<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24363
Interplay Entertainment Corp.
(Exact name of the registrant as specified in its charter)
Delaware 33-0102707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16815 Von Karman Avenue, Irvine, California 92606
(Address of principal executive offices)
(949) 553-6655
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Issued and Outstanding at August 6, 1999
----- ----------------------------------------
Common Stock, $0.001 par value 22,770,712
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
______________
<TABLE>
<CAPTION>
Page Number
-----------------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the Three and
Six Months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Part II. Other Information
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1999 1998
------ ----------- ------------
(Unaudited)
<S> <C> <C>
Current Assets: (Dollars in thousands)
Cash and cash equivalents $ 738 $ 614
Restricted cash 2,536 -
Trade receivables, net of allowances
of $15,011 and $18,431, respectively 33,116 36,407
Inventories 8,612 6,303
Prepaid licenses and royalties 19,922 18,128
Deferred income taxes 4,000 5,358
Other 1,068 685
-------- --------
Total current assets 69,992 67,495
Property and Equipment, net 4,856 5,679
Other Assets 1,597 1,792
-------- --------
$ 76,445 $ 74,966
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable $ 21,445 $ 23,403
Accrued liabilities 19,613 22,300
Current portion of long-term debt 29,955 24,521
Income taxes payable 254 254
-------- --------
Total current liabilities 71,267 70,478
Long-Term Debt, net of current portion 6,852 130
Deferred Income Taxes - 22
Minority Interest 124 143
Commitments and Contingencies (Note 4)
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 22,770,712 shares as of June 30, 1999
and 18,292,431 shares as of December 31, 1998 23 18
Paid-in capital 61,198 51,918
Retained earnings (accumulated deficit) (63,309) (48,097)
Accumulated comprehensive income adjustments 290 354
-------- --------
Total stockholders' equity (deficit) (1,798) 4,193
-------- --------
$ 76,445 $ 74,966
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 29,430 $ 40,725 $ 50,982 $ 81,721
Cost of goods sold 17,616 20,291 30,135 39,512
----------- ----------- ----------- -----------
Gross profit 11,814 20,434 20,847 42,209
Operating expenses:
Marketing and sales 6,895 9,025 14,409 17,614
General and administrative 3,158 2,922 6,177 5,777
Product development 5,010 6,121 10,400 11,940
Other 1,123 - 1,633 -
----------- ----------- ----------- -----------
Total operating expenses 16,186 18,068 32,619 35,331
----------- ----------- ----------- -----------
Operating income (loss) (4,372) 2,366 (11,772) 6,878
Other income (expense):
Interest income 43 - 44 6
Interest expense (952) (1,440) (1,766) (2,786)
Other (268) (4) (346) (82)
----------- ----------- ----------- -----------
Total other income (expense) (1,177) (1,444) (2,068) (2,862)
Income (loss) before provision
for income taxes (5,549) 922 (13,840) 4,016
Provision for income taxes 1,372 231 1,372 476
----------- ----------- ----------- -----------
Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540
========== =========== =========== ===========
Net income (loss) per share:
Basic $ (0.33) $ 0.06 $ (0.77) $ 0.32
========== =========== =========== ===========
Diluted $ (0.33) $ 0.06 $ (0.77) $ 0.29
========== =========== =========== ===========
Weighted average number of
common shares outstanding:
Basic 20,932,509 11,512,445 19,817,123 11,233,950
=========== =========== =========== ===========
Diluted 20,932,509 12,276,408 19,817,123 14,181,155
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------
1999 1998
---------- ---------
Cash flows from operating activities: (Dollars in thousands)
<S> <C> <C>
Net income (loss) $ (15,212) $ 3,540
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 1,517 1,699
Noncash expense for stock options 20 -
Deferred income taxes 1,336 2
Minority interest in loss of subsidiary (19) (7)
Changes in assets and liabilities:
Trade receivables 3,291 (13,398)
Inventories (2,309) 802
Income taxes receivable - 1,427
Other current assets (383) (319)
Other assets 409 -
Prepaid licenses and royalties (1,794) (2,923)
Accounts payable (1,958) 1,260
Accrued liabilities (2,687) (4,581)
Income taxes payable - 717
---------- ---------
Net cash used in operating activities (17,789) (11,781)
Cash flows from investing activities:
Purchase of property and equipment (908) (937)
---------- ---------
Net cash used in investing activities (908) (937)
Cash flows from financing activities:
Net (repayments) borrowings on line of credit 5,480 (13,134)
Net proceeds from issuance of common stock 9,257 24,871
Proceeds from exercise of stock options 8 -
Additions to restricted cash (2,536) -
Net proceeds from issuance of notes payable 6,676 -
---------- ---------
Net cash provided by financing activities 18,885 11,737
---------- ---------
Effect of exchange rate changes on cash and cash equivalents (64) -
---------- ---------
Net increase (decrease) in cash and cash equivalents 124 (981)
Cash and cash equivalents, beginning of period 614 1,536
---------- ---------
Cash and cash equivalents, end of period $ 738 $ 555
========== =========
Supplemental cash flow information:
Cash paid for:
Interest $ 1,756 $ 2,875
Income taxes - -
========== =========
Supplemental disclosures of noncash transactions:
Issuance of common stock in exchange for development
of intellectual properties $ 1,000 -
Issuance of note payable in exchage for put rights 1,000 -
Issuance of note payable in lieu of common stock 1,052 -
========== =======================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying interim consolidated financial statements of Interplay
Entertainment Corp. and its subsidiaries (the "Company") are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) that,
in the opinion of management, are necessary for a fair presentation of the
results for the interim period in accordance with instructions for Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the current interim period
are not necessarily indicative of results to be expected for the current year or
any other period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1998 as filed with
the Securities and Exchange Commission.
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.
Reclassifications
Certain reclassifications have been made to the prior period's financial
statements to conform to classifications used in the current period.
Restricted Cash
Restricted cash represents cash collateral deposits made in accordance with
the Company's amended Loan and Security Agreement (see Note 3). Restricted cash
earns interest at the bank's prime rate (7.75 percent at June 30, 1999) less
three percent, or 4.75 percent at June 30, 1999.
Revenue Recognition
Revenues are recorded when products are delivered to customers in accordance
with Statement of Position (SOP) 97-2, Software Revenue Recognition. On
agreements that provide the customers the right to multiple copies in exchange
for guaranteed amounts, revenue is recognized for the guaranteed amounts 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 expenses are not material and are
charged to operations as incurred.
6
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Factors Affecting Future Performance
For the six months ended June 30, 1999, the Company incurred a net loss of $15.2
million and used cash in operating activities of $17.8 million. Partially
because of these losses, the Company's liquidity deteriorated during the period
ended June 30, 1999. At June 30, 1999, the Company had negative working capital
of $1.3 million.
To provide working capital to support the Company's future operations, the
Company took several actions during the period, including extending the
expiration of its line of credit to January 1, 2000, in connection with which
the Company's Chief Executive Officer personally guaranteed $5 million of the
Company's obligations under such line of credit. Further, in March 1999, the
Company entered into a Stock Purchase Agreement with an investor which provided
for the issuance of 2.5 million shares of the Company's Common Stock for $10
million (See Note 5), and in July 1999, the Company entered into an agreement
for a $25 million equity transaction with the same investor (See Note 11).
The Company believes that funds available under its line of credit, funds
received and to be received from the sale of equity securities, amounts to be
received under various product license and distribution agreements and
anticipated funds from operations, if any, will be sufficient to satisfy the
Company's projected working capital and capital expenditure needs and debt
obligations in the normal course of business at least through the expiration of
its line of credit on January 1, 2000 (see Note 3).
In addition to the risks related to the Company's liquidity discussed above,
the Company also faces numerous other risks associated with its industry. These
risks include dependence on new product introductions, product completion and
release delays, rapidly changing technology, intense competition, dependence on
distribution channels and risk of customer returns. Certain additional risks
are discussed on pages 20-30 of the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern. Accordingly, the consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities or any other adjustments that might result should the Company be
unable to continue as a going concern.
A valuation allowance is provided for the deferred tax asset when it is
estimated to be more likely than not that a portion of the deferred tax asset
will not be realized. Primarily as a result of the factors discussed above,
during the three months ended June 30, 1999, the Company increased the valuation
allowance provided for its deferred tax asset by $1.4 million. Additional
increases to the valuation allowance could be required in future periods.
Note 2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Packaged software $ 6,710 $ 4,070
CD-ROMs, cartridges, manuals, packaging and supplies 1,902 2,233
------- -------
$ 8,612 $ 6,303
======= =======
</TABLE>
7
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
(Dollars in thousands)
<S> <C> <C>
Loan Agreement $ 29,955 $ 24,475
Convertible Loans (See Note 5) 6,052 $ -
Other 800 176
-------- --------
36,807 24,651
Less--current portion (29,955) (24,521)
------- --------
$ 6,852 $ 130
======== ========
</TABLE>
Loan Agreement
Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (5.22 percent at June 30, 1999 and 5.62 percent at December
31, 1998) plus 4.87 percent (10.09 percent at June 30, 1999 and 10.49 percent at
December 31, 1998). In March 1999 and in July 1999, the Company amended its line
of credit under the Loan Agreement with a financial institution to extend its
current line of credit through January 1, 2000 and thereafter, based on
qualifying receivables and inventory. Under the terms of the Amendment the
$37.5 million maximum credit line will continue through November 29, 1999, with
a reduction to $30 million through December 30, 1999 and $25 million thereafter.
Within the total credit limit, the Company may borrow up to $14 million in
excess of its borrowing base through August 16, 1999, $10 million in excess
through September 29, 1999, $7 million through November 29, 1999 and $5 million
in excess thereafter. Under the amended line of credit the Company was required
to place a cash collateral deposit of $2.5 million by April 15, 1999. In
addition, the Company is required to maintain certain borrowing limitations
beginning July 30, 1999 where actual borrowings are limited to $35 million with
various month end limitations, generally decreasing to $25 million at December
31, 1999 and the $5 million personal guarantee by the Company's Chairman and
Chief Executive Officer will remain in place throughout the term. All other
terms and conditions remain in full force and effect. The Company is currently
in compliance with the terms of the Loan Agreement.
Note 4. Commitments and Contingencies
In April 1999, the Company was named as one of many defendants in a multi-
party civil action that was filed in the Western District of Kentucky, alleging
that the Company, along with the other media industry defendants, contributed to
the unlawful actions of a convicted felon. The Company believes that this civil
action is without merit and will vigorously defend its position.
Note 5. Stockholders' Equity
In March 1999, the Company entered into a Stock Purchase Agreement with an
investor which provides for the issuance of 2.5 million shares of the Company's
Common Stock for $10 million. Under the terms of the Stock Purchase Agreement up
to 2.5 million additional shares of the Company's common stock may be issued
without additional consideration based on the average closing share price per
share of the Company's Common Stock as of certain specified future dates;
provided, however, the investor will not be issued a total number of shares
equaling or exceeding 20 percent of the Company's current outstanding Common
Stock without the approval of the Company's stockholders (See Note 11).
Pursuant to the terms and conditions of the Stock Purchase Agreement on June 30,
1999, the Company issued an additional 1,161,771 million shares of its Common
Stock to the investor without any additional consideration and is seeking
stockholder approval to issue an additional 430,301 shares . Until the Company
obtains stockholder approval, the Company has issued the investor a promissory
note in the amount of approximately $1 million which may be exchanged for
430,301 shares of the Company's Common Stock in the event stockholder approval
is obtained. The note matures on January 1, 2000 and bears interest at 10
percent. The
8
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
final recalculation date will be on August 20, 1999 which could result in the
issuance or redemption of the Company's Common Stock to or by the investor.
In May 1999, the Company signed a letter of intent to sell additional shares
of Common Stock to the same investor which would give the investor a controlling
interest in the Company. As a condition of the letter of intent, the investor
deposited $5 million with the Company in exchange for a note payable. The note
payable has an interest rate of 6 percent from the date of the letter of intent
if the transactions contemplated by the letter of intent are not consummated on
or before August 31, 1999. In July 1999, a definitive agreement to consummate
these transactions was signed with the investor which is subject to standard
conditions, including stockholders approval anticipated to be obtained at the
scheduled August 24, 1999 stockholders meeting.
As consideration for the extension of a $5 million personal guarantee by the
Company's Chairman and Chief Executive Officer (the "Chairman") under the
Company's Loan Agreement (See Note 3), the Company agreed to assume the
obligation of the Chairman under an agreement between the Chairman and the
Company's former President, pursuant to which the Chairman granted certain put
rights to the former President with respect to the 271,528 common stock options
held by the former President. The Company recorded compensation expense of
approximately $0.7 million through December 31, 1998 related to these options
and interest expense of $0.1 million for the three months ended June 30, 1999,
in connection with the assumption of the put right, and an additional $0.2
million will be amortized as interest expense over the remaining term of the
Loan Agreement. During the three months ended June 30, 1999, the Company issued
271,528 shares of Common Stock for the exercise of the former President's stock
options in conjunction with an Agreement and General Release executed with the
former President. The Company guaranteed the former President $1 million for
the options with periodic payments through January 2000. On the due dates of
the payments, the Company has the option to either request that the former
president sell shares on the open market or the Company may purchase the shares
from the former president and retire them.
In April 1999, the Company entered into a multi-product development agreement
with a developer which provides for the delivery of ten titles to the Company
during 1999 in exchange for $0.5 million paid in cash installments and the
issuance of 484,848 shares of the Company's Common Stock. The shares of Common
Stock will be restricted as to registration rights until such products are
delivered and accepted by the Company. The arrangement also includes certain
penalties to the developer in the event of noncompliance and the terms and
conditions are subject to the approval by the Company's underwriters and
lenders, if necessary.
Note 6. Other Operating Expenses
The Company recorded an asset valuation, restructuring charge and severance
expense of $0.6 and $1.1 million during the three and six months ended June 30,
1999, respectively, in connection with the reductions in the Company's European
operations. In addition, the Company recorded severance expense of $ 0.5
million for the departure of the Company's former president during the three
months ended June 30, 1999.
9
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding and does not include the impact of any potentially dilutive common
stock equivalents. Diluted net income (loss) per share is calculated by
dividing net income (loss) by the weighted average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options.
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
BASIC (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540
Average common shares outstanding 20,932,509 11,512,445 19,817,123 11,233,950
------------ ------------ ------------ ------------
Net income (loss) per common share - basic $ (0.33) $ 0.06 $ (0.77) $ 0.32
============ ============ ============ ============
DILUTED
Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540
Adjustments to net income - - - 502
------------ ------------ ------------ ------------
Diluted net income (loss) $ (6,921) $ 691 $ (15,212) $ 4,042
Average common shares outstanding 20,932,509 11,512,445 19,817,123 11,233,950
Stock option adjustment - 763,963 - 2,947,205
------------ ------------ ------------ ------------
Average common shares and equivalents outstanding 20,932,509 12,276,408 19,817,123 14,181,155
------------ ------------ ------------ ------------
Net income (loss) per common share - diluted $ (0.33) $ 0.06 $ (0.77) $ 0.29
============ ============ ============ ============
</TABLE>
Options and warrants to purchase 2,323,580 shares of common stock and 484,848
shares of restricted common stock at June 30, 1999 were not included in the
computation of diluted earnings per share as the effect would be antidilutive.
The weighted average exercise price of the outstanding options and warrants at
June 30, 1999 and 1998 was $3.84 and $4.75, respectively.
Note 8. Comprehensive Income (Loss)
Comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments (42) (1) (64) -
-------- -------- --------- --------
Other comprehensive income (loss) (42) (1) (64) -
-------- -------- --------- --------
Total comprehensive income (loss) $ (6,963) $ 690 $ (15,276) $ 3,540
======== ======== ========= ========
</TABLE>
During the three and six months ended June 30, 1999, the Company had a pre-tax
decrease in foreign currency translation adjustments of $32,000 and $56,000 ,
respectively, compared to a pre-tax decrease of $1,000 and zero for the
comparable periods of 1998.
10
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Distribution, Publishing and Investment in Affiliate
Distribution and Publishing Agreements
In February 1999, the Company signed an International Distribution Agreement
with Virgin Interactive Entertainment Limited ("Virgin") which provides for the
exclusive distribution of substantially all of the Company's products in Europe,
CIS, Africa and the Middle East for a seven year period, cancelable under
certain conditions, subject to termination penalties and costs. Under the
Agreement, the Company pays Virgin a monthly overhead fee and a distribution fee
based on net sales, subject to a minimum annual payment, and Virgin provides
certain market preparation, warehousing, sales and fulfillment services on
behalf of the Company. In connection with this arrangement the Company paid
$0.6 million in distribution fees and $1.3 million in overhead fees to Virgin
for the three months ended June 30, 1999 and paid $1.0 million in distribution
fees and $1.8 million in overhead fees for the six months ended June 30, 1999.
The Company has also executed a Product Publishing Agreement with Virgin which
provides the Company with an exclusive license to publish and distribute
substantially all of Virgin's products within North America, Latin America and
South America for a royalty based on net sales. During the three and six months
ended June 30, 1999, the Company did not distribute any of Virgin's products.
In April 1999, the Company entered into an exclusive North American
distribution agreement with an investor which provides for the distribution of
eight titles on multiple platforms for a two year period. Under the terms of
the arrangement, the Company will receive a distribution fee for all orders
shipped and will provide certain services including marketing, order processing,
billings and collections. During the three months ended June 30, 1999, the
company recognized revenue of $0.1 million for performing distribution services
on behalf of the investor.
In June 1999, the Company executed Publishing agreements with Titus
Interactive S.A. ("Titus") for two titles. As a result of these agreements, the
Company recognized revenue of $2.2 million for delivery of these titles to
Titus.
Investment in Affiliate
In connection with the International Distribution Agreement and Product
Publishing Agreement, the Company has also executed an Operating Agreement with
Virgin which, among other terms and conditions, provides the Company with a 43.9
percent equity interest in VIE Acquisition Group LLC ("VIE"), the parent entity
of Virgin under which the Company was obligated to make a cash payment of
$9,000 . However, the Company is not obligated to make any future contributions
to the working capital of Virgin other than the monthly overhead fee discussed
above. In addition, two members of the management of Interplay Productions
Limited, the Company's United Kingdom subsidiary, have acquired a 6.0 percent
interest in VIE.
The Company accounts for its investment in VIE in accordance with the equity
method of accounting. The Company did not recognize any material income or loss
in connection with it's investment in VIE for the three and six months ended
June 30, 1999.
