company sells to retailers and distributors through its North American
sales organization. The Company's North American sales force is largely
responsible for generating retail demand for the Company's products by
presenting new products to the Company's retail customers in advance of the
products' scheduled release dates, by providing technical advice with respect
to the Company's products and by working closely with retailers and
distributors to sell the Company's products. The Company typically ships its
products within a short period of time after acceptance of purchase orders
from distributors and other customers. Accordingly, the Company typically does
not have a material backlog of unfilled orders, and net sales in any quarter
are substantially dependent on orders booked in that quarter. Any significant
weakening in customer demand would therefore have a material adverse impact on
the Company's operating results and on the Company's ability to maintain
profitability. See "Risk Factors--Fluctuations in Operating Results;
Uncertainty of Future Results; Seasonality."
The Company seeks to extend the life cycle and financial return of many of
its products by marketing those products differently along the product's sales
life. Although the product life cycle for each title varies based on a number
of factors, including the quality of the title, the number and quality of
competing titles, and in certain instances seasonality, the Company typically
considers a title as "back catalog" six months after its initial release. The
Company utilizes marketing programs appropriate for the particular title,
which generally include progressive price reductions over time to increase the
product's longevity in the retail channel as the Company shifts its
advertising support to newer releases. The Company introduced its Signature
Series product line in 1996 to market its older titles in the under $15.00
price category.
The Company has acquired the right to distribute certain products on an
affiliate label basis whereby it distributes products that are produced and
published by a third party and are marketed under the third party's name with
the package bearing a notation that the product is being distributed by the
Company. The Company's focus in obtaining affiliate label products is to
select titles that complement the Company's product families. Products that
are distributed through the Company's affiliate label program are generally
purchased directly from the third party and sold based on a distribution mark-
up. These products generally have a lower gross margin than internally and
externally developed products.
The Company provides terms of sale comparable to competitors in its
industry. In addition, the Company provides technical support in North America
for its products through its customer support department and a 90-day limited
warranty to end-users that its products will be free from manufacturing
defects. While to date the Company has not experienced any material warranty
claims, there can be no assurance that the Company will not experience
material warranty claims in the future. See "Risk Factors--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."
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International. The Company, through Interplay Europe, employs approximately
15 persons dedicated to sales to the European market. Interplay Europe
maintains relationships with distributors and retailers throughout the
continent. For example, Interplay Europe has entered into an agreement with
Infogrames U.K. and Virgin Interactive Entertainment Limited to pool resources
in order to distribute PC and video game console software to independent
software retailers in the United Kingdom, and has entered into distribution
agreements with Acclaim Entertainment pursuant to which Acclaim Entertainment
distributes certain of the Company's titles in selected European countries.
Net revenues from such distribution agreements with Acclaim Entertainment
represented 6.5%, 7.4%, 14.9% and 7.0% of the Company's net revenues in the
three months ended March 31, 1998, the eight months ended December 31, 1997
and the Company's former fiscal years ended April 30, 1997 and 1996,
respectively. In addition, Interplay Europe manages sales and distribution
efforts in Central and Eastern Europe, the Near East, the Middle East, and
Africa. The Company seeks to localize its products for the various
international markets and intends to release localized versions of many of its
products simultaneously with the commercial release of these titles in North
America.
The Company has built a distribution capability in certain of the developed
markets in Asia and the Americas utilizing third party distribution
arrangements for specified products and platforms. In 1995 the Company
established operations in Japan in order to expand its Japanese sales. In July
1997, the Company initiated a licensing strategy in Japan and terminated its
operations there. For example, the Company recently licensed a number of its
titles to Sony Computer Entertainment to publish in Japan on the PlayStation.
The Company has recently entered into an agreement with Electronic Arts Pty.
Ltd. pursuant to which Electronic Arts has the exclusive right to market and
distribute the Company's PC products in Australia and New Zealand, and an
agreement with Roadshow Entertainment Pty. Ltd., pursuant to which Roadshow
Entertainment Pty. Ltd. has the exclusive right to market and distribute the
Company's video game console products in those countries.
OEM. Interplay OEM employs approximately 20 people focused on the
distribution of interactive entertainment software in bundling transactions to
hardware and peripheral companies. Under these arrangements, one or more
software titles, which are typically limited feature versions of the retail
version of a game, are bundled with hardware or peripheral devices and are
sold by the OEM so that the purchaser of the hardware device obtains the
software on a discounted basis as part of the hardware purchase. In addition,
Interplay OEM has established a development capability in order to create
modified versions of titles which support its customers' technologies.
Although it is customary for OEM customers to pay the Company a lower per unit
price on sales through OEM bundling arrangements, such arrangements typically
involve a high unit volume commitment to the Company. OEM net revenues
generally are incremental net revenues and do not have significant additional
product development or sales and marketing costs, and accordingly have a more
significant impact on the Company's operating results. There can be no
assurance, however, that OEM sales will continue to generate consistent
profits for the Company, and a decrease in OEM sales or margins could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition to distributing the Company's titles,
Interplay OEM serves as the exclusive OEM distributor for a number of
interactive entertainment software publishers, including LucasArts
Entertainment Company, Microprose (Spectrum Holobyte) and Sales Curve
Interactive Ltd. Interplay OEM's hardware customers include many of the
industry's largest computer and peripheral manufacturers including IBM,
Hewlett-Packard, Compaq, Apple Computer, NEC, Diamond Multimedia, Packard
Bell, Creative Labs and Rockwell. The Company currently devotes seven
employees to modifying existing Company products into suitable OEM products.
On-Line Services. The Company has entered into an agreement with Games On-
Line, Inc., doing business as Engage Games Online ("Engage"), an Internet/on-
line games and entertainment company, pursuant to which Engage modifies the
Company's games to enable them to be offered as multi-player games on on-line
services, such as America Online, and through a number of Internet access
providers. Engage performs certain services which include modifying the
Company's games, managing the on-line game site and chat areas and organizing
activities and tournaments to promote the games. The agreement obligates
Engage to pay the Company royalty fees based upon the revenue generated by the
Company's games through subscriber fees, player use fees, advertising revenue,
bounty fees and transaction fees. See "Certain Transactions--Engage
Transactions."
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The Company's North American and international distribution channels 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. The Company is exposed to the risk of product returns
and markdown allowances with respect to its distributors and retailers. The
Company allows distributors and retailers to return defective, shelf-worn and
damaged products in accordance with negotiated terms, and also offers a 90-day
limited warranty to its end users that its products will be free from
manufacturing defects. In addition, the Company provides markdown allowances
to its customers to help manage its customers' inventory levels in the
distribution channel. Although the Company maintains a reserve for returns and
markdown allowances, and although the Company's agreements with certain of its
customers place certain limits on product returns and markdown allowances, the
Company could be forced to accept substantial product returns and provide
markdown allowances to maintain its relationships with retailers and its
access to distribution channels. Product returns and markdown allowances that
exceed the Company's reserves could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Dependence on Distribution Channels; Risk of Customer Business
Failures; Product Returns."
MARKETING
The Company's marketing department is organized into five product groups,
mirroring the Company's five product development groups, to promote a focused
marketing strategy and brand image for each product group. In addition, the
marketing department has three functional groups (public relations, creative
services and direct sales) that support the five product groups.
The Company's marketing department develops and implements marketing
programs and campaigns for each of the Company's titles and product groups.
The Company's marketing activities in preparation for a product launch include
print advertising, game reviews in consumer and trade publications, retail in-
store promotions, attendance at trade shows and public relations. The Company
sends direct and electronic mail promotional materials to its large database
of gamers. The Company has also selectively used radio advertisements in
connection with the introduction of certain of its products. The Company
budgets a portion of each product's sales for cooperative advertising and
market development funds with retailers. Every title and brand is launched
with a multi-tiered marketing campaign that is developed on an individual
basis to promote product awareness and customer pre-orders. The Company
anticipates that over time, as the market for its products matures and
competition becomes more intense, it will become necessary to devote more
resources to marketing its products and the marketing costs for its products
will increase accordingly.
The Company uses on-line marketing primarily through the maintenance of
several web sites. These sites provide news and information of interest to its
customers through free demonstration versions, contests, games, tournaments
and promotions. Also, to generate interest in new product introductions, the
Company provides free demonstration versions of upcoming titles both through
magazine cover mounts and through game samples that consumers can download
from the Company's web site.
COMPETITION
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and
software products. 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
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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 on 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
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 sales 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.
See "Risk Factors--Industry Competition; Competition for Shelf Space."
MANUFACTURING
The Company's PC-based products consist primarily of CD-ROMs, user manuals
and packaging. Substantially all of the Company's CD-ROM duplication is
performed by unaffiliated third parties. Printing of the user manual and
packaging, manufacturing of related materials and assembly of completed
packages are performed to the Company's specifications by unaffiliated third
parties. To date, the Company has not experienced any material difficulties or
delays in the manufacture and assembly of its CD-ROM-based products, and has
not experienced significant returns due to manufacturing defects.
Sony Computer Entertainment and Nintendo manufacture the Company's products
that are compatible with their respective video game consoles, as well as the
manuals and packaging for such products, and ship finished products to the
Company for distribution. PlayStation 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 manufactured software products, its net sales and operating
results could be materially adversely affected. Furthermore, the long
manufacturing cycle associated with video game cartridges requires that the
Company forecast retailer and consumer demands for its manufactured titles
further in advance of shipment than for PC-based products or PlayStation CD-
ROMs. See "Risk Factors--Dependence on Licenses from and Manufacturing by
Hardware Companies."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company holds copyrights on its products, product literature and
advertising and other materials, and holds trademark rights in the Company's
name, the Interplay logo, its "By Gamers. For Gamers.(TM)" slogan and certain
of its product names and publishing labels. The Company does not currently
hold any patents. The Company has licensed certain products to third parties
for distribution in particular geographic markets or for particular platforms,
and receives royalties on such licenses. The Company also outsources some of
its product development to third party developers, contractually retaining all
intellectual property rights related to such
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projects. The Company also licenses certain products developed by third
parties and pays royalties on such products. See "--Product Development."
The Company regards its software as proprietary and relies primarily 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 countries, 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. In addition, the intellectual property laws are less
clear with respect to such emerging technologies. 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 software products in the interactive entertainment software
industry increases and the features and content of these products further
overlap, interactive entertainment 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 communication
from third parties asserting that features or content of certain of its
products may infringe upon the intellectual property rights 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. See "Risk Factors--Protection of Proprietary
Rights."
EMPLOYEES
As of March 31, 1998, the Company had 501 full time employees, including 296
in product development, 120 in sales and marketing and 85 in finance, general
and administrative. This includes 33 full time employees of Shiny, 20 full
time employees of Interplay OEM and 47 full time employees of Interplay
Europe. The Company also retains independent contractors to provide certain
services, primarily in connection with its product development activities. The
Company and its full time employees are not subject to any collective
bargaining agreements and the Company believes that its relations with its
employees are good.
From time to time the Company has retained actors and/or "voice over" talent
to perform in certain of the Company's products, and the Company expects to
continue this practice in the future. These performers are typically members
of the Screen Actors Guild ("SAG") or other performers' guilds, which guilds
have established collective bargaining agreements governing their members'
participation in interactive media projects. The Company or an affiliated
entity may be required to become subject to the jurisdiction of SAG's
collective bargaining agreement, or some other applicable performers guild,
with respect to the Company's development projects in the future in order to
engage the services of performers in the development of the Company's
products.
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FACILITIES
The Company's headquarters are located in Irvine, California, where the
Company leases approximately 101,325 square feet of office space. This lease
expires in June 2006 and provides the Company with one five year option to
extend the term of the lease and expansion rights, on an "as available basis,"
to approximately double the size of the office space. Interplay Europe leases
approximately 10,000 square feet of space in Buckinghamshire, England. This
lease expires, at Interplay Europe's option, either in November 2000 or in
November 2005. Shiny leases approximately 4,100 square feet of space in Laguna
Beach, California, which lease expires in October 1998 and which provides
Shiny with an option to extend the term for an additional five years. The
Company believes that its facilities are adequate for its current needs and
that suitable additional or substitute space will be available in the future
to accommodate expansion of the Company's operations.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Prospectus, the Company is not a party to any legal proceedings, the
final outcome of which, in management's opinion, individually or in aggregate,
would have a material adverse effect on the Company's business, operating
results or financial condition.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES
The following table sets forth certain information regarding the Company's
directors and executive officers and certain significant employees, and their
ages as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Brian Fargo............. 35 Chairman of the Board of Directors and Chief Executive Officer
Christopher J. Kilpa-
trick.................. 41 President and Director
Richard S.F. Lehrberg... 50 Executive Vice President and Director
James C. Wilson......... 48 Chief Financial Officer
Steven "Chuck" Camps.... 38 Chief Operating Officer and Assistant Secretary
Phillip G. Adam......... 44 Vice President of Business Development
Kim Motika.............. 37 Vice President of Sales
Patricia J. Wright...... 37 Vice President of Development
Keven F. Baxter......... 38 Vice President of Corporate Affairs and General Counsel
Peter A. Bilotta........ 43 President of Interplay Productions Limited
Jill S. Goldworn........ 34 President of Interplay OEM, Inc.
David Perry............. 30 President of Shiny Entertainment, Inc.
David R. Dukes(1)(2).... 53 Director
Charles S. Paul(2)...... 48 Director
Mark Pinkerton(1)....... 37 Director
Paul A. Rioux(1)(2)..... 52 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Brian Fargo, Chairman of the Company's Board of Directors, founded the
Company in 1983 and has served as the Company's chief executive officer since
that time. Prior to June 1995, Mr. Fargo also served as the Company's
President. Mr. Fargo also currently serves as a member of the Board of
Directors of the Interactive Digital Software Association.
Christopher J. Kilpatrick has served as President of the Company since June
1995, and served as Vice President and General Counsel of the Company from May
1994 to May 1995. From June 1990 to May 1994 Mr. Kilpatrick was a shareholder
and member of Stradling Yocca Carlson & Rauth, counsel to the Company, and was
a shareholder of such firm until September 1997. Mr. Kilpatrick currently
serves as a director of several privately-held companies, including Masimo
Corporation, a manufacturer of medical devices.
Richard S.F. Lehrberg joined the Company as Vice President in November 1991
and has served as Executive Vice President of the Company since October 1994.
Mr. Lehrberg served as a director of the Company since April 1989. Prior to
joining the Company, from December 1988 to November 1991, Mr. Lehrberg served
as President of Lehrberg Associates, an international licensing company. From
August 1982 to November 1988, Mr. Lehrberg was employed by Activision, Inc.,
an interactive entertainment software publisher, in various positions,
including Vice President and General Manager of the Entertainment Division.
James C. Wilson joined the Company in August 1997 and has served as Chief
Financial Officer of the Company since October 1997. Prior to joining the
Company, from January 1996 to August 1997, Mr. Wilson served as Chief
Financial Officer, Treasurer and Vice President of Administration of Cloud 9
Interactive Inc., a publisher and developer of educational and entertainment
multi-media products. Between October 1993 and December 1995, Mr. Wilson
served as Vice President--Finance and Chief Financial Officer of Applause
Enterprises Inc., a worldwide distributor of gifts and toys. Between February
1992 and October 1993, Mr. Wilson served as a Finance Executive for Sega of
America, a video game system manufacturer.
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Steven "Chuck" Camps joined the Company in February 1993 and has served as
Chief Operating Officer of the Company since June 1995 and as Assistant
Secretary since October 1994. Mr. Camps served as Chief Financial Officer of
the Company from February 1993 through October 1997. Mr. Camps served as a
consultant to the Company from October 1992 to February 1993. Prior to
consulting for the Company, Mr. Camps served as Chief Financial Officer of
Pratt Industries (USA), Inc., a manufacturing and finance company. Prior to
July 1987, Mr. Camps served as a Manager at Arthur Andersen & Co., a worldwide
accounting firm.
Phillip G. Adam joined the Company as Vice President of Sales and Marketing
in December 1990 and has served as Vice President of Business Development of
the Company since October 1994. Prior to joining the Company, from January
1984 to December 1990, Mr. Adam served as President of Spectrum Holobyte, an
interactive entertainment software publisher, where he was a co-founder. From
May 1990 to May 1996, Mr. Adam served as the Chairman or a member of the Board
of Directors of the Software Publishers Association and, during part of such
period, as President of the Software Publishers Association. From March 1997
to March 1998 Mr. Adam served as the Chairman of the Public Policy Committee
of the Interactive Digital Software Association.
Kim Motika joined the Company as National Sales Manager in November 1991,
and was promoted to Vice President of Sales of the Company in October 1994.
Prior to joining the Company, from May 1989 to October 1991, Ms. Motika served
as a Sales Manager for Ashton-Tate, a software publisher, and served as
Western Regional Vice President of Ingram Micro, a worldwide distributor of
information technology products, from 1983 to 1988.
Patricia J. Wright joined the Company as Vice President of Marketing of the
Company in October 1995 and has served as Vice President of Development since
June 1997. Prior to joining the Company, from April 1993 to October 1995, Ms.
Wright served as Vice President of Marketing for Activision, Inc. and as
Director of Marketing for the Barbie Products division of Mattel, Inc., a toy
manufacturer, from January 1990 to April 1993.
Keven F. Baxter joined the Company as Corporate Counsel in June 1995, was
promoted to General Counsel in June 1996 and has served as Vice President of
Corporate Affairs of the Company since October 1997. Prior to joining the
Company, from 1988 to 1994, Mr. Baxter practiced corporate law in the Business
and Technology Group of the law firm Brobeck, Phleger & Harrison.
Peter A. Bilotta has served as President of Interplay Europe since August
1994. Prior to joining the Company, from January 1992 to July 1994, Mr.
Bilotta served as Managing Director--Distributed Territories of Acclaim
Entertainment Ltd., an entertainment software publisher. Mr. Bilotta also
served as Managing Director and Chief Executive Officer of Arena Entertainment
Inc., an interactive entertainment software publisher, from March 1991 to
December 1991. Mr. Bilotta serves as a director of Interactive Media, Ltd., a
privately-held interactive entertainment software developer, and Bizarre Love
Triangle, a privately-held interactive entertainment software distributor.
Jill S. Goldworn has served as President of Interplay OEM, Inc., the
Company's OEM subsidiary, since December 1996. Prior to that, Ms. Goldworn
served as Vice President, OEM and Merchandising of the Company since June
1995. Prior to that, Ms. Goldworn served as Director of the OEM division of
the Company from September 1992 to June 1995. Prior to joining the Company,
from November 1991 to August 1992, Ms. Goldworn served as Director of Contract
Sales of PC Globe, Inc., a publisher of desktop geography software.
David Perry has served as President of Shiny Entertainment, Inc. since
October 1993. Mr. Perry founded Shiny, developer of Earthworm Jim, in October
1993. Prior to founding Shiny, from January 1991 to September 1993, Mr. Perry
served as a consulting engineer for Virgin Interactive Entertainment Inc., an
interactive entertainment software publisher.
David R. Dukes was elected to serve as a director of the Company in March
1998. From September 1989 until his retirement in May 1998, Mr. Dukes was
employed by Ingram Micro in various executive capacities,
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including Acting President of Ingram Micro Asia-Pacific from May 1997 to May
1998, Chief Executive Officer of Ingram Alliance from January 1994 to May
1998, President of Ingram Micro from September 1989 to December 1991 and Chief
Operating Officer of Ingram Micro from September 1989 to December 1993.
Mr. Dukes currently serves as Vice Chairman of the Board of Directors of
Ingram Micro.
Charles S. Paul has served as a director of the Company since October 1994.
Mr. Paul served as a member of the Compensation Committee from October 1994 to
December 1995. Since March 1995, Mr. Paul has been employed by Sega GameWorks,
a location-based entertainment company, and has served as the Chairman and
Chief Executive Officer of Sega GameWorks L.L.C., a location-based
entertainment software company, since March 1996. Mr. Paul previously served
as Executive Vice President of Universal from December 1986 to March 1995.
Mr. Paul is a director of National Golf Properties, Inc. and Entertainment
Properties Trust, both real estate investment trusts.
Mark Pinkerton has served as a director of the Company since March 1998. Mr.
Pinkerton has served as a Senior Manager of Corporate Development and
Strategic Planning for Universal since July 1996. From February 1995 to June
1996, Mr. Pinkerton was an independent consultant. Mr. Pinkerton was a Vice
President in the Mergers and Acquisitions Department of the Investment Banking
Division of Lehman Brothers Inc., an investment banking and stock brokerage
firm, from August 1991 to January 1995.
Paul A. Rioux has served as a director of the Company since July 1996. Mr.
Rioux has served as President of Universal Studios New Media, Inc., a
subsidiary of Universal, since April 1996. Previously, from November 1989 to
April 1996, Mr. Rioux served as Executive Vice President of Sega of America.
All members of the Board of Directors hold office until the next annual
meeting of stockholders or until their successors are elected and qualified.
The Bylaws do not permit removal of directors except for cause, unless
approved by a two-thirds vote of the Company's stockholders. Officers serve at
the discretion of the Board of Directors. Messrs. Pinkerton and Rioux were
appointed as directors by Universal pursuant to its rights under the
Shareholders' Agreement. See "Certain Transactions--Transactions With Fargo
and Universal."
BOARD COMMITTEES
The Company has two standing committees of the Board of Directors: an Audit
Committee and a Compensation Committee. The Audit Committee reviews the
functions of the Company's management and independent auditors pertaining to
the Company's financial statements and performs such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors. The Compensation Committee determines officer and director
compensation and administers the Company's benefit plans.
DIRECTOR COMPENSATION
The Company's directors currently do not receive cash or equity compensation
for attendance at Board of Directors or committee meetings. However, in the
future, non-employee directors may receive compensation for attendance and may
be reimbursed for certain expenses in connection with attendance at board and
committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The Compensation Committee currently consists of Messrs. Dukes, Paul and
Rioux. No member of the Compensation Committee or executive officer of the
Company has a relationship that would constitute an interlocking relationship
with executive officers and directors of another entity. During 1997,
decisions regarding executive compensation were made by the Compensation
Committee of the Board of Directors, which then consisted of Messrs. Fargo,
Kilpatrick and Rioux. Messrs. Fargo and Kilpatrick are directors, officers and
employees of the Company. Mr. Rioux is an officer of Universal Studios New
Media, Inc., a subsidiary of Universal, which has entered into various
transactions with the Company. See "Certain Transactions--Transactions with
Fargo and Universal."
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned during the twelve months ended December 31, 1997 by the Company's Chief
Executive Officer, each of the two other most highly compensated executive
officers of the Company whose total salary and bonus during such year exceeded
$100,000 (collectively, the "Named Executive Officers") and a selected
executive officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- ---------------------
SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER(1) UNDERLYING OPTIONS(#)
- --------------------------- -------- ----- -------- ---------------------
<S> <C> <C> <C> <C>
Brian Fargo....................... $237,500 $ -- $ -- --
Chief Executive Officer
Christopher J. Kilpatrick......... 200,000 -- 4,750 20,000
President
Richard S.F. Lehrberg............. 200,000 -- 4,792 --
Executive Vice President
James C. Wilson................... (2) (2) (2) 50,000
Chief Financial Officer
</TABLE>
- --------
(1) Consists of matching payments made under the Company's 401(k) plan. See
"Employee Benefit Plans--401(k) Plan."
(2) Mr. Wilson joined the Company in August 1997 at an annual base salary of
$135,000. Although not a Named Executive Officer for the year ended
December 31, 1997, the Company anticipates that he will so qualify in
future years.
OPTION MATTERS
Option Grants. The following table sets forth certain information concerning
stock options granted to the Named Executive Officers and a selected executive
officer during the twelve months ended December 31, 1997.
STOCK OPTION GRANTS DURING TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($)(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR ($/SH)(2) DATE(3) 5% 10%
- ---- ---------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Christopher J.
Kilpatrick(5).......... 20,000 5.7% $8.00 07/17/07 $100,623 $254,999
James C. Wilson......... 50,000 14.5 8.00 07/17/07 251,558 637,497
</TABLE>
- --------
(1) Represents options granted pursuant to the Company's 1997 Plan. All such
options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. All such options vest at the
rate of 20% per year.
(2) Subsequent to December 31, 1997, the Compensation Committee repriced all
options granted at an exercise price of greater than $8.00 which were held
by current employees of the Company or its wholly owned subsidiaries,
including the options listed above, to an exercise price of $8.00.
(3) Options granted to such individuals pursuant to the 1997 Plan expire 10
years from the date of grant.
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<PAGE>
(4) Represents amounts that may be realized upon exercise of the options
immediately prior to expiration of their terms assuming appreciation of 5%
and 10% over the option term. The 5% and 10% numbers are calculated based
on rules required by the Securities and Exchange Commission (the "
Commission") and do not reflect the Company's estimate of future stock
price growth. The actual value realized may be greater or less than the
potential realizable value set forth.
(5) Pursuant to the terms of his employment contract, Mr. Kilpatrick's options
granted prior to December 31, 1997 will be fully vested as of the closing
of the Offering. See "Management--Employment Agreements."
Recent Option Grants. In February 1998, the Company granted options to
purchase an aggregate of 240,100 shares of Common Stock to certain officers
and other employees of the Company, including Brian Fargo (150,000 shares) and
Christopher J. Kilpatrick (20,000 shares). The options granted to Messrs.
Fargo and Kilpatrick have an exercise price of $8.00 per share and vest over a
period of five years from the date of grant.
Option Exercises and Year-End Option Values. Shown below is information
relating to the exercise of stock options during the twelve months ended
December 31, 1997 for each of the Named Executive Officers and a selected
executive officer, and the year-end value of unexercised options.
AGGREGATE OPTION EXERCISES AND 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
AT YEAR-END YEAR-END(1)
SHARES ACQUIRED (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE)
- ---- --------------- -------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Brian Fargo............. -- -- 0/ 0 --
Richard S.F. Lehrberg... -- -- 572,874/ 0 $5,068,216/ $ 0
Christopher J. Kilpa-
trick.................. -- -- 251,528/ 0 1,076,647/ 0
James C. Wilson......... -- -- 0/ 50,000 0/ 50,000
</TABLE>
- --------
(1) Represents an amount equal to the difference between the assumed initial
public offering price of $9.00 per share and the option exercise price,
multiplied by the number of unexercised in-the-money options.
EMPLOYEE BENEFIT PLANS
Stock Incentive Plans. The Company has granted options under three stock
option plans. The Interplay Productions Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan--1991 (the "1991 Plan") was
adopted by the Board of Directors and stockholders of the Company in March
1992, the Interplay Productions 1994 Incentive Stock Option and Nonqualified
Stock Option Plan (the "1994 Plan") was adopted by the Board of Directors and
stockholders of the Company in March 1994 and the Interplay Productions 1997
Stock Incentive Plan (the "1997 Plan" and, together with the 1991 Plan and the
1994 Plan, the "Plans") was adopted by the Board of Directors and stockholders
of the Company in January 1997. The Plans have been amended from time to time.
The 1991 Plan and the 1994 Plan were terminated by the Board of Directors for
purposes of future grants in March 1998.
The Company believes that its equity compensation program is an important
element of the overall compensation package which it can offer to attract and
retain employees and that it represents a competitive advantage over certain
competitors. The Company anticipates that it will be necessary in the future
to grant options to attract key personnel, to retain its existing employees
and, where appropriate, as part of strategic acquisition opportunities. See
"Risk Factors--Dilution."
The Plans are administered by the Board of Directors, unless the Board of
Directors delegates such authority to a committee composed of members of the
Board of Directors (hereinafter referred to collectively as the "Board").
Subject to certain limitations set forth in the Plans, the Board has the
authority (i) to select the persons to whom rights under the Plans (the
"Awards") will be granted, (ii) to determine whether an Award will be an
50
<PAGE>
incentive stock option within the meaning of Section 422 of the Internal
Revenue Code (an "ISO"), an option that does not qualify as an ISO (a
"Nonqualified Stock Option," and together with ISOs, the "Options"), a right
to purchase restricted stock (a "Right to Purchase") under either the 1991
Plan or the 1997 Plan, or a combination of the foregoing, and (iii) to specify
the type of consideration to be paid to the Company upon the exercise of an
Award. All employees, directors, consultants, advisors or other independent
contractors of the Company or of any present or future parent or subsidiary
corporation of the Company are eligible to participate in the Plans. Any
eligible person may be granted a Nonqualified Stock Option or a Right to
Purchase under either the 1991 Plan or the 1997 Plan, but only employees may
be granted ISOs under the Plans.
As of March 31, 1998, an aggregate of 898,425, 639,984 and 2,219,891 shares
of the Company's Common Stock were authorized pursuant to the 1991 Plan, 1994
Plan and the 1997 Plan, respectively, of which, 302,198, 638,784, and 539,350
shares, respectively, were subject to currently outstanding Options. The 1991
Plan and 1994 Plan were terminated for purposes of future grants in March
1998. An aggregate of 1,680,541 shares of Common Stock remain available for
grant under the 1997 Plan. No shares of the Company's Common Stock have been
issued pursuant to Rights to Purchase under any of the Plans. In addition,
572,874 shares are subject to non-statutory options granted outside the
Company's stock option plans. To the extent any outstanding Award expires or
terminates prior to exercise in full or if shares issued upon exercise of an
Award are repurchased by the Company, the unexercised portion of such Award or
the repurchased shares are returned to the pool of shares reserved under the
1997 Plan and will thereafter be available for grant or offer under the 1997
Plan.
The exercise price per share of an ISO under the 1997 Plan must equal at
least the fair market value of a share of the Company's Common Stock on the
date of grant. However, the exercise price per share of any ISO granted to a
person who at the time of grant owns stock possessing more than ten percent of
the total combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation of the Company must be at least 110% of the
fair market value of a share of the Company's Common Stock on the date of
grant. The exercise price per share of Nonqualified Stock Options granted
under the 1997 Plan must be at least 85% of the fair market value of a share
of the Company's Common Stock on the date of grant. In no event shall any
person receive options or Rights to Purchase under the 1997 Plan in any one
calendar year pursuant to which the aggregate number of shares of Common Stock
that may be acquired thereunder exceeds 500,000 shares.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan"), covering an aggregate of 200,000 shares of Common
Stock, was adopted by the Board of Directors and approved by the Company's
stockholders in March 1998. The Purchase Plan, which is intended to qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code"), will be implemented by twelve-month
offerings with purchases occurring at six-month intervals commencing on the
date of this Prospectus. The Purchase Plan will be administered by the Board
of Directors. The Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions, which may not exceed 15% of an employee's
compensation. The price of stock purchased under the Purchase Plan will be 85%
of the lower of the fair market value of the Common Stock at the beginning of
the offering period or on the applicable purchase date.
401(k) Plan. The Company maintains a defined contribution retirement plan
with a cash or deferred arrangement as described in Section 401(k) of the Code
(the "401(k) Plan"). The 401(k) Plan is intended to be qualified under Section
401(a) of the Code. All employees of the Company are eligible to participate
in the 401(k) Plan on the first day of the plan year or the first day of the
seventh month of the plan year, whichever first occurs, following completion
of one year of service with the Company. The 401(k) Plan provides that each
participant may make elective contributions up to 15% of his or her
compensation, subject to statutory limits. The Company also provides a 50%
matching contribution, up to six percent of an employee's compensation,
subject to statutory limits. Under the terms of the 401(k) Plan, allocation of
the matching contribution is integrated with Social Security, in accordance
with applicable non-discrimination rules under the Code.
51
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Brian Fargo for a
term of five years commencing March 1994, pursuant to which he currently
serves as Chairman of the Board of Directors and Chief Executive Officer of
the Company. The employment agreement provides for a base salary of $250,000
per year, with such annual raises as may be approved by the Board of
Directors, plus annual bonuses at the discretion of the Board of Directors. In
the event that Mr. Fargo is terminated without cause or resigns for good
reason as set forth in the agreement, the Company is required to pay Mr. Fargo
150% of his base salary and 75% of his imputed annual bonuses for the
remainder of the term of the agreement, which payments are contingent upon Mr.
Fargo's non-competition with the Company, as defined in the agreement. Mr.
Fargo is also entitled to participate in the incentive compensation and other
employee benefit plans established by the Company from time to time.
The Company has entered into an employment agreement with Christopher J.
Kilpatrick for a term of five years commencing May 1994, pursuant to which he
currently serves as President of the Company. The employment agreement
provides for a base salary of $157,200 per year, with annual raises determined
by the Board of Directors of not less than ten percent per year, plus annual
bonuses at the discretion of the Board of Directors. In the event Mr.
Kilpatrick is terminated without cause or resigns for good reason as defined
in the agreement, the Company is required to pay Mr. Kilpatrick 150% of his
base salary and 75% of his imputed annual bonuses for the remainder of the
term of the agreement, which payments are contingent upon Mr. Kilpatrick's
non-competition with the Company, as set forth in the agreement. In addition,
in the event Mr. Kilpatrick is terminated without cause or resigns for good
reason as defined in the agreement, all stock options held by Mr. Kilpatrick
will vest to the extent they would have vested through the end of the term of
the agreement. In June 1995, following a change in control of the Company as
defined in the agreement, all of the stock options then held by Mr. Kilpatrick
automatically vested. Upon the closing of the Offering, the options granted
Mr. Kilpatrick in 1997 will automatically vest. Mr. Kilpatrick is also
entitled to participate in the incentive compensation and other employee
benefit plans established by the Company from time to time.
The Company has entered into an employment agreement with Richard S.F.
Lehrberg for a term of five years commencing March 1994, pursuant to which he
currently serves as Executive Vice President of the Company. The employment
agreement provides for a base salary of $200,000 per year, with annual raises
as approved by the Board of Directors. Mr. Lehrberg is also entitled to an
annual bonus based on the achievement of goals and objectives agreed upon by
the Board of Directors and Mr. Lehrberg, up to a maximum of $134,000 per year.
In 1994 and 1995, Mr. Lehrberg agreed to defer the receipt of bonuses in the
amounts of $120,000 and $34,000, respectively, payable under the agreement,
and such accrued bonuses will be paid following the closing of the Offering.
In the event Mr. Lehrberg is terminated without cause or resigns for good
reason as set forth in the agreement, the Company is required to pay Mr.
Lehrberg 150% of his base salary and 75% of his imputed annual bonuses for the
remainder of the term of the agreement, which payments are contingent upon
Mr. Lehrberg's non-competition with the Company, as defined in the agreement.
Mr. Lehrberg is also entitled to participate in the incentive compensation and
other employee plans established by the Company from time to time.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by the General Corporation Law of the State of Delaware (the
"DGCL"). The Company believes that indemnification under its Bylaws covers at
least negligence and gross negligence by indemnified parties, and permits the
Company to advance litigation expenses in the case of stockholder derivative
actions or other actions, against an undertaking by the indemnified party to
repay such advances if it is ultimately determined that the indemnified party
is not entitled to indemnification. Prior to the closing of the Offering, the
Company expects to have in place liability insurance for its officers and
directors.
In addition, the Company's Certificate of Incorporation provides that,
pursuant to the DGCL, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty to the Company and its
52
<PAGE>
stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under the DGCL. In addition, each director will continue
to be subject to liability for breach of the director's duty of loyalty to the
Company, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under the DGCL. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify them against liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities
arising from actions not taken in good faith or in a manner the indemnitee
believed to be opposed to the best interests of the Company), and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. The Company believes that its Certificate of Incorporation and
Bylaw provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following sets forth certain information concerning the beneficial
ownership of the Company's outstanding Common Stock as of March 31, 1998 for
(i) each person (or group of affiliated persons) who is known by the Company
to own beneficially five percent or more of the Company's Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers, and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
SHARES OWNED
------------------------------
SHARES
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1)(2) OFFERING OFFERING(3)
- ------------------------------------ ------------ ------------ --------------
<S> <C> <C> <C>
Universal Studios, Inc.(4)....... 5,408,216 49.4% 29.1%
Mark Pinkerton(5)
Paul A. Rioux(5)
100 Universal City Plaza
Universal City, CA 91608
Brian Fargo(6)................... 4,922,897 45.0 28.2
16815 Von Karman Avenue
Irvine, CA 92606
Christopher J. Kilpatrick(7)..... 251,628 2.3 1.4
Richard S. F. Lehrberg(8)........ 574,557 5.0 3.3
James C. Wilson.................. -- -- --
Charles S. Paul.................. -- -- --
David R. Dukes................... -- -- --
All Directors and Executive Offi-
cers as a Group
(7 persons)(9).................. 11,157,298 94.7% 59.4%
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options currently
exercisable, or exercisable within 60 days of May 1, 1998, are deemed
outstanding for computing the percentage of the person holding such
options but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Excludes shares which will be issued to such persons upon the closing of
the Offering pursuant to the conversion of Subordinated Secured Promissory
Notes and Common Stock Warrants held by such persons at an exercise price
of $6.30 per share (based on an assumed initial public offering price of
$9.00 per share), as follows: Brian Fargo (317,460 shares), Christopher J.
Kilpatrick (15,873 shares) and Richard S.F. Lehrberg (47,619 shares). See
"Description of Capital Stock--Common Stock Warrants."