11
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Segment and Geographical Information
The Company operates in three principal business segments. Information about
the Company's operations in the United States and foreign areas is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
1999 1998 1999 1998
---------- ---------- ------------ ----------
Net revenues: (Dollars in thousands)
<S> <C> <C> <C> <C>
United States $ 28,813 $ 32,770 $ 41,075 $ 64,015
United Kingdom 617 7,955 9,907 17,706
-------- -------- ---------- --------
Consolidated net revenues $ 29,430 $ 40,725 $ 50,982 $ 81,721
======== ======== ========== ========
Operating income (loss):
United States $ (2,340) $ 3,117 $ (9,206) $ 4,596
United Kingdom (2,032) (751) (2,566) 2,282
-------- -------- ---------- --------
Consolidated (loss) income from operations $ (4,372) $ 2,366 $ (11,772) $ 6,878
======== ======== ========== ========
Expenditures made for the acquisition
of long-lived assets:
United States $ 615 $ 348 $ 908 $ 695
United Kingdom - 124 - 242
-------- -------- ---------- --------
Total expenditures for
long-lived assets $ 615 $ 472 $ 908 $ 937
======== ======== ========== ========
</TABLE>
Net revenues were made to geographic regions as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------------- ----------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------- ----------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
----------- ------------ ------------ ------------ ---------- ------------ ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America $ 15,599 53.0 % $ 26,244 64.4 % $ 24,343 47.8 % $ 47,907 58.6 %
Europe 5,047 17.1 7,562 18.6 13,066 25.6 16,886 20.7
Rest of World 1,466 5.0 1,442 3.5 3,330 6.5 4,416 5.4
OEM, royalty and
licensing 7,318 24.9 5,477 13.5 10,243 20.1 12,512 15.3
-------- --------- -------- --------- -------- -------- -------- --------
$ 29,430 100.0 % $ 40,725 100.0 % $ 50,982 100.0 % $ 81,721 100.0 %
======== ========= ======== ========= ======== ======== ======== ========
Net investments in long-lived assets by geographic regions are as follows:
June 30, December 31,
1999 1998
------------------------------- --------------------------------
Amount Percent Amount Percent
----------- ---------- ---------- ----------
(Dollars in thousands)
North America $ 6,185 97.0 % $ 6,621 89.6 %
Europe 125 2.0 723 9.8
Rest of World - - - -
OEM, royalty and
licensing 64 1.0 44 0.6
------- -------- ------- ----------
$ 6,374 100.0 % $ 7,388 100.0 %
======= ======== ======= ==========
</TABLE>
12
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Subsequent Events
Pending Change in Control
In May 1999, the Company signed a letter of intent with Titus pursuant to
which Titus loaned the Company $5 million (See Note 3), and the Company and
Titus agreed to negotiate certain additional transactions. In July 1999, the
Company and Titus entered into the agreements contemplated by the letter of
intent pursuant to which Titus will make a strategic equity investment of $25
million in the Company, purchasing 6.25 million shares of Common Stock at a
purchase price of $4 per share. The transaction is subject to standard
conditions, including the approval of the Company's stockholders, and is
expected to close in September 1999 following approval by the Company's
stockholders at the scheduled stockholders meeting scheduled for August 24,
1999. The Stock Purchase Agreement is based upon the letter of intent between
the Company and Titus dated May 12, 1999 and follows Titus' $10 million equity
investment in the Company in March 1999. As part of the agreement, Titus has an
option to purchase all of the shares of the Company's Common Stock held by
Universal Studios, Inc. ("Universal") which was granted to Titus by Universal in
connection with the March 1999 transaction. In addition, as a condition to
Titus' obligations under the Stock Purchase Agreement, the Company's chairman
and chief executive officer, will exchange 2 million shares of the Company's
Common Stock held by him for shares of Titus Common Stock. Following these
transactions, Titus is expected to hold approximately 57 percent of the
outstanding Common Stock of the Company, resulting in a change of control of the
Company in favor of Titus. Upon the closing of the transaction, the Company,
Titus and the Company's chairman and chief executive officer will enter into a
Stockholder Agreement providing for certain voting agreements, rights of first
refusal, tag-along rights, approval rights of Titus with respect to certain
actions by the Company, and certain other matters. In addition, Titus and
certain of its major shareholders will enter into an Exchange Agreement
implementing the exchange of shares referenced above and providing for certain
lock-up provisions and put rights with respect to such shares. The Company will
also enter into three-year employment agreements with Brian Fargo, the Company's
chairman and chief executive officer, and Herve Caen, Titus' chairman and chief
executive officer, pursuant to which they will be employed as chief executive
officer and president, respectively, of the Company. The Company and Titus will
also negotiate a distribution agreement pursuant to which the Company or a
jointly owned entity would distribute substantially all of Titus' console titles
in North America. Pursuant to the Stock Purchase Agreement, the Company will
file a registration statement covering the shares of the Company's Common Stock
issued to Titus in connection with the two equity transactions. Upon closing of
the transaction, two members of Titus' management will join the Company's board
of directors replacing two former designees of Universal who resigned from the
board in anticipation of the purchase by Titus of Universal's stock in the
Company.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
The information contained in this Form 10-Q is intended to update the
information contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and presumes that readers have access to, and will have
read, the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information contained in such Form 10-K.
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 and such forward-looking statements are
subject to the safe harbors created thereby. For this purpose, any statements
contained in this Form 10-Q, except for historical information, may be deemed to
be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions. For example, any statements regarding future cash flow,
financing activities, cost reduction measures, compliance with the Company's
line of credit and an extension or replacement of such line are forward-looking
statements and there can be no assurance that the Company will generate positive
cash flow in the future or that the Company will be able to obtain financing on
satisfactory terms, if at all, or that any cost reductions effected by the
Company will be sufficient to offset any negative cash flow from operations or
that the Company will remain in compliance with its line of credit or be able to
renew or replace such line. Additional risks and uncertainties include
possible delays in the completion of products, the possible lack of consumer
appeal and acceptance of products released by the Company, fluctuations in
demand, lost sales because of the rescheduling of products launched or orders
delivered, failure of the Company's markets to continue to grow, that the
Company's products will remain accepted within their respective markets, that
competitive conditions within the Company's markets will not change materially
or adversely, that the Company will retain key development and management
personnel, that the Company's forecasts will accurately anticipate market
demand, that there will be no material adverse change in the Company's
operations or business. Additional factors that may affect future operating
results are discussed in more detail in "Factors Affecting Future Performance,"
below as well as the Company's Annual Report on Form 10-K on file with the
Securities and Exchange Commission. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, the business and
operations of the Company are subject to substantial risks that increase the
uncertainty inherent in the forward-looking statements, and the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
In addition, risks, uncertainties and assumptions change as events or
circumstances change. The Company disclaims any obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-Q with the SEC or otherwise to revise or update any oral or written
forward-looking statement that may be made from time to time by or on behalf of
the Company.
14
<PAGE>
Results of Operations
The following table sets forth certain selected consolidated statements of
operations data, segment data and platform data for the periods indicated in
dollars and as a percentage of total net revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------------------
1999 1998 1999 1998
--------------------- -------------------- ----------------------- ---------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
-------- -------- -------- ------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $29,430 100.0% $40,725 100.0% $ 50,982 100.0% $81,721 100.0%
Cost of goods sold 17,616 59.9% 20,291 49.8% 30,135 59.1% 39,512 48.3%
-------- ------- -------- ------- --------- ------ -------- -------
Gross profit 11,814 40.1% 20,434 50.2% 20,847 40.9% 42,209 51.7%
-------- ------- -------- ------- --------- ------ -------- -------
Operating expenses:
Marketing and sales 6,895 23.4% 9,025 22.2% 14,409 28.3% 17,614 21.6%
General and administrative 3,158 10.7% 2,922 7.2% 6,177 12.1% 5,777 7.1%
Product development 5,010 17.0% 6,121 15.0% 10,400 20.4% 11,940 14.6%
Other 1,123 3.8% - 0.0% 1,633 3.2% - 0.0%
-------- ------- -------- ------- --------- ------ -------- -------
Total operating expenses 16,186 54.9% 18,068 44.4% 32,619 64.0% 35,331 43.3%
-------- ------- -------- ------- --------- ------ -------- -------
Operating income (loss) (4,372) -14.8% 2,366 5.8% (11,772) -23.1% 6,878 8.4%
Other income (expense) (1,177) -4.0% (1,444) -3.5% (2,068) -4.1% (2,862) -3.5%
-------- ------- -------- ------- --------- ------ -------- -------
Income (loss) before income taxes (5,549) -18.8% 922 2.3% (13,840) -27.2% 4,016 4.9%
Provision for income taxes 1,372 4.7% 231 0.6% 1,372 2.7% 476 0.6%
-------- ------- -------- ------- --------- ------ -------- -------
Net income (loss) $(6,921) -23.5% $ 691 1.7% $(15,212) -29.9% $ 3,540 4.3%
======== ======= ======== ======= ========= ====== ======== =======
Net revenues by geographic region:
North America $15,599 53.0% $26,244 64.4% $ 24,343 47.8% $47,907 58.6%
International 6,513 22.1% 9,004 22.1% 16,396 32.1% 21,302 26.1%
OEM, royalty and licensing 7,318 24.9% 5,477 13.5% 10,243 20.1% 12,512 15.3%
Net revenues by platform:
Personal computer $19,237 65.3% $23,969 58.8% $ 32,999 64.7% $44,986 55.1%
Video game console 2,875 9.8% 11,279 27.7% 7,740 15.2% 24,223 29.6%
</TABLE>
Net Revenues
Net revenues for the three months ended June 30, 1999 decreased 27.7 percent
to $29.4 million from $40.7 million in the comparable 1998 quarter. North
America net revenues decreased to $15.6 million, or 53 percent of net revenues,
from $26.2 million, or 64.4 percent of net revenues, in the 1998 quarter.
International net revenues decreased to $6.5 million, or 22.1 percent of net
revenues, from $9.0 million, or 22.1 percent of net revenues in the 1998
quarter. OEM, royalty and licensing net revenues increased 33.6 percent to $7.3
million, or 24.9 percent of net revenues, in the 1999 quarter from $5.5 million,
or 13.5 percent of net revenues, in the 1998 quarter.
Net revenues for the six months ended June 30, 1999 decreased 37.6 percent to
$51.0 million from $81.7 million in the comparable 1998 period. North America
net revenues decreased to $24.3 million, or 47.7 percent of net revenues, from
$47.9 million, or 58.6 percent of net revenues, in the 1998 period.
International net revenues decreased to $16.4 million, or 32.1 percent of net
revenues, from $21.3 million, or 26.1 percent of net revenues in the 1998
period. OEM, royalty and licensing net revenues decreased to $10.2 million, or
20.1 percent of net revenues, in the 1999 period from $12.5 million, or 15.3
percent of net revenues, in the 1998 period.
The decrease in North America and International net revenues for the three
months ended June 30, 1999 was primarily due to decreased major title releases,
lower initial ship-ins on new titles and higher reserves for product returns and
markdowns, which was partially offset by increases in OEM, royalty and licensing
revenues. For the six months ended June 30, 1999, the decrease in North America
and International net revenues was primarily due to decreased major title
releases, lower initial ship-ins on new titles, lower licensing and royalty
revenues and higher reserves for product returns and markdowns as well as a high
level of product returns.
15
<PAGE>
Cost of Goods Sold; Gross Margin
Cost of goods sold decreased 13.2 percent in the three months ended June 30,
1999 to $17.6 million, or 59.9 percent of net revenues, from $20.3 million, or
49.8 percent of net revenues in the comparable 1998 quarter. Gross margin
decreased to 40.1 percent in the 1999 quarter from 50.2 percent in the 1998
quarter.
Cost of goods sold decreased 23.7 percent in the six months ended June 30,
1999 to $30.1 million, or 59.1 percent of net revenues, from $39.5 million, or
48.3 percent of net revenues in the comparable 1998 period. Gross margin
decreased to 40.9 percent in the 1999 period from 51.7 percent in the 1998
period.
The decrease in gross margin during the three months ended June 30, 1999 and
the six months ended June 30, 1999 was primarily a result of a lower net revenue
base than in the 1998 period. The 1999 periods also included the effects of
additional write-offs of prepaid royalties relating to titles or platform
versions of titles which had been canceled, and a higher percentage of
externally developed titles as well as higher royalty rates on such titles.
Additionally, gross margin was affected by the distribution of certain titles by
others on behalf of the Company.
Operating Expenses
Total operating expenses decreased 10.4 percent to $16.2 million, or 54.9
percent of net revenues, in the three months ended June 30, 1999 from $18.1
million, or 44.4 percent of net revenues, for the comparable 1998 quarter.
Total operating expenses decreased 7.7 percent to $32.6 million, or 64 percent
of net revenues, in the six months ended June 30, 1999 from $35.3 million, or
43.3 percent of net revenues, for the comparable 1998 period.
Marketing and Sales. Marketing and sales expenses primarily include
advertising and retail marketing support, sales commissions, marketing and sales
personnel, customer support services and other costs. Marketing and sales
expenses decreased 23.6 percent to $6.9 million, or 23.4 percent of net
revenues, for the three months ended June 30, 1999 from $9.0 million, or 22.2
percent of net revenues for the comparable 1998 quarter and decreased 18.2
percent to $14.4 million, or 28.3 percent of net revenues, for the six months
ended June 30, 1999 from $17.6 million, or 21.6 percent of net revenues for the
comparable 1998 period. The decreases in absolute dollars were primarily
attributable to decreased advertising and other marketing costs associated with
the decrease in major titles launched and products sold during the 1999 period,
as well as a reduction of personnel as a result of International Distribution
Agreement entered into in February 1999 between the Company and Virgin
Interactive Entertainment Limited ("Virgin"), offset in part by increased
marketing development funds in the U.S. market. The increases as a percentage
of net revenues were primarily attributable to a lower net revenues base than
the 1998 period. The Company expects that in future periods marketing and sales
expenses will increase in absolute dollars, but may vary as a percentage of net
revenues.
General and Administrative. General and administrative expenses primarily
include administrative personnel expenses, facilities costs, professional
expenses and other overhead charges. General and administrative expenses
increased 8.1 percent to $3.2 million, or 10.7 percent of net revenues, in the
three months ended June 30, 1999 from $2.9 million, or 7.2 percent of net
revenues in the comparable 1998 quarter and increased 6.9 percent to $6.2
million, or 12.1 percent of net revenues, for the six months ended June 30, 1999
from $5.8 million, or 7.1 percent of net revenues for the comparable 1998
period. The Company recorded bad debt expense of $1 million during the three
months ended June 30, 1999 in response to the deteriorating financial condition
of a few of the Company's larger customers. Excluding the provision for bad
debt expense, the Company's general and administrative expense decreased 26.1
and 10.4 percent for the three and six months ended June 30, 1999, respectively.
This decrease is primarily due to the reorganization of the Company's European
operations. The Company may in the future be required to make additional
payments of approximately $0.2 million in the aggregate under a lease of
equipment originally utilized by Engage. The Company is attempting to mitigate
this potential expense by using or subleasing a portion of the equipment. 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 decreased 18.2 percent to $5.0 million, or 17
percent of net revenues, in the three month period ended June 30, 1999 from $6.1
million, or 15 percent of net revenues, in the comparable 1998 quarter and
decreased 12.9 percent to $10.4 million, or 20.4 percent of net revenues, for
the six months ended June 30, 1999 from $11.9 million, or 14.6 percent of net
revenues for the comparable 1998 period. The decreases in absolute dollars were
primarily due to decreased labor and overhead costs as a result of personnel
reductions. The increases as a percentage of net revenues were due to a lower
net
16
<PAGE>
revenue base than in the 1998 period. 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 Operating Expense. Other operating expenses are primarily one-time
expenses associated with the operations of the Company. Other operating
expenses of $1.1 million and $1.6 million for the three and six months ended
June 30, 1999, respectively, were primarily due to the anticipated asset
valuation and restructuring charge in connection with the Company's reductions
in its European operations. In addition, the Company recorded severance expense
for the departure of the Company's former president during the six months ended
June 30, 1999.
Other Expense
Other expense for the three month and six month periods ended June 30, 1999
primarily included interest expense on the Company's line of credit. Other
expense decreased to $1.2 million in the three months ended June 30, 1999 from
$1.4 million in the comparable 1998 quarter and decreased to $2.1 million in the
six months ended June 30, 1999 from $2.9 million in the comparable 1998 period.
The decreases were primarily due to decreased interest expense resulting from
the repayment of the Subordinated Secured Promissory Notes and the reduction of
the outstanding balance of the line of credit from the proceeds of the IPO in
June 1998, $9.8 million related to distribution and other advances on future
products and $10 million related to a Stock Purchase Agreement with an investor
for 2.5 million shares of the Company's Common Stock.
Provision (Benefit) for Income Taxes
The Company recorded a tax provision of $1.4 million in the three months ended
June 30, 1999 compared to $0.2 million in the three months ended June 30, 1998
and recorded a tax provision of $1.4 million in the six months ended June 30,
1999 compared to $0.5 million in the six months ended June 30, 1998. The tax
provision recorded during 1999 represents an increase of the valuation allowance
on the deferred tax asset due to the uncertainty of realization of the deferred
tax asset in future periods.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through the use of
lines of credit and equipment leases, through cash generated by the private sale
of securities, from the proceeds from the initial public offering and from
operations. As of June 30, 1999 the Company's principal sources of liquidity
included cash and short term investments of approximately $0.7 million and the
Company's line of credit bearing interest at the London Interbank Offered Rate
plus 4.87 percent (10.09 percent as of June 30, 1999), expiring January 1, 2000.
Under the terms of the line of credit as in effect on June 30, 1999, the
Company had maximum availability for borrowings and letters of credit up to
$37.5 million through November 29, 1999, $30 million through December 30, 1999
and $25 million thereafter, based in part upon qualifying receivables and
inventory. Within the overall credit limit, the line of credit as of June 30,
1999 also provided that the Company could borrow up to $14 million in excess of
its borrowing base through August 16, 1999, $10 million in excess through
September 29, 1999, $7 million through November 29, 1999 and up to $5 million in
excess of its borrowing base thereafter. Under the line of credit the Company
was required to place a cash collateral deposit of $2.5 million by April 15,
1999. As amended, the Company is additionally required to maintain certain
borrowing limitations beginning August 16, 1999 where actual borrowings are
limited to $35 million with various month end limitations, generally decreasing
to $25 million at December 31, 1999 and the $5 million personal guarantee by the
Company's Chairman and Chief Executive Officer will remain in place throughout
the term. All other terms and conditions remain in full force and effect. The
Company is currently in compliance with the terms of the Loan Agreement. As of
June 30, 1999, the Company's balance on the line of credit was $30 million with
no stand by letters of credit outstanding. Based upon certain assumptions,
including without limitation, the Company's ability to achieve anticipated
operating results, and the completion of the proposed transactions with Titus
under the July 1999 agreement discussed below or other potential debt or equity
financing, the Company believes that it will be able to renew its line of credit
or obtain alternate financing on reasonable terms. However, there can be no
assurance that the assumptions relied on by the Company will prove correct or
that the Company will be able to renew or replace its line of credit or obtain
alternate financing on reasonable terms, if at all.
In March 1999, the Company obtained equity financing by selling 2.5 million
shares of its Common Stock to Titus for $10 million. The purchase price of such
transaction was recalculated on June 30, 1999, and will be recalculated again on
August 20, 1999, based upon the per share price of the Company's common stock
at certain future dates. As a consequence of the first such recalculation,
Titus was issued approximately 1.2 million additional shares by the Company
pursuant to such transaction. An additional 0.4 million shares would have been
issued, but they would have resulted in an aggregate ownership by Titus of 20
percent or greater of the outstanding Common
17
<PAGE>
Stock of the Company, and, in accordance with NASDAQ Stock Market rules, the
Company must obtain the approval of its stockholders for such issuance. The
Company is in the process of obtaining such approval from it's stockholders.
Since such approval has not been obtained yet, the Company issued Titus a
promissory note for approximately $1 million, the principal amount equal to the
value of the shares in excess of 20 percent of the Company's outstanding Common
Stock to which Titus would otherwise be entitled, with interest at a rate of 10
percent. There can be no assurance that the Company will obtain the approval of
its stockholders for any additional issuance, and that the Company will not
redeem the promissory note for the additional shares of the Company's Common
Stock to Titus as set forth above.
In May 1999, the Company and Titus signed a letter of intent under the terms
of which Titus loaned the Company $5 million, and contemplates a strategic
equity investment by Titus of $25 million, subject to the entering into of
definitive agreements concerning such transaction by the Company and Titus. In
July 1999, the Company and Titus entered into such agreements subject to the
standard conditions, including stockholder approval. There can be no assurance
that the transactions contemplated by the definitive agreements, including the
additional equity investment by Titus, will be consummated.
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 $17.8 million and $11.8 million
during the six months ended June 30, 1999 and 1998, respectively. The cash used
by operating activities in the six months ended June 30, 1999 was primarily
attributable to the net loss incurred and decreases in accounts payable and
accrued liabilities as well as increases in inventories and prepaid licenses and
royalties.
Cash provided by financing activities of $18.9 million in the six months ended
June 30, 1999 resulted primarily from the issuance of Common Stock to an
investor, debt issued to the same investor and borrowings on the line of credit,
which were partially offset by restricted cash deposits to the Company's lender.
Cash provided by financing activities of $11.7 million in the six months ended
June 30, 1998 resulted primarily from the proceeds from the Company's initial
public offering offset in part by repayments on the Company's line of credit.
Cash used in investing activities of $0.9 million during the six months ended
June 30, 1999 and 1998 consisted of capital expenditures, primarily for office
and computer equipment used in Company operations. The Company does not
currently have any material commitments with respect to any capital
expenditures.
To provide liquidity, the Company implemented certain measures during the
fourth quarter of 1998 and the first half of 1999, including a reduction of
personnel, a decrease in management compensation and the delay, cancellation or
scale back of certain product development and marketing programs, among other
actions. In addition, the Company entered into two Stock Purchase agreements
with Titus. The first Stock Purchase Agreement was consummated in March 1999,
and the second Stock Purchase Agreement was entered into in July 1999. If the
second Stock Purchase Agreement is consummated, Titus will own approximately 57%
of the Company's outstanding Common Stock, resulting in a change of control of
the Company in favor of Titus. There can be no assurance that the Company's
operating expenses or current obligations will not materially exceed cash flows
available from the Company's operations in fiscal 1999 and beyond or that the
increased line of credit will be sufficient to finance any negative cash flow
from operations or that such line of credit will be renewed or replaced on
reasonable terms, if at all. In addition, no assurance can be given that the
measures heretofore effected will not materially adversely affect the Company's
ability to develop and publish commercially viable titles, or that such
measures, whether alone or in conjunction with increased net revenues, if any,
will be sufficient to generate operating profits in fiscal 1999 and beyond.
The Company may be required to seek additional funds through debt or equity
financings, product licensing or distribution transactions or some other source
of financing in order to provide sufficient working capital for the Company.
Certain of such measures may require third party consents or approvals,
including the Company's financial institution, and there can be no such
assurance that such consents or approvals can be obtained.
The Company believes that funds available under its line of credit, amounts to
be received under various product license and distribution agreements,
anticipated funds from operations, and the proceeds from planned debt or equity
financings will be sufficient to satisfy the Company's projected working capital
and capital expenditure needs and debt obligations in the normal course of
business at least through the expiration of its line of credit on January 1,
2000. Based upon certain assumptions, including without limitation, the
Company's ability to achieve
18
<PAGE>
anticipated operating results and the completion of the proposed transactions
with Titus under the July 1999 agreements or other potential debt or equity
financings, the Company believes that it will be able to renew its line of
credit or obtain alternate financing on reasonable terms. However, there can be
no assurance that the assumptions relied on by the Company will prove correct or
that the Company will be able to renew or replace its line of credit on
satisfactory terms, if at all. Further, there can be no assurance that the
Company will complete the transaction with Titus or other potential debt or
equity financings during such period. If the Company is required to raise
additional working capital, there can be no assurance that the Company will be
able to raise such additional working capital on acceptable terms, if at all. In
the event the Company is unable to raise additional working capital, further
measures would be necessary including, without limitation, the sale or
consolidation of certain operations, the delay, cancellation or scale back of
product development and marketing programs and other actions. No assurance can
be given that such measures would not materially adversely affect the Company's
ability to develop and publish commercially viable titles, or that such measures
would be sufficient to generate operating profits in fiscal 1999 and beyond.
Certain of such measures may require third party consents or approvals,
including the Company's financial institution, and there can be no such
assurance that such consents or approvals can be obtained.
Year 2000 Issue
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. Therefore, they do not
properly recognize a year that begins with "20" rather than "19". Others do not
correctly process "leap year" dates. As a result, such systems and applications
could fail or create erroneous results unless corrected so that they can
correctly process data related to the year 2000 and beyond. The Company relies
on its systems and applications in operating and monitoring all major aspects of
its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, networks and telecommunications
systems equipment and end products. The Company also relies, directly and
indirectly, on external systems of suppliers for the management and control of
product development and of business enterprises such as developers, customers,
suppliers, creditors, financial organizations, and governmental entities, both
domestic and international, for accurate exchange of data. The Company could be
affected through disruptions in the operation of the enterprises with which the
Company interacts or from general widespread problems or an economic crisis
resulting from non-compliant Year 2000 systems. Despite the Company's efforts
to address the Year 2000 impact on its internal systems and business operations,
there can be no assurance that such impact will not result in a material
disruption of its business or have a material adverse effect on the Company's
business, operating results and financial condition.
The Company is currently in the process of assessing the potential impact of
the Year 2000 issue on its business and the related foreseeable expenses that
may be incurred in attempting to remedy such impact. The Company is employing a
combination of internal resources and outside consultants to evaluate and
address Year 2000 issues. The Company's Year 2000 plan includes (i) Assessment:
Conducting an evaluation of the Company's computer based systems, facilities and
products (and those of significant dealers, vendors and other third parties with
which the Company does business) to determine their Year 2000 compliance, (ii)
Remediation: Coordinating the replacement and/or upgrade of non-compliant
systems, as necessary, and (iii) Test and Implement: Developing and overseeing
the implementation of all of the initiatives in the Company's Year 2000
compliance plan. For example, the Company is in the process of upgrading its
internal accounting software and expects such upgrade to be completed prior to
the completion of the 3rd quarter in 1999. Although the Company has identified
certain systems and applications that are not Year 2000 compliant and the
Company is in the process of upgrading its software to address the Year 2000
issue, there can be no assurance that such upgrades will be completed on a
timely basis at reasonable costs, or that such upgrades will be able to
anticipate all of the problems triggered by the actual impact of the year 2000.
In addition, the inability of any internal system to achieve Year 2000
compliance could result in material disruption to the Company's operations.
With respect to customers, developers, suppliers and other enterprises upon
which the Company relies, even where assurances are received from such third
parties, there remains a risk that failure of systems and applications of such
third parties could have a material adverse effect on the Company.
The Company is currently assessing its products for Year 2000 compliance and
anticipates such assessment to be complete prior to the end of the 3rd quarter
in 1999. However, there can be no assurance that any of the Company's products
are or will be Year 2000 compliant. The failure of any of the Company's products
to achieve Year 2000 compliance would result in increased warranty costs,
customer satisfaction issues, potential lawsuits and other material costs and
liabilities. In addition, if the computer systems on which the consumers use
the Company's
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products are not Year 2000 compliant, such non compliance could adversely affect
the consumers ability to use such products.
The Company believes that it will substantially complete the implementation of
its Year 2000 plan prior to the completion of the 3rd quarter in 1999. However,
if the Company does not complete its Year 2000 plan prior to the commencement of
the year 2000, or if the Company fails to identify and remediate all critical
Year 2000 problems or if major suppliers, developers or customers experience
material Year 2000 problems, the Company's results of operations or financial
condition could be materially adversely effected.
The Company has estimated that the total cost of Year 2000 compliance will be
less than $0.5 million, $0.3 million of which had been spent. The costs of
compliance have been included in the Company's 1999 budget. The Company
currently does not have a formal contingency plan in the event that an area of
its operations does not become Year 2000 compliant. The Company will consider
adopting a formal plan upon completion of the Year 2000 assessment or if,
pending such completion, it becomes more evident that there will be an area of
non-compliance in its systems or at a critical third party.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers, developers and suppliers in
addressing the Year 2000 issue. The Company's evaluation is ongoing and it
expects that new and different information will become available to it as the
evaluation continues. Consequently, there can be no assurance that all material
elements will be Year 2000 compliant in time.
FACTORS AFFECTING FUTURE PERFORMANCE
Future operating results of the Company depend upon many factors and are
subject to various risks and uncertainties. Some of the risks and uncertainties
which may cause the Company's operating results to vary from anticipated results
or which may materially and adversely affect its operating results are as
follows:
Liquidity; Future Capital Requirements
The Company used net cash in operations of $17.8 million and $11.8 million,
respectively, in the six months ended June 30, 1999 and 1998. There can be no
assurance that the Company will ever generate positive cash flow from
operations. The Company's ability to fund its capital requirements out of
available cash, its 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 may be required to
seek additional funds through debt or equity financings, product licensing or
distribution transactions or some other source of financing in order to provide
sufficient working capital for the Company. The issuance of additional equity
securities by the Company could result in substantial dilution to stockholders.
In July 1999, the Company entered into a stock purchase agreement with Titus
pursuant to which Titus will purchase 6.25 million shares of the Company's
Common Stock for $25 million. This stock sale is subject to the fulfillment of
certain conditions, including approval by the Company's stockholder's, which
will be solicited at a meeting to be held on August 24, 1999. There can be no
assurance that such stockholder approval will be obtained, and that the sale of
stock to Titus will occur. In the event the stock sale to Titus does not occur,
the Company may be required to raise additional working capital from alternative
sources. If the Company is required to raise additional working capital, there
can be no assurance that the Company will be able to raise such additional
working capital on acceptable terms, if at all. In the event the Company is
unable to raise additional working capital, further cost reduction measures
would be necessary including, without limitation, the sale or consolidation of
certain operations, the delay, cancellation or scale back of product development
and marketing programs and other actions. No assurance can be given that such
measures would not materially adversely affect the Company's ability to publish
commercially viable titles, or that such measures would be sufficient to
generate operating profits. Certain of such measures may require third party
approvals, including the Company's financial institution, and there can be no
assurance that such consents or approvals can be obtained.
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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, delays in shipment, 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 and may not be
recaptured in subsequent quarters. A significant portion of the Company's
operating expenses is relatively fixed, and planned expenditures are based
primarily on sales forecasts. If net revenues do not meet the Company's
expectations in any given quarter, operating results may be materially adversely
affected. The interactive entertainment software industry is highly seasonal,
with the highest levels of consumer demand occurring during the year-end holiday
buying season, followed by demand during the first calendar quarter. As a
result, net revenues, gross profits and operating income for the Company have
historically been highest during the fourth and the following first calendar
quarters, and have declined from those levels in subsequent second and third
calendar quarters.
The failure or inability of the Company to introduce products on a timely
basis to meet such seasonal increases in demand may have a material adverse
effect on the Company's business, operating results and financial condition.
The Company may over time become increasingly affected by the industry's
seasonal patterns. Although the Company seeks to reduce the effect of such
seasonal patterns on its business by distributing its product release dates more
evenly throughout the year, there can be no assurance that such efforts will be
successful. There can be no assurance that the Company will be profitable in
any particular period given the uncertainties associated with software
development, manufacturing, distribution and the impact of the industry's
seasonal patterns on the Company's net revenues.
As a result of the foregoing factors and the other factors discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance," 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.
Significant Recent Losses
The Company has experienced significant net losses in recent periods,
including a loss of $15.2 million and $28.2 million for the six months ended
June 30, 1999 and the year ended December 31, 1998, respectively. These losses
resulted primarily from delays in the completion of certain products, a higher
than expected level of product returns and markdowns on products released during
the year and lower than expected worldwide sales of certain releases, as well as
from operating expense levels that were high relative to the Company's revenue
level. 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 or adequate working capital, or bring its costs
into line with revenues, so as to attain or sustain profitability in the future.
Dependence on New Product Introductions; Risk of Product Delays and Product
Defects
The Company's products typically have short life cycles, and the Company
depends on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously
released products to additional platforms, to generate net revenues to fund
operations and to replace declining net revenues from older products. 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
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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 frequently experienced significant delays
in the introduction of new products, including certain products currently under
development. Because net revenues associated with the initial shipments of a new
product generally constitute a high percentage of the total net revenues
associated with a product, any delay in the introduction of, or the presence of
a defect in, one or more new products expected in a period could have a material
adverse effect on the ultimate success of such products and on the Company's
business, operating results and financial condition. The costs of developing and
marketing new interactive entertainment software have increased in recent years
due to such factors as the increasing complexity and content of interactive
entertainment software, increasing sophistication of hardware technology and
consumer tastes and increasing costs of obtaining licenses for intellectual
properties, and the Company expects this trend to continue. There can be no
assurance that new products will be introduced on schedule, if at all, or that,
if introduced, they will achieve significant market acceptance or generate
significant net revenues. In addition, software products as complex as those
offered by the Company may contain undetected errors when first introduced or
when new versions are released. There can be no assurance that, despite testing
by the Company, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Uncertainty of Market Acceptance; Dependence on Hit Titles
Consumer preferences for interactive entertainment software are continually
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved sustained market acceptance.
Rather, a limited number of releases have become "hits" and have accounted for a
substantial 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 consumer loyalty. The Company
expects the importance of introducing hit titles to increase in the future.
There can be no assurance that new products introduced by the Company will
achieve significant market acceptance, that such acceptance, if achieved, will
be sustainable for any significant period, or that product life cycles will be
sufficient to permit the Company to recover development and other associated
costs. Most of the Company's products have a relatively short life cycle and
sell for a limited period of time after their initial release, usually less than
one year. The Company believes that these trends will continue and that the
Company's future revenue will continue to be dependent on the successful
production of hit titles on a continuous basis. Because the Company introduces
a relatively limited number of new products in a given period, the failure of
one or more of such products to achieve market acceptance could have a material
adverse effect on the Company's business, operating results and financial
condition. Further, if market acceptance is not achieved, the Company could be
forced to accept substantial product returns or grant significant markdown
allowances to maintain its relationship with retailers and its access to
distribution channels. For example, the Company had higher than expected
product returns and markdowns in the three months ended June 30, 1999 and there
can be no assurance that higher than expected product returns and markdowns will
not continue in the future. 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.
Potential for Control by Titus
Titus currently owns approximately 16.2 percent of the Company's outstanding
Common Stock, and may be issued additional shares based upon the Company's stock
price at certain future dates, further increasing its ownership in the Company
in addition to any other potential increases in ownership. Titus also holds an
option to purchase the 4,658,216 shares of the Common Stock currently held by
Universal, which would increase its ownership percentage to approximately 36.6
percent. If the transactions contemplated by the agreements entered into by the
Company and Titus, among others, in July 1999 are consummated, Titus would own
approximately 57 percent of the Common Stock of the Company, resulting in a
change in control of the Company in favor of Titus. In connection with such
change in control, Titus' president and chief executive officer, Herve Caen,
would become the president of the Company, and assume substantial authority for
the Company's operations. The effect of such a change in control and the
resulting addition of Mr. Caen as president on the Company is uncertain, and
there can be no assurance that such a change in control would not have a
material adverse effect on the Company's business, operating results or
financial condition.
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Continued Listing on the NASDAQ National Market
The Company's Common Stock is currently quoted on the NASDAQ National Market
under the symbol "IPLY." For continued inclusion on the NASDAQ National Market,
a company must meet certain tests, such as a minimum bid price of $1.00 and net
tangible assets of at least $4.0 million. In the event that the Company fails
to satisfy the listing standards on a continuous basis, the Company's Common
Stock may be removed from listing on the NASDAQ National Market. If the
Company's Common Stock is delisted from the NASDAQ National Market, trading of
the Company's Common Stock, if any, would be conducted in the over-the-counter
market in the so-called "pink sheets" or, if available, the NASD's "Electronic
Bulletin Board." In such event, investors could find it more difficult to
dispose of, or to obtain accurate quotations as to the value of, the Company's
Common Stock and the trading price per share would most likely be reduced as a
result. Consummation of the transaction agreed to in July 1999, by the Company
and Titus (See Note 11 of the Notes to Unaudited Consolidated Financial
Statements) should assist the Company in continuing to meet the listing
standards of the NASDAQ National Market.
Distribution Agreement
In February 1999, in connection with the Company's acquisition of a 43.9
percent membership interest in Virgin's parent entity, the Company signed an
International Distribution Agreement with Virgin. Under this Agreement, the
Company appointed Virgin as the exclusive distribution for substantially all of
the Company's products in Europe, CIS, Africa and the Middle East, subject to
certain reserved rights, for a seven year period. Because of the exclusive
nature of the Agreement, if Virgin were to experience problems with its
business, or were to fail to perform as expected, the Company's business,
operating results and financial condition could be materially and adversely
affected. In connection with this Agreement, Virgin hired the Company's
European sales and marketing personnel, and the Company pays Virgin a
distribution fee for its marketing and distribution of the Company's products,
subject to a minimum amount, as well as a fixed overhead fee, subject to
reduction in certain events. Because of the minimum distribution fee, in the
event the Company's European sales are lower than expected, the Company may
effectively pay a higher distribution fee on the units sold, which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, due to the fixed nature of the overhead fee,
the Company will not be able to reduce its European sales and marketing expenses
in response to downturns in the Company's sales in Europe, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
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 involved advance payments by the Company of royalties and
guaranteed minimum royalty payments, and the Company expects to continue to
enter into such arrangements. If the sales volumes of products subject to such
arrangements are not sufficient to recover such royalty advances and guarantees,
the Company would be required to write-off unrecovered portions of such
payments, which could have a material adverse effect on its business, operating
results and financial condition. Further, there can be no assurance that third
party developers will not demand renegotiation of their arrangements with the
Company.
Rapidly Changing Technology; Platform Risks
The interactive entertainment software industry is subject to rapid
technological change. The introduction of new technologies, including operating
systems such as Microsoft Windows 98, technologies that support multi-player
games, new media formats such as on-line delivery and digital video disks
("DVDs") and as yet unreleased video game platforms could render the Company's
current products or products in development obsolete or
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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.
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. The broad range of competing and incompatible emerging
technologies may lead consumers to postpone buying decisions with respect to
products until one or more of such technologies gain widespread acceptance.
Such postponement could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is currently
actively developing products for the Microsoft Windows 98, Sony PlayStation and
Nintendo 64 platforms, as well as for the Sega Dreamcast platform scheduled for
release in September 1999. The Company's success will depend in part on its
ability to anticipate technological changes and to adapt its products to
emerging game platforms. There can be no assurance that the Company will be
able to anticipate future technological changes, to obtain licenses to develop
products for those platforms on terms favorable to the Company or to create
software for those new platforms, and any failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition.