(3) The percentages indicated reflect the issuance of 1,388,700 shares upon
the closing of the Offering pursuant to the exercise of Common Stock
Warrants by the cancellation of Subordinated Secured Promissory Notes at
an exercise price based on an assumed initial public offering price of
$9.00 per share. See "Description of Capital Stock--Common Stock
Warrants."
(4) Universal has granted the Underwriters' 30-day option to purchase up to
937,500 shares to cover over-allotments, if any. If such option is
exercised in full, following the completion of the Offering Universal will
beneficially own 4,470,716 shares, or 24.1%, of the Company's Common
Stock.
(5) Messrs. Pinkerton and Rioux, who are employees of Universal or its
subsidiaries and have been appointed as directors by Universal, disclaim
beneficial ownership of the shares held by Universal.
(6) Does not include 5,408,216 shares held by Universal, as to which Mr. Fargo
may be deemed to have beneficial ownership due to certain contractual
rights held by Mr. Fargo, as such rights terminate upon the closing of the
Offering. See "Certain Transactions--Transactions with Fargo and
Universal."
(7) Includes 251,528 shares subject to options exercisable within 60 days of
May 1, 1998.
(8) Includes 572,874 shares subject to options exercisable within 60 days of
May 1, 1998.
(9) Includes 824,402 shares subject to options exercisable within 60 days of
May 1, 1998.
54
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH FARGO
In April 1991, Brian Fargo, the Chief Executive Officer and Chairman of the
Board of Directors of the Company, loaned $536,375 to the Company, evidenced
by a promissory note due April 30, 1996, which note was subsequently converted
into a demand note. The note provides that interest accrues at a rate of nine
percent per year with accrued interest paid on a semi-annual basis. As of
December 31, 1997, the loan balance was $16,107.
Prior to moving to its current business location in August 1996, the Company
occupied premises owned by Mr. Fargo consisting of approximately 22,792 square
feet located at 17922 Fitch Avenue, Irvine, California, pursuant to a Lease
Agreement, dated March 1, 1994, between the Company and Mr. Fargo, which had a
term extending through December 31, 2002 and provided for monthly rent of
$19,125, subject to increase in accordance with the Consumer Price Index. The
Company entered into a restated Lease Agreement with Mr. Fargo in October
1996. When the Company relocated to its present location in August 1996,
Interplay subleased such premises to Engage pursuant to a Sublease Agreement
dated October 1, 1996, and the Company concurrently executed an agreement with
Engage pursuant to which the Company subleased 5,000 square feet of
specialized audio facilities from Engage, on the same terms, until December
1997. In December 1997, Engage entered into a direct lease with the owner of
such property and all leases and subleases involving the Company were
terminated.
TRANSACTIONS WITH FARGO AND UNIVERSAL
The Company, Mr. Fargo and Universal entered into a Stock Purchase
Agreement, dated January 25, 1994, for the purchase of Common Stock. On March
30, 1994, pursuant to the Stock Purchase Agreement, Universal purchased
1,824,897 shares of Common Stock from the Company for a purchase price of $15
million and 1,216,598 shares of Common Stock from Mr. Fargo for a purchase
price of $10 million. Pursuant to the Stock Purchase Agreement, the Company,
Mr. Fargo and Universal entered into an Option Agreement, dated March 30,
1994, pursuant to which Mr. Fargo granted Universal an option to purchase
additional shares of Common Stock held by Mr. Fargo. Pursuant to such
Agreement, Universal purchased 1,216,598 additional shares of Common Stock
from Mr. Fargo at a price of $9.10 per share on April 25, 1995 and 1,150,123
additional shares of Common Stock at a price of $14.62 per share on April 26,
1996, such that Universal became a 35% owner of the Company as of April 25,
1995 and a 45% owner of the Company as of April 26, 1996. In order to acquire
sufficient shares of Common Stock for sale to Universal on each of the three
sale dates, Mr. Fargo acquired such number of shares as was required for sale
to Universal from existing shareholders of the Company in simultaneous
transactions. Pursuant to the Stock Purchase Agreement, the Company, Mr. Fargo
and Universal entered into a Shareholders' Agreement dated March 30, 1994, as
amended October 8, 1996 and in March 1998, which contains certain restrictions
on transfer of shares, rights of first refusal, voting provisions,
registration rights and certain restrictions on corporate actions. Only the
mutual rights of first refusal as between Universal and Mr. Fargo and the
registration rights of Universal and Mr. Fargo will survive the closing of the
Offering. See "Description of Capital Stock--Registration Rights." For his
services in connection with such transaction, Mr. Fargo was awarded a bonus of
$1.0 million by the Board of Directors on March 28, 1994. Mr. Fargo has agreed
to defer the payment of such bonus to a future date.
The Company has entered into three Merchandising License Agreements with
MCA/Universal Merchandising Inc., a subsidiary of Universal. Pursuant to an
agreement dated May 23, 1994, the Company has the exclusive right to use the
theme and characters of the Waterworld motion picture in software products for
specified platforms until July 31, 1998. Pursuant to an agreement dated May
23, 1994, the Company has the non-exclusive right to use the theme and
characters of the Casper motion picture in software products for specified
platforms for a period of three years following the release of such motion
picture. Pursuant to an agreement dated April 16, 1996, the Company has the
exclusive right to the theme and characters of the Flipper motion picture for
an interactive story book product on specified platforms until June 1, 2001.
Each of the agreements provide for the Company to pay specified advances
against royalties and for specified royalty
55
<PAGE>
guarantees. To date, the Company has paid a total of $0.5 million, $0.5
million and $30,000, respectively, in advances and royalty payments under such
agreements. In addition, pursuant to a letter agreement dated September 27,
1996, with Universal Interactive Studios, a subsidiary of Universal ("UIS"),
the Company has the exclusive distribution rights in North America for
PlayStation versions of Disruptor (the "Disruptor Agreement"), plus the
exclusive rights to manufacture, publish and distribute Disruptor on any video
game platform outside of North America. Currently, approximately $1.9 million
is due UIS pursuant to the Disruptor Agreement, of which $1.5 million will be
paid to UIS upon the closing of the Offering. On August 16, 1995, the Company
and UIS entered into an exclusive distribution agreement pursuant to which UIS
agreed to distribute the Company's interactive software products in Europe
through UIS's affiliate, MCA Home Video, Inc., which in turn distributes
through Cinema International Corporation ("CIC"). The distribution agreement
was subsequently terminated, and the Company and UIS/CIC are currently
negotiating a final accounting reconciliation to determine the amounts owed to
the Company. In December 1996 UIS, on behalf of CIC, paid $300,000 to the
Company as an interim payment pending the resolution of the final accounting
reconciliation. The Company issued a promissory note to UIS dated December 20,
1996 in the principal amount of $300,000 (the "Advance Note") evidencing the
interim payment made to the Company. The Advance Note is guaranteed by
Interplay Europe, does not bear interest and was payable on March 31, 1997. In
March 1998, the Company entered into an agreement with UIS whereby the Company
agreed to pay to UIS all net amounts owed to UIS under the Disruptor Agreement
and the Company and UIS agreed to work together to determine the final amount,
if any, due to Interplay to resolve such accounting dispute and to pay any
amounts found to be owing to the other party in connection therewith.
Mark Pinkerton and Paul A. Rioux, directors of the Company, are employees of
Universal or its subsidiaries.
ENGAGE TRANSACTIONS
In June 1995, the Company formed a subsidiary to divest Engage, which
formerly operated as a division of the Company. Pursuant to a Stock Purchase
Agreement dated June 30, 1995, the Company sold 10,000,000 shares of common
stock of Engage to Mr. Fargo for $237,000. In connection with such sale, the
Company and Mr. Fargo entered into an Option Agreement dated June 30, 1995,
granting the Company an option to repurchase all of such shares at an
aggregate exercise price of $337,000 at any time prior to June 30, 2005 (the
"Termination Date"). In conjunction with a financing agreement between Engage
and Mr. Fargo, the Option Agreement was amended in March 1998 to reduce the
shares subject to such option to 19% of the shares held by Mr. Fargo and to
reduce the exercise price to $250,000. In the event the Company elects not to
exercise its option to repurchase the shares, upon certain events Universal
has an option to purchase the shares at the same exercise price. If Universal
exercises its option to purchase the shares, the Company has an option to
purchase such shares from Universal at the $250,000 exercise price until the
Termination Date.
Prior to March 1996, the Company loaned Engage approximately $1.8 million to
fund the operations of Engage, which debt was evidenced by a convertible
demand promissory note dated March 29, 1996, bearing interest at the prime
rate plus two percent per annum. Approximately, $0.8 million of the principal
amount was repaid to the Company in a number of installments during 1996 and
1997. In connection with a secured debt financing in August 1997, the
remaining outstanding principal of approximately $1.0 million was converted
into a secured convertible promissory note due in August 1998, bearing
interest at a rate of eight percent per annum. As part of the August 1997
transaction, the Company loaned an additional $100,000 to Engage on the same
terms.
In March 1996, the Company entered into an agreement with Engage which,
among other things, provides that the Company will provide certain
administrative services to Engage, and grants Engage the exclusive right to
use certain of the Company's products in Internet-based on-line services.
Engage currently owes the Company approximately $300,000 in connection with
such agreement.
FINANCING TRANSACTIONS
In October 1996, the Company sold an aggregate of $2,400,000 in Subordinated
Secured Promissory Notes and Common Stock Warrants to Brian Fargo
($2,000,000), Richard S.F. Lehrberg ($300,000) and
56
<PAGE>
Christopher J. Kilpatrick ($100,000). The Secured Subordinated Promissory
Notes bear interest at a rate of 12% per annum. Messrs. Fargo, Lehrberg and
Kilpatrick elected to receive 11,688, 1,683 and 100 shares of Common Stock,
respectively, in lieu of the May 1997 interest payment due under the Secured
Subordinated Promissory Notes, at a price of $11.25 per share. In February
1998, the Company offered to amend the terms of such Notes and Warrants to
permit the exercise of the Warrants or the repayment of the Notes upon the
closing of this Offering whether or not this Offering constitutes a Qualified
Event (as defined in the Notes and Warrants). Messrs. Fargo, Lehrberg and
Kilpatrick have elected to exercise such Warrants for 317,460, 47,619 and
15,873 shares of Common Stock, respectively, by canceling such Notes effective
upon the closing of the Offering at an exercise price of $6.30 per share
(based upon an assumed initial public offering price of $9.00 per share). See
"Description of Capital Stock--Common Stock Warrants."
OTHER TRANSACTIONS
In March 1998, the Company entered into Indemnification Agreements with all
of its directors and executive officers providing for indemnification of such
persons by the Company in certain circumstances. See "Management--Limitation
of Liability and Indemnification Matters."
David R. Dukes, a director of the Company, is an officer and director of
Ingram Micro, a customer of the Company. During the eight months ended
December 31, 1997 and the three months ended March 31, 1998, the Company
derived net revenues of $2.4 million and $1.3 million, respectively, from
sales to Ingram Micro. See "Business--Sales and Distribution."
Until September 1997, Christopher J. Kilpatrick, an officer and director of
the Company, was a shareholder of Stradling Yocca Carlson & Rauth, counsel to
the Company.
The Company has entered into Employment Agreements with certain executive
officers. See "Management--Employment Agreements."
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.001 par value,
and 5,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of March 31, 1998, there were 10,953,028 shares of Common Stock issued
and outstanding and held by 17 stockholders of record and 2,053,206 shares of
Common Stock reserved for issuance upon the exercise of stock options
outstanding under the Company's 1991 Plan, 1994 Plan, 1997 Plan and non-
statutory stock options granted outside the Company's plans. The outstanding
shares of Common Stock are fully paid and nonassessable. The Company's
Certificate of Incorporation provides that holders of Common Stock are
entitled to one vote for each share on all matters submitted to a vote of
stockholders, provided that, with respect to the election of directors,
stockholders shall be entitled to cumulate their votes whereby each
stockholder will have a number of votes equal to the number of shares held
multiplied by the number of directors to be elected. In addition, with respect
to the election of directors, certain preferential voting rights will exist
until the closing of the Offering. See "Certain Transactions--Transactions
with Fargo and Universal." The Certificate of Incorporation of the Company
provides that the authorized number of directors shall be between seven and
nine, with the exact number fixed at seven until changed by unanimous vote of
the Board of Directors.
Subject to the preference in dividend rights of any series of Preferred
Stock which the Company may issue in the future, the holders of Common Stock
are entitled to receive such cash dividends, if any, as may be declared by the
Board of Directors out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, after payment of all debts and
liabilities and after payment of the liquidation preferences of any shares of
Preferred Stock then outstanding, the holders of the Common Stock will be
entitled to all assets that are legally available for distribution.
Other than the rights described above, the holders of Common Stock have no
preemptive subscription, redemption, sinking fund or conversion rights and
have equal rights and preferences. The rights and preferences of holders of
Common Stock will be subject to the rights of any series of Preferred Stock
which the Company may issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock, $.001 par
value, in one or more series and to fix the rights, preferences and privileges
thereof, including voting rights, terms of redemption, redemption prices,
liquidation preference and number of shares constituting any series or the
designation of such series. The rights of the holders of the Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights, including economic
rights senior to the Common Stock, and, as a result, the issuance thereof
could have a material adverse effect on the market value of the Common Stock.
The Company has no present plans to issue shares of Preferred Stock.
COMMON STOCK WARRANTS
In connection with its subordinated debt financing in October 1996 through
February 1997, the Company issued and sold certain Common Stock Warrants (the
"Warrants") to purchasers of its Subordinated Secured Promissory Notes (the
"Notes"), at a price equal to one percent of the purchaser's total investment
in the Notes and Warrants. The Company sold an aggregate of $14,803,000 of
such Notes and Warrants. The Warrants entitle the Warrant holder to purchase,
by surrender of such holder's Note, up to that number of shares of Common
Stock equal to the quotient determined by dividing the purchaser's aggregate
investment in the Notes and Warrants by the Exercise Price (as defined below),
rounded to the nearest whole number of shares. The
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<PAGE>
"Exercise Price" per share of Common Stock under the Warrants is the product
of 0.70 multiplied by either of the following amounts, as applicable: (i) in
the event of a Qualified IPO (as defined in the Warrants), the initial public
offering price of Common Stock; or (ii) in the event of a Sales Transaction
(as defined in the Warrants), the fair market value per share of the Company's
Common Stock as established in such Sales Transaction or, if no such price is
established, as determined in good faith by the Board of Directors. In
February 1998, the Company offered to amend the terms of each holder's Note
and Warrant to permit such holder to exercise its Warrant upon the closing of
the Offering whether or not the Offering constitutes a Qualified IPO, and
offered each holder the option to either exercise its Warrant effective upon
the closing of the Offering or to have its Note repaid following the closing
of the Offering. Holders of an aggregate amount of $8,748,808 of the Notes and
Warrants elected to exercise their Warrants, and 1,388,700 shares of Common
Stock will be issued to such holders upon the closing of the Offering at an
exercise price of $6.30 per share (based on an assumed initial public offering
price of $9.00). Holders of $5,993,650 in principal amount of the Notes
elected to have their Notes repaid out of the proceeds of the Offering. See
"Use of Proceeds."
REGISTRATION RIGHTS
The Shareholders' Agreement provides each of Universal and Brian Fargo with
certain registration rights with respect to their respective shares of the
Common Stock of the Company. Pursuant to the terms of the Shareholders'
Agreement, each of Universal and Mr. Fargo have four demand registrations,
whereby such party may require the Company to register not less than 1,000,000
shares of the Common Stock owned by such party, subject to certain conditions
and restrictions contained therein. Each of Universal and Mr. Fargo also have
unlimited piggyback registrations whereby they are entitled to be notified of
and participate in registrations of the Company's Common Stock initiated by
the Company or a third party, subject to certain conditions and restrictions.
The Company has also agreed to indemnify and hold harmless the stockholders
who are a party to the Shareholders' Agreement and the officers and directors
of Universal from any loss, claim or damage arising from such registrations
unless, and to the extent that, such loss, claim or damage arises out of or is
based upon an untrue statement, alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished by or on behalf of such party for use in the preparation
of the documents related to the registration.
The Company and the holders of the Warrants have entered into an Investors
Rights Agreement, as amended ("Investors Rights Agreement") which provides
such holders with certain registration rights with respect to the shares of
Common Stock issuable upon exercise of the Warrants. Pursuant to the terms of
the Investors Rights Agreement, the Warrant holders have one demand
registration, whereby the holders of a majority of the shares of Common Stock
issuable upon exercise of the Warrants may require the Company to register the
shares of Common Stock owned by such parties, subject to certain conditions
and restrictions. In addition, the Investors Rights Agreement provides the
Warrant holders certain piggyback registration and S-3 registration rights,
subject to certain conditions and restrictions. The Company has also agreed to
indemnify and hold harmless the stockholders who are a party to the Investors
Rights Agreement from any loss, claim or damage arising from such
registrations unless, and to the extent that, such loss, claim or damage
arises out of or is based upon an untrue statement, alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished by or on behalf of such party for use in the
preparation of the documents related to the registration.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in certain business
combinations with a person or affiliate or associate of such person who is an
"interested stockholder" for a period of three years from the date such person
became an interested stockholder, unless: (i) the transaction resulting in the
acquiring person's becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before
the person becomes an interested stockholder, (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same
59
<PAGE>
transaction that makes it an interested stockholder, excluding (a) shares held
by directors who are also officers, or (b) shares held in certain employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer, or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least two-thirds of
the corporation's outstanding voting stock, at an annual or special meeting
(excluding shares held by the interested stockholder). Except as otherwise
specified in Section 203, an "interested stockholder" is defined as: (a) any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, (b) any person that is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior
to the date on which it is sought to be determined whether such person is the
interested stockholder, or (c) the affiliates and associates of any such
person. By restricting the ability of the Company to engage in business
combinations with an interested person, the application of Section 203 to the
Company may provide a barrier to hostile or unwanted takeovers.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to such interested stockholder. For purposes
of Section 203, an "interested" stockholder is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation also provides that stockholder
action can be taken only at an annual or special meeting of stockholders and
may not be taken by written consent. The Bylaws provide that special meetings
of stockholders can be called only by the Chairman of the Board, the President
or the Board of Directors. Stockholders are not permitted to call a special
meeting or to require that the Board of Directors call a special meeting of
stockholders. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the business set forth in the notice for
the meeting. The Bylaws set forth an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors,
of candidates for election as directors at any special meeting of stockholders
and with regard to business to be brought before an annual meeting of
stockholders of the Company, other than the election of directors. The Bylaws
do not permit removal of directors except for cause, unless approved by a two-
thirds vote of the Company's stockholders. See "Management--Directors,
Executive Officers and Certain Significant Employees."
The Company's Certificate of Incorporation limits the liability of directors
to the Company and its stockholders to the fullest extent permitted by the
DGCL. Specifically, under the DGCL, a director will not be personally liable
for monetary damages for breach of the director's fiduciary duty as a
director, except liability (i) for a breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions by a director
not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) for liability arising under Section 174 of the
DGCL (relating to the declaration of dividends and purchase or redemption of
shares in violation of the DGCL), or (iv) for any transaction from which the
director derived an improper personal benefit. The inclusion of this provision
in the Company's Certificate of Incorporation may have the effect of reducing
the likelihood of derivative litigation against Directors and may discourage
or deter stockholders or management from bringing a lawsuit against directors
for breach of their duty of care. This limitation on monetary liability does
not alter the duties of Directors, affect the availability of equitable
relief, or affect the availability of monetary relief predicated on claims
based on federal law, including the federal securities laws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation, Glendale, California.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and adversely affect the Company's
ability to raise additional capital in the capital markets at a time and price
favorable to the Company.
Upon completion of the Offering, the Company will have 18,591,728 shares of
Common Stock outstanding, assuming no exercise of outstanding options. Of
these shares, the 6,250,000 shares sold in the Offering (7,187,500 shares
assuming the Underwriters' over-allotment option is exercised in full) will be
freely transferable without restriction or further registration under the
Securities Act, unless they are purchased by "affiliates" of the Company as
that term is used under the Securities Act. The remaining 12,341,728 shares
held by existing stockholders (11,404,228 shares assuming the Underwriters'
over-allotment option is exercised in full) will be "restricted securities" as
defined in Rule 144 ("Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rule 144, which is summarized below. Sales of Restricted
Shares in the public market, or the availability of such shares for sale,
could adversely affect the market price of the Common Stock.
All officers, directors, certain stockholders and certain option holders
have agreed with the Underwriters that they will not sell any Common Stock
owned by them for a period of 180 days after the effective date of the
Offering without the prior written consent of Piper Jaffray Inc. (the "180-Day
Lock-Up"). An aggregate of 12,340,528 shares of Common Stock (11,403,028
shares assuming the Underwriters' over-allotment option is exercised in full)
are subject to the 180-Day Lock-Up. Upon the expiration of the 180-Day Lock-Up
(or earlier upon the consent of Piper Jaffray Inc.), 10,974,249 Restricted
Shares (10,036,749 Restricted Shares assuming the Underwriters' over-allotment
option is exercised in full) will become eligible for sale subject to the
volume and other restrictions of Rule 144, and 1,361,279 Restricted Shares
will be eligible for sale without restriction under Rule 144(k).
In general, under Rule 144, beginning 90 days after the effective date of
the Offering, any person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of one percent of the then outstanding shares of the Company's
Common Stock (approximately 185,917 shares immediately after the Offering) or
the average weekly trading volume during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice and availability of current public information
about the Company. In addition, Restricted Shares which have been beneficially
owned for at least two years and which are held by non-affiliates may, under
Rule 144(k) be sold free of any restrictions under Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Act to register shares of Common Stock reserved for issuance under its Plans,
thus permitting the resale by non-affiliates of shares issued under the plan
in the public market without restriction under the Securities Act. Such
registration statement will become effective immediately upon filing, which is
expected on or shortly after the closing of the Offering. As of the closing of
the Offering, options or rights to purchase 2,053,206 shares of Common Stock
will be outstanding under the Company's Plans, of which 1,667,228 shares are
subject to the 180-Day Lock-Up.
61
<PAGE>
UNDERWRITING
The Company and the Selling Stockholder have entered into a Purchase
Agreement (the "Purchase Agreement") with the underwriter's listed in the
table below (the "Underwriters"), for whom Piper Jaffray Inc., Bear, Stearns &
Co. Inc., and UBS Securities LLC are acting as representatives (the
"Representatives"). Subject to the terms and conditions contained in the
Purchase Agreement, the Company has agreed to sell to the Underwriters, and
each of the Underwriters has severally agreed to purchase from the Company,
the aggregate number of shares of Common Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
<S> <C>
Piper Jaffray Inc. .........................................
Bear, Stearns & Co. Inc. ...................................
UBS Securities LLC..........................................
---------
Total..................................................... 6,250,000
=========
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement, if any is purchased (excluding Common
Stock covered by the over-allotment option granted by the Selling Stockholder
to the Underwriters). In the event of a default by any Underwriter, the
Purchase Agreement provides that, in certain circumstances, purchase
commitments of nondefaulting Underwriters may be increased or the Purchase
Agreement may be terminated.
The Underwriters propose initially to offer the shares to the public at the
public offering price set forth on the cover page of this Prospectus. The
Underwriters may allow a selling concession not in excess of $ per share to
certain dealers. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other dealers. After the
Offering, the public offering price and other selling terms may be changed by
the Underwriters.
The Selling Stockholder has granted the Underwriters an option, exercisable
by the Representatives within 30 days after the date of the Purchase
Agreement, to purchase up to an additional 937,500 shares of Common Stock at
the same price per share to be paid by the Underwriters for the shares offered
hereby. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become committed to purchase such additional shares of Common
Stock in the same proportion as set forth in the above table.
The Company and its directors, officers and certain stockholders (holding in
the aggregate 12,340,528 shares of Common Stock upon completion of the
Offering, or 11,403,028 shares if the Underwriters' over-allotment option is
exercised in full) have agreed to deliver to the Representatives prior to the
date of this Prospectus lock-up agreements under which they agree not to,
directly or indirectly, offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, or otherwise dispose of or transfer
any shares of Common Stock or any securities exchangeable or exercisable for
or convertible into its Common Stock, whether now owned or hereafter acquired
or with respect to which the Company and any such director, officer or
stockholder has or hereafter acquires the power of disposition, or participate
in any registration statement under the Securities Act with respect to any of
the foregoing or enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock for a period of 180 days after
the date of this Prospectus, without the prior written consent of Piper
Jaffray Inc. on behalf of the Underwriters. Such lock-up agreements shall not
apply to the sale of Common Stock by the Selling Stockholder pursuant to the
exercise of the Underwriters' over-allotment option. Piper Jaffray Inc. may,
at its sole discretion and at any time without notice, release all or any
portion of the shares subject to such lock-up agreements. See "Shares Eligible
for Future Sale."
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<PAGE>
In the Purchase Agreement, the Company, the Selling Stockholder and the
Underwriters have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the Underwriters may be required to make in respect thereof. The Company has
agreed to reimburse the Underwriters for their reasonable out of pocket
expenses incurred in connection with the Offering. The Company and Piper
Jaffray Inc. are parties to an agreement pursuant to which Piper Jaffray Inc.
has in the past performed and may in the future perform certain financial
advisory services to the Company, including advice with respect to mergers and
acquisitions.
The Representatives have informed the Company and the Selling Stockholder
that they do not intend to confirm sales to accounts over which they exercise
discretionary authority without the prior written approval of the customer.
Prior to the Offering there has been no public market for the Common Stock.
The initial public offering price was determined by negotiation between the
Company, the Selling Stockholder and the Representatives. Among the factors
considered in determining such public offering price were the nature of the
Company's business, its history and present state of development, recent
financial operating information, prospects and management abilities, the
general conditions of the securities markets at the time of the Offering and
other factors deemed relevant.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment,
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such securities are repurchased
by the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise, and these activities, if commenced,
may be discontinued at any time.
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<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Stradling Yocca Carlson & Rauth, a Professional Corporation,
Newport Beach, California. An investment partnership in which certain
shareholders of Stradling Yocca Carlson & Rauth are partners holds an
aggregate of $100,000 of the Company's Subordinated Secured Promissory Notes
and Common Stock Warrants, which will be converted into 15,873 shares of
Common Stock upon the closing of the Offering at an exercise price of $6.30
per share (based on an assumed initial public offering price of $9.00 per
share), and holds 523 shares of the Company's Common Stock. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The Consolidated Financial Statements and schedule of the Company as of
April 30, 1996 and 1997, and as of December 31, 1997, and for each of the
three years in the period ended April 30, 1997 and the eight months ended
December 31, 1997 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and to the exhibits and schedules filed
therewith. A copy of the Registration Statement may be inspected without
charge at the public reference facilities of the Commission located at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part of the Registration Statement may be obtained at the
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and its public reference facilities
in New York, New York and Chicago, Illinois, upon the payment of the fees
prescribed by the Commission. The Registration Statement is also available
through the Commission's website on the world wide web at http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified by such reference.
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<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
To Interplay Entertainment Corp.:
After the completion of the reincorporation and merger discussed in Note 13,
we expect to be in a position to render the following audit report and the
report on schedule included elsewhere in this Registration Statement.
/s/ Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interplay Entertainment Corp.:
We have audited the accompanying consolidated balance sheets of INTERPLAY
ENTERTAINMENT CORP. (a Delaware corporation) and subsidiaries as of April 30,
1996 and 1997 and December 31, 1997, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended April 30, 1997 and the eight months ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The Subordinated Secured Promissory Notes mature on November 30, 1998 and
give the holders the option, 30 days thereafter, to notify the Company in
writing that the Notes are due and payable. In addition, the Company's line of
credit matures in May 1999. For further discussion about the terms of these
borrowings and management's plan in connection with their repayment, see Notes
6 and 13.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interplay Entertainment
Corp. and subsidiaries as of April 30, 1996 and 1997 and December 31, 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended April
30, 1997 and the eight months ended December 31, 1997 in conformity with
generally accepted accounting principles.
Orange County, California
March 20, 1998 (except for the first
paragraph of Note 8--Litigation,
for which the date is April 28, 1998)
F-2
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30,
---------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998
------- -------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................... $ 4,923 $ 5,410 $ 1,536 $ 1,937
Trade receivables, net of allowances of
$9,100, $14,894, $14,461 and $11,394, re-
spectively................................. 22,983 22,346 34,684 38,233
Inventories................................. 5,896 7,404 6,338 6,065
Prepaid licenses and royalties.............. 14,483 10,914 12,628 12,382
Income taxes receivable..................... 1,425 1,601 1,427 --
Deferred income taxes....................... 323 7,889 7,792 7,522
Other....................................... 6,053 2,354 4,218 3,365
------- -------- -------- --------
Total current assets........................ 56,086 57,918 68,623 69,504
------- -------- -------- --------
Property and Equipment, net................... 7,838 8,117 7,026 6,746
------- -------- -------- --------
Other Assets.................................. 4,587 2,970 2,172 2,077
------- -------- -------- --------
$68,511 $ 69,005 $ 77,821 $ 78,327
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current Liabilities:
Accounts payable............................ $16,945 $ 16,975 $ 17,121 $ 14,193
Accrued expenses............................ 15,549 21,100 22,549 22,231
Short term borrowings....................... 5,050 10,950 -- --
Current portion of long-term debt........... 57 123 14,767 14,825
Income taxes payable........................ -- 880 570 813
------- -------- -------- --------
Total current liabilities................. 37,601 50,028 55,007 52,062
------- -------- -------- --------
Long-Term Debt, net of current portion........ 51 14,847 23,387 23,855
------- -------- -------- --------
Deferred Income Taxes......................... 366 403 434 434
------- -------- -------- --------
Minority Interest............................. 298 326 260 307
------- -------- -------- --------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, no par value--
Authorized--5,000,000 shares
Issued and outstanding--none............... -- -- -- --
Common stock, $.001 par value--
Authorized 50,000,000 shares
Issued and outstanding--10,829,781,
11,114,060, 10,951,828 and 10,953,028
shares, respectively....................... 11 11 11 11
Paid-in capital............................. 17,783 18,020 18,408 18,494
Retained earnings (accumulated deficit)..... 12,401 (14,818) (19,877) (17,028)
Cumulative translation adjustment........... -- 188 191 192
------- -------- -------- --------
Total stockholders' equity (deficit)...... 30,195 3,401 (1,267) 1,669
------- -------- -------- --------
$68,511 $ 69,005 $ 77,821 $ 78,327
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED THREE MONTHS ENDED
YEARS ENDED APRIL 30, DECEMBER 31, MARCH 31,
---------------------------------- ----------------------- ------------------------
1995 1996 1997 1996 1997 1997 1998
---------- ---------- ---------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 79,546 $ 96,952 $ 83,262 $ 50,364 $ 85,961 $ 22,410 $ 40,996
Cost of goods sold...... 45,491 49,939 62,480 35,725 44,864 13,508 19,221
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 34,055 47,013 20,782 14,639 41,097 8,902 21,775
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Marketing and sales..... 14,280 23,285 24,627 15,747 20,603 7,280 8,589
General and
administrative......... 5,528 9,025 9,408 8,730 8,989 3,088 2,855
Product development..... 8,200 15,120 21,431 12,464 14,291 5,384 5,819
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating ex-
penses................. 28,008 47,430 55,466 36,941 43,883 15,752 17,263
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 6,047 (417) (34,684) (22,302) (2,786) (6,850) 4,512
---------- ---------- ---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income......... 244 102 190 48 92 324 6
Interest expense........ (38) (531) (1,907) (1,088) (3,009) (663) (1,346)
Other................... 840 (378) 117 (45) 644 (36) (78)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income (ex-
pense)................. 1,046 (807) (1,600) (1,085) (2,273) (375) (1,418)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 7,093 (1,224) (36,284) (23,387) (5,059) (7,225) 3,094
Provision (benefit) for
income taxes........... 2,844 (480) (9,065) (5,918) -- (1,782) 245
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 4,249 $ (744) $ (27,219) $ (17,469) $ (5,059) $ (5,443) $ 2,849
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per
share:
Basic................... $ 0.40 $ (0.07) $ (2.46) $ (1.58) $ (0.45) $ (0.49) $ 0.26
========== ========== ========== ========== ========== ========== ==========
Diluted................. $ 0.35 $ (0.07) $ (2.46) $ (1.58) $ (0.45) $ (0.49) $ 0.23
========== ========== ========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding:
Basic................... 10,568,042 10,661,944 11,085,632 11,066,487 11,123,327 11,114,060 10,952,375
========== ========== ========== ========== ========== ========== ==========
Diluted................. 12,045,687 10,661,944 11,085,632 11,066,487 11,123,327 11,114,060 14,144,627
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
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, April 30,
1994................... 10,565,136 $11 $16,146 $ 8,896 $-- $ 25,053
Exercise of stock op-
tions................ 176,763 -- 54 -- -- 54
Tax benefit from exer-
cise of stock op-
tions................ -- -- 620 -- -- 620
Compensation of stock
options granted...... -- -- 93 -- -- 93
Net income............ -- -- -- 4,249 -- 4,249
---------- --- ------- -------- ---- --------
Balance, April 30,
1995................... 10,741,899 11 16,913 13,145 -- 30,069
Exercise of stock op-
tions................ 177,104 -- 140 -- -- 140
Repurchase of common
stock................ (89,222) -- -- -- -- --
Tax benefit from exer-
cise of stock op-
tions................ -- -- 424 -- -- 424
Compensation for stock
options granted...... -- -- 306 -- -- 306
Net loss.............. -- -- -- (744) -- (744)
---------- --- ------- -------- ---- --------
Balance, April 30,
1996................... 10,829,781 11 17,783 12,401 -- 30,195
Exercise of stock op-
tions................ 313,403 -- 58 -- -- 58
Repurchase of common
stock................ (29,124) -- (275) -- -- (275)
Proceeds from war-
rants................ -- -- 148 -- -- 148
Compensation for stock
options granted...... -- -- 306 -- -- 306
Net loss.............. -- -- -- (27,219) -- (27,219)
Translation adjust-
ment................. -- -- -- -- 188 188
---------- --- ------- -------- ---- --------
Balance, April 30,
1997................... 11,114,060 11 18,020 (14,818) 188 3,401
Issuance of common
stock................ 16,362 -- 184 -- -- 184
Repurchase of common
stock................ (178,594) -- -- -- -- --
Compensation for stock
options granted...... -- -- 204 -- -- 204
Net loss.............. -- -- -- (5,059) -- (5,059)
Translation adjust-
ment................. -- -- -- -- 3 3
---------- --- ------- -------- ---- --------
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 adjust-
ment................. -- -- -- -- 1 1
---------- --- ------- -------- ---- --------
Balance, March 31, 1998
(unaudited)............ 10,953,028 $11 $18,494 $(17,028) $192 $ 1,669
========== === ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED THREE MONTHS ENDED
YEARS ENDED APRIL 30, DECEMBER 31, MARCH 31,
-------------------------- -------------------- -----------------------
1995 1996 1997 1996 1997 1997 1998
------- ------- -------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 4,249 $ (744) $(27,219) $(17,469) $ (5,059) $(5,443) $ 2,849
Adjustments to
reconcile net income
(loss) to the cash
provided by (used in)
operating
activities--
Depreciation and
amortization......... 756 1,985 3,172 1,817 2,138 741 840
Gain on sale of
property and
equipment............ -- (21) -- -- -- -- --
Noncash expense for
stock options........ 93 306 306 204 204 76 76
Noncash interest
expense.............. -- -- -- -- 184 -- --
Write-off of non-
current assets....... -- 388 250 -- -- -- --
Deferred income
taxes................ 1,360 (335) (6,649) -- 128 -- 653
Minority interest in
earnings (loss) of
subsidiary........... -- 25 28 (4) (66) 23 44
Changes in assets and
liabilities:
Trade receivables.... (7,824) (3,229) 3,926 (1,823) (12,338) 3,641 (9,708)
Inventories.......... (1,343) (2,193) (1,508) (824) 1,066 (805) 273
Income taxes
receivable.......... -- (1,403) (176) -- 174 -- 1,427
Other current
assets.............. (1,364) (2,232) 5,732 2,713 (1,864) (258) (2,837)
Other assets......... (1,098) (467) 5,610 -- 543 -- --
Prepaid licenses and
royalties........... (6,897) (5,966) (4,102) (3,922) (1,714) 90 245
Accounts payable..... (328) 7,589 (1,999) (272) 146 (3,059) (2,927)
Accrued expenses..... 4,027 9,223 5,618 7,047 1,449 5,061 8,968
Income taxes
payable............. (347) (467) -- (5,919) (310) (1,807) (140)
------- ------- -------- -------- -------- ------- -------
Net cash provided by
(used in) operating
activities......... (8,716) 2,459 (17,011) (18,452) (15,319) (1,740) (237)
------- ------- -------- -------- -------- ------- -------
Cash flows from
investing activities:
Purchase of property
and equipment........ (3,323) (4,585) (3,451) (1,981) (792) (617) (296)
Proceeds from sales of
property and
equipment............ -- 14 -- -- -- -- --
Acquisition of
subsidiary, net of
cash acquired of
$119................. -- (3,196) -- -- -- -- --
Proceeds from sale of
investment in
affiliate............ -- 200 -- -- -- -- --
Proceeds from sale of
marketable
securities........... 15,012 69 -- -- -- -- --
------- ------- -------- -------- -------- ------- -------
Net cash provided by
(used in) investing
activities......... 11,689 (7,498) (3,451) (1,981) (792) (617) (296)
------- ------- -------- -------- -------- ------- -------
Cash flows from
financing activities:
Net borrowings on line
of credit............ -- 5,050 5,900 5,392 12,296 466 971
Issuances of
Subordinated Secured
Promissory Notes and
Warrants............. -- -- 14,803 13,230 -- 1,961 --
Borrowings (repay-
ments) on notes pay-
able................. (122) (117) (75) (34) (62) 31 (48)
Proceeds from exercise
of stock options..... 54 140 58 57 -- -- 10
Tax benefit from stock
option exercise...... 620 424 -- -- -- -- --
Other financing activ-
ities................ -- (11) -- -- -- -- --
------- ------- -------- -------- -------- ------- -------
Net cash provided by
financing
activities......... 552 5,486 20,686 18,645 12,234 2,458 933
------- ------- -------- -------- -------- ------- -------
Effect of exchange rate
changes on cash and
cash equivalents...... -- (58) 263 -- 3 -- 1
------- ------- -------- -------- -------- ------- -------
Net increase (decrease)
in cash and cash
equivalents........... 3,525 389 487 (1,788) (3,874) 101 401
Cash and cash
equivalents, beginning
of year............... 1,009 4,534 4,923 4,923 5,410 3,135 1,536
------- ------- -------- -------- -------- ------- -------
Cash and cash
equivalents, end of
year.................. $ 4,534 $ 4,923 $ 5,410 $ 3,135 $ 1,536 $ 3,236 $ 1,937
======= ======= ======== ======== ======== ======= =======
Supplemental cash flow
information:
Cash paid during the
year for:
Interest.............. $ 22 $ 480 $ 1,638 $ 822 $ 2,936 $ 563 $ 1,372
======= ======= ======== ======== ======== ======= =======
Income taxes.......... $ 1,318 $ 526 $ -- $ -- $ -- $ -- $ --
======= ======= ======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. LINE OF BUSINESS
Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(collectively with Interplay Productions, a California corporation, the
"Company"), develop, publish, and distribute interactive entertainment
software. In addition, the Company distributes certain titles to hardware or
peripheral device manufacturers for use in bundling arrangements. The
Company's software is developed for use on various interactive entertainment
software platforms, including personal computers and current generation video
game consoles, such as the PlayStation and Nintendo 64.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions Pty Ltd
(Australia), Interplay Co., Ltd., (Japan) and its 91 percent-owned subsidiary
Shiny Entertainment, Inc. All significant intercompany accounts and
transactions have been eliminated.