Industry Competition; Competition for Shelf Space
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new interactive entertainment
software platforms and software platforms. The Company's competitors vary in
size from small companies to very large corporations with significantly greater
financial, marketing and product development resources than those of the
Company. Due to these greater resources, certain of the Company's competitors
are able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies, pay higher fees to licensors of desirable motion picture,
television, sports and character properties and pay more to third party software
developers than the Company. The Company believes that the principal
competitive factors in the interactive entertainment software industry include
product features, brand name recognition, access to distribution channels,
quality, ease of use, price, marketing support and quality of customer service.
The Company competes primarily with other publishers of PC and video game
console interactive entertainment software. Significant competitors include
Electronic Arts, GT Interactive Software Corp., Mattel, Activision, Inc.,
Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc.,
Acclaim Entertainment Inc., Havas Interactive 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 sale volume, and there can be no assurance that retailers will
continue to purchase the Company's products or to provide the Company's products
with adequate
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levels of shelf space and promotional support, and a prolonged failure in this
regard may have a material adverse effect on the Company's business, operating
results and financial condition.
Dependence 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, including Wal-Mart, have entered into exclusive buying arrangements
with other software developers or distributors, which arrangements prevent the
Company from selling certain of its products directly to that mass merchant. If
the number of mass merchants entering into exclusive buying arrangements with
software distributors other than the Company were to increase, the Company's
ability to sell to such merchants would be restricted to selling through the
exclusive distributor. Because sales to distributors typically have a lower
gross profit than sales to retailers, this would have the effect of lowering the
Company's gross profit. In addition, this trend could increase the material
adverse impact on the Company's business, operating results and financial
condition. In addition, emerging methods of distribution, such as the Internet
and on-line services, may become more important in the future, and it will be
important for the Company to maintain access to these channels of distribution.
There can be no assurance that the Company will maintain such access or that the
Company's access will allow the Company to maintain its historical levels of
sales volume.
Distributors and retailers in the computer industry have from time to time
experienced significant fluctuations in their businesses, and there have been a
number of business failures among these entities. The insolvency or business
failure of any significant distributor or retailer of the Company's products
could have a material adverse effect on the Company's business, operating
results and financial condition. Sales are typically made on unsecured credit,
with terms that vary depending upon the customer and the nature of the product.
Although the Company has obtained insolvency risk insurance to protect against
any bankruptcy, insolvency or liquidation that may occur involving its
customers, such insurance contains a significant deductible and a co-payment
obligation, and the policy does not cover all instances of non-payment. In
addition, while the Company maintains a reserve for uncollectible receivables,
the actual reserve may not be sufficient in every circumstance. As a result, a
payment default by a significant customer could have a material adverse effect
on the Company's business, operating results and financial condition.
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
return 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 three months ended June 30, 1999 were adversely affected by a higher than
expected level of product returns and markdown allowances and consequently
reduced net revenues. There can be no assurance that the Company will not
continue to experience such high levels of product returns and markdown
allowances in future periods, which could have a material adverse effect on the
Company's business, operating results and financial condition.
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Dilution; Shares Eligible for Future Sale
In March 1999, the Company entered into a Stock Purchase Agreement with Titus
Interactive S.A. ("Titus"), pursuant to which Titus purchased from the Company
2.5 million shares of the Company's Common Stock for an aggregate purchase price
of $10 million. Pursuant to such Agreement, the Company may become obligated to
issue additional shares of Common Stock to Titus without additional
consideration in certain events (see Note 5 to the Company's Consolidated
Financial Statements) and on June 30, 1999, the Company issued approximately 1.2
million shares per the terms of the agreement. There will be a final
recalculation on August 20, 1999 which could result in the issuance or
redemption of the Company's Common Stock to or by the investor
In addition, the Company has agreed to register all of the unregistered shares
held by Titus for resale under the Securities Act of 1933, as amended. Such
registration could temporarily 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 Company's
Common Stock.
In May 1999, the Company signed a letter of intent with Titus pursuant to
which Titus loaned the Company $5 million, and the Company and Titus negotiated
certain additional transactions. In July 1999, certain of the agreements
contemplated by the letter of intent were entered into, in connection with which
Titus will make a strategic equity investment of $25 million in the Company,
purchasing 6.25 million shares of Common Stock at a purchase price of $4 per
share, subject to standard conditions including approval by the Company's
stockholders. As part of the agreements, Titus' chairman and chief executive
officer will become president of the Company. The agreements also contemplate
the swap by the Company's chairman and chief executive officer of 2 million
personal shares of Interplay Common Stock for an agreed upon number of Titus
shares. If the transactions are consummated, Titus will own approximately 57
percent of the Company's outstanding Common Stock, resulting in a change of
control of the Company in favor of Titus.
Dependence Upon Third Party Licenses
Many of the Company's products, such as its Star Trek, Major League Baseball
and Caesar's 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. For example, Paramount has granted
the Star Trek license to a third party upon the expiration of the Company's
rights. Should the Company be unable to obtain licenses for the underlying
content that it believes offers the greatest consumer appeal, the Company would
either have to seek alternative, potentially less appealing licenses, or release
the products without the desired underlying content, either of which events
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that acquired
properties will enhance the market acceptance of the Company's products based on
such properties, that the Company's new product offerings will generate net
revenues in excess of their costs of development and marketing or minimum
royalty obligations, or that net revenues from new product sales will meet or
exceed net revenues from existing product sales.
Dependence on 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 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, Europe and Australia and
is currently negotiating with Nintendo for licenses covering additional
territories. With the new Sega Dreamcast video game system shipping in the
United States and Europe in Fall 1999, the Company is currently negotiating
agreements to develop software for this new platform. 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, Sony Computer Entertainment, Nintendo and Sega each
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.
26
<PAGE>
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, Nintendo and Sega for the manufacture of the Company's
products that are compatible with their respective video game consoles. As a
result, Sony, Nintendo and Sega 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 and Dreamcast products
consist of CD-ROMs and are typically delivered by Sony Computer Entertainment
and Sega, respectively, 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.
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 22.1 percent of the Company's total
net revenues for the three months ended June 30, 1999 and 1998, and 32.1 percent
and 26.1 percent of the Company's total net revenues for the six months ended
June 30, 1999 and 1998, respectively. Additionally, in February 1999, the
Company entered into an International Distribution Agreement with Virgin for the
exclusive distribution of its products in selected international territories.
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.
27
<PAGE>
Risks Associated with New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("Participating Countries") established fixed conversion rates between
their existing sovereign currencies and a new European currency, the "euro".
The euro was adopted by the Participating Countries as the common legal currency
on that date. A significant portion of the Company's sales are made to
Participating Countries and consequently, the Company anticipates that the euro
conversion will, among other things, create technical challenges to adapt
information technology and other systems to accommodate euro-denominated
transactions and limit the Company's ability to charge different prices for its
producers in different markets. While the Company anticipates that the
conversion will not cause material disruption of its business, there can be no
assurance that the conversion will not have a material effect on the Company's
business or financial condition.
Protection of Proprietary Rights
The Company regards its software as proprietary and relies on a combination of
patent, 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, and holds the
rights to one patent application related to the software engine for its Messiah
title. 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 generally copy protect its
products, it does not provide source code to third parties unless they have
signed nondisclosure agreements with respect thereto.
The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such counties, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-line
services, the ability of the Company to protect its intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. There can be no assurance that existing intellectual
property laws will provide adequate protection to the Company's products in
connection with such emerging technologies.
As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although the Company makes reasonable efforts to ensure that its products do not
violate the intellectual property rights of others, there can be no assurance
that claims of infringement will not be made. Any such claims, with or without
merit, can be time consuming and expensive to defend. From time to time, the
Company has received communications from third parties of such parties. There
can be no assurance that existing or future infringement claims against the
Company will not result in costly litigation or require the Company to license
the intellectual property rights of third parties, either of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Entertainment Software Rating System; Governmental Restrictions
Legislation is periodically introduced at the state and federal levels in the
U.S. and in foreign countries to establish a system for providing consumers with
information about graphic violence and sexually explicit material contained in
interactive entertainment software products. Such a system would include
procedures with which interactive entertainment software publishers would be
expected to comply by identifying particular products within defined rating
categories and communicating such ratings to consumers through appropriate
package labeling and through advertising and marketing presentations consistent
with each products' rating. In addition, many foreign countries have laws which
permit governmental entities to censor the content of certain works, including
interactive entertainment software. In certain instances, the Company may be
required to modify its products to comply with the requirements of such
governmental entities, which could delay the release of those products in such
countries. Such delays could have a material adverse effect on the Company's
business, operating results and financial
28
<PAGE>
condition. While the Company currently voluntarily submits its products to
industry-created review boards and publishes their ratings on its game
packaging, the Company believes that mandatory government-run integrative
entertainment software products rating systems eventually will be adopted in
many countries which represent significant markets or potential markets for the
Company. Due to the uncertainties inherent in the implementation of such a
rating system, confusion in the marketplace may occur, and the Company is unable
to predict what effect, if any, such a rating system would have on the Company's
business. In addition to such regulations, certain retailers have in the past
declined to stock certain of the Company's products because they believed that
the content of the packaging artwork or the products would be offensive to the
retailer's customer base. While to date such actions have not had a material
adverse effect on the Company's business, operating results or financial
condition, there can be no assurance that similar actions by the Company's
distributors or retailers in the future would not have a material adverse effect
on the Company's business, operating results and financial condition.
Control by Directors and Officers
The Company's directors and executive officers beneficially own, in the
aggregate, approximately 27.9 percent of the Company's outstanding Common Stock.
These stockholders, if acting together with Universal Studios, Inc.
("Universal") and Titus, see "Potential for Control by Titus", 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.
Year 2000 Compliance
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. Therefore, they do not
properly recognize a year that begins with "20" rather than "19". Others do not
correctly process "leap year" dates. As a result, such systems and applications
could fail or create erroneous results unless corrected so that they can
correctly process data related to the Year 2000 and beyond. The Company relies
on its systems and applications in operating and monitoring all major aspects of
its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, networks and telecommunications
systems equipment and end products. The Company also relies, directly and
indirectly, on external systems of suppliers for the management and control of
product development and of business enterprises such as developers, customers,
suppliers, creditors, financial organizations, and governmental entities, both
domestic and international, for accurate exchange of data. The Company could be
affected through disruptions in the operation of the enterprises with which the
Company interacts or from general widespread problems or an economic crisis
resulting from noncompliant Year 2000 systems. Despite the Company's efforts to
address the Year 2000 impact on its internal systems and business operations,
there can be no assurance that such impact will not result in a material
disruption of its business or have a material adverse effect on the Company's
business, operating results and financial condition.
The Company is currently in the process of assessing the potential impact of
the Year 2000 issue on its business and the related foreseeable expenses that
may be incurred in attempting to remedy such impact. Although the Company has
identified certain systems and applications that are not Year 2000 compliant and
the Company is in the process of upgrading its software to address the Year 2000
issue, there can be no assurance that such upgrades will be completed on a
timely basis at reasonable costs, or that such upgrades will be able to
anticipate all of the problems triggered by the actual impact of the Year 2000.
In addition, the inability of any internal system to achieve Year 2000
compliance could result in material disruption to the Company's operations.
With respect to customers, developers, suppliers and other enterprises upon
which the Company relies, even where assurances are received from such third
parties, there remains a risk that failure of systems and applications of such
third parties could have a material adverse effect on the Company.
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
29
<PAGE>
bandwidth and the speed of responsiveness to the point that will allow the
Company to conduct and support on-line product offerings. Because global
commerce and the exchange of information on the Internet and other similar open,
wide area networks are relatively new and evolving, there can be no assurance
that a viable commercial marketplace on the Internet will emerge from the
developing industry infrastructure, that the appropriate complementary products
for providing and carrying Internet traffic and commerce will be developed, that
the Company will be able to create or develop a sustainable or profitable on-
line presence or that the Company will be able to generate any significant
revenue from on-line product offerings in the near future, it at all. If the
Internet does not become a viable commercial marketplace, or if such development
occurs but is insufficient to meet the Company's needs or if such development is
delayed beyond the point where the Company plans to have established an on-line
service, the Company's business, operating results and financial condition could
be materially adversely affected.
Risks Associated with Acquisitions
As part of its strategy to enhance distribution and product development
capabilities, the Company intends to review potential acquisitions of
complementary businesses, products and technologies. Some of these acquisitions
could be material in size and scope. While the Company will continue to search
for appropriate acquisition opportunities, there can be no assurance that the
Company will be successful in identifying suitable acquisition opportunities.
If any potential acquisition opportunity is identified, there can be no
assurance that the Company will consummate such acquisition, and if such
acquisition does occur, there can be no assurance that it will be successful in
enhancing the Company's business or will be accretive to the Company's earnings.
As the interactive entertainment software industry continues to consolidate, the
Company may face increased competition for acquisition opportunities, which may
inhibit its ability to complete suitable transactions or increase the cost
thereof. Future acquisitions could also divert substantial management time,
could result in short term reductions in earnings or special transactions 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 be dilutive to its
stockholders. 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.
Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws, as well as Delaware
corporate law, contain certain provisions that could have the effect of
delaying, deferring or preventing a change in control of the Company and could
materially adversely affect the prevailing market price of the Common Stock.
Certain of such provisions impose various procedural and other requirements that
could make it more difficult for stockholders to effect certain corporate
actions.
Stock Price Volatility
The trading price of the Company's Common Stock has been and could continue to
be subject to wide fluctuations in response to quarter to quarter variations in
results of operations, announcements of new products by the Company or its
competitors, product development or release schedule, general conditions in the
computer, software, entertainment, media or electronics industries, changes in
earnings estimates or buy/sell recommendations by analysts, investor perceptions
and expectations regarding the products, plans and strategic position of the
Company, its competitors and its customers, or other events or factors. In
addition, the public stock markets have experienced extreme price and trading
volume volatility, particularly in high technology sectors of the market. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
30
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of June 30,
1999. Further, the Company is not exposed to interest rate risk as the
Company's revolving line of credit agreement has a variable interest rate.
Therefore, the fair value of these instruments are not affected by changes in
market interest rates, but do affect the Company's future earnings and cash
flows. The Company believes that the market risk arising from holdings of its
financial instruments is not material.
31
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal proceedings, claims and
litigation arising in the ordinary course of business, including
disputes arising over the ownership of intellectual property rights and
collection matters. In the opinion of management, the outcome of such
routine claims will not have a material adverse effect on the Company's
business, financial condition or results of operations.
In April 1999, the Company was named as one of many defendants in a
multi-party civil action that was filed in the Western District of
Kentucky, alleging that the Company, along with the other media
industry defendants, contributed to the unlawful actions of a convicted
felon. The Company believes that this civil action is without merit and
will vigorously defend its position.
Item 2. Changes in Securities and Use of Proceeds
On June 30, 1999, the Company issued 1,161,771 shares of the Company's
Common Stock to Titus Interactive S.A., a French corporation under the
terms of the Stock Purchase Agreement signed in March 1999. On April
30, 1999, the Company issued 484,848 shares of the Company's Common
Stock to RuneCraft Limited. Such shares were issued in reliance upon
the exemption provided by Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
10.1 Stock Purchase Agreement dated July 20, 1999, by and among the Company,
Titus and Brian Fargo.
10.2 Exchange Agreement dated July 20, 1999 by and among Titus, Brian Fargo,
Herve Caen and Eric Caen.
27.1 Financial data schedule for the three month period ended June 30, 1999.
</TABLE>
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K, dated May 12, 1999. The
Company signed a letter of intent with Titus Interactive SA ("Titus")
pursuant to which Titus will loan the Company $5 million and the
Company and Titus will negotiate certain additional transactions,
including the purchase of 6.25 million shares of the Company's Common
Stock by Titus at a purchase price of $4 per share.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERPLAY ENTERTAINMENT CORP.
Date: August 12, 1999 By: /s/ BRIAN FARGO
-----------------------
Brian Fargo,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999 By: /s/ MANUEL MARRERO
--------------------
Manuel Marrero,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
33
<PAGE>
EXHIBIT 10.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTERPLAY ENTERTAINMENT CORP.