Change of Fiscal Year End
Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents and Noncash Activities
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
During the fiscal year ended April 30, 1997, in a noncash financing
transaction, the Company acquired 29,124 shares of common stock in exchange
for a $275 note payable.
Inventories
Inventories consist of CD-ROMs, video game console cartridges (cartridges),
manuals, packaging materials, supplies and packaged software ready for
shipment and are valued at the lower of cost (first-in, first-out) or market.
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 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
F-7
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation of computers,
equipment and furniture and fixtures is provided using the straight-line
method over a five year period. Leasehold improvements are amortized on a
straight line basis over the lesser of the estimated useful life or the
remaining lease term.
Other Non-current Assets
Other non-current assets consist primarily of goodwill which the Company is
amortizing on a straight-line basis over seven years (see Note 3). Accumulated
amortization as of April 30, 1995, 1996 and 1997 and December 31, 1997 was $0,
$327, $710 and $965, respectively.
Long-lived Assets
As prescribed by Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of," the Company assesses the recoverability of its long-lived
assets (including goodwill) by determining whether the asset balance can be
recovered over the remaining depreciation or amortization period through
projected undiscounted future cash flows. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximates the fair value. In addition,
the carrying value of all borrowings approximate fair value based on interest
rates currently available to the Company.
Revenue Recognition
Revenues are recorded when products are delivered to customers in accordance
with Statement of Position (SOP) 91-1, Software Revenue Recognition. For those
agreements that provide the customers the right to multiple copies in exchange
for guaranteed amounts, revenue is recognized at the delivery of the product
master or the first copy. Per copy royalties on sales that exceed the
guarantee are recognized as earned. The Company is generally not contractually
obligated to accept returns, except for defective product. However, the
Company permits customers to return or exchange product and may provide price
protection on products unsold by a customer. In accordance with SFAS No. 48,
revenue is recorded net of an allowance for estimated returns, exchanges,
markdowns, price concessions, and warranty costs. Such reserves are based upon
management's evaluation of historical experience, current industry trends and
estimated costs. The amount of reserves ultimately required could differ
materially in the near term from the amounts included in the accompanying
consolidated financial statements. Postcontract customer support provided by
the Company is limited to telephone support. These costs are not material and
are charged to expenses as incurred.
Product Development
Product development expenses are charged to operations in the period
incurred and consist primarily of payroll and payroll related costs.
F-8
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income Taxes
The Company accounts for income taxes using the liability method as
prescribed by the SFAS No. 109, "Accounting for Income Taxes." The statement
requires an asset and liability approach for financial accounting and
reporting of income taxes. Deferred income taxes are provided for temporary
differences in the recognition of certain income and expense items for
financial reporting and tax purposes given the provisions of the enacted tax
laws.
Foreign Currency Translation
The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at
the weighted average exchange rate prevailing during the period. Gains or
losses arising from the translation of the foreign subsidiaries' financial
statements are included in the accompanying consolidated balance sheets as a
separate component of stockholders' equity (deficit). Gains (losses) resulting
from foreign currency transactions amounted to $(7), $325, $364 and $246
during the years ended April 30, 1995, 1996 and 1997 and the eight months
ended December 31, 1997, respectively, and are included in other income
(expense) in the consolidated statements of operations.
Net Income (Loss) Per Share
The Company accounts for net income per share in accordance with SFAS No.
128 "Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." 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 issued in connection with Subordinated
Secured Promissory Notes.
For the year ended April 30, 1995 and the three months ended March 31, 1998,
1,477,645 and 3,192,252 dilutive stock options and warrants, respectively,
were included in the diluted net income per share calculation. For years ended
April 30, 1996 and 1997 and the eight months ended December 31, 1997, all
options and warrants to purchase common stock were excluded from the diluted
loss per share calculation as the effect of such inclusion would be
antidilutive (see Note 10).
F-9
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Data (unaudited)
Pro forma net income (loss) represents the reduction of interest expense
assuming (i) the conversion or repayment of the Subordinated Secured
Promissory Notes (Notes) as of the beginning of the period, and (ii) the
application of proceeds of the Offering to repay the outstanding borrowings on
the line of credit. Pro forma net income (loss) per share was computed by
dividing pro forma net income (loss) by the pro forma weighted average shares
outstanding. Pro forma weighted average shares includes an estimated number of
shares of common stock from the exercise of common stock warrants, and an
estimated number of shares of common stock issued in the Offering sufficient
to repay the outstanding borrowings on the line of credit and the Notes that
are not expected to convert to common stock.
<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
APRIL 30, DECEMBER 31, MARCH 31,
1997 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss):
Historical income (loss) before pro-
vision (benefit) for income taxes.. $ (36,284) $ (5,059) $ 3,094
Adjust interest expense............. 1,616 2,379 1,062
Less provision (benefit) for income
taxes.............................. (9,065) -- 245
---------- ---------- ----------
Pro forma net income (loss)......... $ (25,603) $ (2,680) $ 3,911
========== ========== ==========
Pro forma net income (loss) per
share: $ (1.78) $ (0.17) $ 0.25
========== ========== ==========
Pro forma weighted average number of
common shares outstanding: 14,368,776 15,772,694 15,665,519
========== ========== ==========
</TABLE>
Stock-Based Compensation
As permitted under generally accepted accounting principles, the Company
accounts for employee stock options in accordance with the Accounting
Principles Board Opinion No. 25 and makes the necessary pro forma disclosures
mandated by SFAS No. 123 (see Note 10).
Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." In addition, the American
Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue
Recognition" and SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SFAS No. 130, SFAS No. 131 and SOP
97-2 are effective for fiscal years beginning after December 15, 1997 and SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not believe that adoption of these standards will have a material
impact on the Company's results of operations.
Unaudited Quarterly Information
The accompanying financial information as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 is unaudited and has been prepared
on substantially the same basis as the annual financial
F-10
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
statements. In the opinion of management, the unaudited information contains
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and results of operations as of such date and
for such periods.
3. ACQUISITION
Effective June 24, 1995, the Company acquired a 91 percent interest in Shiny
Entertainment, Inc. (Shiny) for $3,624 in cash and stock. The acquisition was
accounted for using the purchase method. The allocation of purchase price is
summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents............................................ $ 119
Receivables.......................................................... 107
Other current assets................................................. 6
Property and equipment............................................... 417
Goodwill............................................................. 3,057
Accounts payable and accrued expenses................................ (82)
------
Total purchase price............................................... $3,624
======
</TABLE>
The purchase agreement requires the Company to pay the former owner of Shiny
additional cash payments of up to $5,325 upon the delivery and acceptance of
five future Shiny interactive entertainment software titles, as defined.
Future payments, if any, will be expensed in the six-month period following
the initial shipment of such products. As of December 31, 1997, the Company
had not been required to make any additional payments.
4. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998
------ ------ ------------ ---------
<S> <C> <C> <C> <C>
Packaged software..................... $4,211 $5,309 $4,171 $ 3,852
CD-ROMs, cartridges, manuals,
packaging and supplies................ 1,685 2,095 2,167 2,213
------ ------ ------ -------
$5,896 $7,404 $6,338 $ 6,065
====== ====== ====== =======
</TABLE>
Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998
------ ------ ------------ ---------
<S> <C> <C> <C> <C>
Prepaid expenses....................... $2,960 $ 977 $1,640 $1,301
Royalties receivables.................. 1,331 581 1,644 --
Deposits............................... 553 560 162 214
Other receivables...................... 236 236 772 1,850
Stockholder receivable................. 973 -- -- --
------ ------ ------ ------
$6,053 $2,354 $4,218 $3,365
====== ====== ====== ======
</TABLE>
F-11
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998
------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Computers and equipment........... $ 9,179 $11,325 $12,383 $12,793
Furniture and fixtures............ 336 702 474 511
Leasehold improvements............ 1,249 1,514 1,125 1,144
------- ------- ------- -------
10,764 13,541 13,982 14,448
Less--accumulated depreciation and
amortization..................... (2,926) (5,424) (6,956) (7,702)
------- ------- ------- -------
$ 7,838 $ 8,117 $ 7,026 $ 6,746
======= ======= ======= =======
</TABLE>
Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998
------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Royalties payable..................... $ 5,463 $ 8,178 $ 6,901 $ 5,051
Accrued payroll....................... 2,621 2,261 2,707 3,027
Payable to distributor................ 2,806 1,715 4,240 554
Accrued bundle and affiliate.......... 2,115 4,149 2,923 2,981
Deferred income....................... -- 2,464 3,442 4,845
Other................................. 2,544 2,333 2,336 5,773
------- ------- ------- -------
$15,549 $21,100 $22,549 $22,231
======= ======= ======= =======
</TABLE>
5. SHORT-TERM BORROWINGS
In May 1993, the Company entered into a trade finance agreement with a bank,
bearing interest at prime (8.25 percent at April 30, 1996) plus one-half
percent. Amounts outstanding under this agreement were $5,050 at April 30,
1996. This agreement expired in October 1996. In April 1996, the Company
entered into a line of credit agreement with the same bank, bearing interest
at prime plus one-half percent. No amounts were outstanding under this line of
credit at April 30, 1996, and the line of credit expired in June 1996. In
October 1996, the Company entered into a trade finance agreement with two
banks, bearing interest at prime (8.5 percent at April 30, 1997) plus one-half
percent. Amounts outstanding under this agreement were $10,950 at April 30,
1997. In June 1997, the Company retired this trade finance agreement and
entered into a Loan and Security Agreement with a financial institution (see
Note 6).
F-12
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------- DECEMBER 31, MARCH 31,
1996 1997 1997 1998
---- ------- ------------ ---------
<S> <C> <C> <C> <C>
Subordinated Secured Promissory
Notes............................. $-- $14,655 $ 14,655 $ 14,655
Loan Agreement..................... -- -- 23,246 23,820
Other.............................. 108 315 253 205
---- ------- -------- --------
108 14,970 38,154 38,680
Less--current portion.............. (57) (123) (14,767) (14,825)
---- ------- -------- --------
$ 51 $14,847 $ 23,387 $ 23,855
==== ======= ======== ========
</TABLE>
Subordinated Secured Promissory Notes
From October 1996 through February 1997, the Company issued $14,803 in
Subordinated Secured Promissory Notes (Notes) and nondetachable Warrants to
purchase common stock (Warrants). Employees, officers, and directors of the
Company hold $2,600 of the total Notes outstanding. Of the total proceeds
received, $14,655 represents the principal amount of the Notes and $148
represents the purchase price of the Warrants. 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 consolidated balance sheets.
The Notes bear interest at a rate of 12.0 percent per year. Interest is
payable quarterly, with the first payment due May 1, 1997. The principal
amount and all accrued but unpaid interest will be payable upon the
consummation of a qualified initial public offering (IPO), as defined or the
sale of substantially all of the Company's assets or a merger where the
Company is not the surviving entity (Sales Transaction). If neither of these
events occur prior to November 30, 1998, the Note holders may elect to extend
the Notes one additional year or may notify the Company in writing of their
desire to full payment in cash. Interest expense related to the notes was $856
for the year ended April 30, 1997 and $1,172 for the eight months ended
December 31, 1997.
Each Warrant holder has 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 .70 multiplied by (a) the 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. The term of the
Warrants commenced on the date of issuance and expire upon the redemption of
the Notes, as described above (see Note 13).
Total interest due on the Notes at May 1, 1997 was $856. The Company offered
to pay the interest in cash or offered to issue one share of common stock for
each $11.25 of interest due (management's estimate of fair value of the
Company's common stock at the time). Interest of $672 was paid in cash and
$184 of interest was paid with 16,362 shares of common stock.
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) plus 4.87 percent (10.59 percent at December 31, 1997). The
agreement
F-13
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
provides for a line of credit and letters of credit to be issued, 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 expires in May 1999.
7. INCOME TAXES
The Company files a consolidated U.S. Federal income tax return which
includes substantially all of its domestic operations. The Company files
separate tax returns for each of its foreign subsidiaries in the countries in
which they reside.
Income (loss) before provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
EIGHT MONTHS
YEARS ENDED APRIL 30, ENDED
------------------------ DECEMBER 31,
1995 1996 1997 1997
------ ------- -------- ------------
<S> <C> <C> <C> <C>
Domestic.............................. $5,689 $(1,890) $(32,888) $(2,784)
Foreign............................... 1,404 666 (3,396) (2,275)
------ ------- -------- -------
Total............................... $7,093 $(1,224) $(36,284) $(5,059)
====== ======= ======== =======
The provision (benefit) for income taxes is comprised of the following:
<CAPTION>
EIGHT MONTHS
YEARS ENDED APRIL 30, ENDED
------------------------ DECEMBER 31,
1995 1996 1997 1997
------ ------- -------- ------------
<S> <C> <C> <C> <C>
Current:
Federal............................. $ 915 $ (275) $ (1,689) $ (179)
State............................... 125 10 -- --
Foreign............................. -- 456 153 51
------ ------- -------- -------
1,040 191 (1,536) (128)
Deferred:
Federal............................. 1,591 (653) (7,303) 128
State............................... 213 (18) (226) --
------ ------- -------- -------
1,804 (671) (7,529) 128
------ ------- -------- -------
$2,844 $ (480) $ (9,065) $ --
====== ======= ======== =======
</TABLE>
The Company's available net operating loss (NOL) carryforward for federal
tax reporting purposes approximates $17,300 and may be subject to certain
limitations as defined under Section 382 of the Internal Revenue Code. The
federal NOL carryforwards expire through the year 2012. The Company's NOL's
for state tax reporting purposes approximate $13,000 and expire through the
year 2002.
F-14
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
YEARS ENDED EIGHT MONTHS
APRIL 30, ENDED
-------------------- DECEMBER 31,
1995 1996 1997 1997
---- ----- ----- -------------
<S> <C> <C> <C> <C>
Statutory income tax rate.............. 34.0 % (34.0)% (34.0)% (34.0)%
State and local income taxes, net of
federal income tax benefit............ 6.6 (3.0) (3.0) (3.0)
Valuation allowance.................... -- -- 8.0 39.7
Other.................................. (0.5) (2.2) 4.0 (2.7)
---- ----- ----- -----
Effective income tax rate.............. 40.1 % (39.2)% (25.0)% -- %
==== ===== ===== =====
</TABLE>
The components of the Company's net deferred income tax asset (liability)
are as follows:
<TABLE>
<CAPTION>
APRIL 30,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Current deferred tax asset (liability):
Prepaid royalties......................... $(4,681) $(3,060) $(2,760)
Nondeductible reserves.................... 3,655 5,532 5,603
Accrued expenses.......................... 675 769 1,015
Foreign loss and credit carryforward...... 568 207 1,008
Federal and state net operating losses.... -- 6,264 6,668
Research and development credit
carryforward............................. -- 831 831
Other..................................... 106 241 330
------- ------- -------
323 10,784 12,695
Valuation allowance....................... -- (2,895) (4,903)
------- ------- -------
$ 323 $ 7,889 $ 7,792
======= ======= =======
Non-current deferred tax asset (liability):
Depreciation expense...................... $ (591) $ (585) $ (625)
Nondeductible reserves.................... 155 127 191
Other..................................... 70 55 --
------- ------- -------
$ (366) $ (403) $ (434)
======= ======= =======
</TABLE>
F-15
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space in Irvine, California for its corporate
offices. The lease expires in June 2006 with one five-year option to extend
the term of the lease. The Company has also entered into various computer
equipment operating leases. Future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................... $ 2,036
1999............................................................... 1,710
2000............................................................... 1,414
2001............................................................... 1,522
2002............................................................... 1,669
Thereafter......................................................... 6,133
-------
$14,484
=======
</TABLE>
Total rent expense was $362, $697 and $2,089 for the years ended April 30,
1995, 1996 and 1997, respectively, and $1,292 for the eight months ended
December 31, 1997.
Pending Internal Revenue Service Examination
The Internal Revenue Service (the IRS) is currently examining the Company's
consolidated federal income tax returns for the years ended April 30, 1994,
1995 and 1996. The consolidated federal income tax return for the year ended
April 30, 1997 remains open. The IRS has preliminarily challenged the timing
of certain tax deductions taken by the Company. The Company is currently
contesting such challenges. However, if the IRS is successful in its position,
the effect on the consolidated financial statements would be to reduce amounts
currently shown as deferred income taxes and net operating loss carryforwards
and the recording of interest expense of approximately $700. In conjunction
with this matter, the Company has recorded certain reserves and, in the
opinion of management, settlement of this matter will not have a material
adverse effect on the consolidated financial position or operating results of
the Company.
Litigation
In July 1997, S3 Incorporated (S3), an original equipment manufacturer (OEM)
customer, filed a complaint against the Company claiming, among other things,
that the Company breached its obligations to S3 under a license agreement. In
September 1997, the Company filed a cross-complaint against S3 claiming, among
other things, that S3 breached the license agreement by failing to make
guaranteed payments. Both parties are seeking in excess of $1,000 in the
lawsuit. On April 28, 1998, the Company entered into a Settlement and Release
Agreement pursuant to which S3 has agreed to pay the Company certain amounts
in full settlement of all claims.
The Company is also involved in other litigation arising from the normal
course of business. Management believes that the final outcome of all legal
matters will not have a material adverse effect on the Company's financial
position or results of operations.
Employment Agreements
The Company has entered into employment agreements with three of its
officers providing for, among other things, salary, bonuses and the right to
participate in certain incentive compensation and other employee benefit plans
established by the Company. Under these agreements, upon termination without
cause or resignation for
F-16
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
good reason, as defined, the employees are entitled to 150 percent of their
annual salary and 75 percent of the imputed bonus, as defined. These
agreements expire in 1999.
9. COMMON STOCK
During 1994, the Company issued 1,824,897 shares of common stock for cash to
a corporate stockholder. In addition, the corporate stockholder purchased
1,216,598 shares of common stock for cash from the founder of the Company (the
Founder). In connection with this transaction, the corporate stockholder was
granted options to purchase additional shares from the Founder, which were
exercisable in 1995 and 1996. The corporate stockholder exercised these
options and purchased 1,150,123 and 1,216,598 shares from the Founder during
1996 and 1995, respectively.
On May 26, 1995, the Company entered into an Agreement of Settlement and
Mutual Release with a former employee whereby 89,222 shares of common stock
were cancelled and the former employee's remaining shares of 45,000 shares
were retained by the former employee.
On February 1, 1997, the Company repurchased 29,124 shares of common stock
from an employee in exchange for a $275 note payable. The note bears interest
at 7 percent and is payable over 36 months.
On September 12, 1997, the Company entered into a Separation and Release
Agreement with a former employee whereby 178,594 shares of common stock were
cancelled and the former employee's remaining shares of 149,500 shares were
retained by the former employee.
10. EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company has three stock option plans. Under the Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan--1991 (1991
Plan), the Company may grant options to its employees to purchase up to
2,250,000 shares of common stock. Under the Incentive Stock Option and
Nonqualified Stock Option Plan--1994 (1994 Plan), the Company may grant
options to its employees to purchase up to 808,300 shares of common stock.
Under the 1997 Stock Incentive Plan, adopted in 1997, the Company may grant
options to its employees, consultants and directors to purchase up to 700,000
shares of common stock (See Note 13).
Options under all three plans generally vest over five years. Holders of
options under the 1991 Plan and the 1994 Plan shall be deemed 100 percent
vested in the event of a merger in which the Company is not the surviving
entity, a sale of substantially all of the assets of the Company, or a sale of
all shares of common stock of the Company. The Company has treated the
difference, if any, between the exercise price and the estimated fair market
value, as determined by the board of directors on the date of grant, as
compensation expense for financial reporting purposes. Compensation expense
for the vested portion aggregated $306 for each of the years ended April 30,
1996 and 1997 and $204 for the eight months ended December 31, 1997.
F-17
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following is a summary of option activity pursuant to the Company's stock
option plans:
<TABLE>
<CAPTION>
APRIL 30, 1996 APRIL 30, 1997 DECEMBER 31, 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 1,665,479 $1.69 1,824,025 $ 3.16 1,630,022 $ 4.59
Granted................. 418,050 8.79 136,800 14.08 263,750 11.25
Exercised............... (177,104) 0.79 (313,403) 0.18 -- --
Cancelled............... (82,400) 7.16 (17,400) 8.50 (54,800) 12.50
--------- ----- --------- ------ --------- ------
Options outstanding at
end of year............ 1,824,025 $3.16 1,630,022 $ 4.59 1,838,972 $ 5.31
========= ===== ========= ====== ========= ======
Options exercisable..... 1,434,775 1,218,102 1,324,132
========= ========= =========
</TABLE>
The following outlines the significant assumptions used to calculate the fair
value information presented utilizing the Black Scholes Single Option approach
with ratable amortization:
<TABLE>
<CAPTION>
APRIL 30,
--------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Risk free rate.......................... 6.1% 6.1% 6.1%
Expected life........................... 7.12 years 7.13 years 8.02 years
Expected volatility..................... -- -- --
Expected dividends...................... -- -- --
Weighted-average grant-date fair value
of options granted..................... $2.34 $3.68 $3.61
</TABLE>
A detail of the options outstanding and exercisable as of December 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACT EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
--------------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.15-$ 0.47 676,659 4.31 years $ 0.21 676,659 $ 0.21
2.00- 4.44 274,913 6.15 years 3.48 274,913 3.48
4.50- 8.50 446,350 7.26 years 7.91 278,360 7.84
10.00- 14.62 441,050 8.49 years 11.65 94,200 11.62
------------- --------- ---------- ------ --------- ------
$ 0.15-$14.62 1,838,972 6.30 years $ 5.31 1,324,132 $ 3.30
============== ========= ========== ====== ========= ======
</TABLE>
F-18
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table shows pro forma net loss as if the fair value based
accounting method prescribed by SFAS No. 123 had been used to account for
stock based compensation cost:
<TABLE>
<CAPTION>
EIGHT MONTHS
YEARS ENDED APRIL 30, ENDED
---------------------- DECEMBER 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
Net loss as reported.................. $ (744) $ (27,219) $(5,059)
Pro forma compensation expense........ (121) (348) (276)
--------- ----------- -------
Pro forma net loss.................... $ (865) $ (27,567) $(5,335)
========= =========== =======
Basic and diluted net loss as report-
ed................................... $ (0.07) $ (2.46) $ (0.45)
Basic and diluted pro forma net loss.. $ (0.08) $ (2.49) $ (0.48)
</TABLE>
Profit Sharing 401(k) Plan
The Company sponsors a 401(k) plan (the Plan) for full-time employees over
18 years of age. Eligible employees may participate in the Plan in each year
in which the employee has greater than 1,000 hours of service with the
Company. The Company matches 50 percent of the participant's contributions up
to the first six percent of the participant's salary deferral. The profit
sharing contribution amount is at the sole discretion of the Company's board
of directors. Participants vest at a rate of 20 percent per year after the
first year of service for profit sharing contributions and 20 percent per year
after the first three years of service for matching contributions.
Participants become 100 percent vested upon death, permanent disability or
termination of the Plan. Benefit expense for the years ended April 30, 1995,
1996 and 1997 was $53, $160, and $229, respectively, and $178 for the eight
months ended December 31, 1997.
11. RELATED PARTIES
The Company has amounts due from a business controlled by the Chairman and
CEO of the Company. Net amounts due, prior to reserves, at April 30, 1996, and
1997 and December 31, 1997 were $1,607, $783 and $1,515, respectively. Such
amounts at April 30 and December 31, 1997 are fully reserved. Through December
1997, the Company rented office space from the Chairman and CEO of the
Company. Rent expense paid to the Chairman and CEO was $236, $248 and $191 for
the years ended April 30, 1995, 1996 and 1997, respectively and $160 for the
eight months ended December 31, 1997.
12. SIGNIFICANT CUSTOMERS
For the year ended April 30, 1997 one customer accounted for approximately
15 percent of net revenues. No single customer accounted for ten percent or
more of net revenues in the years ended April 30, 1995 and 1996 and the eight
months ended December 31, 1997.
13. SUBSEQUENT EVENTS
Reincorporation
On March 2, 1998, the Board of Directors of Interplay Productions approved a
reincorporation plan. Under the reincorporation plan Interplay Productions
formed a new subsidiary in Delaware into which Interplay
F-19
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Productions will be merged. The new Delaware Corporation has 50,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock authorized for
issuance.
Initial Public Offering
On March 2, 1998, the Company's Board of Directors authorized management to
pursue an initial public offering of the Company's common stock (IPO). The
Company plans to file an S-1 Registration Statement with the Securities and
Exchange Commission to sell common stock to the public. The proceeds of the
offering will be used, in part, to repay debt.
Subordinated Secured Promissory Notes
As discussed in Note 6, the Note holders may elect to convert their Notes to
common stock upon the closing of a qualified IPO, as defined. In accordance
with the terms of the Notes, the Company has 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. In the event this IPO is completed, the holders of approximately $8,700
of Notes and Warrants have elected to exercise their Warrants by cancellation
of their Notes to common stock and the balance of approximately $6,100 have
requested payment in cash.
If the Company does not complete the IPO prior to November 30, 1998, the
holders have the option, 30 days thereafter, to notify the Company in writing,
that they declare the Notes due and payable or may unilaterally elect to
extend the Notes one year. Management's current projections indicate that
there will be sufficient cash flow from operations to fund that obligation
should the Note holders elect cash payment. However, if the Company is not
able to achieve the operating plan and therefore cash flows from operations
are insufficient to repay the Notes, management would be prepared to implement
certain cost-cutting measures. Such measures would include deferrals of
advertising expenditures, capital additions and product development projects.
Stock Options (unaudited)
Effective February 9, 1998, the Company repriced substantially all
outstanding options with exercise prices greater than $8 per share and
subsequently reissued these options with exercise prices equal to $8 per
share, management's estimate of the fair value of the Company's common stock
as of the date of reissuance. The effect of this has not been reflected in the
information in Note 10. These options were accounted for as new grants.
Effective February 23, 1998, the number of shares authorized under the 1991
Plan and the 1994 Plan were reduced to 898,425 and 639,984, respectively, and
such plans were terminated for purposes of future grants. The aggregate
reduction of 1,519,891 shares were contributed to the 1997 Plan resulting in
2,219,891 authorized shares under the 1997 Plan, of which 1,680,541 remain
available for grant. Also, on February 23, 1998, the Company granted 240,100
stock options with an exercise price equal to the estimated fair market value
of $8 per share.
F-20
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A schedule of the options outstanding as of February 28, 1998 giving effect
for the repricing discussed above is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACT EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
--------------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15-$ 0.47 676,659 4.15 years $0.20 676,659 $0.20
2.00- 4.44 274,913 5.99 years 3.48 274,913 3.48
4.50- 6.66 81,500 6.37 years 5.33 61,500 5.61
7.00- 10.00 1,021,634 8.36 years 8.15 320,260 8.19
------------ --------- ---------- ----- --------- -----
$0.15-$10.00 2,054,706 6.58 years $4.80 1,333,332 $3.05
============= ========= ========== ===== ========= =====
</TABLE>
14. OPERATIONS BY GEOGRAPHICAL AREA
The Company operates in one industry segment. Information about the
Company's operations in the United States and foreign areas for the fiscal
years ended April 30, 1995, 1996 and 1997 and for the eight months ended
December 31, 1997 and the three months ended March 31, 1998 is presented
below:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, APRIL 30, DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
--------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net revenues:
United States......... $68,021 $78,823 $ 54,469 $65,199 $31,245
United Kingdom........ 11,525 18,127 27,867 20,689 9,751
Other................. -- 2 926 73 --
------- ------- -------- ------- -------
Consolidated net
revenues........... $79,546 $96,952 $ 83,262 $85,961 $40,996
======= ======= ======== ======= =======
Income (loss) from oper-
ations:
United States......... $ 5,090 $(1,410) $(30,764) $ 298 $ 1,478
United Kingdom........ 957 1,853 (3,871) (2,666) 3,034
Other................. -- (860) (49) (418) --
------- ------- -------- ------- -------
Consolidated income
(loss) from
operations......... $ 6,047 $ (417) $(34,684) $(2,786) $ 4,512
======= ======= ======== ======= =======
Identifiable assets:
United States......... $39,211 $57,550 $ 53,722 $65,535 $69,650
United Kingdom........ 5,015 10,234 13,836 12,033 9,070
Other................. -- 727 1,447 253 (393)
------- ------- -------- ------- -------
Consolidated
identifiable
assets............. $44,226 $68,511 $ 69,005 $77,821 $78,327
======= ======= ======== ======= =======
</TABLE>
F-21
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net revenues for the years ended April 30, 1995, 1996 and 1997 and the eight
months ended December 31, 1997 and the three months ended March 31, 1998 were
made to geographic regions as follows:
<TABLE>
<CAPTION>
APRIL 30, 1995 APRIL 30, 1996 APRIL 30, 1997 DECEMBER 31, 1997 MARCH 31, 1998
--------------- --------------- --------------- ------------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North America........... $51,892 65.2% $54,702 56.4% $38,606 46.4% $ 51,833 60.3% $23,516 57.4%
Europe.................. 12,911 16.2 17,683 18.3 26,752 32.1 19,941 23.2 8,265 20.2
Rest of world........... 918 1.2 6,896 7.1 5,254 6.3 4,701 5.5 2,958 7.2
OEM, royalty and
licensing.............. 13,825 17.4 17,671 18.2 12,650 15.2 9,486 11.0 6,257 15.2
------- ----- ------- ----- ------- ----- --------- ------- ------- -----
$79,546 100.0% $96,952 100.0% $83,262 100.0% $ 85,961 100.0% $40,996 100.0%
======= ===== ======= ===== ======= ===== ========= ======= ======= =====
</TABLE>
F-22
<PAGE>
FUTURE
RELEASES
BALDUR'S GATE
CAESARS PALACE VIP SERIES
CRIME KILLER
DESCENT:
[ANIMATED DEPICTIONS OF CHARACTERS AND FREESPACE THE GREAT WAR
ARTWORK FROM CERTAIN OF THE LISTED FUTURE
RELEASES ARE ARRANGED VERTICALLY
TO THE LEFT OF THE RIGHT COLUMN] EARTHWORM JIM 3D
FALLOUT 2
M.A.X. 2
MESSIAH
REDNECK RAMPAGE RIDES AGAIN
STAR TREK:
SECRET OF VULCAN FURY
VR BASEBALL '99
VR FOOTBALL '99
WILD 9
THERE CAN BE NO ASSURANCE
THAT THE ANTICIPATED FUTURE
TITLES WILL BE RELEASED IN
A TIMELY MANNER, IF AT ALL.
SEE "RISK FACTORS"
COMMENCING ON PAGE FIVE.
STAR TREK AND RELATED
ELEMENTS(TM) & (C) 1998
PARAMOUNT PICTURES. ALL
RIGHTS RESERVED.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE OF THE PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Consolidated Financial Data...................................... 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Dilution................................................................. 17
Capitalization........................................................... 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 32
Management............................................................... 46
Principal Stockholders................................................... 54
Certain Transactions..................................................... 55
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 62
Legal Matters............................................................ 64
Experts.................................................................. 64
Available Information.................................................... 64
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,250,000 Shares
[LOGO OF INTERPLAY APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Piper Jaffray inc.
Bear, Stearns & Co. Inc.
UBS Securities
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereunder. All of the
amounts shown are estimates except for the SEC registration fee and the NASD
filing fee.
<TABLE>
<CAPTION>
TO BE PAID BY
THE COMPANY
-------------
<S> <C>
SEC registration fee........................................... $ 21,203
NASD filing fee................................................ 7,688
Nasdaq National Market application fee......................... 50,000
Printing expenses.............................................. 150,000
Legal fees and expenses........................................ 300,000
Accounting fees and expenses................................... 175,000
Blue sky fees and expenses..................................... 25,000
Transfer agent and registrar fees.............................. 50,000
Directors and officers insurance premiums...................... 150,000
Miscellaneous.................................................. 71,109
----------
Total........................................................ $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by the Delaware General Corporation Law ("DGCL"), the
Certificate of Incorporation of the Company (Exhibit 3.1 hereto) eliminates
the liability of directors to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a directors, except to the extent
otherwise required by the DGCL.
(b) The Certificate of Incorporation provides that the Company will
indemnify each person who was or is made a party to any proceeding by reason
of the fact that such person is or was a director or officer of the Company
against all expense, liability and loss reasonably incurred or suffered by
such person in connection therewith to the fullest extent authorized by the
DGCL. The Company's Bylaws (Exhibit 3.2 hereto) provide for a similar
indemnity to directors and officers of the Company to the fullest extent
authorized by the DGCL.
(c) The Certificate of Incorporation also gives the Company the ability to
enter into indemnification agreements with each of its directors and officers.
The Company has entered into indemnification agreements with certain of its
directors and officers (Exhibit 10.11 hereto), which provide for the
indemnification of such persons against any and all expenses, judgments,
fines, penalties and amounts paid in settlement, to the fullest extent
permitted by law.
(d) The Purchase Agreement to be entered into among the Company and the
Underwriters (the form of which is filed as Exhibit 1.1 to this Registration
Statement) requires the Underwriters to indemnify the Company and its officers
and directors for certain liabilities, including certain liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act:
From March 31, 1995 to March 31, 1998, the Company issued an aggregate of
1,192,200 nonqualified stock options to purchase Common Stock pursuant to the
Company's Incentive Stock Option and Nonqualified Stock Option Plan--1994 (the
"1994 Plan") and pursuant to the Company's 1997 Stock Incentive Plan (the
II-1
<PAGE>
"1997 Plan") to officers, directors and employees of the Company as described
in the Prospectus, at a weighted average exercise price of $9.56. Such options
were issued but not sold, in the view of the Company, and, therefore,
registration thereof was not required. During the same period, the Company
issued an aggregate of 668,470 shares of its Common Stock to three executive
officers, eight employees and one terminated employee upon the exercise of
options issued under the Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan--1991 (the "1991 Plan") with purchase prices
ranging from $0.153 to $4.44 per share for an aggregate consideration of
$253,080.62 and the Company issued an aggregate of 1,200 shares of Common
Stock upon the exercise of options under the 1994 Plan to one terminated
employee at a purchase price of $8.50 per share. During the period referred to
above, no options issued pursuant to the 1997 Plan were exercised.