------------------------------------
STOCK PURCHASE AGREEMENT
------------------------------------
6,250,000 SHARES OF COMMON STOCK
Dated as of July 20, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Authorization Of Investor Stock........................................... 1
2. Sale And Purchase Of Investor Stock....................................... 1
3. Closing; Termination...................................................... 2
3.1 Closing............................................................. 2
3.2 Termination......................................................... 2
4. Register Of Investor Stock; Restrictions On Transfer Of Securities;
Removal Of Restrictions On Transfer Of Investor Stock............... 2
4.1 Register Of Investor Stock.......................................... 2
4.2 Restrictions On Transfer............................................ 3
4.3 Removal Of Transfer Restrictions.................................... 4
5. Representations And Warranties By The Company............................. 4
5.1 Organization, Standing, Etc......................................... 5
5.2 Qualification....................................................... 5
5.3 Capital Stock....................................................... 5
5.4 Investor Stock...................................................... 6
5.5 Indebtedness For Borrowed Money..................................... 6
5.6 Shareholder List.................................................... 6
5.7 Corporate Acts And Proceedings...................................... 7
5.8 Compliance With Laws And Other Instruments.......................... 7
5.9 Binding Obligations................................................. 7
5.10 Securities Laws.................................................... 7
5.11 No Brokers Or Finders.............................................. 8
5.12 Financial Statements............................................... 8
5.13 Changes............................................................ 8
5.14 Material Agreements Of The Company................................. 9
5.15 Employees.......................................................... 9
5.16 Tax Returns And Audits............................................. 9
5.17 Patents And Other Intangible Assets................................ 10
5.18 Employment Benefit Plans; Erisa.................................... 11
5.19 Title To Property And Encumbrances; Leases......................... 11
5.20 Condition Of Properties............................................ 12
5.21 Insurance Coverage................................................. 12
5.22 Litigation......................................................... 12
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.23 Registration Rights............................................... 12
5.24 Licenses.......................................................... 12
5.25 Interested Party Transactions..................................... 13
5.26 Minute Books...................................................... 13
5.27 Computer Software................................................. 13
5.28 Interplay Web Site And Systems.................................... 13
5.29 Product Returns................................................... 14
5.30 Disclosure........................................................ 14
6. Representations And Warranties Of Investor............................... 14
6.1 Organization, Standing, Etc........................................ 14
6.2 Corporate Acts And Proceedings..................................... 14
6.3 Compliance With Laws And Other Instruments......................... 14
6.4 Binding Obligations................................................ 14
6.5 No Brokers Or Finders.............................................. 15
7. Conditions Of Parties' Obligations....................................... 15
7.1 Conditions Of Investor's Obligations At The Closing................ 15
(a) No Errors, Etc................................................. 15
(b) Compliance With Agreement...................................... 15
(c) No Default..................................................... 15
(d) Certificate Of Company......................................... 15
(e) Opinion Of The Company's Counsel............................... 15
(f) Qualification Under State Securities Laws...................... 15
(g) Supporting Documents........................................... 15
(h) Proceedings And Documents...................................... 16
(i) Employment Agreements.......................................... 16
(j) Lender's Consent............................................... 16
(k) Waiver Of Existing Rights Agreement............................ 16
(l) Government And Other Consents.................................. 16
(m) Stockholder Agreement.......................................... 16
(n) Exchange Agreement............................................. 17
(o) Termination Of Shareholders' Agreement......................... 17
(p) Operating Plan................................................. 17
(q) Universal Option............................................... 17
7.2 Conditions Of Company's Obligations................................ 17
8. Covenants Of The Company And Fargo....................................... 17
8.1 Maintain Insurance................................................. 17
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.2 Compliance With Initial Purchase Agreement........................................ 17
8.3 Compliance With Section 7......................................................... 17
8.4 Use Of Proceeds................................................................... 18
8.5 Exclusivity....................................................................... 18
8.6 Restriction On Transfer Of Fargo's Common Stock................................... 18
8.7 Fargo Voting Covenant............................................................. 18
8.8 HSR Filing........................................................................ 18
8.9 Development Of Extended Operating Plan............................................ 18
8.10 Maintenance of Distribution Agreements; Negotiations for
Distribution Agreement............................................................ 19
9. Covenants Of Investor................................................................... 19
9.1 Compliance With Legal Requirements................................................ 19
9.2 Additional Financing.............................................................. 19
9.3 Compliance With Initial Purchase Agreement........................................ 19
9.4 Maintenance of Distribution Arrangements; Negotiations For
Distribution Agreement............................................................ 19
10. Registration Of Investor Stock.......................................................... 20
10.1 Required Registration............................................................ 20
10.2 Registration Procedures.......................................................... 20
10.3 Expenses......................................................................... 21
10.4 Indemnification.................................................................. 22
10.5 Reporting Requirements Under The Exchange Act.................................... 23
10.6 Investor Information............................................................. 24
10.7 Transferability Of Registration Rights........................................... 24
10.8 Suspension Of Registration Obligations In Initial Purchase
Agreement; Reinstatement Of Registration Obligations In
Event Of Termination............................................................. 24
11. Enforcement............................................................................. 24
11.1 Survival Of Representations And Warranties....................................... 24
11.2 Indemnification.................................................................. 24
11.3 Injunctive Relief................................................................ 27
11.4 No Implied Waiver................................................................ 27
12. Rights Of First Refusal................................................................. 27
12.1 Subsequent Offerings............................................................. 27
12.2 Exercise Of Rights............................................................... 27
12.3 Issuance Of Equity Securities To Other Persons................................... 27
12.4 Excluded Securities.............................................................. 28
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
12.5 Termination Of Rights.................................................... 28
13. Definitions..................................................................... 28
14. Miscellaneous................................................................... 31
14.1 Waivers And Amendments................................................... 31
14.2 Rights Of Investor....................................................... 32
14.3 Notices.................................................................. 32
14.4 Severability............................................................. 33
14.5 Assignment; Parties In Interest.......................................... 33
14.6 Headings................................................................. 34
14.7 Choice Of Law; Jurisdiction And Venue.................................... 34
14.8 Publicity................................................................ 34
14.9 Counterparts............................................................. 34
14.10 Entire Agreement; Effect On Initial Purchase Agreement................... 34
14.11 Attorneys' Fees.......................................................... 34
14.12 Arbitration.............................................................. 35
</TABLE>
iv
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of July 20,
---------
1999 among INTERPLAY ENTERTAINMENT CORP., a Delaware corporation (the
"Company"), TITUS INTERACTIVE SA, a French corporation ("Titus" or the
------- -----
"Investor"), and to the extent expressly provided herein, BRIAN FARGO, an
--------
individual ("Fargo"). Capitalized terms not otherwise defined herein shall have
-----
the meanings ascribed thereto in Section 13 hereof.
R E C I T A L S
- - - - - - - -
A. The Company, Investor and Fargo have previously entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") dated March 18, 1999,
------------------------
whereby, among other things, the Company agreed to sell and Investor agreed to
purchase up to Five Million (5,000,000) Shares of the Company's Common Stock (as
defined below), and the parties consummated the purchase and sale contemplated
by the Stock Purchase Agreement.
B. The Stock Purchase Agreement contemplated a merger or other business
combination between the Company and Investor, referred to in the Stock Purchase
Agreement as a "Permitted Transaction." Subsequent to the consummation of the
---------------------
Initial Purchase Agreement, the Company and Investor entered into a Letter of
Intent as of May 12, 1999 (the "Letter of Intent") whereby, among other things,
----------------
the Company and Investor entered into a nonbinding expression of intent with
respect to a Permitted Transaction and amended the Stock Purchase Agreement in
certain limited respects. The Stock Purchase Agreement, as amended by the
Letter of Intent, shall be referred to herein from time to time as the "Initial
-------
Purchase Agreement."
- ------------------
C. The parties hereby desire to effect a Permitted Transaction, on the
terms and conditions set forth herein.
THE PARTIES hereby agree as follows:
1. Authorization of Investor Stock. The Company has authorized the issue
-------------------------------
and sale of Six Million Two Hundred Fifty Thousand (6,250,000) shares (the
"Investor Stock") of its Common Stock, par value $.001 per share ("Common
- --------------- ------
Stock").
- -----
2. Sale and Purchase of Investor Stock. Upon the terms and subject to
-----------------------------------
the conditions herein contained, the Company agrees to sell to Investor, and
Investor agrees to purchase from the Company, at the Closing (as hereinafter
defined) on the Closing Date (as hereinafter defined) the Investor Stock at a
price in the aggregate of Twenty-Five Million Dollars ($25,000,000) (the
"Purchase Payment"). The parties acknowledge that Investor has previously paid
- -----------------
the Company Five Million Dollars (the "Deposit"), in accordance with the Letter
-------
of Intent, which Deposit the Company shall repay in accordance with the
Convertible Promissory Note dated as of May 12, 1999 (the "Initial Note").
------------
Simultaneously with the execution of this Agreement, Investor shall make
additional payments to the Company as mutually agreed upon by the Company and
Investor, which amounts the Company shall repay in accordance with the
Convertible Promissory Note dated as of the date hereof (the "Additional Note").
---------------
<PAGE>
3. Closing; Termination.
--------------------
3.1 Closing. The closing of the sale to and purchase by Investor
-------
of the Investor Stock (the "Closing") shall occur at the offices of Paul,
-------
Hastings, Janofsky & Walker LLP, 555 South Flower Street, Twenty-Third Floor,
Los Angeles, California, at the hour of 10:00 A.M., Pacific time, on the first
business day after the date upon which all of the conditions to Investor's and
the Company's obligations hereunder have been satisfied (or waived in accordance
with the terms hereof), or at such later time or day as the Investor and the
Company shall agree (the "Closing Date"). At the Closing, the Company shall
------------
deliver to Investor a certificate evidencing the Investor Stock which shall be
registered in Investor's name, against delivery to the Company of payment by
check or wire transfer in an amount equal to (a) the Purchase Payment less (b)
the Deposit (the Net Purchase Payment"). Simultaneously therewith, each of the
--------------------
Initial Note and the Additional Note shall be tendered to the Company by the
Investor in satisfaction of the balance of the Purchase Payment.
3.2 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing Date by written notice from the terminating party,
delivered in accordance with Section 14.3, specifying the reason therefor:
(a) by mutual agreement of the parties hereto;
(b) by Investor if (i) any condition precedent to Closing set
forth in Section 7.1 of this Agreement has not been met on or before September
30, 1999, (ii) the Closing has not occurred on or before September 30, 1999 for
any reason other than (I) a material default by Investor in its obligations
hereunder or (II) failure to consummate the transactions contemplated by the
Exchange Agreement attached hereto as Exhibit E, where such failure is solely
---------
due to the inability of Investor to issue to Fargo the Exchanged Shares (as
described therein) as of such date, or (iii) the Company has committed any
material breach or default under the terms of this Agreement, which breach or
default is not cured within ten (10) days after Company's receipt of written
notice thereof;
(c) by the Company if (i) any condition precedent to Closing
set forth in Section 7.2 of this Agreement has not been met on or before
September 30, 1999, (ii) the Closing has not occurred on or before September 30,
1999 for any reason other than (I) a material default by the Company in its
obligations hereunder or (II) failure to consummate the transactions
contemplated by the Exchange Agreement attached hereto as Exhibit E, where such
---------
failure is solely due to the inability of Investor to issue to Fargo the
Exchanged Shares (as described therein) as of such date, or (iii) the Investor
has committed any material breach or default under the terms of this Agreement,
which breach or default is not cured within ten (10) days after Investor's
receipt of written notice thereof.
4. Register of Investor Stock; Restrictions on Transfer of Securities;
-------------------------------------------------------------------
Removal of Restrictions on Transfer of Investor Stock.
- -----------------------------------------------------
4.1 Register of Investor Stock. The Company or its duly appointed
---------------------------
agent shall maintain a register for the shares of Investor Stock, in which it
shall register the issue and sale of all such shares. All transfers of the
Investor Stock shall be recorded on the register maintained by the Company or
its agent, and the Company shall be
2
<PAGE>
entitled to regard the registered holder of the Investor Stock as the actual
holder of the Investor Stock so registered until the Company or its agent is
required to record a transfer of such Investor Stock on its register. Subject to
Section 4.2(c) hereof, the Company or its agent shall be required to record any
such transfer when it receives the shares of Investor Stock to be transferred
duly and properly endorsed by the registered holder thereof or by its attorney
duly authorized in writing.
4.2 Restrictions on Transfer.
------------------------
(a) Investor understands and agrees that the shares of
Investor Stock it will be acquiring have not been registered under the
Securities Act, and that accordingly they will not be fully transferable except
as permitted under various exemptions contained in the Securities Act, or upon
satisfaction of the registration and prospectus delivery requirements of the
Securities Act. Investor acknowledges that it must bear the economic risk of its
investment in the Investor Stock for an indefinite period of time (subject,
however, to the Company's obligation to effect the registration of the Investor
Stock under the Securities Act in accordance with this Agreement) since they
have not been registered under the Securities Act and therefore cannot be sold
unless they are subsequently registered or an exemption from registration is
available.
(b) Investor hereby represents and warrants to the Company
that (i) it is acquiring the Investor Stock for investment purposes only, for
its own account, and not as nominee or agent for any other Person, and not with
the view to, or for resale in connection with, any distribution thereof within
the meaning of the Securities Act, and (ii) it is an "accredited investor"
within the meaning of Regulation D of the Commission under the Securities Act.
(c) Investor hereby agrees with the Company as follows:
(i) Subject to Section 4.3 hereof, the certificates
evidencing the Investor Stock it has agreed to purchase, and each certificate
issued in transfer thereof, will bear the following legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and, except
as stated in an agreement between the holder of this certificate, or its
predecessor in interest, and the issuer corporation, such securities may
not be sold or transferred unless there is an effective registration
statement under such Act covering such securities or the issuer corporation
receives an opinion of counsel (which may be counsel for the issuer
corporation) stating that such sale or transfer is exempt from the
registration and prospectus delivery requirements of such Act."
(ii) The certificates representing such Investor Stock,
and each certificate issued in transfer thereof, will also bear any legend
required under any applicable state securities law.
(iii) Absent an effective registration statement under the
Securities Act, covering the disposition of the Investor Stock which Investor
acquires, Investor will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of any or
3
<PAGE>
all of the Investor Stock without first providing the Company with an opinion of
counsel (which may be counsel for the Company) to the effect that such sale,
transfer, assignment, pledge, hypothecation or other disposition will be exempt
from the registration and the prospectus delivery requirements of the Securities
Act and the registration or qualification requirements of any applicable state
securities laws, except that no such registration or opinion shall be required
with respect to (A) a transfer not involving a change in beneficial ownership,
(B) a transfer to an Affiliate of Investor, or (C) a sale to be effected in
accordance with Rule 144 of the Commission under the Securities Act (or any
comparable exemption).
(iv) Investor agrees that, if the Investor Stock is issued
in accordance herewith prior to the Final Valuation Date (as defined in Section
13 hereof), neither it nor any of its affiliates will, during the period between
the Closing Date and the Final Valuation Date, (A) 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 to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any of the Investor
Stock or (B) enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of the
Investor Stock, whether any such transaction described in clause (A) or (B)
above is to be settled by delivery of the Investor Stock, in cash or otherwise.
Investor agrees that the certificates evidencing the Investor Stock, if such
Investor Stock is issued during the period between the Closing Date and the
Final Valuation Date, and each certificate issued in transfer thereof, will bear
the following legend:
"The sale, pledge, hypothecation or transfer of the securities
represented by this certificate is subject to the terms and conditions
(including certain adjustment provisions) of a certain Stock Purchase
Agreement by and between the Corporation and the holder hereof. Copies of
such agreement may be obtained upon written request to the secretary of
the Corporation."
(v) Investor consents to the Company's making a notation
on its records or giving instructions to any transfer agent of the Investor
Stock in order to implement the restrictions on transfer of the Investor Stock
mentioned in this subsection (c).
4.3 Removal of Transfer Restrictions. Any legend endorsed on a
--------------------------------
certificate evidencing shares of Investor Stock pursuant to Section 4.2(c)(i)
hereof and any stop transfer instructions and record notations with respect to
such Investor Stock shall be removed and the Company shall issue a certificate
without such legend to the holder of such Investor Stock (a) if such Investor
Stock is registered under the Securities Act, or (b) if such Investor Stock may
be sold under Rule 144(k) of the Commission under the Securities Act or (c) if
such holder provides the Company with an opinion of counsel (which may be
counsel for the Company) reasonably acceptable to the Company to the effect that
a public sale or transfer of such Investor Stock may be made without
registration under the Securities Act.
5. Representations and Warranties by the Company. In order to induce
---------------------------------------------
Investor to enter into this Agreement and to purchase the Investor Stock, the
Company hereby covenants with, and represents and warrants to, Investor, as of
the date hereof,
4
<PAGE>
except as set forth on the Schedule of Exceptions delivered to Investor
concurrently herewith, as follows (unless the context otherwise requires, the
"Company" shall refer to the Company and its Subsidiaries, collectively):
5.1 Organization, Standing, etc. The Company is a corporation
----------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite power and authority to carry on its
business, to own and hold its properties and assets, to enter into this
Agreement, to issue the Investor Stock and to carry out the provisions hereof
and thereof. The copies of the Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws of the Company which have been
delivered to Investor prior to the execution of this Agreement are true and
complete and have not been amended or repealed. Subsidiaries of the Company are
set forth on Schedule 5.1.
------------
5.2 Qualification. The Company is duly qualified, licensed or
--------------
domesticated as a foreign corporation in good standing in each jurisdiction
wherein the nature of its activities or its properties owned or leased makes
such qualification, licensing or domestication necessary, except where the
failure to be so qualified would not have a Material Adverse Effect on the
Company.
5.3 Capital Stock. The authorized capital stock of the Company
-------------
consists of 50,000,000 shares of Common Stock, and 5,000,000 shares of Preferred
Stock, and the Company has no authority to issue any other capital stock. No
shares of Preferred Stock have been issued prior to the Closing; 22,770,712
shares of Common Stock are issued and outstanding, and such shares are duly
authorized, validly issued, fully paid and nonassessable. Except where the
failure to do so would not result in a Material Adverse Effect on the Company,
the offer, issuance and sale of the shares of Common Stock were (a) registered
or qualified under (or were exempt from the registration and prospectus delivery
requirements of) the Securities Act, (b) registered or qualified (or were exempt
from registration or qualification) under the registration or qualification
requirements of all applicable state securities laws, and (c) accomplished in
conformity with all other federal and applicable state securities laws, rules
and regulations. As of the date hereof, the Company has (A) reserved a total of
154,356 shares of Common Stock for issuance to employees, officers and directors
under a 1991 stock purchase plan, under which options to purchase a total of
154,356 shares have been granted, but neither exercised nor forfeited by the
holder thereof, (B) reserved a total of 353,050 shares of Common Stock for
issuance to employees, officers and directors under a 1994 stock option plan,
under which options to purchase a total of 353,050 shares have been granted, but
neither exercised nor forfeited by the holder thereof, and (C) reserved a total
of 2,353,425 shares of Common Stock for issuance to employees, officers and
directors under a 1997 stock incentive plan, under which options to purchase
1,905,700 shares have been granted, but neither exercised nor forfeited by the
holder thereof, (D) reserved a total of 200,000 shares of Common Stock for
issuance to employees and officers under an Employee Stock Purchase Plan, of
which 56,102 shares have been granted, but neither exercised nor forfeited by
the holder thereof, and (E) reserved a total of 572,874 shares of Common Stock
for issuance upon the exercise of options granted outside the Company's option
plans, of which 572,874 shares have been granted, but neither exercised nor
forfeited by the holder thereof. The Company has reserved a total of 400,000
shares for issuance upon exercise of outstanding warrants issued by the Company.
Under the terms thereof, to the extent that any outstanding award under the 1991
stock purchase plan or 1994 stock option plan expires or terminates prior to
exercise of such award in full, or if shares issued upon exercise are
repurchased by the Company,
<PAGE>
the unexercised portion or repurchased shares shall be added to the pool of
shares under the 1997 stock incentive plan and shall thereafter be available for
grant under the terms of such 1997 stock incentive plan. Each of the 1991 stock
purchase plan and 1994 stock option plan has been terminated with respect to
future grants of shares of Common Stock. Except as expressly provided in the
Initial Purchase Agreement and this Agreement, the Company has no outstanding
subscription, option, warrant, call, contract, demand, commitment, convertible
security or other instrument, agreement or arrangement of any character or
nature whatsoever under which the Company is or may be obligated to issue Common
Stock, Preferred Stock or other Equity Security (as hereinafter defined) of any
kind. Neither the offer nor the issuance or sale of the Investor Stock
constitutes or will constitute an event, under any Equity Security or any anti-
dilution or similar provision of any agreement or instrument to which the
Company is a party or by which it is bound or affected, which shall either
increase the number of shares or units of Equity Securities issuable upon
conversion of any securities (whether stock or Indebtedness for Borrowed Money
(as hereinafter defined)) or upon exercise of any warrant or right to subscribe
to or purchase any stock or similar security (including Indebtedness for
Borrowed Money), or decrease the consideration per share or unit of Equity
Security to be received by the Company upon such conversion or exercise.
5.4 Investor Stock. The Investor Stock has been duly authorized
--------------
and validly issued, and upon payment to the Company of the Net Purchase Payment
and cancellation of the Initial Note and the Additional Note at the Closing,
will be fully paid and nonassessable Common Stock, free and clear of all Liens
and restrictions, other than Liens that might have been created by Investor and
restrictions imposed by (i) Section 4.2 hereof, (ii) applicable state securities
laws, (iii) the Securities Act and (iv) the Stockholder Agreement.
5.5 Indebtedness for Borrowed Money. The Company has no
------------------------------
Indebtedness for Borrowed Money except as disclosed on the Balance Sheet or on
Schedule 5.5 hereto.