From October 10, 1996 to February 21, 1997, the Company issued Subordinated
Secured Promissory Notes (the "Notes") and Warrants to purchase Common Stock,
in the aggregate amount of $14,803,000 to 51 accredited investors, as defined
under the Act, in a private offering. Subsequent to the closing of the private
offering, the Company exchanged the original Notes bearing interest at the
prime rate plus five percent (5%), but not less than ten percent (10%), per
annum for Notes of equivalent principal value, but bearing interest at the
rate of twelve percent (12%) per annum. Between May 7, 1997 and June 4, 1997,
the Company issued 16,362 shares of Common Stock to Note holders who elected
to convert the accrued interest on their Notes in the aggregate amount of
$184,072.50 into such shares.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Purchase Agreement among the Company and the Underwriters.
2.1 Form of Agreement and Plan of Reorganization and Merger, dated May ,
1998, between the Company and Interplay Productions.
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company.
3.2 Form of Amended and Restated Bylaws of the Company.
4.1 Specimen form of stock certificate for Common Stock.
4.2 Shareholders' Agreement among MCA Inc., the Company, and Brian Fargo,
dated March 30, 1994, as amended.+
4.3 Investors' Rights Agreement dated October 10, 1996, as amended, among
the Company and holders of its Subordinated Secured Promissory Notes
and Warrants to purchase Common Stock.+
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation.**
10.1 Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan").
10.2 Form of Stock Option Agreement pertaining to the 1997 Plan.+
10.3 Form of Restricted Stock Purchase Agreement pertaining to the 1997
Plan.+
10.4 Incentive Stock Option and Nonqualified Stock Option Plan--1994, as
amended (the "1994 Plan").+
10.5 Form of Nonqualified Stock Option Agreement pertaining to the 1994
Plan.+
10.6 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan--1991, as amended (the "1991 Plan").+
10.7 Form of Incentive Stock Option Agreement pertaining to the 1991 Plan.+
10.8 Form of Nonqualified Stock Option Agreement pertaining to the 1991
Plan.+
10.9 Intentionally omitted.
10.10 Employee Stock Purchase Plan.+
10.11 Form of Indemnification Agreement for Officers and Directors of the
Company.+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.12 Form of Subordinated Secured Promissory Note between the Company and
note holders.+
10.13 Form of Warrant to Purchase Common Stock between the Company and
warrant holders.+
10.14 Von Karman Corporate Center Office Building Lease between the Company
and Aetna Life Insurance Company of Illinois ("Aetna"), dated
September 8, 1995, together with amendments thereto.+
10.15 Loan and Security Agreement among Greyrock Business Credit, a Division
of NationsCredit Commercial Corporation ("Greyrock"), the Company,
and Interplay OEM, Inc. ("Interplay OEM"), dated June 16, 1997, as
amended, with Schedules.+
10.16 Intentionally omitted.
10.17 Intentionally omitted.
10.18 Letter of Credit Agreement among Greyrock, the Company and Interplay
OEM, dated September 10, 1997.+
10.19 Letter of Credit Agreement among Greyrock, the Company and Interplay
OEM, dated September 24, 1997.+
10.20 Master Equipment Lease between Brentwood Credit Corporation and the
Company, dated March 28, 1996, with Schedules.+
10.21 Intentionally omitted.
10.22 Master Equipment Lease Agreement between General Electric Capital
Computer Leasing Corporation ("GECC") and the Company, dated December
14, 1994, as amended, with Schedules.+
10.23 Confidential License Agreement for Nintendo 64 Video Game System,
between the Company and Nintendo of America, Inc., dated October 7,
1997. (Portions omitted pursuant to Rule 406.)+
10.24 PlayStation License Agreement, between Sony Computer Entertainment of
America and the Company, dated February 16, 1995. (Portions omitted
pursuant to Rule 406.)+
10.25 Master Merchandising License Agreement between Paramount Pictures
Corporation and the Company, dated as of June 16, 1992. (Portions
omitted pursuant to Rule 406).+
10.26 Employment Agreement between the Company and Brian Fargo, dated March
28, 1994, as amended.
10.27 Employment Agreement between the Company and Christopher J.
Kilpatrick, dated May 1, 1994.
10.28 Employment Agreement between the Company and Richard S.F. Lehrberg,
dated March 28, 1994, as amended.
21.1 Subsidiaries of the Company.
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation
(to be contained in the opinion to be filed as Exhibit 5.1 hereto).**
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included as page II-5 to the Registration
Statement).+
27.1 Financial Data Schedule.+
</TABLE>
- --------
+ Previously filed.
** To be filed by amendment.
II-3
<PAGE>
(b) Financial Statement Schedules
NUMBER
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required under the
related instructions, are inapplicable, or the information is included in the
Consolidated Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Representatives at the
closing specified in the Purchase Agreement certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act
shall be deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF IRVINE, STATE OF CALIFORNIA, ON THE 6TH DAY OF MAY, 1998.
INTERPLAY ENTERTAINMENT CORP.
By: /s/ Brian Fargo
----------------------------------
BRIAN FARGO CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brian Fargo Chairman of the May 6, 1998
- ------------------------------------- Board of Directors
BRIAN FARGO and Chief Executive
Officer (Principal
Executive Officer)
/s/ Christopher J. Kilpatrick President and May 6, 1998
- ------------------------------------- Director
CHRISTOPHER J. KILPATRICK
/s/ James C. Wilson Chief Financial May 6, 1998
- ------------------------------------- Officer (Principal
JAMES C. WILSON Financial and
Accounting Officer)
Executive Vice May 6, 1998
* President and
- ------------------------------------- Director
RICHARD S.F. LEHRBERG
Director May 6, 1998
*
- -------------------------------------
MARK PINKERTON
Director May 6, 1998
*
- -------------------------------------
CHARLES S. PAUL
Director May 6, 1998
*
- -------------------------------------
PAUL A. RIOUX
Director May 6, 1998
*
- -------------------------------------
DAVID R. DUKES
/s/ Brian Fargo
*By:
----------------------------------
BRIAN FARGO
ATTORNEY-IN-FACT
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interplay Entertainment Corp:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Interplay Entertainment Corp.
included in this registration statement and have issued our report thereon
dated March 20, 1998. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule included on
page S-2 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Our report on the consolidated financial statements includes an explanatory
paragraph that states that the Subordinated Secured Promissory Notes ("Notes")
mature on November 30, 1998 and that the holders have the option to notify the
Company in writing that they declare the Notes due and payable. In addition,
the Company's line of credit matures in May 1999. Terms of these borrowings
and management's plans in connection with repayment are, 30 days thereafter,
discussed further in Notes 6 and 13 to the consolidated financial statements.
Arthur Andersen LLP
Orange County, California
March 20, 1998
S-1
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended April 30, 1995
Allowance for doubtful accounts and
returns............................ $ 1,448 $10,878 $ (7,294) $ 5,032
======= ======= ======== =======
Year Ended April 30, 1996
Allowance for doubtful accounts and
returns............................ $ 5,032 $26,882 $(22,814) $ 9,100
======= ======= ======== =======
Year Ended April 30, 1997
Allowance for doubtful accounts and
returns............................ $ 9,100 $34,424 $(28,630) $14,894
======= ======= ======== =======
Eight Months Ended December 31, 1997
Allowance for doubtful accounts and
returns............................ $14,894 $21,915 $(22,348) $14,461
======= ======= ======== =======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Purchase Agreement among the Company and the
Underwriters.
2.1 Form of Agreement and Plan of Reorganization and
Merger, dated May , 1998, between the Company and
Interplay Productions.
3.1 Form of Amended and Restated Certificate of
Incorporation of the Company.
3.2 Form of Amended and Restated Bylaws of the Company.
4.1 Specimen form of stock certificate for Common Stock.
4.2 Shareholders' Agreement among MCA Inc., the Company,
and Brian Fargo, dated March 30, 1994, as amended.+
4.3 Investors' Rights Agreement dated October 10, 1996, as
amended, among the Company and holders of its
Subordinated Secured Promissory Notes and Warrants to
purchase Common Stock.+
5.1 Opinion of Stradling Yocca Carlson & Rauth, a
Professional Corporation.**
10.1 Amended and Restated 1997 Stock Incentive Plan (the
"1997 Plan").
10.2 Form of Stock Option Agreement pertaining to the 1997
Plan.+
10.3 Form of Restricted Stock Purchase Agreement pertaining
to the 1997 Plan.+
10.4 Incentive Stock Option and Nonqualified Stock Option
Plan--1994, as amended (the "1994 Plan").+
10.5 Form of Nonqualified Stock Option Agreement pertaining
to the 1994 Plan.+
10.6 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan--1991, as amended (the
"1991 Plan").+
10.7 Form of Incentive Stock Option Agreement pertaining to
the 1991 Plan.+
10.8 Form of Nonqualified Stock Option Agreement pertaining
to the 1991 Plan.+
10.9 Intentionally omitted.
10.10 Employee Stock Purchase Plan.+
10.11 Form of Indemnification Agreement for Officers and
Directors of the Company.+
10.12 Form of Subordinated Secured Promissory Note between
the Company and note holders.+
10.13 Form of Warrant to Purchase Common Stock between the
Company and warrant holders.+
10.14 Von Karman Corporate Center Office Building Lease
between the Company and Aetna Life Insurance Company
of Illinois ("Aetna"), dated September 8, 1995,
together with amendments thereto.+
10.15 Loan and Security Agreement among Greyrock Business
Credit, a Division of NationsCredit Commercial
Corporation ("Greyrock"), the Company, and Interplay
OEM, Inc. ("Interplay OEM"), dated June 16, 1997, as
amended, with Schedules.+
10.16 Intentionally omitted.
10.17 Intentionally omitted.
10.18 Letter of Credit Agreement among Greyrock, the Company
and Interplay OEM, dated September 10, 1997.+
10.19 Letter of Credit Agreement among Greyrock, the Company
and Interplay OEM, dated September 24, 1997.+
10.20 Master Equipment Lease between Brentwood Credit
Corporation and the Company, dated March 28, 1996,
with Schedules.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.21 Intentionally omitted.
10.22 Master Equipment Lease Agreement between General
Electric Capital Computer Leasing Corporation ("GECC")
and the Company, dated December 14, 1994, as amended,
with Schedules.+
10.23 Confidential License Agreement for Nintendo 64 Video
Game System, between the Company and Nintendo of
America, Inc., dated October 7, 1997. (Portions
omitted pursuant to Rule 406.)+
10.24 PlayStation License Agreement, between Sony Computer
Entertainment of America and the Company, dated
February 16, 1995. (Portions omitted pursuant to Rule
406.)+
10.25 Master Merchandising License Agreement between
Paramount Pictures Corporation and the Company, dated
as of June 16, 1992. (Portions omitted pursuant to
Rule 406).+
10.26 Employment Agreement between the Company and Brian
Fargo, dated March 28, 1994, as amended.
10.27 Employment Agreement between the Company and
Christopher J. Kilpatrick, dated May 1, 1994.
10.28 Employment Agreement between the Company and Richard
S.F. Lehrberg, dated March 28, 1994, as amended.
21.1 Subsidiaries of the Company.
23.1 Consent of Stradling Yocca Carlson & Rauth, a
Professional Corporation (to be contained in the
opinion to be filed as Exhibit 5.1 hereto).**
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included as page II-5 to the
Registration Statement).+
27.1 Financial Data Schedule.+
</TABLE>
- --------
+ Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 1.1
Draft Dated May 6, 1998
-----------------------
6,250,000 Shares/1/
INTERPLAY ENTERTAINMENT CORP.
Common Stock
PURCHASE AGREEMENT
------------------
___________________, 1998
PIPER JAFFRAY INC.
BEAR, STEARNS & CO. INC.
UBS SECURITIES LLC
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Interplay Entertainment Corp., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "Underwriters") 6,250,000 shares (the "Firm Shares") of Common
Stock, $0.001 par value per share (the "Common Stock"), of the Company.
Universal Studios, Inc. (the "Selling Stockholder") has also granted to the
several Underwriters an option to purchase up to 937,500 additional shares of
Common Stock on the terms and for the purposes set forth in Section 3 hereof
(the "Option Shares"). The Firm Shares and any Option Shares purchased pursuant
to this Purchase Agreement are herein collectively called the "Securities."
The Company and the Selling Stockholder hereby confirm their respective
agreements with respect to the sale and issuance of the Securities to the
several Underwriters, for whom you are acting as Representatives (the
"Representatives").
1. Registration Statement. A registration statement on Form S-1 (File
----------------------
No. 333-48473) with respect to the Securities, including a preliminary form of
prospectus, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission")
/1/ Plus an option to purchase up to 937,500 additional shares to cover over-
allotments.
<PAGE>
thereunder and has been filed with the Commission; one or more amendments to
such registration statement have also been so prepared and have been, or will
be, so filed. Copies of such registration statement and amendments and each
related preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
statement as amended at the time it is or was declared effective by the
Commission, and, in the event of any amendment thereto after the effective date
and prior to the First Closing Date (as hereinafter defined), such registration
statement as so amended (but only from and after the effectiveness of such
amendment), including the information deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A, if applicable, and
any registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations relating to the Securities are hereinafter called the "Registration
Statement." The prospectus included in the Registration Statement at the time
it is or was declared effective by the Commission is hereinafter called the
"Prospectus," except that if any prospectus filed by the Company with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or any other
prospectus provided to the Underwriters by the Company for use in connection
with the offering of the Securities (whether or not required to be filed by the
Company with the Commission pursuant to Rule 424(b) of the Rules and
Regulations) differs from the prospectus on file at the time the Registration
Statement is or was declared effective by the Commission, the term "Prospectus"
shall refer to such differing prospectus from and after the time such prospectus
is filed with the Commission or transmitted to the Commission for filing
pursuant to such Rule 424(b) or from and after the time it is first provided to
the Underwriters by the Company for such use. The term "Preliminary Prospectus"
as used herein means any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective under the Act and any
prospectus subject to completion as described in Rule 430A of the Rules and
Regulations.
2. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Stockholder.
- -----------
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; except that the foregoing shall not apply to statements in or
omissions from any Preliminary Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation
thereof.
(ii) As of the time the Registration Statement (or any post-
effective amendment thereto) is or was declared effective by the
Commission, upon the filing or first delivery to the Underwriters of the
Prospectus (or any supplement to the Prospectus) and at the First Closing
Date and Second Closing Date (as hereinafter defined), (A) the Registration
Statement and the Prospectus (in each case, as so amended and/or
supplemented) will conform or conformed in all material respects to the
requirements of the Act and the Rules and Regulations, (B) the Registration
Statement (as so amended) will not or did not include an untrue statement
of a material fact or omit to state a material
-2-
<PAGE>
fact required to be stated therein or necessary to make the statements
therein not misleading and (C) the Prospectus (as so supplemented) will not
or did not include an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they are or
were made, not misleading; except that the foregoing shall not apply to
statements in or omissions from any such document in reliance upon, and in
conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation
thereof. If the Registration Statement has been declared effective by the
Commission, no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceeding for that purpose has been
initiated or, to the Company's knowledge, threatened by the Commission.
(iii) The consolidated financial statements of the Company,
together with the notes thereto, set forth in the Registration Statement
and the Prospectus comply in all material respects with the requirements of
the Act and fairly present the financial condition of the Company and its
subsidiaries as of the dates indicated and the results of operations and
changes in cash flows for the periods therein specified in conformity with
generally accepted accounting principles consistently applied throughout
the periods involved; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules are required to be
included in the Registration Statement or the Prospectus. Arthur Andersen
LLP, who have expressed their opinion with respect to the consolidated
financial statements and schedules filed as a part of the Registration
Statement and included in the Registration Statement and the Prospectus,
are independent public accountants as required by the Act and the Rules and
Regulations.
(iv) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries has full corporate power and authority to own its properties
and conduct its business as currently being carried on and as described in
the Registration Statement and the Prospectus, and is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction in
which it owns or leases real property or in which the conduct of its
business makes such qualification necessary and in which the failure to so
qualify would have a material adverse effect upon the business, condition
(financial or otherwise) or properties of the Company and its subsidiaries,
taken as a whole.
(v) Except as contemplated in the Prospectus, subsequent to
the respective dates as of which information is given in the Registration
Statement and the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct
or contingent, or entered into any material transactions, or declared or
paid any dividends or made any distribution of any kind with respect to its
capital stock; and there has not been any change in the capital stock, or
any material change in the short-term or long-term debt, or any issuance of
options, warrants, convertible securities or other rights to purchase the
capital stock, of the Company or any of its subsidiaries, or any material
adverse change, or any development reasonably likely to involve a
prospective material adverse change, in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects, net
worth or results of operations of the Company and its subsidiaries, taken
as a whole.
(vi) Except as set forth in the Prospectus under the caption
"Business -- Legal Proceedings," there is not pending or threatened or, to
the knowledge of the Company, contemplated,
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<PAGE>
any action, suit or proceeding to which the Company or any of its
subsidiaries is a party before or by any court or governmental agency,
authority or body, or any arbitrator, which is required to be disclosed
pursuant to Item 103 of Regulation S-K.
(vii) There are no contracts or documents of the Company or any
of its subsidiaries that are required to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have
not been so filed.
(viii) This Agreement has been duly authorized, executed and
delivered by the Company, and constitutes a valid, legal and binding
obligation of the Company, enforceable in accordance with its terms, except
as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity. The
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any material agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries is bound or to which any of its or their property
is subject, the charter or by-laws of the Company or any of its
subsidiaries, or any order, rule, regulation or decree of any court or
governmental agency or body having jurisdiction over the Company or any of
its subsidiaries or any of its or their properties; no consent, approval,
authorization or order of, or filing with, any court or governmental agency
or body is required for the execution, delivery and performance of this
Agreement or for the consummation of the transactions contemplated hereby,
including the issuance or sale of the Securities by the Company, except
such as may be required under the Act or state securities or blue sky laws;
and the Company has full power and authority to enter into this Agreement
and to authorize, issue and sell the Securities as contemplated by this
Agreement.
(ix) All of the issued and outstanding shares of capital stock
of the Company, including the outstanding shares of Common Stock, are duly
authorized and validly issued, fully paid and nonassessable, have been
issued in compliance with all applicable federal and state securities laws
and were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, and the holders
thereof are not subject to personal liability by reason of being such
holders; the Securities which may be sold hereunder by the Company have
been duly authorized and, when issued, delivered and paid for in accordance
with the terms hereof, will have been validly issued and will be fully paid
and nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders; and the capital stock of the
Company, including the Common Stock, conforms to the description thereof in
the Registration Statement and the Prospectus. Except as otherwise stated
in the Registration Statement and the Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any restriction
upon the voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument to which
the Company is a party or by which the Company is bound, other than
agreements that will terminate effective upon the offering contemplated by
this Agreement. Except to the extent of the sale by the Selling Stockholder
contemplated by this Agreement, neither the filing of the Registration
Statement nor the offering or sale of the Securities as contemplated by
this Agreement gives rise to any rights for or relating to the registration
of any shares of Common Stock or other securities of the Company, except
such rights as have been duly and validly waived. All of the issued and
outstanding shares of capital stock of each of the Company's subsidiaries
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise described
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<PAGE>
in the Registration Statement and the Prospectus and except for any
directors' qualifying shares, the Company owns of record and beneficially,
free and clear of any security interests, claims, liens, proxies, equities
or other encumbrances, all of the issued and outstanding shares of such
stock, except as otherwise described in the Registration Statement and the
Prospectus. Except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or other
rights in existence to purchase or acquire from the Company or any
subsidiary of the Company any shares of the capital stock of the Company or
any subsidiary of the Company. The Company has an authorized and
outstanding capitalization as set forth in the Registration Statement and
the Prospectus.
(x) The Company and each of its subsidiaries holds, and is
operating in compliance in all material respects with, all franchises,
grants, authorizations, licenses, permits, easements, consents,
certificates and orders of any governmental or self-regulatory body
required for the conduct of its business, except where the failure to so
comply would not have a material adverse effect upon the business,
condition (financial or otherwise) or properties of the Company and its
subsidiaries, taken as a whole, and all such franchises, grants,
authorizations, licenses, permits, easements, consents, certifications and
orders are valid and in full force and effect; and the Company and each of
its subsidiaries is in compliance in all respects with all applicable
federal, state, local and foreign laws, regulations, orders and decrees
except where the failure to so comply would not have a material adverse
effect upon the business, condition (financial or otherwise) or properties
of the Company and its subsidiaries, taken as a whole.
(xi) The Company and its subsidiaries have good and marketable
title to all property described in the Registration Statement and the
Prospectus as being owned by them, in each case free and clear of all
liens, claims, security interests or other encumbrances except such as are
described in the Registration Statement and the Prospectus; the property
held under lease by the Company and its subsidiaries is held by them under
valid, subsisting and enforceable leases with only such exceptions with
respect to any particular lease as do not interfere in any material respect
with the conduct of the business of the Company or its subsidiaries; the
Company and each of its subsidiaries owns or possesses all patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and rights necessary for the conduct of the
business of the Company and its subsidiaries as currently carried on and as
described in the Registration Statement and the Prospectus; except as
stated in the Registration Statement and the Prospectus, to the best of the
Company's knowledge, no name which the Company or any of its subsidiaries
uses and no other aspect of the business of the Company or any of its
subsidiaries will involve or give rise to any infringement of, or license
or similar fees for, any patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets or other similar rights of
others material to the business or prospects of the Company and its
subsidiaries, taken as a whole, and neither the Company nor any of its
subsidiaries has received any notice alleging any such infringement or fee.
(xii) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in breach of or otherwise
in default in the performance of any material obligation, agreement or
condition contained in any bond, debenture, note, indenture, loan agreement
or any other material contract, lease or other instrument to which it is
subject or by which any of them may be bound, or to which any of the
material property or assets of the Company or any of its subsidiaries is
subject.
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<PAGE>
(xiii) The Company and its subsidiaries have filed all federal,
state, local and foreign income and franchise tax returns required to be
filed and are not in default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto, other
than any which the Company or any of its subsidiaries is contesting in good
faith.
(xiv) The Company has not distributed and will not distribute
any prospectus or other offering material in connection with the offering
and sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by the
Company.
(xv) The Securities have been approved for listing on the
Nasdaq National Market and, on the date the Registration Statement became
or becomes effective, the Company's Registration Statement on Form 8-A or
other applicable form under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), became or will become effective.
(xvi) Other than the subsidiaries of the Company listed in
Exhibit 21 to the Registration Statement, the Company owns no capital stock
or other equity or ownership or proprietary interest in any corporation,
partnership, association, trust or other entity.
(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions
are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (C) access
to assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xviii) Each of the Company and its subsidiaries (A) is in
compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (B) has received all permits, licenses
or other approvals required of it under applicable Environmental Laws to
conduct its business and (C) is in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance
with Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have
a material adverse effect on the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole.
(xix) The Company is not, and upon receipt and pending
application of the net proceeds from the sale of the Stock to be sold by
the Company in the manner described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of 1940, as
amended.
(xx) Each of the Company and its subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for its
business, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect. The Company has not been refused any insurance coverage
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<PAGE>
sought or applied for; and the Company has no reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially
and adversely affect the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries taken as a
whole.
(xxi) Neither the Company nor any of its subsidiaries has at
any time during the last five (5) years in any jurisdiction (i) made any
unlawful contribution to any candidate for office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
governmental officer or official, or other person charged with similar
public or quasi-public duties other than payments required or permitted by
the laws of the United States.
(xxii) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or broker's fee or
agent's commission in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(b) The Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters as follows:
(i) The Selling Stockholder is the record and beneficial
owner of, and has, and on the First Closing Date and/or the Second Closing
Date (as hereinafter defined), as the case may be, will have, good and
marketable title to the Securities to be sold by the Selling Stockholder,
free and clear of any adverse claims, all restrictions on transferability,
legends, proxies or other encumbrances other than under the Shareholders'
Agreement dated March 30, 1994, as amended (the "Shareholders' Agreement");
and upon delivery of and payment for such Securities hereunder, the several
Underwriters will acquire good and marketable title thereto, free and clear
of any adverse claims and obtain control thereto. The Selling Stockholder
is selling the Securities to be sold by the Selling Stockholder for the
Selling Stockholder's own account and is not selling such Securities,
directly or indirectly, for the benefit of the Company, and no part of the
proceeds of such sale received by the Selling Stockholder will inure,
either directly or indirectly, to the benefit of the Company.
(ii) The Selling Stockholder has duly authorized, executed and
delivered a Letter of Transmittal and Custody Agreement ("Custody
Agreement"), which Custody Agreement is a valid and binding obligation of
such Selling Stockholder, to [___________________________________________],
as Custodian (the "Custodian"); pursuant to the Custody Agreement the
Selling Stockholder has placed or caused to be placed in custody with the
Custodian, for delivery under this Agreement, the certificates representing
the Securities to be sold by the Selling Stockholder; and such certificates
were duly and properly endorsed in blank for transfer, or were accompanied
by all documents duly and properly executed that are necessary to validate
the transfer of title thereto, to the Underwriters, free of any legend,
restriction on transferability, proxy, lien or claim, whatsoever.
(iii) The Selling Stockholder has the power and authority to
enter into this Agreement and to sell, transfer and deliver the Securities
to be sold by the Selling Stockholder; and such Selling Stockholder has
duly authorized, executed and delivered to [_____________________________],
and [______________________________], as attorneys-in-fact (the "Attorneys-
in-Fact"), an irrevocable power of attorney (a "Power of Attorney")
authorizing and directing the Attorneys-in-Fact, or either of them, to
effect the sale and delivery of the Securities being sold by the Selling
Stockholder and to execute and deliver, on such Selling Stockholder's
behalf, this Agreement and any other document that they
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<PAGE>
or any of them may deem necessary or desirable in connection with the
transactions contemplated hereby and thereby.
(iv) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly authorized, executed and delivered by or on
behalf of the Selling Stockholder and each constitutes a valid and binding
agreement of the Selling Stockholder, enforceable in accordance with its
terms, except as rights to indemnity hereunder or thereunder may be limited
by bankruptcy, insolvency, reorganization or laws affecting the rights of
creditors generally and subject to general principles of equity. The
execution and delivery of this Agreement, the Custody Agreement and the
Power of Attorney and the performance of the terms hereof and thereof and
the consummation of the transactions herein and therein contemplated will
not result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any agreement or instrument to which the
Selling Stockholder is a party or by which the Selling Stockholder is
bound, or any law, regulation, order or decree applicable to the Selling
Stockholder; no consent, approval, authorization or order of, or filing
with, any court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Custody
Agreement and the Power of Attorney or for the consummation of the
transactions contemplated hereby and thereby, including the sale of the
Securities being sold by the Selling Stockholder, except such as may be
required under the Act, applicable state securities laws or blue sky laws
and by the NASD.
(v) The Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Securities other than any Preliminary Prospectus
or the Prospectus or other materials permitted by the Act to be distributed
by the Selling Stockholder.
(vi) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, are made in reliance on, and in
conformity with, written information furnished to the Company by or on
behalf of the Selling Stockholder specifically for use in the preparation
thereof, each such part of such Preliminary Prospectus and the Registration
Statement did, and each such part of the Prospectus and any amendments or
supplements to the Registration Statement or Prospectus (including any term
sheet meeting the requirements of Rule 434 of the Rules and Regulations)
will, when they become effective or are filed with the Commission, as the
case may be, not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading and conform in all material respects
to the requirements of the Act and the Rules and Regulations. The Company
and the Underwriters acknowledge that the statements relating to such
Selling Stockholder under the headings "Principal and Selling
Stockholders," "Certain Transactions--Transactions with Fargo and
Universal," "--Engage Transactions," and "Description of Capital
Stock--Registration Rights" constitute the only information furnished in
writing by or on behalf of the Selling Stockholder for inclusion in the
Registration Statement or any Prospectus.
(vii) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities.
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<PAGE>
(viii) The sale of the Securities by the Selling Stockholder
pursuant hereto is not prompted by any adverse information concerning the
Company which is not set forth in the Registration Statement and
Prospectus.
(ix) Although the Selling Stockholder has not independently
verified the accuracy or completeness of the information contained therein
(other than the information regarding the Selling Stockholder or its
affiliates set forth under the captions "Management," "Principal and
Selling Stockholders" and "Certain Transactions--Transactions with Fargo
and Universal," "--Engage Transactions," and "Description of Capital Stock-
-Registration Rights"), nothing has come to the attention of the Selling
Stockholder that would lead such Selling Stockholder to believe that (A)
upon the effectiveness of the Registration Statement, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading or (B) as of the date of the
Prospectus, the Prospectus contained and, on the Closing Date, contains any
untrue statement of a material fact or omitted or omits to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(c) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters at the closing shall be
deemed a representation and warranty by the Company to each Underwriter as to
the matters covered thereby; any certificate signed by or on behalf of the
Selling Stockholder as such and delivered to you or to counsel for the
Underwriters at the closing shall be deemed a representation and warranty of the
Selling Stockholder to each Underwriter as to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
-----------------------------------------
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell 6,250,000 Firm Shares to the several
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto. The purchase price for each Firm Share
shall be $____ per share. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraph (c) of
this Section 3 and in Section 8 hereof, the agreement of each Underwriter is to
purchase only the respective number of Firm Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by wire transfer of immediately available funds payable to the order of
the Company, at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable, at 9:00 a.m., Minneapolis time, on the third full business
day (or, if the Firm Shares are priced as contemplated by Rule 15c6-1(c) of the
Exchange Act, after 4:30 p.m., Washington, D.C. time, the fourth full business
day) following the date hereof, or at such other time as you and the Company
determine, such time and date of delivery being herein referred to as the "First
Closing Date." The Firm Shares, in definitive form and in such denominations
and registered in such names as you may request upon at least two business days'
prior notice to the Company, will be made available for checking and packaging
at the offices of Piper Jaffray Inc., Piper Jaffray Tower,
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<PAGE>
222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable, at least one business day prior to the First Closing Date.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Selling Stockholder hereby grants to the several Underwriters an option to
purchase all or any portion of the Option Shares at the same purchase price as
the Firm Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the effective date of this Agreement upon notice (confirmed in
writing) by the Representatives to the Company and the Selling Stockholder
setting forth the aggregate number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which the
certificates for the Option Shares are to be registered and the date and time,
as determined by you, when the Option Shares are to be delivered, such time and
date being herein referred to as the "Second Closing" and "Second Closing Date,"
respectively; provided, however, that the Second Closing Date shall not be
earlier than the First Closing Date nor earlier than the second business day
after the date on which the option shall have been exercised. The number of
Option Shares to be purchased by each Underwriter shall be the same percentage
of the total number of Option Shares to be purchased by the several Underwriters
as the number of Firm Shares to be purchased by such Underwriter is of the total
number of Firm Shares to be purchased by the several Underwriters, as adjusted
by the Representatives in such manner as the Representatives deem advisable to
avoid fractional shares. No Option Shares shall be sold and delivered unless
the Firm Shares previously have been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Custodian to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by wire transfer of immediately available funds payable to the order of
the Selling Stockholder at the offices of Piper Jaffray Inc., Piper Jaffray
Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as
may be mutually acceptable at 9:00 a.m., Minneapolis time, on the Second Closing
Date. The Option Shares in definitive form and in such denominations and
registered in such names as you have set forth in your notice of option
exercise, will be made available for checking and packaging at the office of
Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable, at least one
business day prior to the Second Closing Date.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company, on behalf of any Underwriter for the Securities to
be purchased by such Underwriter. Any such payment by you shall not relieve any
such Underwriter of any of its obligations hereunder. Nothing herein contained
shall constitute any of the Underwriters an unincorporated association or
partner with the Company.
4. Covenants.
---------
(a) The Company covenants and agrees with the several Underwriters as
follows:
(i) If the Registration Statement has not already been
declared effective by the Commission, the Company will use its best efforts
to cause the Registration Statement and any post-effective amendments
thereto to become effective as promptly as possible; the Company will
notify you promptly of the time when the Registration Statement or any
post-effective amendment to the Registration Statement has become effective
or any supplement to the Prospectus has been filed and of any request by
the Commission for any amendment or supplement to the Registration
Statement
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or the Prospectus or additional information; if the Company has elected to
rely on Rule 430A of the Rules and Regulations, the Company will file a
Prospectus containing the information omitted therefrom pursuant to such
Rule 430A with the Commission within the time period required by, and
otherwise in accordance with the provisions of, Rules 424(b) and 430A of
the Rules and Regulations; the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to
the Registration Statement or the Prospectus that, in your opinion, may be
necessary or advisable in connection with the distribution of the
Securities by the Underwriters; and the Company will provide you with a
copy of any amendment or supplement to the Registration Statement or the
Prospectus a reasonable time prior to the filing and will discuss in good
faith any reasonable comments or objections you may have regarding such
amendment or supplement.
(ii) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation
or threatening of any proceeding for any such purpose; and the Company will
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such a stop order should be issued.
(iii) Within the time during which a prospectus relating to the
Securities is required to be delivered under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Securities as contemplated by the provisions
hereof and the Prospectus. If during such period any event occurs as a
result of which the Prospectus would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act,
the Company will promptly notify you and will amend the Registration
Statement or supplement the Prospectus (at the expense of the Company) so
as to correct such statement or omission or effect such compliance.
(iv) The Company will use its best efforts to qualify the
Securities for sale under the securities laws of such jurisdictions as you
reasonably designate and to continue such qualifications in effect so long
as required for the distribution of the Securities, except that the Company
shall not be required in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process in any
state.
(v) The Company will furnish to the Underwriters copies of the
Registration Statement (three of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments
and supplements to such documents, in each case as soon as available and in
such quantities as you may from time to time reasonably request.
(vi) During a period of five years commencing with the date
hereof, the Company will furnish to the Representatives, and to each
Underwriter who may so request in writing, copies of all periodic and
special reports furnished to the stockholders of the Company and all
information, documents and reports filed with the Commission, the National
Association of Securities Dealers, Inc. (the "NASD"), the Nasdaq National
Market or any securities exchange or similar organization.
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(vii) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months
after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month period beginning
after the effective date of the Registration Statement that shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
(viii) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming
effective under the provisions of Section 9(a) hereof or is terminated,
will pay or cause to be paid (i) all expenses (including transfer taxes
allocated to the respective transferees) incurred in connection with the
delivery to the Underwriters of the Securities, (ii) all expenses and fees
(including, without limitation, fees and expenses of the Company's
accountants and counsel but, except as otherwise provided below, not
including fees of the Underwriters' counsel) in connection with the
preparation, printing, filing, delivery, and shipping of the Registration
Statement (including the financial statements therein and all amendments,
schedules, and exhibits thereto), the Securities, each Preliminary
Prospectus, the Prospectus, and any amendment thereof or supplement
thereto, and the printing, duplication, delivery, and shipping of this
Agreement and other underwriting documents, including Blue Sky Memoranda,
(iii) all filing fees and reasonable fees and disbursements of the
Underwriters' counsel incurred in connection with the qualification of the
Securities for offering and sale by the Underwriters or by dealers under
the securities or blue sky laws of the states and other jurisdictions which
you shall designate in accordance with Section 4(a)(iv) hereof, (iv) the
fees and expenses of any transfer agent or registrar, (v) the filing fees
incurred in connection with any required review by the NASD of the terms of
the sale of the Securities, (vi) listing fees, if any, and (vii) all other
costs and expenses incident to the performance of its obligations hereunder
that are not otherwise specifically provided for herein. If the sale of
the Securities provided for herein is not consummated by reason of action
by the Company pursuant to Section 9(a) hereof which prevents this
Agreement from becoming effective, or by reason of any failure, refusal or
inability on the part of the Company or Selling Stockholder to perform any
agreement on its or their part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be
fulfilled by the Company or the Selling Stockholder is not fulfilled, the
Company will reimburse the several Underwriters for all reasonable out-of-
pocket disbursements (including reasonable fees and disbursements of
counsel) incurred by the Underwriters in connection with their
investigation, preparing to market and marketing the Securities or in
contemplation of performing their obligations hereunder. The Company shall
not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of
the Securities to be sold by it hereunder for the purposes set forth in the
Prospectus and will file such reports with the Commission with respect to
the sale of the Securities and the application of the proceeds therefrom as
may be required in accordance with Rule 463 of the Rules and Regulations.
(x) The Company will not, without your prior written consent,
offer for sale, sell, contract to sell, grant any option for the sale of or
otherwise issue or dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or rights to purchase
or acquire, Common Stock, for a period of 180 days after the commencement
of the public offering of the Securities by the Underwriters except (i) to
the Underwriters pursuant to this Agreement, (ii) upon the exercise of
outstanding stock options described in the Registration Statement and the
Prospectus, (iii) for the grant of stock options in the ordinary course of
business pursuant to the Company's 1997
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Stock Incentive Plan described in the Registration Statement and the
Prospectus and (iv) for the issuance of shares pursuant to the Company's
Employee Stock Purchase Plan described in the Registration Statement and
the Prospectus. The Company will impose a stop-transfer order with respect
to such shares, options, or shares issued upon the exercise of such options
held by a holder in the event that a holder attempts to sell, offer,
dispose or otherwise transfer any such shares or options during the 180 day
period after the commencements of the public offering of the Securities by
the Underwriters and without the prior written consent of Piper Jaffray
Inc. (which consent may be withheld at the sole discretion of Piper Jaffray
Inc.).