- ------------
5.6 Shareholder List. Schedule 5.6 hereto contains a true and
---------------- ------------
complete list of the names and addresses of all persons or entities known to the
Company, based on Schedules 13D and/or 13G filed by such persons or entities or
otherwise based on the Company's actual knowledge, to be the beneficial holders
of more than five percent (5%) of the outstanding Common Stock and of the
holders of all outstanding options, warrants or other rights to purchase from
the Company more than five percent (5%) of Common Stock. With respect to
holders of more than 5% of Common Stock, Schedule 5.6 contains, to the Company's
------------
knowledge, a true and complete description of the number of shares held by each
such holder. With respect to each option set forth on such Schedule, Schedule
--------
5.6 sets forth the date of grant, the number of shares subject thereto, the
- ---
exercise price, vesting schedule and expiration date. With respect to the
warrants set forth on such Schedule, Schedule 5.6 sets forth the date of issue
------------
of each warrant, the number of shares of Common Stock subject to the warrant,
the exercise price and expiration date. Except as provided on Schedule 5.6, and
------------
except for the Investor, no holder of Common Stock or any other security of the
Company or any other Person is entitled to any preemptive right, right of first
refusal or similar right from the Company or, to the Company's knowledge, any
Person as a result of the issuance of the Investor Stock or otherwise. Except
as provided on Schedule 5.6, there is no voting trust, agreement or arrangement
------------
among any of the beneficial holders of Common Stock of the Company affecting the
exercise of the voting rights of such stock.
6
<PAGE>
5.7 Corporate Acts and Proceedings. All corporate acts and
------------------------------
proceedings required for the authorization, execution and delivery of this
Agreement, the offer, issuance and delivery of the Investor Stock and the
performance of this Agreement have been lawfully and validly taken or will have
been so taken prior to the Closing.
5.8 Compliance with Laws and Other Instruments. The business and
------------------------------------------
operations of the Company have been and are being conducted in accordance with
all applicable federal, state and local laws, rules and regulations, except to
the extent that noncompliance with laws, rules and regulations would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The execution, delivery and performance by the Company of this Agreement (a)
will not require from the Board or stockholders of the Company any consent or
approval that has not been validly and lawfully obtained, (b) will not require
any authorization, consent, approval, license, exemption of or filing or
registration with any domestic or, to best of the Company's knowledge, foreign,
court or governmental department, commission, board, bureau, agency or
instrumentality of government, except such as shall have been lawfully and
validly obtained prior to the Closing, (c) will not cause the Company to violate
or contravene (i) any provision of law, (ii) any rule or regulation of any
agency or government, domestic or foreign, (iii) any order, writ, judgment,
injunction, decree, determination or award, or (iv) any provision of the Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws of the
Company, (d) will not violate or be in conflict with, result in a breach of or
constitute (with or without notice or lapse of time or both) a default under,
any indenture, loan or credit agreement, note agreement, deed of trust,
mortgage, security agreement or other agreement, lease or instrument, commitment
or arrangement to which the Company is a party or by which the Company or any of
its properties, assets or rights is bound or affected, which in any such case
would have a Material Adverse Effect on the Company, and (e) will not result in
the creation or imposition of any Lien, other than Liens in favor of the
Investor. The Company is not in violation of, or (with or without notice or
lapse of time or both) in default under, any term or provision of its Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws or of
any indenture, loan or credit agreement (including any agreement evidencing
Indebtedness for Borrowed Money), note agreement, deed of trust, mortgage,
security agreement or other material agreement, lease or other instrument,
commitment or arrangement to which the Company is a party or by which any of the
Company's properties, assets or rights is bound or affected, which in any such
case would have a Material Adverse Effect on the Company. The Company is not
subject to any restriction of any kind or character which prohibits the Company
from entering into this Agreement or would prevent its performance of or
compliance with all or any part of this Agreement or the consummation of the
transactions contemplated hereby or thereby.
5.9 Binding Obligations. This Agreement constitutes the legal,
-------------------
valid and binding obligation of the Company and is enforceable against the
Company in accordance with its terms, except as such enforcement is limited by
bankruptcy, insolvency and other similar laws affecting the enforcement of
creditors' rights generally.
5.10 Securities Laws. Based in part upon the representations of
---------------
Investor in Section 4.2, the offer, issue and sale of the Investor Stock are and
will be exempt from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
7
<PAGE>
5.11 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against the
Company or the Investor for any commission, fee or other compensation as a
finder or broker, or in any similar capacity based upon obligations incurred by
the Company.
5.12 Financial Statements. Included in the Company's Annual Report
--------------------
on Form 10-K for the year ended December 31, 1998 is the Company's audited
balance sheet (the "Balance Sheet") as of December 31, 1998 (the "Balance Sheet
------------- -------------
Date"), and the audited statement of operations for the twelve-month period then
- ----
ended. Included in the Company's Registration Statement on Form S-1 effective
June 19, 1998 (the "Form S-1") are the Company's audited balance sheets as of
--------
April 30, 1996 and 1997, and December 31, 1997, and the audited statements of
operations, cash flow and shareholders' equity for each of the periods then
ended, together with the related opinion thereon of Arthur Andersen LLP,
independent certified public accountants. Included in the Company's Report on
10-Q for the quarterly period ended March 31, 1999 (the "Form 10-Q") are the
---------
Company's unaudited balance sheet as of March 31, 1999 and the unaudited
statement of operations for the three-month period then ended. The foregoing
financial statements (i) are in accordance with the books and records of the
Company, (ii) present fairly in all material respects, taken as a whole, the
financial condition of the Company at the Balance Sheet Date and other dates
therein specified and the results of its operations and cash flow for the
periods therein specified, and (iii) have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with
prior accounting periods ("GAAP"). Specifically, but not by way of limitation,
----
the Balance Sheet discloses all of the material debts, liabilities and
obligations of any nature (whether absolute, accrued, contingent or otherwise
and whether due or to become due) of the Company at the Balance Sheet Date which
must be disclosed on a balance sheet in accordance with GAAP.
5.13 Changes. Since the Balance Sheet Date, except as disclosed on
-------
Schedule 5.13 hereto, the Company has not (a) incurred any material debts,
- -------------
obligations or liabilities, absolute, accrued, contingent or otherwise, whether
due or to become due in excess of $250,000, except current liabilities incurred
in the usual and ordinary course of business, none of which (individually or in
the aggregate) materially and adversely affects the business, finances,
properties or prospects of the Company, (b) discharged or satisfied any Liens
other than those securing, or paid any obligation or liability other than,
current liabilities shown on the Balance Sheet and current liabilities incurred
since the Balance Sheet Date, in each case in the usual and ordinary course of
business, (c) mortgaged, pledged or subjected to Lien any of its assets,
tangible or intangible, (d) sold, transferred or leased any of its assets of
value exceeding $250,000 except in the usual and ordinary course of business,
(e) canceled or compromised any debt or claim, or waived or released any right,
of value exceeding $250,000, (f) suffered any physical damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the properties, business or prospects of the Company, (g) encountered any labor
difficulties or labor union organizing activities, (h) made or granted any wage
or salary increase to any executive officer other than in the ordinary course of
business or entered into any employment agreement, (i) issued or sold any shares
of capital stock or other securities or granted any options with respect
thereto, (j) modified any Equity Security, except to the extent disclosed on
Schedule 5.6 hereto, (k) declared or paid any dividends on or made any other
- ------------
distributions with respect to, or purchased or redeemed, any of its outstanding
Equity Securities, (l) suffered or experienced any change in, or condition
affecting, the condition (financial or otherwise) of the Company as a whole
other than
8
<PAGE>
changes, events or conditions in the usual and ordinary course of its business,
none of which (either by itself or in conjunction with all such other changes,
events and conditions) has been or could reasonably be expected to be materially
adverse, (m) made any change in the accounting principles, methods or practices
followed by it or depreciation or amortization policies or rates theretofore
adopted, or (n) entered into any agreement, or otherwise obligated itself, to do
any of the foregoing.
5.14 Material Agreements of the Company. Except as expressly set
----------------------------------
forth in this Agreement, the Balance Sheet, as disclosed in the Index (compiled
pursuant to Item 601 of Regulation S-K of the Commission) to the Company's
filings under the Securities Act and the Exchange Act or as disclosed on
Schedule 5.14 hereto, the Company is not a party to any written or oral
- -------------
agreement, instrument or arrangement not made in the ordinary course of business
that is material to the Company and is either (a) an agreement with any labor
---
union, (b) an agreement for the purchase of fixed assets or for the purchase of
materials, supplies or equipment over $250,000, (c) an agreement for the
employment of any officer on other than an at-will basis, (d) an indenture, loan
or credit agreement, note agreement, deed of trust, mortgage, security
agreement, promissory note or other agreement or instrument relating to or
evidencing Indebtedness for Borrowed Money in excess of $250,000 or subjecting
any asset or property of the Company to any Lien, (e) a guaranty of any
Indebtedness, (f) a lease or agreement under which the Company is lessee of or
holds or operates any property, real or personal, owned by any other Person
under which payments to such Person exceed $250,000 per annum, (g) a lease or
agreement under which the Company is lessor or permits any Person to hold or
operate any property, real or personal, owned or controlled by the Company
having a value over $250,000 other than in the ordinary course of business, (h)
an agreement granting any preemptive right, right of first refusal or similar
right to any Person, (i) a covenant not to compete or other restriction on its
ability to conduct a business or engage in any other activity, or (j) an
agreement to register securities under the Securities Act. To the Company's
knowledge, all parties having material contractual arrangements with the Company
are in substantial compliance therewith, and none is in default in any material
respect thereunder, except for noncompliance or defaults which will not have a
Material Adverse Effect on the Company.
5.15 Employees. Fargo and David Perry (collectively, "Designated
--------- ----------
Key Employees") are in the full-time employ of the Company and/or one or more of
- -------------
its Subsidiaries. To the best of the Company's knowledge, no Designated Key
Employee has any plans to terminate his employment with the Company or a
Subsidiary, as the case may be, and the Company has no intention of terminating
the employment of any Designated Key Employee. To the best of the Company's
knowledge, no Designated Key Employee or any other employee of the Company is a
party to or is otherwise bound by any agreement or arrangement (including,
without limitation, any license, covenant, or commitment of any nature), or
subject to any judgment, decree, or order of any court or administrative agency,
(a) that would conflict with such employee's obligation diligently to promote
and further the interests of the Company or (b) that would conflict with the
Company's business as now conducted or as proposed to be conducted. The Company
has complied in all material respects with all laws relating to the employment
of labor, including provisions relating to wages, hours, equal opportunity,
collective bargaining and payment of Social Security and other taxes, and the
Company has encountered no material labor difficulties.
5.16 Tax Returns and Audits. All required federal, state and local
----------------------
tax returns of the Company have been accurately prepared and duly and timely
filed, and
9
<PAGE>
all federal, state and local taxes required to be paid with respect to the
periods covered by such returns have been paid. The Company is not delinquent in
the payment of any material tax, assessment or governmental charge. Except as
set forth on Schedule 5.16 hereto, there is not currently pending against the
-------------
Company any tax deficiency proposed or assessed against it and the Company has
not executed any waiver of any statute of limitations on the assessment or
collection of any tax or governmental charge for any tax period for which the
statute of limitations has not expired. Except as set forth on Schedule 5.16
-------------
hereto, none of the Company's federal income tax returns nor any state or
foreign income or franchise tax returns has ever been audited by governmental
authorities in any of the last five (5) tax years. The reserves for taxes,
assessments and governmental charges reflected in the Balance Sheet are and will
be sufficient for the payment of all unpaid taxes, assessments and governmental
charges payable by the Company with respect to the period ended on the Balance
Sheet Date.
5.17 Patents and Other Intangible Assets.
-----------------------------------
(a) Except as disclosed on Schedule 5.17 hereto, the Company
-------------
(i) owns or has the right to use all patents, trademarks, service marks, trade
names, copyrights, licenses and rights with respect to the foregoing, used in or
necessary for the conduct of its business as now conducted and proposed to be
conducted, (ii) to the Company's knowledge, is not infringing upon or otherwise
acting adversely to the right or claimed right of any Person under or with
respect to any patent, trademark, service mark, trade name, copyright or license
with respect thereto, where such infringement would have a Material Adverse
Effect on the Company.
(b) The Company owns or has the right to use all product
rights, manufacturing rights, trade secrets, including know-how, negative know-
how, formulas, patterns, compilations, programs, devices, methods, techniques,
processes, inventions, designs, technical data, computer software (in both
source code and object code forms and all documentation therefor), including
without limitation the Operational Software (as hereinafter defined) (all of the
foregoing of which are collectively referred to herein as "intellectual
------------
property") required for or incident to the conduct of the Company's business, as
- --------
it is presently conducted, in each case free and clear of any right, Lien or
claim of others, including without limitation former employers of its employees,
except for rights reserved by the licensors of such intellectual property and
rights granted by the Company pursuant to license, publishing and distribution
agreements, and except where such right, lien or claim would not have a Material
Adverse Effect on the Company.
(c) Since its organization, the Company has taken reasonable
security measures to protect the secrecy, confidentiality and value of all
intellectual property and all Inventions (as defined below). Without limiting
the generality of the foregoing, except as set forth on Schedule 5.17, each of
-------------
the Company's present employees has signed an agreement with the Company in the
form provided to Investor, and each of the Company's past employees has signed
an agreement with the Company substantially in the form provided to Investor,
except, in either such case, where the failure to do so would not have a
Material Adverse Effect on the Company. As used herein, "Inventions" means all
----------
inventions, developments and discoveries which during the period of an
employee's or other Person's service to the Company he or she makes or conceives
of, either solely or jointly with others, that relate to any subject matter with
which his or her work for the Company may be concerned, or relate to or are
connected with the business, products, services or projects of the Company, or
relate to
10
<PAGE>
the actual or demonstrably anticipated research or development of the Company or
involve the use of the Company's time, material, facilities or trade secret
information.
(d) Except for license, publishing and distribution agreements
with third parties entered into in the ordinary course of business, and except
as disclosed on Schedule 5.17 hereto, the Company has not sold, transferred,
-------------
assigned, licensed or subjected to any Lien, any intellectual property, trade
secret, know-how, invention, design, process, computer software or technical
data, or any interest therein, necessary for the development, manufacture, use,
operation or sale of any product listed on Schedules 5.27(a) and 5.27(b) hereto.
-----------------------------
(e) No director, officer, employee, agent or shareholder of
the Company owns or has any right in the intellectual property of the Company,
or any patents, trademarks, service marks, trade names, copyrights, licenses or
rights with respect to the foregoing, or any inventions, developments or
discoveries used in or necessary for the conduct of the Company's business as
now conducted and as proposed to be conducted, which could reasonably be
expected to have a Material Adverse Effect on the Company.
(f) The Company has not received any communication alleging or
stating that the Company or any of its employees or other agents has violated or
infringed, or by conducting business as proposed, would violate or infringe, any
patent, trademark, service mark, trade name, copyright, trade secret,
proprietary right, process or other intellectual property of any other Person,
which could reasonably be expected to have a Material Adverse Effect on the
Company.
5.18 Employment Benefit Plans; ERISA. Except for the Interplay
-------------------------------
Productions 401(k) Profit Sharing Plan (the "Plan"), as described in Schedule
---- --------
5.18, the Company does not maintain or make contributions to any pension, profit
- ----
sharing or other employee retirement benefit plan. The Plan has been maintained
in compliance with all applicable laws, ordinances, rules, regulations, permits,
orders, writs, judgments, injunctions, decrees, determinations and awards of any
agency, government, or arbitrator. The Company has no material liability with
respect to the Plan or any other such plan (including, without limitation, any
unfunded liability or any accumulated funding deficiency) or any material
liability to the Pension Benefit Guaranty Corporation or under Title IV of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with
-----
respect to the Plan or any multi-employer pension benefit plan, nor would the
Company have any such liability if the Plan or any multi-employer plan were
terminated or if the Company withdrew, in whole or in part, from the Plan or any
multi-employer plan. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated by this Agreement will
constitute a termination of employment or other event entitling any person to
any additional or other benefits, or that would otherwise modify benefits or the
vesting of benefits, provided under the Plan.
5.19 Title to Property and Encumbrances; Leases. The Company has
------------------------------------------
good and marketable title to all of its properties and assets, including without
limitation the properties and assets reflected in the Balance Sheet and the
properties and assets used in the conduct of its business, except for properties
disposed of in the ordinary course of business since the Balance Sheet Date and
except for properties held under valid and subsisting leases which are in full
force and effect and which are not in default, subject to no Lien, except those
which are shown and described on the Balance Sheet and
11
<PAGE>
except for Permitted Liens (as hereinafter defined). All material leases under
which the Company is lessee of any real or personal property are valid,
enforceable and effective in accordance with their terms; there is not under any
such lease any existing or claimed default by the Company or event or condition
which with notice or lapse of time or both would constitute a default by the
Company. Except as disclosed on Schedule 5.19 hereto, no material lease under
-------------
which the Company is lessee of any real property contains any provision which
either (i) treats a sale or transfer of any or all of the outstanding stock of
the Company or a merger of the Company with another Person as an assignment of
the Company's leasehold interest, or (ii) otherwise requires the consent of the
lessor in the event of any such sale, transfer or merger.
5.20 Condition of Properties. All facilities, machinery,
-----------------------
equipment, fixtures, vehicles and other properties owned, leased or used by the
Company with fair market value in excess of $250,000 are in good operating
condition and repair, subject to ordinary wear and tear, and are adequate and
sufficient for the Company's business.
5.21 Insurance Coverage. There is in full force and effect one or
------------------
more policies of insurance issued by insurers of recognized responsibility,
insuring the Company and its properties and business against such losses and
risks, and in such amounts, as are customary in the case of corporations engaged
in the same or similar business and similarly situated. The Company has not
been refused any insurance coverage sought or applied for, and the Company has
no knowledge of any facts that cause it to believe that the Company will be
unable to renew its existing insurance coverage as and when the same shall
expire upon terms at least as favorable as those presently in effect, other than
possible increases in premiums that do not result from any act or omission of
the Company.
5.22 Litigation. Except as disclosed on Schedule 5.22 hereto,
---------- -------------
there is no legal action, suit, arbitration or other legal, administrative or
other governmental investigation, inquiry or proceeding (whether federal, state,
local or foreign) pending or, to the Company's knowledge, threatened against or
affecting (i) the Company or its properties, assets or business (existing or
contemplated), or (ii) any Designated Key Employee, before any court or
governmental department, commission, board, bureau, agency or instrumentality or
any arbitrator, which if adversely determined would have a Material Adverse
Effect on the Company. Except as disclosed on Schedule 5.22 hereto, the Company
-------------
is not aware of any fact which might result in or form the basis for any such
action, suit, arbitration, investigation, inquiry or other proceeding, which if
adversely determined would have a Material Adverse Effect on the Company.
Neither the Company nor, to the best of the Company's knowledge, any of the Key
Employees is in default with respect to any order, writ, judgment, injunction,
decree, determination or award of any court or of any governmental agency or
instrumentality (whether federal, state, local or foreign).
5.23 Registration Rights. Except as set forth on Schedule 5.23,
------------------- -------------
other than under this Agreement and the Initial Purchase Agreement, the Company
has not agreed to register under the Securities Act any of its authorized or
outstanding securities.
5.24 Licenses. The Company possesses from the appropriate agency,
--------
commission, board and governmental body and authority, whether state, local or
federal, all licenses, permits, authorizations, approvals, franchises and rights
which are necessary for the Company to engage in the business currently
conducted by it and
12
<PAGE>
proposed to be conducted (except where the failure to so hold would not have a
Material Adverse Effect on the Company), including without limitation the
development, manufacture, use, sale and marketing of its existing and proposed
products and services; and all such certificates, licenses, permits,
authorizations and rights have been lawfully and validly issued and are in full
force and effect.