(xi) The Company either has caused to be delivered to you or
will cause to be delivered to you prior to the effective date of the
Registration Statement a letter from each of the Company's directors,
officers, holders of more than [98%] of the shares of the Company's Common
Stock and holders of options or warrants or other rights to purchase more
than [98%] of the shares of Common Stock stating that such person agrees
that he, she or it will not, without your prior written consent, offer for
sale, sell, pledge, contract to sell or otherwise dispose of any shares of
Common Stock or options or warrants or rights to purchase Common Stock for
a period of 180 days after commencement of the public offering of the
Securities by the Underwriters, subject to such exceptions as the Company
and you may mutually agree.
(xii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities, and has not effected any sales of Common
Stock which are required to be disclosed in response to Item 701 of
Regulation S-K under the Act which have not been so disclosed in the
Registration Statement.
(xiii) The Company will not incur any liability for any finder's
or broker's fee or agent's commission in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(b) The Selling Stockholder covenants and agrees with the several
Underwriters as follows:
(i) Except as otherwise agreed to by the Company and the
Selling Stockholder, the Selling Stockholder will pay all taxes, if any, on
the transfer and sale, respectively, of the Securities being sold by the
Selling Stockholder and the fees of the Selling Stockholder's counsel. In
addition, the Selling Stockholder agrees to reimburse the Company for any
reimbursement made by the Company to the Underwriters pursuant to Section
4(a)(viii) hereof to the extent such reimbursement resulted from the
failure or refusal on the part of the Selling Stockholder to comply under
the terms or fulfill any of the conditions of this Agreement.
(ii) If this Agreement shall be terminated by the Underwriters
because of any failure, refusal or inability on the part of the Selling
Stockholder to perform any agreement on the Selling Stockholder's part to
be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by the Selling Stockholder
is not fulfilled, the Selling Stockholder agrees to reimburse the several
Underwriters for all out-of-pocket disbursements (including fees and
disbursements of counsel for the Underwriters) incurred by the Underwriters
in connection with their investigation, preparing to market and marketing
the Securities or in
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contemplation of performing their obligations hereunder. The Selling
Stockholder shall not in any event be liable to any of the Underwriters for
loss of anticipated profits from the transactions covered by this
Agreement.
(iii) The Securities to be sold by the Selling Stockholder,
represented by the certificates on deposit with the Custodian pursuant to
the Custody Agreement of the Selling Stockholder, are subject to the
interest of the several Underwriters; the arrangements made for such
custody are, except as specifically provided in the Custody Agreement,
irrevocable; and the obligations of the Selling Stockholder hereunder shall
not be terminated, except as provided in this Agreement or in the Custody
Agreement, by any act of the Selling Stockholder, by operation of law,
whereby the liquidation, dissolution or merger of the Selling Stockholder,
or by the occurrence of any other event. If the Selling Stockholder should
liquidate, dissolve or be a party to a merger or if any other such event
should occur before the delivery of the Securities hereunder, certificates
for the Securities deposited with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as
if such liquidation, dissolution, merger or other event had not occurred,
whether or not the Custodian shall have received notice thereof.
(iv) The Selling Stockholder will not, without your prior
written consent, offer for sale, sell, contract to sell, grant any option
for the sale of or otherwise dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or rights to purchase
or acquire, Common Stock, except to the Underwriters pursuant to this
Agreement, for a period of 180 days after the commencement of the public
offering of the Securities by the Underwriters.
(v) The Selling Stockholder will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities,
and has not effected any sales of Common Stock which, if effected by the
Company, would be required to be disclosed in response to Item 701 of
Regulation S-K.
(vi) The Selling Stockholder shall immediately notify you if
the Selling Stockholder becomes aware of any change in information relating
to the Selling Stockholder stated in the Prospectus or any supplement
thereto, which results in the Prospectus (as supplemented) including an
untrue statement of a material fact or omitting to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
5. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company and the Selling Stockholder contained
herein, to the performance by the Company of its obligations hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Minneapolis time, on the date of this Agreement, or such later
time and date as you, as Representatives of the several Underwriters, shall
approve and all filings required by Rule 424 and Rule 430A of the Rules and
Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order
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<PAGE>
shall have been initiated or threatened; and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to your reasonable
satisfaction.
(b) No Underwriter shall have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto, contains an untrue statement of fact which, in your reasonable opinion,
is material, or omits to state a fact which, in your reasonable opinion, is
material and is required to be stated therein or necessary to make the
statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transaction, or declared or paid any dividends or made
any distribution of any kind with respect to its capital stock; and there shall
not have been any change in the capital stock (other than a change in the number
of outstanding shares of Common Stock due to the issuance of shares upon the
exercise of outstanding options or warrants), or any material change in the
short-term or long-term debt of the Company, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital stock
of the Company or any of its subsidiaries, or any material adverse change or any
development reasonably likely to involve a prospective material adverse change
(whether or not arising in the ordinary course of business), in the general
affairs, condition (financial or otherwise), business, key personnel, property,
prospects, net worth or results of operations of the Company and its
subsidiaries, taken as a whole, that, in your reasonable judgment, makes it
impractical or inadvisable to offer or deliver the Securities on the terms and
in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Stradling Yocca
Carlson & Rauth, a Professional Corporation, counsel for the Company, dated such
Closing Date and addressed to you, to the effect that:
(i) Each of the Company and its material subsidiaries has been
duly organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the Company
and its material subsidiaries has full corporate power and authority to own
its properties and conduct its business as currently being carried on and
as described in the Registration Statement and the Prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which it owns or leases real property or in which
the conduct of its business makes such qualification necessary and in which
the failure to so qualify would have a material adverse effect upon the
business, condition (financial or otherwise) or properties of the Company
and its subsidiaries, taken as a whole.
(ii) The capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock." All of the issued and outstanding
shares of the capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. All outstanding
shares of the Company's capital stock and all outstanding options to
purchase the Company's capital stock were issued in compliance in all
material respects with the registration and qualification requirements of
all applicable federal and state securities laws. The Securities to be
issued and sold by the Company hereunder have been duly authorized and,
when issued, delivered and paid for in accordance with the terms of this
Agreement, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders. Except
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as otherwise stated in the Registration Statement and the Prospectus, there
are no preemptive rights or other rights to subscribe for or to purchase,
or any restriction upon the voting or transfer of, any shares of Common
Stock pursuant to the Company's charter, by-laws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound (other than agreements that terminate effective
upon the offering contemplated by this Agreement). To the best of such
counsel's knowledge, neither the filing of the Registration Statement nor
the offering or sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any shares
of Common Stock or other securities of the Company, except such rights as
have been duly and validly waived.
(iii) All of the issued and outstanding shares of capital stock
of each of the Company's material subsidiaries have been duly and validly
authorized and issued and are fully paid and nonassessable, and, to the
best of such counsel's knowledge, except as otherwise described in the
Registration Statement and the Prospectus and except for directors'
qualifying shares, the Company owns of record and, to the best of such
counsel's knowledge, beneficially, free and clear of any security
interests, claims, liens, proxies, equities or other encumbrances, all of
the issued and outstanding shares of such stock. To the best of such
counsel's knowledge, except as described in the Registration Statement and
the Prospectus, there are no options, warrants, agreements, contracts or
other rights in existence to purchase or acquire from the Company or any
material subsidiary any shares of the capital stock of the Company or any
material subsidiary of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or, to the knowledge of
such counsel, threatened by the Commission.
(v) The descriptions in the Registration Statement and the
Prospectus under the captions "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources," "Business--Legal Proceedings," "Certain
Transactions" and "Description of Capital Stock" of statutes, legal and
governmental proceedings, contracts and other documents are accurate and
fairly present the information required to be shown; and such counsel does
not know of any statutes or legal or governmental proceedings required to
be described in the Prospectus that are not described as required, or of
any contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or included as exhibits to the
Registration Statement that are not described or included as required.
(vi) The Company has full corporate power and authority to
enter into this Agreement, and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid, legal and
binding obligation of the Company enforceable in accordance with its terms
(except as rights to indemnity or contribution hereunder may be limited by
federal or state securities laws and except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
the rights of creditors generally and subject to general principles of
equity); the execution, delivery and performance of this Agreement by the
Company will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, rule or
regulation, any agreement or instrument known to such counsel to which the
Company or any of its material subsidiaries is a party or by which the
Company or any of its material subsidiaries is bound or to which any of its
or their respective property is subject, the Company's charter or by-laws,
or any order or decree known to such counsel of any court or governmental
agency
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or body having jurisdiction over the Company or any of its material
subsidiaries or any of its or their respective properties; and no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company, including the issuance or
sale of the Securities by the Company, except such as may be required under
the Act or state securities laws.
(vii) The statements (A) in the Prospectus under the captions
"Risk Factors--Protection of Proprietary Rights," "Risk Factors--Control by
Directors and Officers," "Risk Factors--Shares Eligible for Future Sale,"
"Risk Factors--Anti-Takeover Effects; Delaware Law and Certain Charter and
Bylaw Provisions; Preferred Stock," "Management," "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale" [other
sections may be added, as appropriate] and (B) in the Registration
Statement in Items 14 and 15, insofar as such statements constitute
summaries of the legal matters or documents referred to therein, fairly
present the information called for with respect to such legal matters and
documents and fairly summarize the matters referred to therein.
(viii) To the best of such counsel's knowledge, the Company and
each of its material subsidiaries holds all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and
orders of any governmental or self-regulatory body required for the conduct
of its business and where the failure to hold such franchises, grants,
authorizations, permits, easements, consents, certificates or orders would
be reasonably likely to have a material adverse effect upon the business,
condition (financial or otherwise) or properties of the Company and its
subsidiaries, taken as a whole; and all such franchises, grants,
authorizations, licenses, permits, easements, consents, certifications and
orders are valid and in full force and effect.
(ix) The statements in the Prospectus under the caption
"Business--Legal Proceedings" fairly summarize the legal matters, documents
and proceedings referred to therein.
(x) To such counsel's knowledge, there is not pending or
threatened any action, suit, proceeding or claim by others (A) challenging
the validity or scope of any copyrights held by or licensed to the Company
or any of its subsidiaries or (B) asserting that any intellectual property
right is infringed by the activities of the Company or any of its
subsidiaries or by the design, development, manufacture, use or sale of any
of the products of the Company or any of its subsidiaries, or other items
made and used according to the copyrights held by or licensed to the
Company or any of its subsidiaries, where the effect of any such action,
suit, proceeding or claim, if adversely determined, would have a material
adverse effect upon the business condition (financial or otherwise) or
properties of the Company and its subsidiaries taken as a whole.
(xi) To the best of such counsel's knowledge, neither the
Company nor any of its material subsidiaries is in violation of its
respective charter or by-laws. To the best of such counsel's knowledge,
neither the Company nor any of its material subsidiaries is in breach of or
otherwise in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note, indenture,
loan agreement or any other material contract, lease or other instrument to
which it is subject or by which any of them may be bound, or to which any
of the material property or assets of the Company or any of its material
subsidiaries is subject.
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<PAGE>
(xii) The Registration Statement and the Prospectus, and any
amendment thereof or supplement thereto, comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations.
Such counsel shall also state that, on the basis of conferences with
officers of the Company, examination of documents referred to in the
Registration Statement and the Prospectus and such other procedures as such
counsel deemed appropriate, nothing has come to the attention of such counsel
that causes such counsel to believe that the Registration Statement or any
amendment thereof, at the time the Registration Statement became effective and
as of such Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus (as of its
date and as of such Closing Date), as amended or supplemented, includes any
untrue statement of material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; it being understood that such counsel need express no
opinion as to the financial statements or financial or statistical data derived
therefrom included in any of the documents mentioned in this clause.
In rendering such opinion such counsel may rely (i) as to matters of
law other than California, Delaware and federal law, upon the opinion or
opinions of local counsel provided that the extent of such reliance is specified
in such opinion and that such counsel shall state that such opinion or opinions
of local counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, to the extent such
counsel deems reasonable upon certificates of officers of the Company and its
subsidiaries provided that the extent of such reliance is specified in such
opinion.
(e) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Munger Tolles &
Olson LLP, counsel for the Selling Stockholder, dated such Closing Date and
addressed to you, to the effect that:
(i) The Underwriting Agreement has been duly authorized,
executed and delivered by or on behalf of, and is a valid and binding
agreement of, the Selling Stockholder, enforceable in accordance with its
terms, except as rights to indemnification and contribution thereunder may
be limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(ii) The execution and delivery by or on behalf of the Selling
Stockholder of, and the performance by the Selling Stockholder of its
obligations under, the Underwriting Agreement and its Custody Agreement and
its Power of Attorney will not (a) contravene or conflict with, result in a
breach of, or constitute a default under, the charter or by-laws,
partnership agreement, trust agreement or other organizational documents,
as the case may be, of the Selling Stockholder, or, (b) violate or
contravene any provision of applicable law or regulation known to be
applicable to the Selling Stockholder, or (c) violate, result in a breach
of or constitute a default under the terms of any other material agreement
or instrument known to such counsel and to which the Selling Stockholder is
a party or by which it is bound, or (d) violate, result in breach of or
constitute a default under any judgment, order or decree known to such
counsel and applicable to the Selling Stockholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over the Selling Stockholder.
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<PAGE>
(iii) To the best of such counsel's knowledge, the Selling
Stockholder has good and valid title of Securities which may be sold by the
Selling Stockholder under the Underwriting Agreement and has the legal
right and power, and all authorizations and approvals required under its
charter and by-laws, partnership agreement, trust agreement or other
organizational documents, as the case may be, to enter into the
Underwriting Agreement and its Custody Agreement and its Power of Attorney,
to sell, transfer and deliver all of the Securities which may sold by the
Selling Stockholder pursuant to the Underwriting Agreement and to comply
with its other obligations pursuant to the Underwriting Agreement, its
Custody Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of the
Selling Stockholder has been duly authorized, executed and delivered by or
on behalf of the Selling Stockholder and is a valid and binding agreement
of the Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification and contribution thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(v) Upon delivery of and payment for the Option Shares to be
sold by the Selling Stockholder as provided in the Underwriting Agreement
and upon registration of the Optional Shares in the names of the
Underwriters (or their nominees) in the stock records of the Company, the
Underwriters will be the owners of the Option Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other adverse
claim, security interests, liens, equities and other encumbrances, provided
that the Underwriters are purchasing the Option Shares in good faith and
without notice of any adverse claim.
(vi) To counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court
or governmental authority or agency, is required for the consummation by
the Selling Stockholder of the transactions contemplated in the
Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD (as to
which such counsel need express no opinion).
(f) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, such opinion or opinions from
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
several Underwriters, dated such Closing Date and addressed to you, with respect
to the formation of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and other related matters as you
reasonably may request, and such counsel shall have received such papers and
information as they request to enable them to pass upon such matters.
(g) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of Arthur Andersen LLP, dated such
Closing Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under Rule
2-01 of Regulation S-X of the Commission, and stating, as of the date of such
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently
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<PAGE>
with the execution of this Agreement, and the effect of the letter so to be
delivered on such Closing Date shall be to confirm the conclusions and findings
set forth in such prior letter.
(h) On each Closing Date, there shall have been furnished to you, as
Representatives of the Underwriters, a certificate, dated such Closing Date and
addressed to you, signed by the chief executive officer and by the chief
financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made at and as
of such Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date;
(ii) No stop order or other order suspending the effectiveness
of the Registration Statement or any amendment thereof or the qualification of
the Securities for offering or sale has been issued, and no proceeding for
that purpose has been instituted or, to the best of their knowledge, is
contemplated by the Commission or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined
the Registration Statement and the Prospectus, and any amendments thereof or
supplements thereto, and (A) such documents contain all statements and
information required to be included therein, the Registration Statement, or
any amendment thereof, does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Prospectus,
as amended or supplemented, does not include any untrue statement of material
fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, (B) since the effective date of the Registration Statement there
has occurred no event required to be set forth in an amended or supplemented
prospectus which has not been so set forth, (C) subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has incurred any
material liabilities or obligations, direct or contingent, or entered into any
material transactions, not in the ordinary course of business, or declared or
paid any dividends or made any distribution of any kind with respect to its
capital stock, and except as disclosed in the Prospectus, there has not been
any change in the capital stock (other than a change in the number of
outstanding shares of Common Stock due to the issuance of shares upon the
exercise of outstanding options or warrants described in the Registration
Statement and the Prospectus), or any material change in the short-term or
long-term debt, or any issuance of options, warrants, convertible securities
or other rights to purchase the capital stock, of the Company, or any of its
subsidiaries, or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the ordinary
course of business), in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or results
of operations of the Company and its subsidiaries, taken as a whole, and (D)
except as stated in the Registration Statement and the Prospectus, there is
not pending, or, to the knowledge of the Company, threatened or contemplated,
any action, suit or proceeding to which the Company or any of its subsidiaries
is a party before or by any court or governmental agency, authority or body,
or any arbitrator, which might result in any material adverse change in the
condition (financial or otherwise), business, prospects or results of
operations of the Company and its subsidiaries, taken as a whole.
(i) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, a certificate or certificates,
dated such Closing Date and addressed to you, signed by the Selling Stockholder
to the effect that the representations and warranties of the Selling Stockholder
contained in this
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Agreement are true and correct as if made at and as of such
Closing Date, and that the Selling Stockholder has complied with all the
agreements and satisfied all the conditions on the Selling Stockholder's part to
be performed or satisfied at or prior to such Closing Date.
(j) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or they
may have reasonably requested.
(k) The Securities shall have been duly authorized for listing by the
Nasdaq National Market upon official notice of issuance.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and counsel for the Underwriters. The Company will
furnish you with such conformed copies of such opinions, certificates, letters
and other documents as you shall reasonably request.
6. Indemnification and Contribution.
--------------------------------
(a) The Company and the Selling Stockholder, jointly and severally, agree
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise (including in settlement of any litigation
if such settlement is effected with the written consent of the Company and/or
the Selling Stockholder, as the case may be), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, including the information deemed to be
a part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A, if applicable, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending against such loss, claim,
damage, liability or action; provided, however, that neither the Company nor the
Selling Stockholder shall be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by you, or by any Underwriter
through you, specifically for use in the preparation thereof; provided further,
that in no event shall the Selling Stockholder be liable under the provisions of
this Section 6 for any amounts in excess of the product obtained by multiplying
(x) the number of Option Shares, if any, sold by the Selling Shareholder
pursuant to this Agreement by (y) the price per share set forth in Section 3(a)
of this Agreement (the "Liability Limit"); and provided further, that the
foregoing indemnity agreement with respect to any Preliminary Prospectus will
not inure to the benefit of any Underwriter, or any person controlling such
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares if a copy of the Prospectus (as amended or
supplemented if the Company shall have furnished to the Underwriters any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage or liability.
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In addition to their other obligations under this Section 6(a), the Company
and the Selling Stockholder, jointly and severally, agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 6(a), they will
reimburse each Underwriter on a monthly basis for all reasonable legal fees or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's and/or the Selling Stockholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction,
subject, in the case of the Selling Stockholder, to the Liability Limit. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriter that received such payment shall promptly return it to
the party or parties that made such payment, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by the Bank of America N.T. & S.A. (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement shall be in addition to any liabilities
which the Company and the Selling Stockholder may otherwise have.
In making a claim for indemnification or for contribution under this
Section 6 (including, without limitation, under the immediately preceding
paragraph) and subject to the further provisions of this paragraph, the
Underwriters may proceed against either (i) both the Company and the Selling
Stockholder jointly or (ii) the Company only, but may not proceed solely against
the Selling Stockholder. Notwithstanding anything in this Agreement to the
contrary, no claim for indemnification shall be made against the Selling
Stockholder pursuant to this Agreement until a claim shall first have been made
against the Company by an Underwriter and either (i) the Company shall have
refused to pay any portion of the amount claimed or (ii) ninety (90) days shall
have elapsed from the date of such claim against the Company, and, in either
case, the Selling Stockholder shall not be responsible for any such
indemnification or contribution that exceeds that proportion of aggregate
losses, claims, damages, liabilities or expenses indemnified or contributed
against as is equal to the proportion of the total number of Option Shares sold
hereunder by the Selling Stockholder to the total number of shares of Common
Stock sold hereunder (the "Pro Rata Portion") except as set forth below. In the
event that the indemnified parties are entitled to seek indemnity or
contribution hereunder against any loss, liability, claim, damage and expense
incurred as contemplated by this Section 6, including, without limitation,
against a final judgment from a trial court then, as a precondition to the
obligation of the Selling Stockholder to provide indemnification or contribution
in excess of the Selling Stockholder's Pro Rata Portion, the indemnified parties
shall first obtain a final judgment from a trial court that such indemnified
parties are entitled to indemnity or contribution under this Agreement with
respect to such loss, liability, claim, damage or expense (the "Final Judgment")
from the Company and the Selling Stockholder and shall seek to satisfy such
Final Judgment in full from the Company by making a written demand upon the
Company for such satisfaction. Only in the event that such Final Judgment shall
remain unsatisfied in whole or part 30 days following the date of receipt by the
Company of such demand shall any party entitled to indemnification hereunder
have the right to take action to satisfy such Final Judgment by making demand
directly on the Selling Stockholder (but only if and to the extent (a) the
Company has not already satisfied such Final Judgment, whether by settlement,
release or otherwise and (b) of the Liability Limit). The Underwriters shall,
however, be relieved of their obligation to first obtain a Final Judgment, to
seek to obtain payment from the Company with respect to such Final Judgment or,
having sought such payment, to wait such 30 days after failure by the Company to
immediately satisfy any such Final Judgment if (w) the Company files a petition
for relief under the United States Bankruptcy Code (the "Bankruptcy Code") and
such order remains unstayed and in effect for 60 days, (x) an order for relief
is entered against the Company in an involuntary case under
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<PAGE>
the Bankruptcy Code and such other remains unstayed and in effect for 60 days,
(y) the Company makes an assignment for the benefit of its creditors, or (z) any
court order or approves the appointment of a receiver or custodian for the
Company or a substantial portion of its assets and such order remains unstayed
and in effect for 60 days.
(b) Each Underwriter severally will indemnify and hold harmless the Company
and the Selling Stockholder against any losses, claims, damages or liabilities
to which the Company and the Selling Stockholder may become subject, under the
Act or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of such Underwriter), insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by you, or by such
Underwriter through you, specifically for use in the preparation thereof, and
will reimburse the Company and the Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or the Selling Stockholder in
connection with investigating or defending against any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve the indemnifying party from any liability that it may have to any
indemnified party. In case any such action shall be brought against any
indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
if, in the sole judgment of the Representatives, it is advisable for the
Underwriters to be represented as a group by separate counsel, the
Representatives shall have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability arising
from any claim in respect of which indemnity may be sought by the Underwriters
under subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party or
parties and reimbursed to the Underwriters as incurred (in accordance with the
provisions of the second paragraph in subsection (a) above). An indemnifying
party shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above, (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Selling Stockholder on the one hand and the Underwriters on the other from
the offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable
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<PAGE>
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholder bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Selling Stockholder or the Underwriters and the parties' relevant
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, the Selling Stockholder and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this subsection (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending against any
action or claim which is the subject of this subsection (d). Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and (ii) the Selling Stockholder shall not be
required to contribute any amounts in excess of the product obtained by
multiplying (x) the number of Option Shares sold by the Selling Shareholder
pursuant to this Agreement by (y) the price per share set forth in Section 3(a)
of this Agreement. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company and the Selling Stockholder under this
Section 6 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 6
shall be in addition to any liability that the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company (including any person who, with his consent, is named in
the Registration Statement as about to become a director of the Company), to
each officer of the Company who has signed the Registration Statement and to
each person, if any, who controls the Company or the Selling Stockholder within
the meaning of the Act.
(f) Neither the provisions of this Section 6, nor anything else in this
Agreement, shall affect any agreement between the Company and the Selling
Stockholder (or its employees) with respect to indemnity or contribution
including, without limitation, the Shareholders' Agreement. The Company
acknowledges that the registration of the Option Shares is pursuant to the
Selling Stockholder's exercise of its rights pursuant to Section 3.1 of the
Shareholders' Agreement.
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<PAGE>
7. Representations and Agreements to Survive Delivery. All representations,
--------------------------------------------------
warranties, and agreements of the Company and the Selling Stockholder herein or
in certificates delivered pursuant hereto, and the agreements of the several
Underwriters, the Company and the Selling Stockholder contained in Section 6
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any controlling person
thereof, or the Company or any of its officers, directors, or controlling
persons or the Selling Stockholder, or any controlling person thereof and shall
survive delivery of, and payment for, the Securities to and by the Underwriters
hereunder.
8. Substitution of Underwriters.
----------------------------
(a) If any Underwriter or Underwriters shall fail to take up and pay for
the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule I hereto,
the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule I hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up and pay for
the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased aggregates more than
10% of the total amount of Firm Shares set forth in Schedule I hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination the Company shall not be under any
liability to any Underwriter (except to the extent provided in Section
4(a)(viii), Section 4(b)(ii) and Section 6 hereof) nor shall any Underwriter
(other than an Underwriter who shall have failed, otherwise than for some reason
permitted under this Agreement, to purchase the amount of Firm Shares agreed by
such Underwriter to be purchased hereunder) be under any liability to the
Company (except to the extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by the non-
defaulting Underwriters or by any other party or parties, the Representatives or
the Company shall have the right to postpone the First Closing Date for not more
than seven business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used herein, the term "Underwriter" includes
any person substituted for an Underwriter under this Section 8.
9. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at 10:00 a.m., Minneapolis time,
on the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective time of the Registration
Statement as you in your discretion shall first release the Securities for sale
to the public; provided, that if the Registration Statement is effective at the
time this Agreement is executed, this Agreement shall become effective at such
time as you in your discretion shall first release the Securities for sale to
the public. For the purpose of this Section, the Securities shall be deemed to
have been released for sale to the public upon release by you of the publication
of a newspaper advertisement relating thereto or upon release by you of telexes
offering the Securities for sale to securities dealers, whichever shall first
occur. By giving notice as hereinafter specified before the time this Agreement
becomes effective, you, as Representatives of the several Underwriters, or the
Company may prevent this Agreement from becoming effective without
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<PAGE>
liability of any party to any other party, except that the provisions of Section
4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at all times be
effective.
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the First Closing Date, and the option referred to in
Section 3(b), if exercised, may be cancelled at any time prior to the Second
Closing Date, if (i) the Company shall have failed, refused or been unable, at
or prior to such Closing Date, to perform any material agreement on its part to
be performed hereunder, (ii) any other condition of the Underwriters'
obligations hereunder is not fulfilled, (iii) trading on the New York Stock
Exchange and the American Stock Exchange shall have been wholly suspended, (iv)
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required, on the New York Stock
Exchange or the American Stock Exchange, by such Exchange or by order of the
Commission or any other governmental authority having jurisdiction, (v) a
banking moratorium shall have been declared by Federal, New York or California
authorities, or (vi) there has occurred any material adverse change in the
financial markets in the United States or an outbreak of major hostilities (or
an escalation thereof) in which the United States is involved, a declaration of
war by Congress, any other substantial national or international calamity or any
other event or occurrence of a similar character shall have occurred since the
execution of this Agreement that, in your judgment, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(a)(viii), Section 4(b)(ii)
and Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section, the Company and an
Attorney-in-Fact, on behalf of the Selling Stockholder, shall be notified
promptly by you by telephone or telegram, confirmed by letter. If the Company
elects to prevent this Agreement from becoming effective, you and an Attorney-
in-Fact, on behalf of the Selling Stockholder, shall be notified by the Company
by telephone or telegram, confirmed by letter.
10. Default by the Company. If the Company shall fail at the First Closing
----------------------
Date to sell and deliver the number of Securities which it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any non-defaulting party.
No action taken pursuant to this Section shall relieve the Company so
defaulting from liability, if any, in respect of such default.
11. Information Furnished by Underwriters. The statements set forth in the
-------------------------------------
last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.
12. Notices. Except as otherwise provided herein, all communications
-------
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to the Representatives c/o Piper Jaffray
Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402,
with a copy to Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo
Alto, California 94304, Attention: Patrick J. Schultheis; except that notices
given to an Underwriter pursuant to Section 6 hereof shall be sent to such
Underwriter at the address stated in the Underwriters' Questionnaire furnished
by such Underwriter in connection with this offering; if to the Company, shall
be mailed, delivered by facsimile or delivered to it at 16815 Von Karman Avenue,
Irvine, California 92606, Attention: Christopher J. Kilpatrick, with a copy to
Stradling, Yocca, Carlson & Rauth, a Professional Corporation, 660 Newport
Center Drive, Suite 1600, Newport Beach, California 92660, Attention: K.C.
Schaaf; if to the Selling Stockholder, at 100 Universal City
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Plaza, Universal City, California 91608, Attention: General Counsel, with a copy
to Munger, Tolles & Olson LLP, 355 S. Grand Avenue, 34th Floor, Los Angeles,
California 90071-1560, Attention: Ruth E. Fisher, or in each case to such other
address as the person to be notified may have requested in writing. All notices
given by facsimile shall be promptly confirmed by mailed copy. Any party to this
Agreement may change such address for notices by sending to the parties to this
Agreement written notice of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to
----------------------------------------
the benefit of and be binding upon the parties hereto and their respective
successors and assigns and the controlling persons, officers and directors
referred to in Section 6. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Minnesota.
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Please sign and return to the Company the enclosed duplicates of this letter
whereupon this letter will become a binding agreement among the Company, the
Selling Stockholder and the several Underwriters in accordance with its terms.
Very truly yours,
INTERPLAY PRODUCTIONS
By: __________________________________
Brian Fargo,
Chairman of the Board of Directors
and Chief Executive Officer
UNIVERSAL STUDIOS, INC.
By: __________________________________
Confirmed as of the date first
above mentioned, on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
PIPER JAFFRAY INC.
By:___________________________
Managing Director
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SCHEDULE I
Number of
Underwriter Firm Shares (1)
- ----------- ---------------
Piper Jaffray Inc.
Bear Stearns & Co. Inc.
UBS Securities LLC
----------
Total.........................................
==========
_________________
(1) The Underwriters may purchase up to an additional __________ Option Shares,
to the extent the option described in Section 3 of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
<PAGE>
EXHIBIT 2.1
FORM OF
AGREEMENT AND PLAN OF MERGER
OF INTERPLAY ENTERTAINMENT CORP.,
A DELAWARE CORPORATION
AND
INTERPLAY PRODUCTIONS,
A CALIFORNIA CORPORATION
THIS AGREEMENT AND PLAN OF MERGER, dated as of ________________, 1998 (this
"Agreement"), is between Interplay Entertainment Corp., a Delaware corporation
("Subsidiary"), and Interplay Productions, a California corporation ("Parent"),
which corporations are sometimes referred to herein as the "Constituent
Corporations."
R E C I T A L S
A. Subsidiary is a corporation duly organized and existing under the laws
of the State of Delaware and has an authorized capital of 55,000,000 shares,
50,000,000 of which are designated "Common Stock," $0.001 par value, and
5,000,000 of which are designated "Preferred Stock," $0.001 par value. As of
March 2, 1998, 1,000 shares of Common Stock were issued and outstanding, all of
which were held by Parent. No shares of Preferred Stock were outstanding.
B. Parent is a corporation duly organized and existing under the laws of
the State of California and has an authorized capital of 90,000,000 shares, all
of which are designated "Common Stock," no par value. As of , 1998,
_______ shares of Common Stock were outstanding.
C. The Board of Directors of Parent has determined that, for the purpose
of effecting the reincorporation of Parent in the State of Delaware, it is
advisable and in the best interests of Parent and its shareholders that Parent
merge with and into Subsidiary upon the terms and conditions herein provided.
D. The respective Boards of Directors of Subsidiary and Parent have
approved this Agreement and have directed that this Agreement be submitted to a
vote of their respective stockholders and executed by the undersigned officers.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Subsidiary and Parent hereby agree, subject to the terms and
conditions hereinafter set forth, as follows:
<PAGE>
I.
MERGER
1.1 MERGER. In accordance with the provisions of this Agreement, the
Delaware General Corporation Law and the California General Corporation Law,
Parent shall be merged with and into Subsidiary (the "Merger"), the separate
existence of Parent shall cease and Subsidiary shall be, and is herein sometimes
referred to as, the "Surviving Corporation," and the name of the Surviving
Corporation shall be "Interplay Entertainment Corp."
1.2 FILING AND EFFECTIVENESS. The Merger shall become effective when the
following actions have been completed:
(a) This Agreement has been adopted and approved by the stockholders
of each Constituent Corporation in accordance with the requirements of the
Delaware General Corporation Law and the California General Corporation
Law;
(b) All of the conditions precedent to the consummation of the Merger
specified in this Agreement have been satisfied or duly waived by the party
entitled to satisfaction thereof; and
(c) An executed Certificate of Merger or an executed counterpart of
this Agreement meeting the requirements of the Delaware General Corporation
Law has been filed with the Secretary of State of the State of Delaware.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."
1.3 EFFECT OF THE MERGER. Upon the Effective Date of the Merger, the
separate existence and corporate organization of Parent shall cease and
Subsidiary, as the Surviving Corporation, shall continue its corporate existence
under the laws of the State of Delaware.
II.
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Subsidiary as in effect immediately before the Effective Date of the Merger
shall continue in full force and effect as the Certificate of Incorporation of
the Surviving Corporation until duly amended or repealed in accordance with the
provisions thereof and applicable law.
2.2 BYLAWS. The Bylaws of Subsidiary as in effect immediately before the
Effective Date of the Merger shall continue in full force and effect as the
Bylaws of the Surviving Corporation until duly amended or repealed in accordance
with the provisions thereof and applicable law.
2.3 DIRECTORS AND OFFICERS. The directors and officers of Parent
immediately before the Effective Date of the Merger shall be the directors and
officers of the Surviving Corporation until the expiration of their current
terms and until their successors have been duly elected and qualified, or
until
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<PAGE>
their prior resignation, removal or death, subject to the Certificate of
Incorporation and the Bylaws of the Surviving Corporation.
III.
MANNER OF CONVERSION OF STOCK
3.1 PARENT SHARES. Upon the Effective Date of the Merger:
(a) Each share of Common Stock, no par value of Parent, issued and
outstanding immediately before the Effective Date of the Merger shall by virtue
of the Merger and without any action by the Constituent Corporations, by the
holder of such shares or by any other person be converted into and exchanged for
one (1) fully paid and nonassessable shares of Common Stock, $0.001 par value,
of the Surviving Corporation.
3.2 PARENT OPTIONS. Upon the Effective Date of the Merger, the Surviving
Corporation shall assume and continue Parent's 1997 Stock Incentive Plan and all
other employee benefit plans of Parent. A number of shares of the Surviving
Corporation's Common Stock shall be reserved for issuance upon the exercise of
stock options, equal to the number of shares of Parent's Common Stock so
reserved immediately before the Effective Date of the Merger.
3.3 SUBSIDIARY COMMON STOCK. Upon the Effective Date of the Merger, each
share of Common Stock, $0.001 par value, of Subsidiary issued and outstanding
immediately before the Effective Date of the Merger shall, by virtue of the
Merger and without any action by Subsidiary, by the holder of such shares or by
any other person be canceled and returned to the status of authorized but
unissued shares.
3.4 EXCHANGE OF CERTIFICATES. After the Effective Date of the Merger,
each holder of an outstanding certificate representing shares of Common Stock of
Parent may, at such stockholder's option, surrender the same for cancellation to
the Surviving Corporation or to its transfer agent (the "Exchange Agent"), and
each such holder shall be entitled to receive in exchange therefor a certificate
or certificates representing the number of shares of the Surviving Corporation's
Common Stock into which the surrendered shares were converted as herein
provided. Until so surrendered, each outstanding certificate theretofore
representing shares of Common Stock of Parent shall be deemed for all purposes
to represent the number of shares of the Surviving Corporation's Common Stock,
as adjusted pursuant to Section 3.1 above, into which such shares of Common
Stock of Parent were converted in the Merger.
The registered owner on the books and records of the Surviving
Corporation or the Exchange Agent of any such outstanding certificate shall,
until such certificate has been surrendered for transfer or conversion or
otherwise accounted for to the Surviving Corporation or the Exchange Agent, have
and be entitled to exercise voting and other rights with respect to and to
receive dividends and other distributions upon the shares of Common Stock of the
Surviving Corporation represented by such outstanding certificate as provided
above.
Each certificate representing Common Stock of the Surviving
Corporation so issued in the Merger shall bear the same legends, if any, with
respect to restrictions on transferability as the
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<PAGE>
certificates of Parent so converted and given in exchange therefor, unless
otherwise determined by the Board of Directors of the Surviving Corporation in
compliance with applicable laws.
If any certificate for shares of Subsidiary stock is to be issued in a
name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay to the Exchange Agent any transfer or other taxes payable by
reason of issuance of such new certificate in a name other than that of the
registered holder of the certificate surrendered or establish to the
satisfaction of Subsidiary that such tax has been paid or is not payable.
IV.
TRANSFER OF ASSETS AND LIABILITIES
4.1 TRANSFER OF ASSETS AND LIABILITIES. On the Effective Date, (i) the
rights, privileges, powers and franchises, both of a public as well as of a
private nature, of each of the Constituent Corporations shall be vested in and
possessed by the Surviving Corporation, subject to all the disabilities, duties
and restrictions of or upon each of the Constituent Corporations; (ii) all
rights, privileges, powers and franchises of each of the Constituent
Corporations, all property, real, personal and mixed, of each of the Constituent
Corporations, all debts due to each of the Constituent Corporations on whatever
account and all things in action or belonging to each of the Constituent
Corporations shall be transferred to and vested in the Surviving Corporation;
(iii) all property, rights, privileges, powers and franchises, as well as all
other interests, shall be as effectively the property of the Surviving
Corporation as they were of the Constituent Corporations before the Effective
Date; and (iv) the title to any real estate vested by deed or otherwise in
either of the Constituent Corporations shall not revert to either of the
Constituent Corporations or be in any way impaired by reason of the Merger.
Notwithstanding the foregoing, (i) the liabilities of the Constituent
Corporations and of their stockholders, directors and officers shall not be
affected by the Merger; (ii) all rights of creditors and all liens upon any
property of either of the Constituent Corporations shall be preserved unimpaired
notwithstanding the Merger; and (iii) any claim existing or action or proceeding
pending by or against either of the Constituent Corporations may be prosecuted
to judgment as if the Merger had not taken place; provided, however, that the
claims and rights of the creditors of either or both of the Constituent
Corporations may be modified with the consent of such creditors; and, provided
further, that all debts, liabilities and duties of or upon each of the
Constituent Corporations shall attach to the Surviving Corporation and
accordingly may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it.
4.2 FURTHER ASSURANCES. From time to time, as and when required by
Subsidiary or by its successors or assigns, there shall be executed and
delivered on behalf of Parent such deeds and other instruments, and there shall
be taken or caused to be taken by it such further and other actions as shall be
appropriate or necessary in order to vest or perfect in or conform of record or
otherwise by Subsidiary the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of Parent and otherwise to carry out the purposes of this Agreement,
and the officers and directors of Subsidiary are fully authorized in the name
and on behalf of Parent or otherwise to take all such actions and to execute and
deliver all such deeds and other instruments.
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<PAGE>
V.
GENERAL
5.1 COVENANTS OF SUBSIDIARY. Subsidiary covenants and agrees that it
will, on or before the Effective Date of the Merger:
(a) Qualify to do business as a foreign corporation in the State of
California and in connection therewith irrevocably appoint an agent for
service of process as required under the provisions of Section 2105 of the
California General Corporation Law.
(b) File all documents with the California Franchise Tax Board
necessary for the assumption by Subsidiary of all of the franchise tax
liabilities of Parent.
(c) Take such other actions as may be required by the California
General Corporation Law.
5.2 DEFERRAL. Consummation of the merger may be deferred by the Board of
Directors of Parent for a reasonable period of time if the Board of Directors
determines that deferral would be in the best interests of Parent and its
shareholders.
5.3 AMENDMENT. The parties hereto, by mutual consent of their respective
Boards of Directors, may amend, modify or supplement this Agreement in such
manner as may be agreed upon by them in writing at any time before or after
adoption and approval of this Agreement by the stockholders of Subsidiary and
Parent, but not later than the Effective Date; provided, however, that no such
amendment, modification or supplement not adopted and approved by the
stockholders of Subsidiary and Parent shall affect the rights of such
stockholders or change any of the principal terms of this Agreement.
5.4 ABANDONMENT. At any time before the Effective Date of the Merger,
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either Parent or of Subsidiary, or of
both, notwithstanding the approval of this Agreement by the shareholders of
Parent or by the stockholders of Subsidiary, or by both. In the event of
abandonment of this Agreement, as above provided, this Agreement shall become
wholly void and of no effect, and no liability on the part of either Constituent
Corporation or its Board of Directors or its stockholders shall arise by virtue
of such termination except as provided in Section 5.5 hereof.
5.5 EXPENSES. If the Merger becomes effective, the Surviving Corporation
shall assume and pay all expenses in connection therewith not theretofore paid
by the respective parties. If for any reason the Merger shall not become
effective, Parent shall pay all expenses incurred in connection with all the
proceedings taken in respect of this Agreement or relating thereto.
5.6 REGISTERED OFFICE. The registered office of the Surviving Corporation
in the State of Delaware is located at Corporation Service Company, 1013 Centre
Road, Wilmington, Delaware 19805, and Corporation Service Company is the
registered agent of the Surviving Corporation at such address.
5.7 AGREEMENT. Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 16815 Von Karman,
Irvine, California 92606, and, upon
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<PAGE>
request and without cost, copies thereof will be furnished to any stockholder of
either Constituent Corporation.
5.8 GOVERNING LAW. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the
California General Corporation Law.
5.9 COUNTERPARTS. In order to facilitate the filing and recording of this
Agreement, the same may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, this Agreement having first been approved by
resolutions of the Boards of Directors of Subsidiary and Parent is hereby
executed on behalf of each of such two corporations and attested by their
respective officers thereunto duly authorized.
INTERPLAY ENTERTAINMENT CORP.
a Delaware corporation
____________________________________
Christopher J. Kilpatrick,
President
____________________________________
Lisa A. Latham, Secretary
INTERPLAY PRODUCTIONS,
a California corporation
____________________________________
Christopher J. Kilpatrick,
President
____________________________________
Lisa A. Latham, Secretary
-7-
<PAGE>
EXHIBIT 3.1
FORM OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
INTERPLAY ENTERTAINMENT CORP.
The undersigned hereby certifies that:
1. She is the duly elected and acting Secretary of Interplay Entertainment
Corp., a Delaware corporation (the "Corporation").
2. The present name of the corporation (hereinafter called the
"Corporation") is Interplay Entertainment Corp., which is the name under which
the Corporation was originally incorporated; the original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
February 27, 1998.
3. This Amended and Restated Certificate of Incorporation was duly adopted
in accordance with Sections 242 and 245 of the Delaware General Corporation Law.
4. The Certificate of Incorporation of the Corporation, as amended and
restated herein, at the effective time of filing of this Amended and Restated
Certificate of Incorporation with the Delaware Secretary of State, shall read in
full as follows:
"AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
INTERPLAY ENTERTAINMENT CORP.
ARTICLE 1
The name of this Corporation is Interplay Entertainment Corp.
ARTICLE 2
The registered office of the Corporation in the State of Delaware is
located at 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at that address is Corporation
Service Company.
ARTICLE 3
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware, as amended from time to time.
<PAGE>
ARTICLE 4
The total number of shares of all classes of stock which this Corporation
shall have authority to issue is 55,000,000, of which (i) 50,000,000 shares
shall be designated "Common Stock" and shall have a par value of $0.001 per
share; and (ii) 5,000,000 shares shall be designated "Preferred Stock" and shall
have a par value of $0.001 per share. The Board of Directors is authorized,
subject to limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in one or more series, and, by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof. The authority of
the Board with respect to each series shall include, but not be limited to,
determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends shall
be cumulative and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the voting
rights provided by law and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges and, if so, the
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable and, if
so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable and the amount per share payable in
case of redemption, which amount may vary under different conditions and at
different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms and amount of such
sinking fund; and
(g) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, and the
relative rights of priority, if any, of payment of shares of that series.
ARTICLE 5
(a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors and elections of directors need
not be by written ballot unless otherwise provided in the Bylaws. The number of
directors which shall constitute the whole Board of Directors of the Corporation
shall be between seven (7) and nine (9), unless changed by amendment to this
Certificate of Incorporation, with such number being initially fixed at seven
(7). The exact number of directors constituting the whole Board of Directors
may be changed from time to time by the Board of Directors, within the limits
provided above, in accordance with the Bylaws of the Corporation.
2
<PAGE>
(b) At all elections of directors of the Corporation, each stockholder
shall be entitled to as many votes as shall equal the number of votes which, in
the absence of this provision (b), such stockholder would have been entitled to
cast for the election of directors with respect to such stockholder's shares of
stock, multiplied by the number of directors to be elected by such stockholder.
Such stockholder may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more of them
as such stockholder may see fit.
(c) Meetings of the stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the Delaware Statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or by the Bylaws of the Corporation.
ARTICLE 6
A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director (i) for any breach of his duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the General Corporation Law of the State of Delaware, or
(iv) for any transaction from which the director derives an improper personal
benefit. If the General Corporation Law of the State of Delaware is hereafter
amended to authorize corporate action further limiting or eliminating the
personal liability of directors, then the liability of the directors of the
Corporation shall be limited or eliminated to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended from time to
time. Any repeal or modification of this Article 6 by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
ARTICLE 7
This Corporation shall, to the maximum extent permitted from time to time
under the law of the State of Delaware, indemnify and upon request shall advance
expenses to any person who is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit, proceeding or claim,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was or has agreed to be a director or officer of this
Corporation or while a director or officer is or was serving at the request of
this Corporation as a director, officer, partner, trustee, employee or agent of
any corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, against expenses
(including attorney's fees and expenses), judgments, fines, penalties and
amounts paid in settlement incurred in connection with the investigation,
preparation to defend or defense of such action, suit, proceeding or claim;
provided; however, that the foregoing shall not require this Corporation to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person.
Such indemnification shall not be exclusive of other indemnification rights
arising under any by-law, agreement, vote of directors or stockholders or
otherwise and shall inure to the
3
<PAGE>
benefit of the heirs and legal representatives of such person. Any person
seeking indemnification under this Article Seven shall be deemed to have met the
standard of conduct required for such indemnification unless the contrary shall
be established. Any repeal or modification of the foregoing provisions of this
Article Seven shall not adversely affect any right or protection of a director
or officer of this corporation with respect to any acts or omissions of such
director or officer occurring prior to such repeal or modification.
ARTICLE 8
In furtherance and not in limitation of the power conferred upon the Board
of Directors by law, the Board of Directors of the Corporation shall have the
power to make, alter, amend, change, add to or repeal the Bylaws of the
Corporation, subject to the right of stockholders entitled to vote with respect
thereto to alter and repeal Bylaws made by the Board of Directors.
ARTICLE 9
Stockholders of the Corporation may not take action by written consent in
lieu of a meeting. Any action contemplated by the stockholders must be taken at
a duly called annual or special meeting.
ARTICLE 10
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE 11
The Corporation is to have perpetual existence."
IN WITNESS WHEREOF, Interplay Entertainment Corp. has caused this certificate to
be signed by the undersigned, and the undersigned has executed this certificate
and does affirm the foregoing as true under penalty of perjury this ___ day of
May, 1998.
---------------------------------------
Lisa A. Latham, Secretary
4
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
INTERPLAY ENTERTAINMENT CORP.
Section 1. Law, Certificate of Incorporation and By-Laws
1.1. These by-laws are subject to the certificate of incorporation of the
corporation. In these by-laws, references to law, the certificate of
incorporation and by-laws mean the law, the provisions of the certificate of
incorporation and the by-laws as from time to time in effect.
Section 2. Stockholders
2.1. Annual Meeting. The annual meeting of stockholders shall be held at
--------------
10:00 a.m. on in each year, unless that day be a legal
holiday at the place where the meeting is to be held, in which case the meeting
shall be held at the same hour on the next succeeding day not a legal holiday,
or at such other date and time as shall be designated from time to time by the
board of directors and stated in the notice of the meeting. At such annual
meeting the stockholders shall elect a board of directors, and shall transact
such other business as has been set forth in the notice of the meeting or as may
be required by law or these by-laws.
2.2. Special Meetings. A special meeting of the stockholders may be called
----------------
at any time by the chairman of the board, if any, the president or the board of
directors. A special meeting of the stockholders shall be called by the
secretary, or in the case of the death, absence, incapacity or refusal of the
secretary, by an assistant secretary or some other officer, upon application of
a majority of the directors. Any such application shall state the purpose or
purposes of the proposed meeting. Any such call shall state the place, date,
hour, and purposes of the meeting, and the business transacted at any special
meeting shall be limited to the purposes set forth in such call.
2.3. Place of Meeting. All meetings of the stockholders for the election of
----------------
directors or for any other purpose shall be held at such place within or without
the State of Delaware as may be determined from time to time by the chairman of
the board, if any, the president or the board of directors. Any adjourned
session of any meeting of the stockholders shall be held at the place designated
in the vote of adjournment.
2.4. Notice of Meetings. Except as otherwise provided by law, a written
------------------
notice of each meeting of stockholders stating the place, day and hour thereof
and, in the case of an annual meeting, any business to be transacted at such
annual meeting other than the election of directors, and, in the case of a
special meeting, the purposes for which the meeting is called, shall be given
not less than ten nor more than sixty days before such special meeting, to each
stockholder entitled to vote thereat, and to each stockholder who, by law, by
the certificate of incorporation or by these by-laws, is entitled to notice, by
leaving such notice with him or at his residence or usual place of business, or
by depositing it in the United States mail, postage prepaid, and addressed to
such stockholder at his address as it appears in the records of the corporation.
Such notice shall be given by the secretary, or by an officer or person
designated by the board of directors, or in the case of a special meeting by the
officer calling the meeting. As to any adjourned session of any meeting of
stockholders, notice of the adjourned meeting need not be given if the time and
place thereof are announced at the meeting at which the adjournment was taken
except that if the adjournment is for more than thirty days or if after the
adjournment a new record date is set for the adjourned session, notice of any
such adjourned session of the meeting shall be given in the manner heretofore
described. No notice of any meeting of stockholders or any adjourned session
thereof need be given to a
<PAGE>
stockholder if a written waiver of notice, executed before or after the meeting
or such adjourned session by such stockholder, is filed with the records of the
meeting or if the stockholder attends such meeting without objecting at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any meeting of the stockholders or any adjourned session
thereof need be specified in any written waiver of notice.
2.5. Quorum of Stockholders. At any meeting of the stockholders a quorum as
----------------------
to any matter shall consist of a majority of the votes entitled to be cast on
the matter, except where a larger quorum is required by law, by the certificate
of incorporation or by these by-laws. Any meeting may be adjourned from time to
time by a majority of the votes properly cast upon the question, whether or not
a quorum is present. If a quorum is present at an original meeting, a quorum
need not be present at an adjourned session of that meeting. Shares of its own
stock belonging to the corporation or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of any corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
2.6. Action by Vote. When a quorum is present at any meeting, a plurality of
--------------
the votes properly cast for election to any office shall elect to such office
and a majority of the votes properly cast upon any question other than an
election to an office shall decide the question, except when a larger vote is
required by law, by the certificate of incorporation or by these by-laws. No
ballot shall be required for any election unless requested by a stockholder
present or represented at the meeting and entitled to vote in the election.
2.7. Action without Meetings. Unless otherwise provided in the certificate
-----------------------
of incorporation, any action required or permitted to be taken by stockholders
for or in connection with any corporate action may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
corporation by delivery to its registered office in Delaware by hand or
certified or registered mail, return receipt requested, to its principal place
of business or to an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Each such
written consent shall bear the date of signature of each stockholder who signs
the consent. No written consent shall be effective to take the corporate action
referred to therein unless written consents signed by a number of stockholders
sufficient to take such action are delivered to the corporation in the manner
specified in this paragraph within sixty days of the earliest dated consent so
delivered.
If action is taken by consent of stockholders and in accordance with the
foregoing, there shall be filed with the records of the meetings of stockholders
the writing or writings comprising such consent.
If action is taken by less than unanimous consent of stockholders, prompt
notice of the taking of such action without a meeting shall be given to those
who have not consented in writing and a certificate signed and attested to by
the secretary that such notice was given shall be filed with the records of the
meetings of stockholders.
In the event that the action which is consented to is such as would have
required the filing of a certificate under any provision of the General
Corporation Law of the State of Delaware, if such action had been voted upon by
the stockholders at a meeting thereof, the certificate filed under such
provision shall state, in lieu of any statement required by such provision
concerning a vote of
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<PAGE>
stockholders, that written consent has been given under Section 228 of said
General Corporation Law and that written notice has been given as provided in
such Section 228.
2.8. Proxy Representation. Every stockholder may authorize another person or
--------------------
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, objecting to
or voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. The authorization of a proxy may but
need not be limited to specified action, provided, however, that if a proxy
limits its authorization to a meeting or meetings of stockholders, unless
otherwise specifically provided such proxy shall entitle the holder thereof to
vote at any adjourned session but shall not be valid after the final adjournment
thereof.
2.9. Inspectors. The directors or the person presiding at the meeting may,
----------
but need not, appoint one or more inspectors of election and any substitute
inspectors to act at the meeting or any adjournment thereof. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number of shares of stock outstanding and the voting power
of each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. Notwithstanding the foregoing, in the
event that a stockholder seeks to nominate one or more directors pursuant to
Section 3.3 of these by-laws, the directors shall appoint two inspectors, who
shall not be affiliated with the Corporation, to determine whether a stockholder
has complied with Section 3.3 of these by-laws. If the inspector shall
determine that a stockholder has not complied with Section 3.3 of these by-laws,
the inspectors shall direct the person presiding over the meeting to declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by the by-laws; and the person presiding over the meeting shall so
declare to the meeting and the defective nomination shall be disregarded. On
request of the person presiding at the meeting, the inspectors shall make a
report in writing of any challenge, question or matter determined by them and
execute a certificate of any fact found by them.
2.10. List of Stockholders. The secretary shall prepare and make, at least
--------------------
ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at such meeting, arranged in alphabetical order
and showing the address of each stockholder and the number of shares registered
in his name. The stock ledger shall be the only evidence as to who are
stockholders entitled to examine such list or to vote in person or by proxy at
such meeting.
Section 3. Board of Directors
3.1. Number. The number of directors which shall constitute the whole
------
board shall not be less than seven (7) nor more than nine (9) in number. The
exact number of directors shall be fixed from time to time by a resolution
adopted by a unanimous vote of directors then serving. Until otherwise fixed by
the directors, the number of directors constituting the entire board of
directors shall be seven (7). The number of directors may be decreased to any
number permitted by the foregoing at any time by the directors by vote of a
majority of the directors then in office, but only to eliminate vacancies
existing by reason of the death, resignation or removal of one or more
directors. Directors need not be stockholders.
3.2. Tenure. At each annual meeting of the stockholders, directors shall be
------
elected to hold office for a term expiring at the next annual meeting of
stockholders. The Secretary shall have the power to certify at any time as to
the number of directors authorized. Except as otherwise provided by law, by the
certificate of incorporation or by these by-laws, each director shall hold
office until the successors of such directors are elected and qualified, or
until he sooner dies,
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resigns, is removed or becomes disqualified.
3.3. Nomination. Nominations of persons for election to the board of
----------
directors may only be made by or at the direction of the board of directors or
by any stockholder beneficially owning (as defined by Rule 13d-3 of the
Securities Exchange Act of 1934, as amended) of record at least one percent (1%)
of the issued and outstanding capital stock of the corporation. Nominations of
persons to be elected to the Board of Directors at any special meeting of
stockholders shall be made pursuant to timely notice in writing to the
Secretary. To be timely, a stockholder's notice (which shall only be required
with respect to a special meeting of stockholders) shall be delivered to or
mailed and received at the principal executive offices of the corporation not
less than 45 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 55 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the date on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice (which shall only be required with respect to a special meeting of
stockholders) shall set forth (A) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the capital stock of the corporation which are beneficially owned by such person
and (iv) any other information relating to such person that would be required to
be disclosed in solicitations of proxies for election of directors, or would be
otherwise required, in each case pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended (including without limitation
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); and (B) as to the stockholder giving
the notice (i) the name and address of such stockholder and (ii) the class and
number of shares of the capital stock of the corporation which are beneficially
owned (as defined by Rule 13d-3 of the Securities Exchange Act of 1934, as
amended) by such stockholder. If requested in writing by the Secretary at least
15 days in advance of the annual meeting, a stockholder whose shares are not
registered in the name of such stockholder on the corporation's books shall
provide the Secretary, within ten days of such request, with documentary support
for such claim of beneficial ownership. At the request of the board of
directors, any person nominated by the board of directors for election as a
director shall furnish to the Secretary that information required to be set
forth in a stockholder's notice of nomination which pertains to the nominee.
3.4. Powers. The business and affairs of the corporation shall be managed by
------
or under the direction of the board of directors who shall have and may exercise
all the powers of the corporation and do all such lawful acts and things as are
not by law, the certificate of incorporation or these by-laws directed or
required to be exercised or done by the stockholders.
3.5. Vacancies. Vacancies and any newly created directorships resulting from
---------
any increase in the number of directors may be filled by vote of the
stockholders at a meeting called for the purpose, or by a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. When one or more directors shall resign from the board, effective at
a future date, a majority of the directors then in office, including those who
have resigned, shall have power to fill such vacancy or vacancies, the vote or
action by writing thereon to take effect when such resignation or resignations
shall become effective. The directors shall have and may exercise all their
powers notwithstanding the existence of one or more vacancies in their number,
subject to any requirements of law or of the certificate of incorporation or of
these by-laws as to the number of directors required for a quorum or for any
vote or other actions.
3.6. Committees. The board of directors may, by vote of a majority of the
----------
whole board, (a) designate, change the membership of or terminate the existence
of any committee or committees, each committee to consist of one or more of the
directors; (b) designate one or more directors as alternate members of any such
committee who may replace any absent or disqualified member at any meeting of
the committee; and (c) determine the extent to which each such
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committee shall have and may exercise the powers of the board of directors in
the management of the business and affairs of the corporation, including the
power to authorize the seal of the corporation to be affixed to all papers which
require it and the power and authority to declare dividends or to authorize the
issuance of stock; excepting, however, such powers which by law, by the
certificate of incorporation or by these by-laws they are prohibited from so
delegating. In the absence or disqualification of any member of such committee
and his alternate, if any, the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Except as the
board of directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the board or such
rules, its business shall be conducted as nearly as may be in the same manner as
is provided by these by-laws for the conduct of business by the board of
directors. Each committee shall keep regular minutes of its meetings and report
the same to the board of directors upon request.
3.7. Regular Meetings. Regular meetings of the board of directors may be
----------------
held without call or notice at such places within or without the State of
Delaware and at such times as the board may from time to time determine,
provided that notice of the first regular meeting following any such
determination shall be given to absent directors. A regular meeting of the
directors may be held without call or notice immediately after and at the same
place as the annual meeting of the stockholders.
3.8. Special Meetings. Special meetings of the board of directors may be
----------------
held at any time and at any place within or without the State of Delaware
designated in the notice of the meeting, when called by the chairman of the
board, if any, the president, or by one-third or more in number of the
directors, reasonable notice thereof being given to each director by the
secretary or by the chairman of the board, if any, the president or any one of
the directors calling the meeting.
3.9. Notice. It shall be reasonable and sufficient notice to a director to
------
send notice by mail at least forty-eight hours or by facsimile at least twenty-
four hours before the meeting addressed to him at his usual or last known
business or residence facsimile number or to give notice to him in person or by
telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any director if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
director who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. Neither notice of a meeting nor a
wavier of a notice need specify the purposes of the meeting.
3.10. Quorum. Except as may be otherwise provided by law, by the certificate
------
of incorporation or these by-laws, at any meeting of the directors a majority of
the directors then in office shall constitute a quorum; a quorum shall not in
any case be less than one-third of the total number of directors constituting
the whole board. Any meeting may be adjourned from time to time by a majority
of the votes cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned without further notice.
3.11. Action by Vote. Except as may be otherwise provided by law, by the
--------------
certificate of incorporation or by these by-laws, when a quorum is present at
any meeting the vote of a majority of the directors present shall be the act of
the board of directors.
3.12. Action Without a Meeting. Any action required or permitted to be taken
------------------------
at any meeting of the board of directors or a committee thereof may be taken
without a meeting if all the members of the board or of such committee, as the
case may be, consent thereto in writing, and such writing or writings are filed
with the records of the meetings of the board or of such committee. Such consent
shall be treated for all purposes as the act of the board or of such
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committee, as the case may be.
3.13. Participation in Meetings by Conference Telephone. Members of the
-------------------------------------------------
board of directors, or any committee designated by such board, may participate
in a meeting of such board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other or by any other means permitted by law. Such
participation shall constitute presence in person at such meeting.
3.14. Compensation. In the discretion of the board of directors, each
------------
director may be paid such fees for his services as director and be reimbursed
from his reasonable expenses incurred in the performance of his duties as
director as the board of directors from time to time may determine. Nothing
contained in this section shall be construed to preclude any director from
serving the corporation in any other capacity and receiving reasonable
compensation therefor.
3.15. Interested Directors and Officers.
---------------------------------
(a) No contract or transaction between the corporation and one or more
of its directors or officers, or between the corporation and any other
corporation, partnership, association, or other organization in which one or
more of the corporation's directors or officers are directors or officers, or
have a financial interest, shall be void or voidable, solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the board of directors
or the committee, and the board or committee in good faith authorizes the
contract or transaction by the affirmative votes of majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholder
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified by the board of directors, a
committee thereof, or the stockholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorized the contract or transaction.
Section 4. Officers and Agents.
4.1. Enumeration; Qualification. The officers of the corporation shall be a
--------------------------
president, a treasurer, a secretary and such other officers, if any, as the
board of directors from time to time may in its discretion elect or appoint
including without limitation a chairman of the board, one or more vice
presidents and a controller. The corporation may also have such agents, if any,
as the board of directors from time to time may in its discretion choose. Any
officer may be but none need be a director or stockholder. Any two or more
offices may be held by the same person. Any officer may be required by the
board of directors to secure the faithful performance of his duties to the
corporation by giving bond in such amount and with sureties or otherwise as the
board of directors may determine.
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4.2. Powers. Subject to law, to the certificate of incorporation and to the
------
other provisions of these by-laws, each officer shall have, in addition to the
duties and powers herein set forth, such duties and powers as are commonly
incident to his office and such additional duties and powers as the board of
directors may from time to time designate.
4.3. Election. The officers may be elected by the board of directors at
--------
their first meeting following the annual meeting of the stockholders or at any
other time. At any time or from time to time the directors may delegate to any
officer their power to elect or appoint any other officer or any agents.
4.4. Tenure. Each officer shall hold office until the first meeting of the
------
board of directors following the next annual meeting of the stockholders and
until his respective successor is chosen and qualified unless a shorter period
shall have been specified by the terms of his election or appointment, or in
each case until he sooner dies, resigns, is removed or becomes disqualified.
Each agent shall retain his authority at the pleasure of the directors, or the
officer by whom he was appointed or by the officer who then holds agent
appointive power.
4.5. Chairman of the Board of Directors, President and Vice President. The
----------------------------------------------------------------
chairman of the board, if any, shall have such duties and powers as shall be
designated from time to time by the board of directors. Unless the board of
directors otherwise specifies, the chairman of the board, or if there is none
the chief executive officer, shall preside, or designate the person who shall
preside, at all meetings of the stockholders and of the board of directors.
Unless the board of directors otherwise specifies, the president shall be the
chief executive officer and shall have direct charge of all business operations
of the corporation and, subject to the control of the directors, shall have
general charge and supervision of the business of the corporation.
Any vice president shall have such duties and powers as shall be set forth in
these by-laws or as shall be designated from time to time by the board of
directors or by the president.
4.6. Treasurer and Assistant Treasurers. Unless the board of directors
----------------------------------
otherwise specifies, the treasurer shall be the chief financial officer of the
corporation and shall be in charge of its funds and valuable papers, and shall
have such other duties and powers as may be designated from time to time by the
board of directors or by the president. If no controller is elected, the
treasurer shall, unless the board of directors otherwise specifies, also have
the duties and powers of the controller.
Any assistant treasurers shall have such duties and powers as shall be
designated from time to time by the board of directors, the president or the
treasurer.
4.7. Controller and Assistant Controller. If a controller is elected, he
-----------------------------------
shall, unless the board of directors otherwise specifies, be the chief
accounting officer of the corporation and be in charge of its books of account
and accounting records, and of its accounting procedures. He shall have such
other duties and powers and may be designated from time to time by the board of
directors, the president or the treasurer.
Any assistant controller shall have such duties and powers as shall be
designated from time to time by the board of directors, the president, the
treasurer or the controller.
4.8. Secretary and Assistant Secretaries. The secretary shall record all
-----------------------------------
proceedings of the stockholders, of the board of directors and of committees of
the board of directors in a book or series of books to be kept therefore and
shall file therein all actions by written consent of stockholders or directors.
In the absence of the secretary from any meeting, an assistant secretary,
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or if there be none or he is absent, a temporary secretary chosen at the
meeting, shall record the proceedings thereof. Unless a transfer agent has been
appointed the secretary shall keep or cause to be kept the stock and transfer
records of the corporation, which shall contain the names and record addresses
of all stockholders and the number of shares registered in the name of each
stockholder. He shall have such other duties and powers as may from time to time
be designated by the board of directors or the president.
Any assistant secretaries shall have such duties and powers as shall be
designated from time to time by the board of directors, the president or the
secretary.
Section 5. Resignations and Removals.
5.1. Any director or officer may resign at any time by delivering his
resignation in writing to the chairman of the board, if any, the president, or
the secretary or to a meeting of the board of directors. Such resignation shall
be effective upon receipt unless specified to be effective at some other time,
and without in either case the necessity of its being accepted unless the
resignation shall so state. A director (including persons elected by directors
to fill vacancies in the board) may be removed from office with or without cause
by the vote of the holders of two-thirds of the shares issued and outstanding
and entitled to vote in the election of directors. The board of directors may
at any time remove any officer either with or without cause. The board of
directors may at any time terminate or modify the authority of any agent. No
director of officer resigning and (except where a right to receive compensation
shall be expressly provided in a duly authorized written agreement with the
corporation) no director or officer removed shall have any right to any
compensation as such director or officer for any period following his
resignation or removal, or any right to damages on account of such removal,
whether his compensation be by the month or by the year or otherwise; unless, in
the case of a resignation, the directors, or, in the case of removal, the body
acting on the removal, shall in their or its discretion provide for
compensation.
Section 6. Vacancies.
6.1. If the office of the president or the treasurer or the secretary becomes
vacant, the directors may elect a successor by vote of a majority of the
directors then in office. If the office of any other officer becomes vacant, any
person or body empowered to elect or appoint that officer may choose a
successor. Each such successor shall hold office for the unexpired term, and in
the case of the president, the treasurer and the secretary until his successor
is chosen and qualified or in each case he sooner dies, resigns, is removed or
becomes disqualified. Any vacancy of a directorship shall be filled as
specified in Section 3.5 of these by-laws.
Section 7. Capital Stock.
7.1. Stock Certificates. Each stockholder shall be entitled to a certificate
------------------
stating the number and the class and the designation of the series, if any, of
the shares held by him, in such form as shall, in conformity to law, the
certificate of incorporation and the by-laws, be prescribed from time to time by
the board of directors. Such certificate shall be signed by the chairman or
vice chairman of the board, if any, or the president or a vice president and by
the treasurer or an assistant treasurer or by the secretary or an assistant
secretary. Any of or all the signatures on the certificate may be a facsimile.
In case an officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he were such
officer, transfer agent, or registrar at the time of its issue.
7.2. Loss of Certificates. In the case of the alleged theft, loss,
--------------------
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms, including receipt of a bond
sufficient to indemnify the corporation against any claim on account
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thereof, as the board of directors may prescribe.
Section 8. Transfer of Shares of Stock.
8.1. Transfer on Books. Subject to the restrictions, if any, stated or noted
-----------------
on the stock certificate, shares of stock may be transferred on the books of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the board of directors
or the transfer agent of the corporation may reasonably require. Except as may
be otherwise required by law, by the certificate of incorporation or by these
by-laws, the corporation shall be entitled to treat the record holder of stock
as shown on its books as the owner of such stock for all purposes, including the
payment of dividends and the right to receive notice and to vote or to give any
consent with respect thereto and to be held liable for such calls and
assessments, if any, as may lawfully be made thereon, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
properly transferred on the books of the corporation.
It shall be the duty of each stockholder to notify the corporation of his post
office address.
8.2. Record Date and Closing Transfer Books. In order that the corporation
--------------------------------------
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the board of directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no such record date is fixed by the board of
directors, the record date for determining the stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
such record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
the General Corporation Law of the State of Delaware, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
Delaware by hand or certified or registered mail, return receipt requested, to
its principal place of business or to an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. If no record date has been fixed by the board of directors and prior
action by the board of directors is required by the General Corporation Law of
the State of Delaware, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the board of directors adopts the resolution
taking such prior action.
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the board of directors may
fix a record date, which record date shall not precede the date upon which
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the resolution fixing the record date is adopted, and which record date shall be
not more than sixty days prior to such payment, exercise or other action. If no
such record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
Section 9. Indemnification.
9.1. Right to Indemnification. Each person who was or is made a party or is
------------------------
threatened to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director officer of the corporation or is or was serving at the request of the
corporation as a director or officer of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director or officer or
in any other capacity while serving as a director or officer, shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than such law permitted the corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in this Section 9.1 with respect to proceedings to enforce
rights to indemnification, the corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the board of
directors of the corporation. The right to indemnification conferred in this
Section 9.1 shall be a contract right and shall include the right to be paid by
the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including without limitation, service to an
employee benefit plan) shall be made only upon delivery to the corporation of an
undertaking, by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is not further right to appeal that such indemnitee is not entitled
to be indemnified for such expenses under this Section 9 or otherwise
(hereinafter an "undertaking").
9.2. Right of Indemnitee to Bring Suit. If a claim under Section 9.1 of
---------------------------------
these by-laws is not paid in full by the corporation within forty-five (45) days
after a written claim has been received by the corporation, the indemnitee may
at any time thereafter bring suit against the corporation to recover the unpaid
amount of the claim. If successful in whole or part in any such suit or in a
suit brought by the corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) any suit by the corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in the
Delaware General Corporation Law. Neither the failure of the corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the
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applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its board of
directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right hereunder, or by the corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or to
such advancement of expenses under this Section 9 or otherwise shall be on the
corporation.
9.3. Non-Exclusivity of Rights. The rights of indemnification and to the
-------------------------
advancement of expenses conferred in this Section 9 shall not be exclusive of
and shall not affect any other right which any person may have or thereafter
acquire under any statue, provision of the Certificate of Incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise, and
shall inure to the benefit of the heirs and legal representatives of such
person.
9.4. Insurance. The corporation may maintain insurance, at its expense, to
---------
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
9.5. Indemnification of Employees or Agents of the Corporation. The
---------------------------------------------------------
corporation may, to the extent authorized from time to time by the board of
directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the corporation to the fullest extent of the
provisions of this Section 9 with respect to the indemnification and advancement
of expenses of directors or officers of the corporation.
9.6. Indemnification Contracts. The board of directors is authorized to
-------------------------
enter into a contract with any director, officer, employee or agent of the
corporation, or any person serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the board of directors so
determines, greater than, those provided for in this Section 9.
9.7. Effect of Amendment. Any amendment, repeal or modification of any
-------------------
provision of this Section 9 by the stockholders or the directors of the
corporation shall not adversely affect any right or protection of a director or
officer of the corporation existing at the time of such amendment, repeal or
modification.
Section 10. Corporate Seal.
10.1. Subject to alteration by the directors, the seal of the corporation
shall consist of a flat-faced circular die with the word "Delaware" and the name
of the corporation cut or engraved thereon, together with such other words,
dates or images as may be approved from time to time by the directors.
Section 11. Execution of Papers.
11.1. Except as the board of directors may generally or in particular cases
authorize the execution thereof in some other manner, all deeds, leases,
transfers, contracts, bonds, notes, checks, drafts or other obligations made,
accepted or endorsed by the corporation shall be signed by the chairman of the
board, if any, the president, a vice president or the treasurer.
11
<PAGE>
Section 12. Fiscal Year.
12.1. The fiscal year of the corporation shall end on December 31.
Section 13. Amendments.
13.1. These by-laws may be adopted, amended or repealed by vote of a majority
of the directors then in office (except that any amendment or repeal of Section
3.1, 3.3 or 13.1 of these bylaws shall be made only by unanimous vote of the
directors then serving) or by vote of a majority of the stock outstanding and
entitled to vote. Any by-law, whether adopted, amended or repealed by the
stockholders or directors, may be amended or reinstated by the stockholders or
the directors.