5.25 Interested Party Transactions. Except as disclosed on
-----------------------------
Schedule 5.25 hereto, no officer, director or 5% shareholder of the Company or
- -------------
any Affiliate of any such Person or the Company has, either directly or
indirectly, (a) a material interest in any Person which (i) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (ii) purchases from or sells or furnishes to the
Company any goods or services, or (b) a beneficial interest in any transaction,
contract or agreement to which the Company is a party or by which it is bound or
affected.
5.26 Minute Books. The minute books of the Company provided to
------------
Paul, Hastings, Janofsky & Walker LLP, special counsel for the Investor, contain
all resolutions adopted by directors and stockholders since the incorporation of
the Company and fairly and accurately reflect, in all material respects, all
matters and transactions referred to in such minutes.
5.27 Computer Software.
-----------------
(a) Each of the computer software programs developed by the
Company that are listed on Schedule 5.27(a) hereto (the "Operational Software")
---------------- --------------------
is functional, complete and operational in all material respects in accordance
with its specifications, has been documented in accordance with the Company's
standard practices, and the Company possesses both the source code and object
code versions thereof.
(b) Attached as Schedule 5.27(b) hereto is a true and complete
----------------
list of all computer software games currently in active development by or on
behalf of the Company (the "Developing Software"). Schedule 5.27(b) also sets
------------------- ----------------
forth whether each such game is being internally or externally developed and, if
externally developed, the name of the third party developer.
5.28 Interplay Web Site and Systems.
------------------------------
(a) The Company owns and has the right to communicate and
publish its "Interplay" Internet product offering (the "Web Site") and conduct
--------
business on the World Wide Web at the Internet address "interplay.com" and in
connection therewith to use the registered service mark and trade name
"Interplay" and in so doing is not acting in conflict with any patent,
trademark, service mark, trade name, copyright, trade secret, license or other
proprietary right with respect thereto, except where such conflict would not
have a Material Adverse Effect on the Company.
(b) The Company has not received any communication from any
Person that the Web Site or the conduct of the Company's business is in
violation of any law, rule or regulation or in conflict with any patent,
trademark, service mark, trade name, copyright, trade secret, license or other
proprietary right with respect thereto, except where such violation or conflict
would not have a Material Adverse Effect on the Company.
13
<PAGE>
5.29 Product Returns. Schedule 5.29 hereto sets forth the
--------------- -------------
Company's experience with respect to the return of any of its products sold or
leased for the three (3) year period ended on December 31, 1998 and for the
three (3) month period ended March 31, 1999.
5.30 Disclosure. To the Company's knowledge, the information
----------
contained in this Agreement, in the Form 10-Q, the Balance Sheet and the Form S-
1, and in any writing furnished pursuant hereto or in connection herewith, taken
as a whole, is true, complete and correct (except that with respect to the Form
10-Q, the Balance Sheet and the Form S-1, the information contained therein
shall be true, complete and correct as of the date thereof), and does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or herein or necessary to make the statements
therein or herein, in light of the circumstances under which they were made, not
misleading.
6. Representations and Warranties of Investor. In order to induce the
------------------------------------------
Company to enter into this Agreement and to issue the Investor Stock, Investor
hereby covenants with, and represents and warrants to, the Company as follows:
6.1 Organization, Standing, etc Investor is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of France, and
has all requisite corporate power and authority to enter into this Agreement,
and to carry out the provisions hereof and thereof.
6.2 Corporate Acts and Proceedings. All corporate acts and
------------------------------
proceedings required for the authorization, execution and delivery of this
Agreement by Investor, and the performance of this Agreement by Investor, have
been lawfully and validly taken or will have been so taken prior to the Closing.
6.3 Compliance with Laws and Other Instruments. The execution,
------------------------------------------
delivery and performance by Investor of this Agreement (a) will not require from
the board of directors or stockholders of Investor any consent or approval that
has not been validly and lawfully obtained, (b) will not require any
authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality of government, except such as shall have
lawfully and validly obtained prior to the Closing, (c) will not cause Investor
to violate or contravene (i) any provision of law, (ii) any rule or regulation
of any agency or government, domestic of foreign, (iii) any order, writ,
judgment, injunction, decree, determination or award binding upon Investor, or
(iv) any provision of the charter documents of Investor, (d) will not violate or
be in conflict with, result in a breach of or constitute (with or without notice
or lapse of time or both) a default under, any indenture, loan or credit
agreement, note agreement, deed of trust, mortgage, security agreement or other
material agreement, lease or instrument, commitment or arrangement to which
Investor is a party or by which Investor or any of its properties, assets or
rights is bound or affected, which in any case would have a Material Adverse
Effect on Investor.
6.4 Binding Obligations. This Agreement constitutes the legal,
-------------------
valid and binding obligations of Investor and is enforceable against Investor in
accordance with its terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally.
14
<PAGE>
6.5 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against the
Company or Investor for any commission, fee or other compensation as a finder or
broker, or in any similar capacity, except for Concordia Capital Technology
Group, Inc., whose fees will be the responsibility of the Investor.
7. Conditions of Parties' Obligations.
----------------------------------
7.1 Conditions of Investor's Obligations at the Closing. The
---------------------------------------------------
obligation of Investor to purchase and pay for the Investor Stock is subject to
the fulfillment prior to or on the Closing Date of the following conditions, any
of which may be waived in whole or in part by Investor:
(a) No Errors, etc. The representations and warranties of the
--------------
Company under this Agreement shall be deemed to have been made again on the
Closing Date and shall then be true and correct in all material respects (except
to the extent already qualified as to materiality, in which case such
representations and warranties shall then be true and correct in all respects).
(b) Compliance with Agreement. The Company shall have
-------------------------
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it on or before the Closing Date.
(c) No Default. There shall not exist on the Closing Date any
----------
Default (as hereinafter defined) or Event of Default (as hereinafter defined) or
any event or condition which, with the giving of notice or lapse of time or
both, would constitute a Default or Event of Default.
(d) Certificate of Company. The Company shall have delivered
----------------------
to Investor a certificate dated the Closing Date, executed by the Chief
Executive Officer and Chief Financial Officer of the Company, certifying the
satisfaction of the conditions specified in subsections (a), (b) and (c) of this
Section 7.1.
(e) Opinion of the Company's Counsel. The Investor shall have
--------------------------------
received from Stradling Yocca Carlson & Rauth, a professional corporation,
counsel for the Company, a favorable opinion dated the Closing Date
substantially in the form of Exhibit A hereto.
---------
(f) Qualification Under State Securities Laws. All
-----------------------------------------
registrations, qualifications, permits and approvals required under applicable
state securities laws shall have been obtained for the lawful execution,
delivery and performance of this Agreement, including without limitation the
offer, sale, issue and delivery of the Investor Stock.
(g) Supporting Documents. Investor shall have received the
--------------------
following:
(1) Copies of resolutions of the Board, certified by the
Secretary of the Company, authorizing and approving the execution, delivery and
performance of this Agreement, and all other documents and instruments to be
delivered pursuant hereto and thereto, and taking all such other actions as
required by the Delaware General Corporation Law with respect to this Agreement
(including without limitation, if
15
<PAGE>
necessary, approval by the stockholders of the Company), and the transactions
contemplated hereby;
(2) A certificate of incumbency executed by the Secretary of
the Company certifying the names, titles and signatures of the officers
authorized to execute the documents referred to in subsection (1) above and
further certifying that the Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws of the Company delivered to the Investors at the
time of the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(3) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Investor or
its special counsel, Paul, Hastings, Janofsky & Walker LLP ("Investor Counsel"),
----------------
may reasonably request.
(h) Proceedings and Documents. All corporate and other proceedings
-------------------------
and actions taken in connection with the transactions contemplated hereby and
all certificates, opinions, agreements, instruments and documents mentioned
herein or incident to any such transactions, shall be satisfactory in form and
substance to Investor and to Investor Counsel.
(i) Employment Agreements. The Company shall have entered into a
---------------------
three-year employment agreement with Brian Fargo in substantially the form
attached hereto as Exhibit B, and a three-year employment agreement with Herve
---------
Caen in substantially the form attached hereto as Exhibit C.
---------
(j) Lender's Consent. The Company's lenders with respect to any
----------------
Indebtedness for Borrowed Money shall have approved this Agreement and the
transactions contemplated hereby, and shall otherwise provide such assurances to
Investor as Investor may reasonably request with respect to the use of the
proceeds from the sale of the Investor Stock and the continuing availability and
renewal of such lenders' current credit facility to the Company (or the Company
shall have provided such assurances to Investor with respect to a substitute
credit facility).
(k) Waiver of Existing Rights Agreement. If necessary, the requisite
-----------------------------------
percentage of the Holders (as defined therein) party to the Investors' Rights
Agreement dated as of October 10, 1996, by and among the Company and the Holders
(the "Existing Rights Agreement"), shall have waived the application of the
-------------------------
Existing Rights Agreement (including without limitation Section 1.12 thereof) to
the issuance of the Investor Stock and the registration rights granted hereunder
with respect to the Investor Stock.
(l) Government and Other Consents. Any approval, consent or waiting
-----------------------------
period required by any governmental agency or authority, or any other Person,
necessary or material to the consummation of the transactions contemplated
hereby shall have been obtained or expired, as the case may be, including
without limitation any approval from NASDAQ and any applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
(m) Stockholder Agreement. The Company, Investor and Fargo shall have
---------------------
entered into the Stockholder Agreement substantially in the form of Exhibit D
---------
hereto.
16
<PAGE>
(n) Exchange Agreement. Investor and Fargo shall have entered
------------------
into the Exchange Agreement substantially in the form of Exhibit E hereto, and
---------
Fargo shall have delivered the proxy to Investor and the Interplay Shares (each
as defined in the Exchange Agreement) into escrow as contemplated therein.
(o) Termination of Shareholders' Agreement. The Shareholders'
--------------------------------------
Agreement dated March 30, 1994 by and among the Company, Fargo and MCA Inc.
shall have been terminated and be of no further force or effect.
(p) Operating Plan. Titus and Fargo shall have jointly
--------------
developed the Operating Plan for the operation of the Company for the period
beginning the first day of the month following the Closing Date and ending
December 31, 1999.
(q) Universal Option. Universal shall have delivered to
----------------
Investor the shares of Option Stock (as defined therein).
7.2 Conditions of Company's Obligations. The Company's obligation
-----------------------------------
to issue and sell the Investor Stock to Investor on the Closing Date is subject
to the fulfillment prior to or at the Closing Date of the conditions precedent
specified in paragraphs (f), (i), (j), (k), (l), (m), (n), (o) and (q) of
Section 7.1 hereof, to the approval of the Company's stockholders of the
transactions contemplated hereby, and to the accuracy in all material respects
of the representations of Investor in Section 4.2 and Section 6 of this
Agreement.
8. Covenants of the Company and Fargo. The Company agrees that unless
----------------------------------
Investor otherwise agrees in writing, from the date hereof through the later of
the Final Valuation Date (as defined below) or the effective date of
registration statement with respect to the Investor Shares (the "Adjustment
----------
Period"), unless another period is expressly provided for in this Section 8, the
- ------
Company (and each of its Subsidiaries unless the context otherwise requires)
and, to the extent expressly provided herein, Fargo, will do the following:
8.1 Maintain Insurance. Maintain in full force and effect (a) a
------------------
policy or policies of insurance issued by insurers of recognized responsibility,
insuring it and its properties and business against such losses and risks, and
in such amounts, as are customary in the case of corporations of established
reputation engaged in the same or a similar business and similarly situated, and
(b) the life insurance policy on the life of Fargo, for the benefit of Investor,
in accordance with Section 8.18 of the Initial Purchase Agreement.
8.2 Compliance With Initial Purchase Agreement. Continue to
------------------------------------------
comply with the following covenants and agreements binding upon the Company set
forth in the Initial Purchase Agreement in accordance with their respective
terms: Sections 8.1, 8.3 through 8.9, 8.11, 8.12, 8.15, 8.17 and 9, including
Sections 9.1 through 9.4.
8.3 Compliance with Section 7. Use commercially reasonable
-------------------------
efforts to cause the conditions specified in Section 7.1 hereof to be met by the
Closing Date.
17
<PAGE>
8.4 Use of Proceeds. Use the proceeds from the sale of the
---------------
Investor Stock hereunder solely for the purposes set forth on Schedule 8.4
------------
hereto.
8.5 Exclusivity. The Company will not, between the date hereof
-----------
and the earlier of the Closing or the termination of this Agreement (the
"Restricted Period"), directly or indirectly, through any officer, director,
- ------------------
employee, agent, 5% stockholder, partner or otherwise, (a) solicit or initiate,
or participate in discussions or negotiations with, or encourage the submission
of bids, offers or proposals by (or commence negotiations with or provide any
information to), any Person with respect to an acquisition of the Company, its
business or assets, or any interest therein, other than Investor, or (b) provide
any non-public information concerning the Company, its business or assets, to
any Person, other than Investor, except for product developers, distributors,
publishers and licensees under agreements with the Company entered into in the
ordinary course of business consistent with past practices, except for the
Company's lender. Notwithstanding the foregoing, the Company may entertain a
written unsolicited bid or proposal from, and provide non-public information to,
any party who delivers such a written bid or proposal with respect to an
acquisition of the Company, its business or assets, but only if and so long as
the Board determines in good faith by a majority vote (with the written
concurring and concurrent advice from outside legal counsel) that failing to
entertain such written bid or proposal would constitute a breach of the
fiduciary duties of the Board under applicable law. The Company shall notify
Investor in writing promptly upon receipt of any bids, offers or proposals
received, written or oral. The Company further agrees that it will not engage
any broker, financial advisor or other consultant on a basis which might provide
such broker, financial advisor or consultant with an incentive to initiate or
encourage proposals or offers from other parties with respect to the Company,
its business or assets, or any interest therein. The Company shall not commence
any proceeding to merge, consolidate, liquidate or dissolve the Company or
obligate itself to do so.
8.6 Restriction on Transfer of Fargo's Common Stock. During the
-----------------------------------------------
Restricted Period, Fargo shall not sell, assign, pledge, mortgage or otherwise
dispose of or transfer his Common Stock, or any other securities of the Company,
whether now owned or hereafter acquired, or agree to do any of the foregoing,
except to Investor.
8.7 Fargo Voting Covenant. Fargo hereby agrees, if necessary, to
---------------------
vote his shares of Common Stock in favor of the issuance and sale of the
Investor Stock.
8.8 HSR Filing. From the date hereof through the Closing, to the
----------
extent that Investor is required in connection with the transactions
contemplated hereby, or the transactions contemplated by the Initial Purchase
Agreement or the Universal Agreement, to file a notification and report form in
compliance with the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as
amended, or the rules and regulations promulgated thereunder (collectively, the
"HSR Act"), the Company shall agree to fully cooperate with Investor to enable
-------
Investor to promptly make such filing and to respond to any requests for
additional information in connection therewith.
8.9 Development of Extended Operating Plan. The Company and Fargo
--------------------------------------
shall cooperate with Investor, and Investor's officers, employees and
representatives in the development of an extended operating plan for the Company
for the Company's fiscal year ending December 31, 2000 (the "Extended Operating
------------------
Plan").
- ----
18
<PAGE>
8.10 Maintenance of Distribution Arrangements; Negotiations for
----------------------------------------------------------
Distribution Agreement. The Company shall continue to distribute certain of
- ----------------------
Investor's products to those accounts previously agreed upon by the Company and
Investor on the terms previously agreed upon by the parties. The Company shall
enter into good faith negotiations with Investor involving the grant by Investor
to the Company (or a newly formed entity jointly owned by the Company and
Investor) of exclusive rights to distribute in North America all or a portion of
Investor's products related to console gaming systems, in exchange for
consideration to be mutually agreed upon by the Company and Investor.
9. Covenants of Investor. Investor agrees that, unless the Company
---------------------
otherwise agrees in writing, during the Restricted Period (unless another period
is expressly provided for in this Section 9) Investor will do the following:
9.1 Compliance with Legal Requirements. Comply promptly with all
----------------------------------
legal requirements that applicable law may impose upon it with respect to the
transactions contemplated by this Agreement, and cooperate promptly with, and
furnish information to, the Company in connection with any such requirements
imposed upon Investor in connection therewith or herewith.
9.2 Additional Financing. Use its commercially reasonable efforts
--------------------
to raise additional debt or equity financing in the European capital markets
following the Closing on terms and conditions reasonably acceptable to Investor
(the "Investor Financing"). If Investor can raise such Investor Financing, and
------------------
such Investor Financing is in the form of debt or debt and equity, provide the
Company with an unsecured line of credit (the "Line of Credit") for a term of
--------------
one year in an aggregate principal amount equal to the lesser of (a) thirty
percent (30%) of the Investor Financing or (b) Fifteen Million Dollars
($15,000,000), in either case with an interest rate and other material terms
substantially the same as the Investor Financing. If Investor can raise such
Investor Financing, and such financing is solely in the form of equity, the
interest rate payable and other material terms with respect to such Line of
Credit would have an interest rate and other material terms substantially the
same as the terms of any intercompany indebtedness between Investor and its
subsidiary, Titus Software Corporation, which interest rate shall be the lowest
rate permitted by applicable law. Investor shall, from time to time, execute
and deliver commercially reasonable Subordination agreements with respect to any
senior lender of the Company.
9.3 Compliance With Initial Purchase Agreement. Except as
------------------------------------------
expressly provided otherwise herein, continue to comply with all covenants and
agreements binding upon Investor set forth in the Initial Purchase Agreement.
9.4 Maintenance of Distribution Arrangements; Negotiations for
----------------------------------------------------------
Distribution Agreement. Investor shall continue to permit the Company to
- ----------------------
distribute certain of Investor's products to those accounts previously agreed
upon by the Company and Investor on the terms previously agreed upon by the
parties. Investor shall enter into good faith negotiations with the Company
involving the grant by Investor to the Company (or a newly formed entity jointly
owned by the Company and Investor) of exclusive rights to distribute in North
America all or a portion of Investor's products related to console gaming
systems, in exchange for consideration to be mutually agreed upon by the Company
and Investor.
19
<PAGE>
10. Registration of Investor Stock.
------------------------------
10.1 Required Registration. On the date which is one business day
---------------------
after the Closing Date (the "Registration Date"), the Company shall prepare and
-----------------
file a registration statement under the Securities Act, on a form selected by
the Company, covering all Investor Stock (which registration statement may also
cover all of the shares to be registered under the Initial Purchase Agreement
under the terms and conditions set forth therein ) and shall use its best
efforts to cause such registration statement to become effective as
expeditiously as possible and to remain effective until the earlier to occur of
the date (x) the Investor Stock covered thereby has been sold, or (y) by which
all Investor Stock covered thereby may be sold under Rule 144(k).