12
<PAGE>
EXHIBIT 4.1
COMMON STOCK INTERPLAY(TM) COMMON STOCK
NUMBER BY GAMERS. FOR GAMERS.(TM) SHARES
INCORPORATED UNDER THE SEE REVERSE FOR CERTAIN
LAWS OF THE STATE OF DELAWARE DEFINITIONS
CUSIP 460615 10 7
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER
SHARE, OF INTERPLAY ENTERTAINMENT CORP.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
INTERPLAY ENTERTAINMENT CORP.
CORPORATE SEAL
DELAWARE
SECRETARY CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
<PAGE>
The corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________ Custodian _________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as Act__________________________
tenants in common (State)
UNIF TRF MIN ACT - ________ Custodian (until age _____)
(Cust)
____________ under Uniform
(Minor)
Transfers to Minors Act
_____________________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated:___________________
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERNATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By: ___________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.1
INTERPLAY PRODUCTIONS
AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN
This Amended and Restated 1997 STOCK INCENTIVE PLAN (the "Plan") is hereby
established by INTERPLAY PRODUCTIONS, a California corporation (the "Company")
and adopted by its Board of Directors as of the 2nd day of March 1998, thereby
amending and restating the Company's 1997 Stock Incentive Plan, dated as of the
22nd day of January, 1997 (the "Effective Date").
ARTICLE 1.
PURPOSES OF THE PLAN
--------------------
1.1 PURPOSES. The purposes of the Plan are (a) to enhance the Company's
--------
ability to attract and retain the services of qualified employees, officers and
directors (including non-employee officers and directors), and consultants and
other service providers upon whose judgment, initiative and efforts the
successful conduct and development of the Company's business largely depends,
and (b) to provide additional incentives to such persons or entities to devote
their utmost effort and skill to the advancement and betterment of the Company,
by providing them an opportunity to participate in the ownership of the Company
and thereby have an interest in the success and increased value of the Company.
The Plan has been amended and restated as of the date hereof to increase the
number of shares of Common Stock issuable hereunder.
ARTICLE 2.
DEFINITIONS
-----------
For purposes of this Plan, the following terms shall have the meanings
indicated:
2.1 ADMINISTRATOR. "Administrator" means the Board or, if the Board
-------------
delegates responsibility for any matter to the Committee, the term Administrator
shall mean the Committee.
2.2 AFFILIATED COMPANY. "Affiliated Company" means any "parent
------------------
corporation" or "subsidiary corporation" of the Company, whether now existing or
hereafter created or acquired, as those terms are defined in Sections 424(e) and
424(f) of the Code, respectively.
2.3 BOARD. "Board" means the Board of Directors of the Company.
-----
2.4 CHANGE IN CONTROL. "Change in Control" shall mean (i) the
-----------------
acquisition, directly or indirectly, by any person or group (within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the
beneficial ownership of securities of the Company possessing more than fifty
percent (50%) of the total combined voting power of all outstanding securities
of the Company; (ii) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated; (iii) the sale, transfer
or other disposition of all or substantially all of the assets of the Company;
(iv) a complete liquidation or dissolution of the Company; or (v) any reverse
merger in which the Company is the surviving entity but in which securities
possessing more than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are
<PAGE>
transferred to or acquired by a person or persons different from the persons
holding those securities immediately prior to such merger.
2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time.
2.6 COMMITTEE. "Committee" means a committee of two or more members of
---------
the Board appointed to administer the Plan, as set forth in Section 7.1 hereof.
2.7 COMMON STOCK. "Common Stock" means the Common Stock, no par value of
------------
the Company, subject to adjustment pursuant to Section 4.2 hereof.
2.8 DISABILITY. "Disability" means permanent and total disability as
----------
defined in Section 22(e)(3) of the Code. The Administrator's determination of a
Disability or the absence thereof shall be conclusive and binding on all
interested parties.
2.9 EFFECTIVE DATE. "Effective Date" means the date on which the Plan is
--------------
adopted by the Board or a Committee thereof, as set forth on the first page
hereof.
2.10 EXERCISE PRICE. "Exercise Price" means the purchase price per share
--------------
of Common Stock payable upon exercise of an Option.
2.11 FAIR MARKET VALUE. "Fair Market Value" on any given date means the
-----------------
value of one share of Common Stock, determined as follows:
(a) If the Common Stock is then listed or admitted to trading on a
Nasdaq market system or a stock exchange which reports closing sale prices, the
Fair Market Value shall be the closing sale price on the date of valuation on
such Nasdaq market system or principal stock exchange on which the Common Stock
is then listed or admitted to trading, or, if no closing sale price is quoted on
such day, then the Fair Market Value shall be the closing sale price of the
Common Stock on such Nasdaq market system or such exchange on the next preceding
day for which a closing sale price is reported.
(b) If the Common Stock is not then listed or admitted to trading on a
Nasdaq market system or a stock exchange which reports closing sale prices, the
Fair Market Value shall be the average of the closing bid and asked prices of
the Common Stock in the over-the-counter market on the date of valuation.
(c) If neither (a) nor (b) is applicable as of the date of valuation,
then the Fair Market Value shall be determined by the Administrator in good
faith using any reasonable method of evaluation, which determination shall be
conclusive and binding on all interested parties.
2.12 INCENTIVE OPTION. "Incentive Option" means any Option designated and
----------------
qualified as an "incentive stock option" as defined in Section 422 of the Code.
2.13 INCENTIVE OPTION AGREEMENT. "Incentive Option Agreement" means an
--------------------------
Option Agreement with respect to an Incentive Option.
2
<PAGE>
2.14 NASD DEALER. "NASD Dealer" means a broker-dealer that is a member of
-----------
the National Association of Securities Dealers, Inc.
2.15 NONQUALIFIED OPTION. "Nonqualified Option" means any Option that is
-------------------
not an Incentive Option. To the extent that any Option designated as an
Incentive Option fails in whole or in part to qualify as an Incentive Option,
including, without limitation, for failure to meet the limitations applicable to
a 10% Shareholder or because it exceeds the annual limit provided for in Section
5.6 below, it shall to that extent constitute a Nonqualified Option.
2.16 NONQUALIFIED OPTION AGREEMENT. "Nonqualified Option Agreement" means
-----------------------------
an Option Agreement with respect to a Nonqualified Option.
2.17 OFFEREE. "Offeree" means a Participant to whom a Right to Purchase
-------
has been offered or who has acquired Restricted Stock under the Plan.
2.18 OPTION. "Option" means any option to purchase Common Stock granted
------
pursuant to the Plan.
2.19 OPTION AGREEMENT. "Option Agreement" means the written agreement
----------------
entered into between the Company and the Optionee with respect to an Option
granted under the Plan.
2.20 OPTIONEE. "Optionee" means a Participant who holds an Option.
--------
2.21 PARTICIPANT. "Participant" means an individual or entity who holds an
-----------
Option, a Right to Purchase or Restricted Stock under the Plan.
2.22 PURCHASE PRICE. "Purchase Price" means the purchase price per share
--------------
of Restricted Stock payable upon acceptance of a Right to Purchase.
2.23 RESTRICTED STOCK. "Restricted Stock" means shares of Common Stock
----------------
issued pursuant to Article 6 hereof, subject to any restrictions and conditions
as are established pursuant to such Article 6.
2.24 RIGHT TO PURCHASE. "Right to Purchase" means a right to purchase
-----------------
Restricted Stock granted to an Offeree pursuant to Article 6 hereof.
2.25 SERVICE PROVIDER. "Service Provider" means a consultant or other
----------------
person or entity who provides services to the Company or an Affiliated Company
and who the Administrator authorizes to become a Participant in the Plan.
2.26 STOCK PURCHASE AGREEMENT. "Stock Purchase Agreement" means the
------------------------
written agreement entered into between the Company and the Offeree with respect
to a Right to Purchase offered under the Plan.
2.27 10% SHAREHOLDER. "10% Shareholder" means a person who, as of a
---------------
relevant date, owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the
3
<PAGE>
Code) stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of an Affiliated Company.
ARTICLE 3.
ELIGIBILITY
-----------
3.1 INCENTIVE OPTIONS. Officers and other key employees of the Company or
-----------------
of an Affiliated Company (including members of the Board if they are employees
of the Company or of an Affiliated Company) are eligible to receive Incentive
Options under the Plan.
3.2 NONQUALIFIED OPTIONS AND RIGHTS TO PURCHASE. Officers and other key
-------------------------------------------
employees of the Company or of an Affiliated Company, members of the Board
(whether or not employed by the Company or an Affiliated Company), Service
Providers or any trust, IRA account or estate planning device (an "Estate
Planning Device") for the benefit of the foregoing are eligible to receive
Nonqualified Options or Rights to Purchase under the Plan.
3.3 LIMITATION ON SHARES. In no event shall any Participant be granted
--------------------
Options or Rights to Purchase in any one calendar year pursuant to which the
aggregate number of shares of Common Stock that may be acquired thereunder
exceeds 500,000 shares.
ARTICLE 4.
PLAN SHARES
-----------
4.1 SHARES SUBJECT TO THE PLAN. A total of shares of Common Stock equal
--------------------------
to the sum of (a) such amount of shares as are or will become available in
accordance with the terms of the Company's Incentive Stock Option and
Nonqualified Stock Option Plan -- 1994 and Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan -- 1991 (collectively, the
"Terminated Plans"), whether by termination of outstanding options, repurchase
of shares issued under the Terminated Plans, or otherwise, and (b) 1,519,891
shares may be issued under the Plan, subject to adjustment as to the number and
kind of shares pursuant to Section 4.2 hereof. For purposes of this limitation,
in the event that (a) all or any portion of any Option or Right to Purchase
granted or offered under the Plan can no longer under any circumstances be
exercised, or (b) any shares of Common Stock are reacquired by the Company
pursuant to an Incentive Option Agreement, Nonqualified Option Agreement or
Stock Purchase Agreement, the shares of Common Stock allocable to the
unexercised portion of such Option or such Right to Purchase, or the shares so
reacquired, shall again be available for grant or issuance under the Plan.
4.2 CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding
----------------------------
shares of Common Stock are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company by reason of a recapitalization, stock split, combination of shares,
reclassification, stock dividend, or other change in the capital structure of
the Company, then appropriate adjustments shall be made by the Administrator to
the aggregate number and kind of shares subject to this Plan, and the number and
kind of shares and the price per share subject to outstanding Option Agreements,
Rights to Purchase and Stock Purchase Agreements in order to preserve, as nearly
as practical, but not to increase, the benefits to Participants.
4
<PAGE>
ARTICLE 5.
OPTIONS
-------
5.1 OPTION AGREEMENT. Each Option granted pursuant to this Plan shall be
----------------
evidenced by an Option Agreement which shall specify the number of shares
subject thereto, the Exercise Price per share, and whether the Option is an
Incentive Option or Nonqualified Option. As soon as is practical following the
grant of an Option, an Option Agreement shall be duly executed and delivered by
or on behalf of the Company to the Optionee to whom such Option was granted.
Each Option Agreement shall be in such form and contain such additional terms
and conditions, not inconsistent with the provisions of this Plan, as the
Administrator shall, from time to time, deem desirable, including, without
limitation, the imposition of any rights of first refusal and resale obligations
upon any shares of Common Stock acquired pursuant to an Option Agreement. Each
Option Agreement may be different from each other Option Agreement.
5.2 EXERCISE PRICE. The Exercise Price per share of Common Stock covered
--------------
by each Option shall be determined by the Administrator, subject to the
following: (a) the Exercise Price of an Incentive Option shall not be less
than 100% of Fair Market Value on the date the Incentive Option is granted, (b)
the Exercise Price of a Nonqualified Option shall not be less than 85% of Fair
Market Value on the date the Nonqualified Option is granted, and (c) if the
person to whom an Incentive Option is granted is a 10% Shareholder on the date
of grant, the Exercise Price shall not be less than 110% of Fair Market Value on
the date the Option is granted.
5.3 PAYMENT OF EXERCISE PRICE. Payment of the Exercise Price shall be
-------------------------
made upon exercise of an Option and may be made, in the discretion of the
Administrator, subject to any legal restrictions, by: (a) cash; (b) check; (c)
the surrender of shares of Common Stock owned by the Optionee that have been
held by the Optionee for at least six (6) months, which surrendered shares shall
be valued at Fair Market Value as of the date of such exercise; (d) the
Optionee's promissory note in a form and on terms acceptable to the
Administrator; (e) the cancellation of indebtedness of the Company to the
Optionee; (f) the waiver of compensation due or accrued to the Optionee for
services rendered; (g) provided that a public market for the Common Stock
exists, a "same day sale" commitment from the Optionee and an NASD Dealer
whereby the Optionee irrevocably elects to exercise the Option and to sell a
portion of the shares so purchased to pay for the Exercise Price and whereby the
NASD Dealer irrevocably commits upon receipt of such shares to forward the
Exercise Price directly to the Company; (h) provided that a public market for
the Common Stock exists, a "margin" commitment from the Optionee and an NASD
Dealer whereby the Optionee irrevocably elects to exercise the Option and to
pledge the shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt of such shares to
forward the Exercise Price directly to the Company; or (i) any combination of
the foregoing methods of payment or any other consideration or method of payment
as shall be permitted by applicable corporate law.
5.4 TERM AND TERMINATION OF OPTIONS. The term and provisions for
-------------------------------
termination of each Option shall be as fixed by the Administrator, but no Option
may be exercisable more than ten (10) years after the date it is granted. An
Incentive Option granted to a person who is a 10%
5
<PAGE>
Shareholder on the date of grant shall not be exercisable more than five (5)
years after the date it is granted.
5.5 VESTING AND EXERCISE OF OPTIONS. Each Option shall vest and become
-------------------------------
exercisable in one or more installments at such time or times and subject to
such conditions, including without limitation the achievement of specified
performance goals or objectives, as shall be determined by the Administrator.
5.6 ANNUAL LIMIT ON INCENTIVE OPTIONS. To the extent required for
---------------------------------
"incentive stock option" treatment under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Common Stock shall
not, with respect to which Incentive Options granted under this Plan and any
other plan of the Company or any Affiliated Company become exercisable for the
first time by an Optionee during any calendar year, exceed $100,000.
5.7 NONTRANSFERABILITY OF OPTIONS. No Option shall be assignable or
-----------------------------
transferable except by will or the laws of descent and distribution, and during
the life of the Optionee shall be exercisable only by such Optionee; provided,
however, that, in the discretion of the Administrator, any Option may be
assigned or transferred in any manner which an "incentive stock option" is
permitted to be assigned or transferred under the Code.
5.8 RIGHTS AS SHAREHOLDER. An Optionee or permitted transferee of an
---------------------
Option shall have no rights or privileges as a shareholder with respect to any
shares covered by an Option until such Option has been duly exercised and
certificates representing shares purchased upon such exercise have been issued
to such person.
5.9 COMPANY'S REPURCHASE RIGHT. In the event of termination of a
--------------------------
Participant's employment or service as a director of the Company for any reason
whatsoever (including death or disability), the Option Agreement may provide, in
the discretion of the Administrator, that the Company shall have the right,
exercisable at the discretion of the Administrator, to repurchase shares of
Common Stock acquired pursuant to the exercise of an Option at either of the
following prices:
(a) The price which is the greater of the Fair Market Value per share
of Common Stock (determined in accordance with Section 2.11 hereof) as of the
date of termination of Optionee's employment or the original Exercise Price; or
(b) The original Exercise Price paid by the Optionee for those shares
of Common Stock issued pursuant to Options, provided that the right of
repurchase under this Section 5.9(b) shall lapse as to 20% of the options each
year until after five (5) years at which time the Company shall have no right of
repurchase with respect to any of such shares of Common Stock issued pursuant to
said Options.
In any event, the right to repurchase must be exercised within ninety (90) days
of the termination of employment and may be paid by the Company by cash, check,
or cancellation of Optionee's purchase money indebtedness to the Company. The
Company may assign the right to repurchase provided that if the right is
assigned, the assignee must pay the Company by cash, check or wire transfer the
difference between the original Purchase Price and the Fair Market Value of the
shares
6
<PAGE>
to be repurchased, unless the assignee is a 100% owned subsidiary of the
issuer or is the parent of the issuer owning 100% of the issuer.
5.10 RESTRICTIONS ON UNDERLYING SHARES OF COMMON STOCK. Shares of Common
-------------------------------------------------
Stock issued pursuant to the exercise of an Option may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in the Option Agreement.
ARTICLE 6.
RIGHTS TO PURCHASE
------------------
6.1 NATURE OF RIGHT TO PURCHASE. A Right to Purchase granted to an
---------------------------
Offeree entitles the Offeree to purchase, for a Purchase Price determined by the
Administrator, shares of Common Stock subject to such terms, restrictions and
conditions as the Administrator may determine at the time of grant ("Restricted
Stock"). Such conditions may include, but are not limited to, continued
employment or the achievement of specified performance goals or objectives.
6.2 ACCEPTANCE OF RIGHT TO PURCHASE. An Offeree shall have no rights with
-------------------------------
respect to the Restricted Stock subject to a Right to Purchase unless the
Offeree shall have accepted the Right to Purchase within ten (10) days (or such
longer or shorter period as the Administrator may specify) following the grant
of the Right to Purchase by making payment of the full Purchase Price to the
Company in the manner set forth in Section 6.3 hereof and by executing and
delivering to the Company a Stock Purchase Agreement. Each Stock Purchase
Agreement shall be in such form, and shall set forth the Purchase Price and such
other terms, conditions and restrictions of the Restricted Stock, not
inconsistent with the provisions of this Plan, as the Administrator shall, from
time to time, deem desirable. Each Stock Purchase Agreement may be different
from each other Stock Purchase Agreement.
6.3 PAYMENT OF PURCHASE PRICE. Subject to any legal restrictions, payment
-------------------------
of the Purchase Price upon acceptance of a Right to Purchase Restricted Stock
may be made, in the discretion of the Administrator, by: (a) cash; (b) check;
(c) the surrender of shares of Common Stock owned by the Offeree that have been
held by the Offeree for at least six (6) months, which surrendered shares shall
be valued at Fair Market Value as of the date of such exercise; (d) the
Offeree's promissory note in a form and on terms acceptable to the
Administrator; (e) the cancellation of indebtedness of the Company to the
Offeree; (f) the waiver of compensation due or accrued to the Offeree for
services rendered; or (g) any combination of the foregoing methods of payment or
any other consideration or method of payment as shall be permitted by applicable
corporate law.
6.4 RIGHTS AS A SHAREHOLDER. Upon complying with the provisions of
-----------------------
Section 6.2 hereof, an Offeree shall have the rights of a shareholder with
respect to the Restricted Stock purchased pursuant to the Right to Purchase,
including voting and dividend rights, subject to the terms, restrictions and
conditions as are set forth in the Stock Purchase Agreement. Unless the
Administrator shall determine otherwise, certificates evidencing shares of
Restricted Stock shall remain in the possession of the Company until such shares
have vested in accordance with the terms of the Stock Purchase Agreement.
7
<PAGE>
6.5 RESTRICTIONS AND REPURCHASE RIGHT. Shares of Restricted Stock may not
---------------------------------
be sold, assigned, transferred, pledged or otherwise encumbered or disposed of
except as specifically provided in the Stock Purchase Agreement. In the event of
termination of a Participant's employment, service as a director of the Company,
or Service Provider status for any reason whatsoever (including death
or disability), the Stock Purchase Agreement may provide, in the discretion of
the Administrator, that the Company shall have the right, exercisable at the
discretion of the Administrator, to repurchase any share of Restricted Stock,
whether Vested or Unvested, at either of the following prices:
(a) The price that is the greater of the Fair Market Value per share
of Restricted Stock as of the date of termination of Purchaser's employment or
the original Purchase Price; or
(b) The price that is the original Purchase Price per share of
Restricted Stock. However, the right of repurchase under this Section 6.5(b)
shall lapse as to 20% of the Restricted Stock each year until after five (5)
years at which time the Company shall have no right of repurchase with respect
to any Restricted Stock.
In any event, the right to repurchase upon termination of Purchaser's employment
must be exercised within ninety (90) days of the termination of employment and
may be paid by the Company by cash, check, or cancellation of Optionee's
purchase money indebtedness to the Company. The Company may assign the right to
repurchase provided that if the right is assigned, the assignee must pay the
Company by cash, check or wire transfer the difference between the original
Purchase Price and the Fair Market Value of the shares to be repurchased.
6.6 VESTING OF RESTRICTED STOCK. The Stock Purchase Agreement shall
---------------------------
specify the date or dates, the performance goals or objectives which must be
achieved, and any other conditions on which the Restricted Stock may vest.
6.7 DIVIDENDS. If payment for shares of Restricted Stock is made by
---------
promissory note, any cash dividends paid with respect to the Restricted Stock
may be applied, in the discretion of the Administrator, to repayment of such
note.
6.8 NONASSIGNABILITY OF RIGHTS. No Participant's Right to Purchase shall
--------------------------
be assignable or transferable except by will or the laws of descent and
distribution or as otherwise provided by the Administrator.
ARTICLE 7.
ADMINISTRATION OF THE PLAN
--------------------------
7.1 ADMINISTRATOR. Authority to control and manage the operation and
-------------
administration of the Plan shall be vested in the Board, which may delegate such
responsibilities in whole or in part to a committee consisting of two (2) or
more members of the Board (the "Committee"). Members of the Committee may be
appointed from time to time by, and shall serve at the pleasure of, the Board.
As used herein, the term "Administrator" means the Board or, with respect to any
matter as to which responsibility has been delegated to the Committee, the term
Administrator shall mean the Committee.
8
<PAGE>
7.2 POWERS OF THE ADMINISTRATOR. In addition to any other powers or
---------------------------
authority conferred upon the Administrator elsewhere in the Plan or by law, the
Administrator shall have full power and authority: (a) to determine the persons
to whom, and the time or times at which, Incentive Options or Nonqualified
Options shall be granted and Rights to Purchase shall be offered, the number of
shares to be represented by each Option and Right to Purchase and the
consideration to be received by the Company upon the exercise thereof; (b) to
interpret the Plan; (c) to create, amend or rescind rules and regulations
relating to the Plan; (d) to determine the terms, conditions and restrictions
contained in, and the form of, Option Agreements and Stock Purchase Agreements;
(e) to determine the identity or capacity of any persons who may be entitled to
exercise a Participant's rights under any Option or Right to Purchase under the
Plan; (f) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Option Agreement or Stock Purchase
Agreement; (g) to accelerate the vesting of any Option or Right to Purchase and
to release, waive, or assign any repurchase rights of the Company with respect
to Restricted Stock or shares issued pursuant to the exercise of an Option; (h)
to extend the exercise date of any Option or acceptance date of any Right to
Purchase; (i) to provide for rights of first refusal and/or repurchase rights;
(j) to amend outstanding Option Agreements and Stock Purchase Agreements to
provide for, among other things, any change or modification which the
Administrator could have provided for upon the grant of an Option or Right to
Purchase or in furtherance of the powers provided for herein; and (k) to make
all other determinations necessary or advisable for the administration of the
Plan, but only to the extent not contrary to the express provisions of the Plan.
Any action, decision, interpretation or determination made in good faith by the
Administrator in the exercise of its authority conferred upon it under the Plan
shall be final and binding on the Company and all Participants.
7.3 LIMITATION ON LIABILITY. No employee of the Company or member of the
-----------------------
Board or Committee shall be subject to any liability with respect to duties
under the Plan unless the person acts fraudulently or in bad faith. To the
extent permitted by law, the Company shall indemnify each member of the Board or
Committee, and any employee of the Company with duties under the Plan, who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed proceeding, whether civil, criminal, administrative or
investigative, by reason of such person's conduct in the performance of duties
under the Plan.
ARTICLE 8.
CHANGE IN CONTROL
-----------------
8.1 CHANGE IN CONTROL. In the event of a Change in Control of the
-----------------
Company, the Plan and all unexercised, outstanding Options and Rights to
Purchase shall terminate, unless provision is made in writing in connection with
such transaction for the continuance of the Plan and for the assumption of
Options and Rights to Purchase theretofore granted, or the substitution for such
Options and Rights to Purchase of new options and new rights to purchase of
comparable value covering shares of a successor corporation, with appropriate
adjustments as to the number and kind of shares and Exercise Prices, in which
event the Plan and such Options and Rights to Purchase, or the new options and
rights to purchase substituted therefor, shall continue in the manner and under
the terms so provided. If such provision is not made in such transaction for
the continuance of the Plan and the assumption of such Options and Rights to
Purchase or the substitution for such Options
9
<PAGE>
and Rights to Purchase of new options and new rights to purchase covering shares
of the successor corporation, then the Administrator shall cause written notice
of the proposed transaction to be given to all Participants not less than
fifteen (15) days prior to the anticipated effective date of the proposed
transaction and on or before the effective date of the proposed transaction,
such persons shall have the right to exercise the vested portion of Options and
accept Rights to Purchase.
ARTICLE 9.
AMENDMENT AND TERMINATION OF THE PLAN
-------------------------------------
9.1 AMENDMENTS. The Board or a Committee of the Board may from time to
----------
time alter, amend, suspend or terminate the Plan in such respects as the Board
may deem advisable. No such alteration, amendment, suspension or termination
shall be made which shall substantially affect or impair the rights of any
Participant under an outstanding Option Agreement or Stock Purchase Agreement
without such Participant's consent. The Board may alter or amend the Plan to
comply with requirements under the Code relating to Incentive Options or other
types of options which give Optionees more favorable tax treatment than that
applicable to Options granted under this Plan as of the date of its adoption.
Upon any such alteration or amendment, any outstanding Option granted hereunder
may, if the Administrator so determines and if permitted by applicable law, be
subject to the more favorable tax treatment afforded to an Optionee pursuant to
such terms and conditions.
9.2 PLAN TERMINATION. Unless the Plan shall theretofore have been
----------------
terminated, the Plan shall terminate on the tenth (10th) anniversary of the
Effective Date and no Options or Rights to Purchase may be granted under the
Plan thereafter, but Option Agreements, Stock Purchase Agreements and Rights to
Purchase then outstanding shall continue in effect in accordance with their
respective terms.
ARTICLE 10.
TAX WITHHOLDING
---------------
10.1 WITHHOLDING. The Company shall have the power to withhold, or require
-----------
a Participant to remit to the Company, an amount sufficient to satisfy any
applicable Federal, state, and local tax withholding requirements with respect
to any Options exercised or Restricted Stock issued under the Plan. To the
extent permissible under applicable tax, securities and other laws, the
Administrator may, in its sole discretion and upon such terms and conditions as
it may deem appropriate, permit a Participant to satisfy his or her obligation
to pay any such tax, in whole or in part, up to an amount determined on the
basis of the highest marginal tax rate applicable to such Participant, by (a)
directing the Company to apply shares of Common Stock to which the Participant
is entitled as a result of the exercise of an Option or as a result of the
purchase of or lapse of restrictions on Restricted Stock or (b) delivering to
the Company shares of Common Stock owned by the Participant. The shares of
Common Stock so applied or delivered in satisfaction of the Participant's tax
withholding obligation shall be valued at their Fair Market Value as of the date
of measurement of the amount of income subject to withholding.
10
<PAGE>
ARTICLE 11.
MISCELLANEOUS
-------------
11.1 BENEFITS NOT ALIENABLE. Other than as provided above, benefits under
----------------------
the Plan may not be assigned or alienated, whether voluntarily or involuntarily.
Any unauthorized attempt at assignment, transfer, pledge or other disposition
shall be without effect.
11.2 NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is strictly a voluntary
---------------------------------
undertaking on the part of the Company and shall not be deemed to constitute a
contract between the Company and any Participant to be consideration for, or an
inducement to, or a condition of, the employment of any Participant. Nothing
contained in the Plan shall be deemed to give the right to any Participant to be
retained as an employee of the Company or any Affiliated Company or to interfere
with the right of the Company or any Affiliated Company to discharge any
Participant at any time.
11.3 APPLICATION OF FUNDS. The proceeds received by the Company from the
--------------------
sale of Common Stock pursuant to Option Agreements and Stock Purchase
Agreements, except as otherwise provided herein, will be used for general
corporate purposes.
11
<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Interplay Productions, Inc., a California
corporation (the "Company"), and Brian Fargo (the "Executive"), dated as of the
28th day of March, 1994.
- ---- -----
WHEREAS, the Company and the Executive have entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with MCA INC., a Delaware corporation
("MCA"), pursuant to which MCA will purchase shares of stock of the Company from
the Company and from the Executive (the "Stock Purchase"); and
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and conditions under which the Executive will continue to be
employed by the Company after the Stock Purchase and the Executive has agreed in
the Stock Purchase Agreement to enter into this Agreement; and
WHEREAS, it is a condition to the obligation of MCA to consummate the Stock
Purchase that the Executive and the Company enter into this Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
-----------------
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the period commencing on the date of consummation of the Stock
Purchase and ending on the fifth anniversary of such date (the "Employment
Period").
<PAGE>
2. Position and Duties. (a) During the Employment Period, the Executive
-------------------
shall be employed by the Company as President and Chief Executive Officer and
shall serve as Chairman of the Board of Directors of the Company, in each case,
with duties and responsibilities substantially similar to those previously
assigned to the Executive.
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote full business attention and time to the business and affairs of the
Company, using the Executive's reasonable best efforts to carry out faithfully
and efficiently the responsibilities assigned to the Executive under this
Agreement. It shall not be considered a violation of the foregoing for the
Executive to (i) serve on corporate boards with the approval of the Company,
(ii) serve on civic or charitable boards or committees, (iii) deliver lectures
or fulfill speaking engagements and (iv) manage personal investments, so long as
such activities do not interfere with the performance of the Executive's
responsibilities under this Agreement or otherwise violate the terms of this
Agreement.
(c) The Executive's services shall be performed primarily at the
location specified on Schedule A. Travel in connection with the business of the
Company may be reasonably requested from time to time by the Board of Directors
of the Company (the "Board").
3. Compensation. (a) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary (the "Annual Base Salary") in an
amount not less than $500,000, payable in accordance with the Company's payroll
practices for executives, as in effect from time to time. During the Employment
Period, the Annual Base Salary shall be reviewed for possible increase at least
annually. Any increase in the Annual Base Salary shall not limit or reduce any
other obligation of the Company under this Agreement. The Annual Base Salary
shall not be reduced after any such increase,
2
<PAGE>
unless the annual base salaries of all executives of the Company are
proportionately reduced, and in any event shall not be reduced below $500,000.
After any such increase (or decrease), the term "Annual Base Salary" shall refer
to the Annual Base Salary as so increased (or decreased).
(b) Annual Bonus. In addition to the Annual Base Salary, the Executive
------------
shall be eligible to receive annual bonuses (each, an "Annual Bonus") at the
discretion of the Board of Directors of the Company.
(c) Other Benefits. The Executive shall be entitled to participate in
--------------
any of the Company's medical, dental or other benefit plans approved by the
Company's Board of Directors.
(d) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all normal and customary expenses
incurred by the Executive in carrying out the Executive's duties under this
Agreement, provided that the Executive complies with the policies, practices and
procedures of the Company for submission of expense reports, receipts, or
similar documentation of such expenses.
(e) Fringe Benefits. During the Employment Period, the Executive shall
---------------
be entitled to the fringe benefits set forth on Schedule A to this Agreement.
(f) Vacation. (i) During the Employment Period, the Executive shall be
--------
entitled to vacations in accordance with Company policies then in effect and, in
no event, shall such vacation time be less than four (4) weeks per calendar
year.
4. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. The Company shall be entitled to terminate the Executive's
employment because of the Executive's
3
<PAGE>
Disability during the Employment Period. "Disability" means that (i) the
Executive has failed, over a period of 180 consecutive days, to perform the
Executive's duties under this Agreement, as a result of physical or mental
illness or injury, and (ii) a physician selected by the Company or its insurers,
and reasonably acceptable to the Executive or the Executive's legal
representative, has determined that the Executive's incapacity constitutes a
disability for purposes of the Company's long-term disability insurance
coverage. A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and shall
be effective upon receipt of such notice by the Executive (the "Disability
Effective Date").
(b) By the Company. (i) The Company may terminate the Executive's
--------------
employment during the Employment Period for Cause or without Cause. "Cause"
shall mean (A) fraud, embezzlement or willful misconduct materially injurious to
the Company on the part of the Executive, (B) the Executive's (x) persistent and
continued failure to substantially perform his material duties (which duties
shall be reasonably consistent with those previously assigned to the Executive)
for the Company when and to the extent reasonably requested by the Board to do
so and (y) failure to correct same within thirty (30) days after notice from the
Board requesting the Executive to do so (it being understood that this standard
is intended to assure the Company of the reasonable attendance, efforts and good
faith business attention of the Executive to his duties on behalf of the
Company, but may not be relied upon by the Company to terminate the Executive
based upon the operating performance of the Company), or (C) the Executive's
breach of any material provision of this Agreement, which breach has not been
cured in all material respects within thirty (30) days after notice of such
breach is given to the Executive by the Company. No act or failure to act on the
part of the Executive shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of the
4
<PAGE>
Company. Any act or failure to act that is based upon authority given pursuant
to a resolution duly adopted by the Board or the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The Executive
shall not be deemed to have been terminated for Cause unless such notice is
accompanied by a copy of a resolution duly adopted by the Board to such effect.
(ii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive written notice of the
termination.
(c) Good Reason. (i) The Executive may terminate employment for Good
-----------
Reason.
"Good Reason" means:
(A) the assignment to the Executive of duties inconsistent in
any material respect with paragraph (a) of Section 2 of this Agreement,
other than actions that are not taken in bad faith and are remedied by the
Company within five (5) business days after receipt of notice thereof from
the Executive;
(B) any failure by the Company to comply with any provision
of Section 3 of this Agreement other than failures that are not taken in
bad faith and are remedied by the Company within five (5) business days
after receipt of notice thereof from the Executive;
(C) any requirement by the Company that the Executive's
services be rendered primarily at a location or locations not complying
with the provisions of paragraph (c) of Section 2 of this Agreement; or
(D) any failure by the Company to require any successor
(whether direct or indirect by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform if no such succession had taken place.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
5
<PAGE>
termination of employment by the Executive for Good Reason shall be effective on
the tenth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given); provided,
--------
that such atermination of employment shall not become effective if the Company
shall have previously corrected to the reasonable satisfaction of the Executive
the circumstance giving rise to the Notice of Termination.
(d) Date of Termination. The "Date of Termination" means the date
-------------------
of the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Company gives
the Executive notice of a termination of employment without Cause, as the case
may be.
5. Obligations of the Company Upon Termination.
-------------------------------------------
(a) Death, Disability, Cause. If, during the Employment Period, the
------------------------
Executive's employment is terminated because of death, Disability, or for Cause,
then except as provided in Section 8, the Executive shall not be entitled to any
compensation provided for under this Agreement, other than Annual Base Salary
through the effective date of any such termination or resignation, benefits
under the long-term disability insurance coverage in the case of termination
because of Disability, and (without limiting the provisions of Section 6 hereof)
vested benefits, if any, required to be paid or provided by law.
(a) Without Cause; Good Reason. If, during the Employment Period,
--------------------------
the Executive's employment is terminated by the Company without Cause or by the
Executive for Good Reason, the Executive shall not be entitled to any
compensation provided for under this Agreement
6
<PAGE>
except as set forth in the following sentence. For the remainder of the
Employment Period, the Executive shall continue to be considered an employee of
the Company, and the Company (i) shall continue to pay the Executive for and
with respect to the unexpired portion of the Employment Period (in the same
manner as specified herein) (A) an amount equal to one hundred and fifty percent
(150%) of his Annual Base Salary and (B) an amount equal to seventy-five percent
(75%) of the Executive's Imputed Annual Bonuses and (ii) shall continue during
the unexpired portion of the Employment Period the welfare benefits set forth in
Section 3 (in the same manner as specified herein); provided that (x) if any
--------
such benefits cannot be provided under the terms of the applicable plans or
applicable law, the Company shall provide the Executive with substitute benefits
that are comparable and equal in value to such benefits, and (y) during any
period when the Executive is eligible to receive any such benefits under another
employer-provided plan, the benefits provided by the Company under this
paragraph may be made secondary to those provided under such other plan. As
used herein, "Imputed Annual Bonuses" shall mean the "target" bonuses or similar
amounts under any Company bonus plan then in effect approved by the Board that
the Executive would have received had he not been terminated.
6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company for which the Executive may qualify,
nor, subject to paragraph (f) of Section 10, shall anything in this Agreement
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company. Vested benefits and other amounts that
the Executive is otherwise entitled to receive under any plan, policy, practice
or program of, or any contract or agreement with, the Company on or after the
Date of Termination shall be payable in accordance with
7
<PAGE>
such plan, policy, practice, program, contract or agreement, as the case may be,
except as explicitly modified by this Agreement.
7. No Mitigation or Reduction. In no event shall the Executive be
--------------------------
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
8. Confidential Information; Other Covenants. (a) The Executive shall
-----------------------------------------
hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company and its
business that the Executive has obtained during the Executive's employment by
the Company and that is not public knowledge (other than as a result of the
Executive's violation of this paragraph (a) of Section 8) ("Confidential
Information"), unless disclosure of such information is required by court order.
The Executive shall not communicate, divulge or disseminate Confidential
Information at any time during or after the Executive's employment with the
Company, except with the prior written consent of the Company or as otherwise
required by law or legal process.
(b) During the full original term of the Employment Period, except as
otherwise provided in paragraph (d) of this Section 8, the Executive shall not,
without the prior written consent of the Board, engage in or become associated
with a Prohibited Activity. For purposes of this paragraph (b) of Section 8: (i)
a "Prohibited Activity" means any business or other endeavor that engages in the
interactive software business in which the Company is at the date hereof, or at
any time during the Employment Period, engaged in the United States (including
Puerto Rico); and (ii) except as provided on Schedule A, the Executive shall be
considered to have become "associated with a Prohibited Activity" if he becomes
directly or indirectly involved as an owner, employee, officer, director,
independent contractor, agent, partner, advisor, lender, or in any other
capacity with any individual, partnership, corporation or other organization
that is engaged in a Prohibited Activity. Notwithstanding the foregoing: (i) the
Executive may make and retain investments during the Employment Period in not
more than five percent (5%) of the equity of any entity engaged in a Prohibited
Activity, if such equity is listed on a national securities exchange or
regularly traded in an over-the-counter market; and (ii) if the Executive's
employment is terminated because of Disability, the provisions of this paragraph
(b) of Section 8 shall only apply if, following notice from the Executive that
his disability has ended and that he intends to seek employment in a Prohibited
Activity, the Company commences payment and continues to pay from the date of
such notice throughout the remainder of the Employment Period the compensation
and benefits provided for hereunder in respect of such remaining term.
(c) The Executive agrees that he will not, at any time during the full
original term of the Employment Period, without the prior written consent of the
Company, whether directly or indirectly, solicit the employment of, whether as
an employee, officer, director, agent, consultant or
8
<PAGE>
independent contractor, any person who was or is at any time during the previous
twelve (12) months an employee, representative, officer or director of the
Company or any of its affiliates.
(d) The Executive acknowledges and agrees that the Company's remedy at
law for any breach of the Executive's obligations under this Section 8 would be
inadequate and agrees and consents that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision of such Section without the necessity of proof of actual damage. With
respect to any provision of this Section 8 finally determined by a court of
competent jurisdiction to be unenforceable, the Executive and the Company hereby
agree that such court shall have jurisdiction to reform this Agreement or any
provison hereof so that it is enforceable to the maximum extent permitted by
law, and the parties agree to abide by such court's determination.
9. Successors. (a) This Agreement is personal to the Executive and,
----------
without the prior written consent of the Company, shall not be assignable by the
Executive. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors.
10. Miscellaneous. (a) This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of California, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended, modified, terminated or waived except with the prior written consent
of MCA, and then only by a written agreement executed by the parties hereto or
their respective successors and legal representatives. MCA is intended to be and
shall be a third-party beneficiary of the preceding sentence.
9
<PAGE>
(b) All notices and other communications under this Agreement shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
-------------------
Brian Fargo
Interplay Productions, Inc.
17922 Fitch Avenue
Irvine, CA 92714
If to the Company:
-----------------
Interplay Productions, Inc.
17922 Fitch Avenue
Irvine, CA 92714
Attention: Chuck Camps
With a copy to:
--------------
MCA INC.
100 Universal City Plaza
Universal City, CA 91608
Attention: Charles S. Paul
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 10. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the Company
may withhold from amounts payable under this Agreement all federal, state, local
and foreign taxes that are required to be withheld by applicable laws or
regulations.
10
<PAGE>
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement except to the extent any
other party hereto is materially prejudiced by such failure.
(f) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ BRIAN FARGO
---------------------------
Brian Fargo
INTERPLAY PRODUCTIONS, INC.
By: /s/ BRIAN FARGO
------------------------
11
<PAGE>
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
BETWEEN
BRIAN FARGO AND INTERPLAY PRODUCTIONS
The Executive's services shall be performed at 17922 Fitch Avenue, Irvine,
California 92714.
A-1
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement ("First Amendment") dated as
of the 2nd day of March, 1998, is made and entered into by INTERPLAY
PRODUCTIONS, a California corporation (the "Company"), BRIAN FARGO (the
"Executive"), and UNIVERSAL STUDIOS, INC., a Delaware corporation formerly known
as MCA, INC. ("Universal").
WHEREAS, Executive is presently employed by the Company pursuant to a
written Employment Agreement ("Employment Agreement") dated as of March 28,
1994; and
WHEREAS, the parties desire to amend the Employment Agreement to reflect
certain new terms for Executive's continued employment, while leaving all
remaining terms of the Employment Agreement in effect;
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Section 2(a) of the Employment Agreement concerning Executive's
Position and Duties is hereby amended to read as follows:
2. Position and Duties. (a) During the Employment Period, the
-------------------
Executive shall be employed by the Company as Chief Executive Officer and
shall serve as Chairperson of the Board of Directors of the Company, in
each case with duties and responsibilities substantially similar to those
previously assigned to the Executive.
2. Section 3(a) of the Employment Agreement concerning Executive's Base
Salary is hereby amended to read as follows:
3. Compensation. (a) Base Salary. Effective March 1, 1998,
------------ -----------
and continuing during the Employment Period, the Executive shall receive an
annual salary (the "Annual Base Salary") in an amount not less than Two
Hundred Fifty Thousand Dollars ($250,000), payable in accordance with the
Company's payroll for executives, as in effect from time to time. During
the Employment Period, the Annual Base Salary shall be reviewed for
possible increase at least annually. Any increase in the Annual Base Salary
shall not limit or reduce any other obligation of the Company under this
Agreement. The Annual Base Salary shall not be reduced after any such
increase, unless the annual base salaries of all executives of the Company
are proportionately reduced, and in any event shall not be reduced below
Two Hundred Fifty Thousand Dollars ($250,000). After any such increase (or
decrease), the term "Annual Base Salary" shall refer to the Annual Base
Salary as so increased (or decreased).
<PAGE>
3. In consideration for this Amendment and other valuable consideration,
Executive hereby waives and releases any claims he may have against the Company
or Universal or their predecessors, successors, and assigns for (i) any Base
Salary, and (ii) any bonus or other compensation (other than the $1 million
dollar bonus reflected in the draft Registration Statement as of the date hereof
and such Annual Bonus, if any, as may be awarded by the Board of Directors for
the fiscal year ending December 31, 1998), in each case for any period prior to
March 1, 1998, and whether arising under the Employment Agreement or otherwise.
4. In all other respects, the Employment Agreement shall remain in full
force and effect according to its terms, except as so amended.
IN WITNESS WHEREOF, the parties have caused this First Amended to be
executed on their behalf as of the date and year first written above.
/s/ Brian Fargo
____________________________________________________
BRIAN FARGO
/s/ Christopher J. Kilpatrick
____________________________________________________
INTERPLAY PRODUCTIONS
/s/ Brian Mulligan
____________________________________________________
UNIVERSAL STUDIOS, INC., formerly known as MCA, INC.
2
<PAGE>
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Interplay Productions, Inc., a California
corporation (the "Company"), and Christopher J. Kilpatrick (the "Executive"),
dated as of the 1st day of May, 1994.
WHEREAS, the Company and its controlling stockholder have entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with MCA INC., a
Delaware corporation ("MCA"), pursuant to which MCA has purchased shares of
stock of the Company from the Company and from such stockholder (the "Stock
Purchase"); and
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and conditions under which the Executive will be employed by
the Company;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
-----------------
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the period commencing on May 1, 1994 and ending on the fifth
anniversary of such date; provided, however, that this Agreement shall
thereafter be continuously extended for additional one year terms thereafter
unless terminated in accordance with the terms herein on or before the one year
anniversary date before the natural date of termination (the "Employment
Period").
2. Position and Duties.
-------------------
(a) During the Employment Period, the Executive shall be employed by
the Company as Vice President - General Counsel, with such duties and
responsibilities as may be determined by the Board of Directors of the Company
(the "Board").
<PAGE>
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote full business attention and time to the business and affairs of the
Company, using the Executive's reasonable best efforts to carry out faithfully
and efficiently the responsibilities assigned to the Executive under this
Agreement. It shall not be considered a violation of the foregoing for the
Executive to (i) serve on corporate boards with the approval of the Company,
(ii) serve on civic or charitable boards or committees, (iii) deliver lectures
or fulfill speaking engagements, (iv) manage personal investments, so long as
such activities do not interfere with the performance of the Executive's
responsibilities under this Agreement or otherwise violate the terms of this
Agreement and (v) receive compensation as a member of Stradling, Yocca, Carlson
and Rauth, on a leave of absence, and in such capacity, consult with clients not
in the interactive computer game industry. Specifically, the Executive shall
transfer responsibility for clients in the interactive computer game industry to
other members of such firm.
(c) The Executive's services shall be performed primarily at the
location specified on Schedule A. Travel in connection with the business of the
Company may be reasonably requested from time to time by the Board.
3. Compensation.
------------
(a) Base Salary. During the Employment Period, the Executive shall
-----------
receive, effective May 1, 1994, an annual base salary (the "Annual Base Salary")
in an amount not less than $157,200, payable in accordance with the Company's
payroll practices for executives, as in effect from time to time. During the
Employment Period, the Annual Base Salary shall be increased annually at a rate
of not less than ten percent (10%) per year from the date of this Agreement. Any
increase in the Annual Base Salary shall not limit or reduce any other
obligation of the Company
2
<PAGE>
under this Agreement. The Annual Base Salary shall not be reduced after any
such increase unless the annual base salaries of all executives of the Company
are proportionally reduced, and in any event shall not be reduced below the
amount specified in the first sentence of this paragraph. After any such
increase, the term "Annual Base Salary" shall refer to the Annual Base Salary as
so increased.
(b) Annual Bonus. In addition to the Annual Base Salary, the Executive
------------
shall receive annual bonuses (each, an "Annual Bonus") at the discretion of the
Board.
(c) Other Benefits. The Executive shall be entitled to participate in
--------------
any of the Company's medical, dental or other benefit plans approved by the
Board or offered generally to executives of the Company. The Company will pay
all expenses required to maintain Executive as an attorney in good standing with
applicable bar and regulatory agencies, including continuing education tuition
and reasonable travel costs.
(d) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all normal and customary expenses
incurred by the Executive in carrying out the Executive's duties under this
Agreement, provided that the Executive complies with the policies, practices and
procedures of the Company for submission of expense reports, receipts, or
similar documentation of such expenses.
(e) Fringe Benefits. During the Employment Period, the Executive shall
---------------
be entitled to the fringe benefits approved from time to time by the Board.
(f) Vacation. During the Employment Period, the Executive shall be
--------
entitled to three (3) weeks vacation per year.
3
<PAGE>
4. Termination of Employment.
--------------------------
(a) Death or Disability. The Executive's employment shall
--------------------
terminate automatically upon the Executive's death during the Employment Period.
The Company shall be entitled to terminate the Executive's employment because
of the Executive's Disability during the Employment Period. "Disability" means
that (i) the Executive has failed, over a period of 180 consecutive days, to
perform the Executive's duties under this Agreement, as a result of physical or
mental illness or injury, and (ii) a physician selected by the Company or its
insurers, and reasonably acceptable to the Executive or the Executive's legal
representative, has determined that the Executive's incapacity constitutes a
disability for purposes of the Company's long-term disability insurance
coverage. A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and shall
be effective upon receipt of such notice by the Executive (the "Disability
Effective Date").
(b) By the Company.
---------------
(i) The Company may terminate the Executive's employment
during the Employment Period for Cause or without Cause. "Cause" shall mean (A)
fraud, embezzlement or willful misconduct materially injurious to the Company on
the part of the Executive, (B) the Executive's (x) persistent and continued
failure to substantially perform his material duties to the best of his
abilities for the Company when and to the extent reasonably requested by the
Board to do so and (y) failure to correct same within thirty (30) days after
notice from the Board requesting the Executive to do so (it being understood
that this standard is intended to assure the Company of the reasonable
attendance, efforts and good faith business attention of the Executive to his
duties on behalf of the Company, but may not be relied upon by the Company to
terminate the Executive based upon the operating performance of the Company), or
(C) the Executive's breach of any
4
<PAGE>
material provision of this Agreement, which breach has not been cured in all
material respects within thirty (30) days after notice of such breach is given
to the Executive by the Company. No act or failure to act on the part of the
Executive shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
executive's action or omission was in the best interests of the Company. Any act
or failure to act that is based upon authority given pursuant to a resolution
duly adopted by the Board or the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The Executive shall not be
deemed to have been terminated for Cause unless such notice is accompanied by a
copy of the resolution duly adopted by the Board to such effect. Notwithstanding
anything else contained herein to the contrary, the Executive shall not be in
breach of this Agreement or of any duty to the Company for failure to disclose
information acquired while acting as independent counsel for any competitor of
the Company.
(ii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive written notice of the
termination.
(c) Good Reason.
-----------
(i) The Executive may terminate employment for Good Reason. "Good
Reason" means:
A. the assignment to the Executive of duties inconsistent in any
material respect with paragraph (a) of Section 2 of this Agreement, other
than actions that are not taken in bad faith and are remedied by the Company
within five (5) business days after receipt of notice thereof from the
Executive;
B. any failure by the Company to comply with any provision of Section
3 of this Agreement other than failures that are not taken in bad faith and
are remedied by the Company within five (5) business days after receipt of
notice thereof from the Executive;
<PAGE>
C. any requirement by the Company that the Executive's services be
rendered primarily at a location or locations not complying with the provisions
of paragraph (c) of Section 2 of this Agreement; or
D. any failure by the Company to require any successor (whether direct or
indirect by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be effective on
the tenth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given); provided,
--------
that such a termination of employment shall not become effective if the Company
shall have previously corrected to the reasonable satisfaction of the Executive
the circumstance giving rise to the Notice of Termination.
(d) Effect on Options upon Termination or Change in Control.
-------------------------------------------------------
Notwithstanding anything to the contrary in the options issued to the Executive,
immediately upon termination of this Agreement by the Company for any reason
other than cause, or by the Executive voluntarily without Good Reason, all
options granted to Executive by the Company shall become immediately exercisable
to the extent they would have become vested through the end of the initial
Employment Period of this Agreement. If a change in control occurs during the
Employment Period of this Agreement, the vesting of shares subject to options
issued to the
6
<PAGE>
Executive shall be accelerated to the date of the change in control. For
purposes of this Agreement, a change in control will be deemed to have occurred
if Brian Fargo is no longer either the majority owner of issued and outstanding
shares of the Company or in control of the Board of Directors. The Company shall
take all best efforts to repurchase Shares subject to unexercised options on a
cashless exercise basis if the Shareholder's employment is terminated for any
reason other than for cause, if requested by the Shareholder or his heirs.
(e) Date of Termination. The "Date of Termination" means the date of
-------------------
the Executives's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Company gives
the Executive notice of a termination of employment without Cause, as the case
may be.
5. Obligations of the Company upon Termination.
-------------------------------------------
(a) Death, Disability, Cause. If, during the Employment Period, the
------------------------
Executive's employment is terminated because of death, Disability or for Cause,
then expect as provided in Section 8, the Executive shall not be entitled to any
compensation provided for under this agreement, other that Annual Base Salary
through the effective date of any such termination or resignation, benefits
under the long-term disability insurance coverage in the case of termination
because of Disability, and (without limiting the provisions of Section 6 hereof)
vested benefits, if any, required to be paid or provided by law.
(b) Without Cause; Good Reason. If, during the Employment Period,
--------------------------
the Executive's employment is terminated by the Company without Cause or by the
Executive for Good Reason, the Executive shall not be entitled to any
compensation provided for under this Agreement except as set forth in the
following sentence. For the remainder of the Employment
7
<PAGE>
Period, the Executive shall continue to be considered an employee of the
Company, and the Company (i) shall continue to pay the Executive for and with
respect to the unexpired portion of the Employment Period (in the same manner as
specified herein) (A) an amount equal to one hundred and fifty percent (150%) of
his Annual Base Salary and (B) an amount equal to seventy-five percent (75%) of
the Executive's Imputed Annual Bonuses and (ii) shall continue during the
unexpired portion of the Employment Period the welfare benefits set forth in
Section 3 (in the same manner as specified herein); provided that (x) if any
--------
such benefits cannot be provided under the terms of the applicable plans or
applicable law, the Company shall provide the Executive with substitute benefits
that are comparable and equal in value to such benefits, and (y) during any
period when the Executive is eligible to receive any such benefits under another
employer-provided plan, the benefits provided by the Company under this
paragraph may be secondary to those provided under such other plan. As used
herein, "Imputed Annual Bonuses" shall mean the "target" bonuses or similar
amounts under any Company bonus plan then in effect approved by the Board that
the Executive would have received had he not been terminated.
6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company for which the Executive may qualify,
nor, subject to paragraph (f) of Section 10, shall anything in this Agreement
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company. Vested benefits and other amounts that
the Executive is otherwise entitled to receive under any plan, policy, practice
or program of, or any contract or agreement with, the Company on or after the
Date of Termination shall be payable in accordance with such plan, policy,
practice, program, contract or agreement, as the case may be, except as
explicitly modified by this Agreement.
8
<PAGE>
7. No Mitigation or Reduction. In no event shall the Executive be
--------------------------
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
8. Confidential Information; Other Covenants.
-----------------------------------------
(a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company and its businesses that the Executive has obtained
during the Executive's employment by the Company and that is not public
knowledge (other than as a result of the Executive's violation of this paragraph
(a) of Section 8) ("Confidential Information"), unless disclosure of such
information is required by court order. The Executive shall not communicate,
divulge or disseminate Confidential Information at any time during or after the
Executive's employment with the Company, except with the prior written consent
of the Company or as otherwise required by law or legal process.
(b) During the full original term of the Employment Period, except as
otherwise provided in paragraph (d) of this Section 8, the Executive shall not,
without the prior written consent of the Board, engage in or become associated
with a Prohibited Activity. For purposes of this paragraph (b) of Section 8:
(i) a "Prohibited Activity" means any business or other endeavor that engages in
the interactive entertainment or educational software business in which the
Company is at the date hereof, or at any time during the Employment Period,
engaged in the United States (including Puerto Rico); and (ii) except as
provided on Schedule A, the Executive shall be considered to have become
"associated with a Prohibited Activity" if he becomes directly or indirectly
involved as an owner, employee, officer, director, independent contractor,
agent, partner, advisor, lender, or in any other capacity with any individual,
partnership, corporation or
9
<PAGE>
other organization that is engaged in an Prohibited Activity. Notwithstanding
the foregoing: (i) the Executive may make and retain investments during the
Employment Period in not more than five percent (5%) of the equity of any entity
engaged in a Prohibited Activity, if such equity is listed on a national
securities exchange or regularly traded in an over-the-counter market; and (ii)
if the Executive's employment is terminated because of Disability, the
provisions of this paragraph (b) of Section 8 shall only apply if, following
notice from the Executive that his disability has ended and that he intends to
seek employment in a Prohibited Activity, the Company commences payment and
continues to pay from the date of such notice throughout the remainder of the
Employment Period the compensation and benefits provided for hereunder in
respect of such remaining term.
(c) The Executive agrees that he will not, at any time during the full
original term of the Employment Period, without the prior written consent of the
Company, whether directly or indirectly, solicit the employment of, whether as
an employee, officer, director, agent, consultant or independent contractor, any
person who was or is at any time during the previous twelve (12) months an
employee, representative, officer or director of the Company or any of its
affiliates.
(d) The Executive acknowledges and agrees that the Company's remedy at law
for any breach of the Executive's obligations under this Section 8 would be
inadequate and agrees and consents that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision of such Section without the necessity of proof of actual damage. With
respect to any provision of this Section 8 finally determined by a court of
competent jurisdiction to be unenforceable, the Executive and the Company hereby
agree that such court shall have jurisdiction to reform this Agreement or any
provision hereof so that it is
10
<PAGE>
enforceable to the maximum extent permitted by law, and the parties agree to
abide by such court's determination.
9. Successors.
----------
(a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors.
10. Miscellaneous.
-------------
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended,
modified, terminated or waived except with the prior written consent of MCA, and
then only by a written agreement executed by the parties hereto or their
respective successors and legal representatives. MCA is intended to be and
shall be a third-party beneficiary of the preceding sentence.
(b) All notices and other communications under this Agreement shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
-------------------
-------------------
-------------------
-------------------
11
<PAGE>
If to the Company:
------------------
Interplay Productions, Inc.
17922 Fitch Avenue
Irvine, CA 92714
Attention: Chuck Camps
With a copy to:
---------------
MCA INC.
100 Universal City Plaza
Universal City, CA 91608
Attention: Charles S. Paul
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 10. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision of, or to assert any right under, this
Agreement (including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to paragraph (c) of Section 4 of
this Agreement) shall not be deemed to be a waiver of such provision or right or
of any other provision of or right under this Agreement except to the extent any
other party hereto is materially prejudiced by such failure.
12
<PAGE>
(f) The Executive and the Company acknowledges that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ Christopher J. Kilpatrick
-----------------------------
Christopher J. Kilpatrick
INTERPLAY PRODUCTIONS, INC.
By: /s/ Steven Camps
--------------------------
13
<PAGE>
SCHEDULE A
TO
EMPLOYMENT AGREEMENT
BETWEEN
_____________ AND INTERPLAY PRODUCTIONS
The Executive's services shall be performed within a thirty (30) mile radius of
the Company's facility at 17922 Fitch Avenue, Irvine, California 92714.
14
<PAGE>
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Interplay Productions, Inc., a California
corporation (the "Company"), and Dick Lehrberg (the "Executive"), dated as of
the 28th day of March 1994.
---- -----
WHEREAS, the Company and its controlling stockholder have entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with MCA INC., a
Delaware corporation ("MCA"), pursuant to which MCA will purchase shares of
stock of the Company from the Company and from such stockholder (the "Stock
Purchase"); and
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and conditions under which the Executive will continue to be
employed by the Company after the Stock Purchase; and
WHEREAS, it is a condition to the obligation of MCA to consummate the Stock
Purchase that the Executive and the Company enter into this Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
-----------------
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the period commencing on the date of consummation of the Stock
Purchase and ending on the fifth anniversary of such date (the "Employment
Period").
2. Position and Duties.
-------------------
(a) During the Employment Period, the Executive shall be employed by
the Company as Executive Vice President, with such duties and responsibilities
as may be determined by the Board of Directors of the Company (the "Board").
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote full business attention and time to the business and affairs of the
Company, using the Executive's reasonable best efforts to carry out faithfully
and efficiently the responsibilities assigned to the Executive under this
Agreement. It shall not be considered a violation of the foregoing for the
Executive to (i) serve on corporate boards with the approval of the Company,
(ii) serve on civic or charitable boards or committees, (iii) deliver lectures
or fulfill speaking engagements and (iv) manage personal investments, so long as
such activities do not interfere with the performance of the Executive's
responsibilities under this Agreement or otherwise violate the terms of this
Agreement.
(c) The Executive's services shall be performed primarily at the
location specified on Schedule A. Travel in connection with the business of the
Company may be reasonably requested from time to time by the Board.
<PAGE>
3. Compensation.
------------
(a) Base Salary. During the Employment Period, the Executive
-----------
shall receive an annual base salary (the "Annual Base Salary") in an amount not
less than $200,000, payable in accordance with the Company's payroll practices
for executives, as in effect from time to time. During the Employment Period,
the Annual Base Salary shall be reviewed for possible increase at least
annually. Any increase in the Annual Base Salary shall not limit or reduce any
other obligation of the Company under this Agreement. [The Annual Base Salary
shall not be reduced after any such increase, unless the annual base salaries of
all executives of the Company are proportionately reduced, and in any event
shall not be reduced below the amount specified in the first sentence of this
paragraph.] After any such increase (or decrease), the term "Annual Base
Salary" shall refer to the Annual Base Salary as so increased (or decreased).
(b) Annual Bonus. In addition to the Annual Base Salary, the
------------
Executive shall be eligible to receive annual bonuses (each, an "Annual Bonus")
at the discretion of the Board. Notwithstanding the foregoing, the Executive
shall receive an annual bonus for each year in which the Company earns profits
in excess of $622,000 in an amount not less than ten percent (10%) of the amount
by which the Company's profits exceed $622,000, but in no event shall such bonus
be greater than $134,000. If the Executive becomes deceased or suffers a
Disability (as defined in Section 4(a) of this Agreement) during a year in which
he would have received a bonus based on the annual profits of the Company, the
Executive, or the Executive's estate if the Executive is deceased, shall be
entitled to an amount equal to the bonus the Executive would have received
multiplied by a fraction, the numerator of which is the number of days in that
year prior to Executive's death or Disability and the denominator of which is
the total number of days in that year (365 or 366).
(c) Other Benefits. The Executive shall be entitled to
--------------
participate in any of the Company's medical, dental or other benefit plans
approved by the Board.
(d) Expenses. During the Employment Period, the Executive shall
--------
be entitled to receive prompt reimbursement for all normal and customary
expenses incurred by the Executive in carrying out the Executive's duties under
this Agreement, provided that the Executive complies with the policies,
practices and procedures of the Company for submission of expense reports,
receipts, or similar documentation of such expenses.
(e) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to the fringe benefits approved from time to time by the
Board.
(f) Vacation. During the Employment Period, the Executive Shall
--------
be entitled to vacations in accordance with Company policies then in effect.
4. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. The
Company shall be entitled to terminate the Executive's employment because of the
Executive's Disability during the Employment Period. "Disability" means that (i)
the Executive has failed, over a period of 180 consecutive days, to perform the
Executive's duties under this Agreement, as a result of physical or mental
illness or injury, and (ii) a physician selected by the Company or its
insurers, and reasonably acceptable to the Executive or the
-2-
<PAGE>
Executive's legal representative, has determined that the Executive's incapacity
constitutes a disability for purposes of the Company's long-term disability
insurance coverage. A termination of the Executive's employment by the Company
for Disability shall be communicated to the Executive by written notice, and
shall be effective upon receipt of such notice by the Executive (the "Disability
Effective Date").
(b) By the Company
--------------
(i) The Company may terminate the Executive's employment during
the Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud,
embezzlement or willful misconduct materially injurious to the Company on the
part of the Executive, (B) the Executive's (x) persistent and continued failure
to substantially perform his material duties for the Company when and to the
extent reasonably requested by the Board to do so and (y) failure to correct
same within thirty (30) days after notice from the Board requesting the
Executive to do so (it being understood that this standard is intended to assure
the Company of the reasonable attendance, efforts and good faith business
attention of the Executive to his duties on behalf of the Company, but may not
be relied upon by the Company to terminate the Executive based upon the
operating performance of the Company), or (C) the Executive's breach of any
material provision of this Agreement, which breach has not been cured in all
material respects within thirty (30) days after notice of such breach is given
to the Executive by the Company. No act or failure to act on the part of the
Executive shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
executive's action or omission was in the best interests of the Company. Any act
or failure to act that is based upon authority given pursuant to a resolution
duly adopted by the Board or the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The Executive shall not be
deemed to have been terminated for Cause unless such notice is accompanied by a
copy of a resolution duly adopted by the Board to such effect.
(ii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive written notice of the
termination.
(c) Good Reason
-----------
(i) The Executive may terminate employment for Good Reason. "Good
Reason" means:
(A) the assignment to the Executive of duties inconsistent in
any material respect with paragraph (a) of Section 2 of this Agreement, other
than actions that are not taken in bad faith and are remedied by the Company
within five (5) business days after receipt of notice thereof from the
Executive;
(B) any failure by the Company to comply with any provision
of Section 3 of this Agreement other than failures that are not taken in bad
faith and are remedied by the Company within five (5) business days after
receipt of notice thereof from the Executive;
(C) any requirement by the Company that the Executive's
services be rendered primarily at a location or locations not complying with the
provisions of paragraph (c) of Section 2 of this Agreement; or
-3-
<PAGE>
(D) any failure by the Company to require any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be effective on
the tenth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given); provided,
that such a termination of employment shall not become effective if the Company
shall have previously corrected to the reasonable satisfaction of the Executive
the circumstance giving rise to the Notice of Termination.
(d) Date of Termination. The "Date of Termination" means the date
-------------------
of the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Company gives
the Executive notice of a termination of employment without Cause, as the case
may be.
5. Obligations of the Company upon Termination.
-------------------------------------------
(a) Death, Disability, Cause. If, during the Employment Period, the
------------------------
Executive's employment is terminated because of death, Disability or for Cause,
then except as provided in Section 8 and Section 3(b), the Executive shall not
be entitled to any compensation provided for under this agreement, other than
Annual Base Salary through the effective date of any such termination or
resignation, benefits under the long-term disability insurance coverage in the
case of termination because of Disability, and (without limiting the provisions
of Section 6 hereof) vested benefits, if any, required to be paid or provided by
law.
(b) Without Cause; Good Reason. If, during the Employment Period, the
--------------------------
Executive's employment is terminated by the Company without Cause or by the
Executive for Good Reason, the Executive shall not be entitled to any
compensation provided for under this Agreement except as set forth in the
following sentence. For the remainder of the Employment Period, the Executive
shall continue to be considered an employee of the Company, and the Company (i)
shall continue to pay the Executive for and with respect to the unexpired
portion of the Employment Period (in the same manner as specified herein) (A) an
amount equal to [one hundred and fifty percent (150%)] of his Annual Base Salary
and (B) an amount equal to [seventy-five percent (75%)] of the Executive's
Imputed Annual Bonuses and (ii) shall continue during the unexpired portion of
the Employment Period the welfare benefits set forth in Section 3 (in the same
manner as specified herein); provided that (x) if any such benefits cannot be
provided under the terms of the applicable plans or applicable law, the Company
shall provide the Executive with substitute benefits that are comparable and
equal in value to such benefits, and (y) during any period when the Executive is
eligible to receive any such benefits under another employer-provided plan, the
benefits provided by the Company under
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this paragraph may be secondary to those provided under such other plan. As
used herein, "Imputed Annual Bonuses" shall mean the "target" bonuses or similar
amounts under any Company bonus plan then in effect approved by the Board that
the Executive would have received had he not been terminated.
6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company for which the Executive may qualify,
nor, subject to paragraph (f) of Section 10, shall anything in this Agreement
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company. Vested benefits and other amounts that
the Executive is otherwise entitled to receive under any plan, policy, practice
or program of, or any contract or agreement with, the Company on or after the
Date of Termination shall be payable in accordance with such plan, policy,
practice, program, contract or agreement, as the case may be, except as
explicitly modified by this Agreement.
7. No Mitigation or Reduction. In no event shall the Executive be
--------------------------
obligated to seek other employment or take any other action by way of mitigation
of the amount payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
8. Confidential Information; Other Covenants.
-----------------------------------------
(a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company and its businesses that the Executive has obtained
during the Executive's employment by the Company and that is not public
knowledge (other than as a result of the Executive's violation of this paragraph
(a) of Section 8) ("Confidential Information"), unless disclosure of such
information is required by court order. The Executive shall not communicate,
divulge or disseminate Confidential Information at any time during or after the
Executive's employment with the Company, except with the prior written consent
of the Company or as otherwise required by law or legal process.
(b) During the full original term of this Employment Period, except as
otherwise provided in paragraph (d) of this Section 8, the Executive shall not,
without the prior written consent of the Board, engage in or become associated
with a Prohibited Activity. For purposes of this paragraph (b) of Section 8:
(i) a "Prohibited Activity" means any business or other endeavor that engages in
the interactive entertainment or educational software business in which the
Company is at the date hereof, or at any time during the Employment Period,
engaged in the United States (including Puerto Rico); and (ii) except as
provided on Schedule A, the Executive shall be considered to have become
"associated with a Prohibited Activity" if he becomes directly or indirectly
involved as an owner, employee, officer, director, independent contractor,
agent, partner, advisor, lender, or in any other capacity with any individual,
partnership, corporation or other organization that is engaged in an Prohibited
Activity. Notwithstanding the foregoing: (i) the Executive may make and retain
investments during the Employment Period in not more than five percent (5%) of
the equity of any entity engaged in a Prohibited Activity, if such equity is
listed on a national securities exchange or regularly traded in an over-the-
counter market; and (ii) if the Executive's employment is terminated because of
Disability, the provisions of this paragraph (b) of Section 8 shall only apply
if, following notice from the Executive that his disability has ended and that
he intends to seek employment in a Prohibited Activity, the
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<PAGE>
Company commences payment and continues to pay from the date of such notice
throughout the remainder of the Employment Period the compensation and benefits
provided for hereunder in respect of such remaining term.
(c) The Executive agrees that he will not, at any time during the full
original term of the Employment Period, without the prior written consent of the
Company, whether directly or indirectly, solicit the employment of, whether as
an employee, officer, director, agent, consultant or independent contractor, any
person who was or is at any time during the previous twelve (12) months an
employee, representative, officer or director of the Company or any of its
affiliates.
(d) The Executive acknowledges and agrees that the Company's remedy at
law for any breach of the Executive's obligations under this Section 8 would be
inadequate and agrees and consents that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision of such Section without the necessity of proof of actual damage. With
respect to any provision of this Section 8 finally determined by a court of
competent jurisdiction to be unenforceable, the Executive and the Company hereby
agree that such court shall have jurisdiction to reform this Agreement or any
provision hereof so that it is enforceable to the maximum extent permitted by
law, and the parties agree to abide by such court's determination.
9. Successors.
----------
(a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors.
10. Miscellaneous.
-------------
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended,
modified, terminated or waived except with the prior written consent of MCA, and
then only by a written agreement executed by the parties hereto or their
respective successors and legal representatives. MCA is intended to be and
shall be a third-party beneficiary of the preceding sentence.
(b) All notices and other communications under this Agreement shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
-------------------
Dick Lehrberg
1085 University Avenue
Palo Alto, California 94301
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<PAGE>
If to the Company:
-----------------
Interplay Productions, Inc.
17922 Fitch Avenue
Irvine, CA 92714
Attention: Chuck Camps
With a copy to:
--------------
MCA INC.
100 Universal City Plaza
Universal City, CA 91608
Attention: Charles S. Paul
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 10. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement except to the extent any
other party hereto is materially prejudged by such failure.
(f) The Executive and the Company acknowledges that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof. Notwithstanding the foregoing, the provisions of the Executive's
Employment Agreement with the Company, dated December 11, 1991 and amended March
30, 1992 (the "Old Agreement") under which the Executive is entitled to receive
securities of the Company shall remain in full force and effect. Specifically,
the Company acknowledges that Executive owns options to purchase, in the
aggregate, 861,156 shares of common stock of the Company (prior to the closing
of the transactions with MCA pursuant to the Stock Purchase Agreement).
Further, notwithstanding anything stated to the contrary in this Agreement, the
Executive shall be entitled to the same disability insurance as he was entitled
to under the Old Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ Dick Lehrberg
--------------------------
DICK LEHRBERG
INTERPLAY PRODUCTIONS, INC.
By: /s/ Brian Fargo
-----------------------
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<PAGE>
SCHEDULE A
TO
EMPLOYMENT AGREEMENT
BETWEEN
DICK LEHRBERG AND INTERPLAY PRODUCTIONS
This Executive's services shall be performed in Palo Alto, California.
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement ("First Amendment") dated as
of the 2nd day of March, 1998, is made and entered into by INTERPLAY
PRODUCTIONS, a California corporation (the "Company"), DICK LEHRBERG (the
"Executive"), and UNIVERSAL STUDIOS, INC., a Delaware corporation formerly known
as MCA, INC. ("Universal").
WHEREAS, Executive is presently employed by the Company pursuant to a
written Employment Agreement ("Employment Agreement") dated as of March 28,
1994; and
WHEREAS, the parties desire to amend the Employment Agreement to reflect
certain new terms for Executive's continued employment, while leaving all
remaining terms of the Employment Agreement in effect;
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Section 3(b) of the Employment Agreement concerning Executive's Annual
Bonus is hereby amended to read as follows:
(b) Annual Bonus. In addition to the Annual Base Salary,
------------
the Executive shall be eligible to receive annual bonuses (each, an "Annual
Bonus") based on achievement of goals and objectives to be mutually agreed
upon by Executive and the Company, up to a maximum of One Hundred
Thirty-Four Thousand Dollars ($134,000) per year.
2. In all other respects, the Employment Agreement shall remain in full
force and effect according to its terms, except as so amended.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
executed on their behalf as of the date and year first written above.
/s/ RICHARD S.F. LEHRBERG
- ---------------------------------------------------
DICK LEHRBERG
/s/ BRIAN FARGO
- ---------------------------------------------------
INTERPLAY PRODUCTIONS
/s/ BRIAN MULLIGAN
- ---------------------------------------------------
UNIVERSAL STUDIOS, INC., formerly known as MCA, INC
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Interplay OEM, Inc. California
Shiny Entertainment, Inc. California
Interplay Productions Limited England and Wales
Interplay Co., Ltd. Japan
Interplay Productions Pty Ltd Australia
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Orange County, California
May 6, 1998