Notwithstanding the foregoing, if (i) prior to the Registration Date, the
Company shall become ineligible to use Form S-3 or (ii) prior to such date the
Company enters into an agreement to cause a sale or other disposition of all or
substantially all of the assets or outstanding Common Stock of the Company and
the Investor would be materially prejudiced in such transaction by holding
unregistered Common Stock, then in either of such cases the Company shall
promptly prepare and file such registration statement on Form S-1. Without
limiting the generality of clause (ii) in the preceding sentence, the parties
agree that Investor would be materially prejudiced in such transaction in the
event that it is unable to dispose of the shares of Investor Stock immediately
upon the consummation of such transaction.
10.2 Registration Procedures. When the Company effects the
-----------------------
registration of the Investor Stock under the Securities Act pursuant to Section
10.1 hereof, the Company will, at its expense, as expeditiously as possible:
(a) In accordance with the Securities Act and the rules and
regulations of the Commission, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period described herein, and prepare and file with the Commission such
amendments to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration statement
effective for such period and such registration statement and prospectus
accurate and complete for such period; the plan of distribution set forth in
such registration statement or in any amendment or supplement shall be subject
to the approval of Investor;
(b) Furnish to Investor such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Investor may reasonably request in order to facilitate the
public offering of such securities;
(c) Use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as Investor may reasonably request within twenty (20)
days following the original filing of such registration statement, except that
the Company shall not for any purpose be required to execute a general consent
to service of process or to qualify to do business as a foreign corporation in
any jurisdiction where it is not so qualified;
(d) Notify Investor, promptly after it shall receive notice
thereof, of the date and time when such registration statement and each post-
effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
20
<PAGE>
(e) Notify Investor promptly of any request by the Commission
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(f) Prepare and file with the Commission, promptly upon the
request of Investor, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for Investor, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Investor Stock by Investor;
(g) Prepare and promptly file with the Commission, and
promptly notify Investor of the filing of, such amendments or supplements to
such registration statement or prospectus as may be necessary (i) to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an 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, or (ii) to revise or amend the plan of
distribution of the Investor Stock, as requested by Investor;
(h) In case Investor is required to deliver a prospectus at a
time when the prospectus then in circulation is not in compliance with the
Securities Act or the rules and regulations of the Commission, prepare promptly
upon request such amendments or supplements to such registration statement and
such prospectus as may be necessary in order for such prospectus to comply with
the requirements of the Securities Act and such rules and regulations; and
(i) Advise Investor, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
10.3 Expenses. With respect to any registration effected pursuant
--------
to Section 10.1 hereof, the Company agrees to bear all fees, costs and expenses
of and incidental to such registration and the public offering in connection
therewith; provided, however, that Investor shall bear its pro rata share of any
underwriting discounts or commissions. The fees, costs and expenses of
registration to be borne as provided in this Section 10.3 shall include, without
limitation, all registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and disbursements
of counsel for the underwriter or underwriters of such securities (if the
Company and/or selling security holders are otherwise required to bear such fees
and disbursements), all legal fees and disbursements and other expenses of
complying with state securities or blue sky laws of any jurisdictions in which
the securities to be offered are to be registered or qualified, reasonable fees
and disbursements of one firm of counsel for the Investor (not to exceed
$15,000), and the premiums and other costs of policies of insurance against
liability of directors and officers arising out of such public offering.
21
<PAGE>
10.4 Indemnification.
---------------
(a) The Company will indemnify and hold harmless Investor and
any underwriter (as defined in the Securities Act) for Investor, and any Person
who controls Investor or such underwriter within the meaning of the Securities
Act, and any officer, director, employee, agent, partner or affiliate of
Investor, from and against, and will reimburse Investor and each such
underwriter, controlling person, officer, director, employee, agent, partner and
affiliate with respect to, any and all claims, actions, demands, losses,
damages, liabilities, costs and expenses to which Investor or any such
underwriter or controlling Person or any such officer, director, employee,
agent, partner or affiliate may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein 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; provided, however, that
the Company will not be liable in any such case to the extent that any such
claim, action, demand, loss, damage, liability, cost or expense is caused by an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity in all material respects with information furnished to the
Company by Investor, such underwriter or such controlling person or such
officer, director, employee, agent, partner or affiliate in writing specifically
for use in the preparation thereof.
(b) Investor will indemnify and hold harmless the Company, and
any Person who controls the Company within the meaning of the Securities Act,
from and against, and will reimburse the Company and such controlling Persons
with respect to, any and all losses, damages, liabilities, costs or expenses to
which the Company or such controlling Person may become subject under the
Securities Act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or are caused by the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, 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 so made in reliance upon and in conformity in all
material respects with written information furnished by Investor to the Company
in writing specifically for use in the preparation thereof. Notwithstanding the
foregoing, the liability of Investor pursuant to this subsection (b) shall be
limited to an amount equal to the per share sale price (less any brokerage or
underwriting discount and commissions) multiplied by the number of shares of
Investor Stock sold by Investor pursuant to the registration statement which
gives rise to such obligation to indemnify (less the aggregate amount of any
damages which Investor has otherwise been required to pay in respect of such
losses, damages, liabilities, costs or expenses or any substantially similar
losses, damages, liabilities, costs or expenses arising from the sale of such
Investor Stock).
(c) Promptly after receipt by a party indemnified pursuant to
the provisions of paragraph (a) or (b) of this Section 10.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of paragraph (a)
or (b), notify the
22
<PAGE>
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to an indemnified party otherwise than under this Section 10.4 and shall not
relieve the indemnifying party from liability under this Section 10.4 except to
the extent that such indemnifying party is materially prejudiced by such
omission. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
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
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party pursuant to the provisions of such paragraph
(a) or (b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall be liable to an indemnified
party for any settlement of any action or claim without the consent of the
indemnifying party. No indemnifying party will consent to entry of any judgment
or enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
complete and unconditional release from all liability in respect to such claim
or litigation.
(d) If the indemnification provided for in subsection (a) or
(b) of this Section 10.4 is held by a court of competent jurisdiction to be
unavailable to a party to be indemnified with respect to any claims, actions,
demands, losses, damages, liabilities, costs or expenses referred to therein,
then each indemnifying party under any such subsection, in lieu of indemnifying
such indemnified party thereunder, hereby agrees to contribute to the amount
paid or payable by such indemnified party as a result of such claims, actions,
demands, losses, damages, liabilities, costs or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions which resulted in such claims, actions, demands, losses,
damages, liabilities, costs or expenses, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party 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 indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding the foregoing, the amount
Investor shall be obligated to contribute pursuant to this subsection (d) shall
be limited to an amount equal to the per share sale price (less any brokerage or
underwriting discount and commissions) multiplied by the number of shares of
Investor Stock sold by Investor pursuant to the registration statement which
gives rise to such obligation to contribute (less the aggregate amount of any
damages which Investor has otherwise been required to pay in respect of such
claim, action, demand, loss, damage, liability, cost or expense or any
substantially similar claim, action, demand, loss, damage, liability, cost or
expense arising from the sale of such Investor Stock). No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution hereunder from any person who
was not guilty of such fraudulent misrepresentation.
10.5 Reporting Requirements Under the Exchange Act. The Company
---------------------------------------------
shall timely file such information, documents and reports as the Commission
23
<PAGE>
may require or prescribe under Section 13 or 15(d) of the Exchange Act. The
Company acknowledges and agrees that the purposes of the requirements contained
in this Section 10.5 are (a) to enable Investor to comply with the current
public information requirement contained in paragraph (c) of Rule 144 should
Investor ever wish to dispose of any of the Investor Stock without registration
under the Securities Act in reliance upon Rule 144 (or any other similar
exemptive provision) and (b) to qualify the Company for the use of registration
statements on Form S-3.
10.6 Investor Information. The Company may require Investor to
--------------------
furnish the Company such information with respect to Investor and the
distribution of the Investor Stock as the Company may from time to time
reasonably request in writing as shall be required by law or by the Commission
in connection therewith.
10.7 Transferability of Registration Rights. Notwithstanding
--------------------------------------
anything to the contrary in this Section 10, the rights of the Investor under
this Section 11 shall automatically transfer to any transferee of at least ten
percent (10%) of the Investor Stock in accordance with Section 14.5 hereof.
10.8 Suspension of Registration Obligations in Initial Purchase
---- ----------------------------------------------------------
Agreement; Reinstatement of Registration Obligations in Event of Termination.
- ----------------------------------------------------------------------------
The Company's obligations set forth in this Section 10 shall be deemed to
relieve the Company of its obligations set forth in Section 11 of the Initial
Purchase Agreement; provided, however, that if this Agreement is terminated
-------- -------
prior to the Closing Date, then the Company's obligations in Section 11 of the
Initial Purchase Agreement shall be reinstated as set forth therein; provided,
--------
further, that upon such reinstatement Section 11.1 of the Initial Purchase
- -------
Agreement shall be deemed amended to (a) replace "June 21, 1999" in the first
sentence thereof with the first business day following the date of termination
of this Agreement, and (b) include in the definition of "Registrable Stock" all
shares of Common Stock into which the Initial Note and/or Additional Note have
been converted, if any, in accordance therewith.
11. Enforcement.
-----------
11.1 Survival of Representations and Warranties. The
------------------------------------------
representations, warranties, covenants and agreements of the parties hereto
contained in this Agreement or in any writing delivered pursuant to the
provisions of this Agreement or at the Closing shall survive any examination by
or on behalf of any party hereto and shall survive the Closing and the
consummation of the transactions contemplated hereby until the date which is
twelve (12) months after the Closing Date; provided, however, that each of the
-------- -------
representations and warranties contained in Sections 5.4, 5.7 and 5.9 hereof
shall survive any examination by or on behalf of any party hereto and shall
survive the Closing and the consummation of the transactions contemplated hereby
until the expiration of any applicable statute of limitations with respect to
such representation and warranty.
11.2 Indemnification.
---------------
(a) Subject to Section 11.2(e), the Company hereby covenants
and agrees to defend, indemnify and save and hold harmless Investor, together
with its officers, directors, shareholders, employees, attorneys and
representatives and each Person who controls Investor within the meaning of the
Securities Act, from and against any loss, cost, expense, liability, claim or
legal damages (including, without
24
<PAGE>
limitation, reasonable fees and disbursements of counsel and accountants and
other costs and expenses incident to any actual or threatened claim, suit,
action or proceeding (each, an "Action") and all costs of investigation)
------
(collectively, the "Damages") arising out of or resulting from (i) any Default,
-------
or any inaccuracy in or breach of, or failure to perform or observe, any
representation, warranty, covenant or agreement made by the Company or Fargo in
this Agreement or in any writing delivered pursuant to this Agreement or at the
Closing, or (ii) any claims of third parties claiming compensation, commissions
or expenses for services as a broker or finder based upon obligations incurred
by the Company.
(b) In the event that any indemnified party is made a defendant in or
party to any action, suit, proceeding or claim, judicial or administrative,
instituted by any third party for Damages or other relief (any such third party
action, suit, proceeding or claim being referred to as a "Claim"), the
-----
indemnified party (referred to in this clause (b) as the "notifying party")
---------------
shall give notice thereof (a "Notice of Claim") as soon as practicable and in
---------------
any event within thirty (30) days after the notifying party receives notice
thereof. The failure to give such notice shall not affect whether an
indemnifying party is liable for reimbursement unless such failure has resulted
in the loss of substantive rights with respect to the indemnifying party's
ability to defend such Claim, and then only to the extent of such loss. Notice
of the intention so to contest and defend shall be given by the indemnifying
party to the notifying party within twenty (20) business days after the
notifying party's notice of such Claim (but, in all events, at least ten (10)
business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the indemnifying party and approved by the indemnified party (which
approval will not be unreasonably withheld). The indemnifying party shall have
the sole right to control the contest and defense of such Claim. The notifying
party shall be entitled, at its own cost and expense (which expense shall not
constitute Damages unless the notifying party reasonably determines that the
indemnifying party because of a conflict of interest, may not adequately
represent, the interests of the indemnified parties, and has provided the
indemnifying party with notice of such determination, and only to the extent
that such expenses are reasonable), to participate in such contest and defense
and to be represented by attorneys of its or their own choosing. The notifying
party will cooperate with the indemnifying party in the conduct of such defense.
Neither the notifying party nor the indemnifying party may concede, settle or
compromise any Claim without the consent of the other party, which consent will
not be unreasonably withheld or delayed in light of all factors of importance to
such party; provided, however, that if the indemnified party shall fail to
consent to the settlement of any Claim where (i) such settlement includes an
unconditional release of all claims against the indemnified party and requires
no payment on the part of the indemnified party to the claimant or any other
party, (ii) such settlement does not require any action on the part of the
indemnified party and does not impose terms restricting or adversely affecting
the indemnified party's activity, and (iii) the claimant has affirmatively
indicated that it will accept such settlement, then the indemnifying party shall
no liability with respect to any payment to be made in respect of such claim in
excess of the proposed settlement amount.
(c) In the event any indemnified party shall have a claim against any
indemnifying party that does not involve a Claim, the indemnified party shall
deliver a notice of such claim with reasonable promptness to the indemnifying
party. The failure to give such notice shall not affect whether an indemnifying
party is liable for reimbursement unless such failure has resulted in the loss
of substantive rights with respect to the indemnifying party's ability to defend
such claim, and then only to the
25
<PAGE>
extent of such loss. If the indemnifying party notifies the indemnified party
that it does not dispute the claim described in such notice or fails to notify
the indemnified party within thirty (30) days after delivery of such notice by
the indemnified party whether the indemnifying party disputes the claim
described in such notice, the Damages in the amount specified in the indemnified
party's notice will be conclusively deemed a liability of the indemnifying party
and the indemnifying party shall pay the amount of such Damages to the
indemnified party on demand.
(d) Any claim for indemnity under this Section 11.2 shall be delivered
in writing to the indemnifying party and set forth with reasonable specificity
as to the amount claimed and the underlying facts supporting such claim. The
indemnifying party shall have thirty (30) days to accept or dispute such claim
by written notice to the indemnified party (a "Contest Notice"); provided,
--------------
however, that if, at the time a Notice of Claim is submitted to the indemnifying
party the amount of the Claim in respect thereof has not yet been determined,
such thirty (30) day period shall not commence until a further written notice (a
"Notice of Liability") has been sent or delivered by the indemnified party to
-------------------
the indemnifying party setting forth the amount of the Claim incurred by the
indemnified party that was the subject of the earlier Notice of Claim. Such
Contest Notice shall specify the reasons or bases for the objection of the
Indemnifying Party to the claim, and if the objection relates to the amount of
the Claim asserted, the amount, if any, which the indemnifying party believes is
due the indemnified party. If no such Contest Notice is given with such 30-day
period, the obligation of the indemnifying party to pay to the indemnified party
the amount of the Claim set forth in the Notice of Claim, or subsequent Notice
of Liability, shall be deemed established and accepted by the indemnifying
party. If, on the other hand, the indemnifying party contests a Notice of Claim
or Notice of Liability (as the case may be) within such 30-day period, the
indemnified party and the indemnifying party shall thereafter attempt in good
faith to resolve their dispute by agreement. If the parties are unable to so
resolve their dispute within the immediately succeeding thirty (30) days, such
dispute shall be resolved by binding arbitration in Los Angeles, California, as
provided in Section 14.13 below. The award of the arbitrator shall be final and
binding on the parties and may be enforced in any court of competent
jurisdiction. Upon final determination of the amount of the Claim that is the
subject of an indemnification claim (whether such determination is the result of
the indemnifying party's acceptance of, or failure to contest, a Notice of Claim
or Notice of Liability, or of a resolution of any dispute with respect thereto
by agreement of the parties or binding arbitration), such amount shall be
payable, in cash by the indemnifying party to the indemnified parties who have
been determined to be entitled thereto within fifteen (15) days of such final
determination of the amount of the Claim due by the indemnifying party. Any
amount that becomes due hereunder and is not paid when due shall bear interest
at the maximum legal rate per annum from the date due until paid.
(e) Anything to the contrary notwithstanding, (i) the Investor shall
not be indemnified and held harmless in respect of any Damages unless and until
the aggregate amount of such Damages exceeds $100,000, in which event the
Investor shall be indemnified and held harmless in respect of all Damages
without regard to the foregoing $100,000 limit, and (ii) the liability of the
Company to the Investor shall be limited to an amount equal to the Purchase
Payment.
(f) Investor hereby covenants and agrees to defend, indemnify and save
and hold harmless the Company, together with officers, directors, shareholders,
employees, attorneys and representatives and each Person who controls the
26
<PAGE>
Company within the meaning of the Securities Act from and against any Damages
arising out of or resulting from (i) any inaccuracy in breach of, or failure to
perform or observe, any representation, warranty, covenant or agreement made by
Investor in this Agreement or in any writing or other agreement delivered
pursuant hereto, or (ii) any claims of third parties claiming compensation,
commissions or expenses for services as a broker or finder based upon
obligations incurred by Investor.
(g) Except as provided in Section 11.3, the provisions of this
Section 11.2 shall be the exclusive remedy or exclusive means to obtain relief,
as the case may be, of any party in the event of any breach of any
representation, warranty, covenant or agreement contained herein (or in any
certificate or other document delivered pursuant hereto) by another party, or
with respect to any Action or Claim; provided, however, that this subsection (g)
-------- -------
shall not limit any statutory claim, or any claim in tort, which any party may
have against the other party.
11.3 Injunctive Relief. (a) Any party may bring a claim seeking
-----------------
specific performance by way of injunctive relief before a court of competent
jurisdiction to enforce the provisions of this Agreement, (b) any party seeking
to enforce a claim for indemnification may bring any claim of indemnification
which is not resolved within the thirty day period provided in Section 11.2(b)
before a court of competent jurisdiction, and (c) in the event of any breach by
either party of Section 14.9, the other party may seek injunctive relief from a
court of competent jurisdiction to restrain any such breach.
11.4 No Implied Waiver. Except as expressly provided in this
-----------------
Agreement, no course of dealing between the Company and Investor and no delay in
exercising any such right, power or remedy conferred hereby or now or hereafter
existing at law in equity, by statute or otherwise, shall operate as a waiver
of, or otherwise prejudice, any such right, power or remedy.
12. Rights of First Refusal.
-----------------------
12.1 Subsequent Offerings. Investor shall have the right of first
--------------------
refusal to purchase all (or any part of all) Equity Securities that the Company
may, from time to time, propose to sell and issue between the date hereof and
the Closing Date, other than the Equity Securities excluded by Section 12.4
hereof.
12.2 Exercise of Rights. If and each time the Company proposes to
------------------
issue any Equity Securities, it shall give Investor written notice of its
intention, describing the Equity Securities, the price, and the general terms
and conditions upon which the Company proposes to issue the same. Investor
shall have ten (10) days from the giving of such notice to agree to purchase
Equity Securities for the price and upon the terms and conditions specified in
the notice by giving written notice to the Company.
12.3 Issuance of Equity Securities to Other Persons. If Investor
----------------------------------------------
fails to exercise in full the rights of first refusal within such ten (10) day
period by giving the agreement referred to in Section 12.2, the Company shall
have ninety (90) days thereafter to complete the sale of the Equity Securities
in respect of which Investor's rights were not exercised, at a price and upon
general terms and conditions no more favorable to the purchasers thereof than
specified in the Company's notice to the Investors pursuant to Section 12.2
hereof. If the Company has not sold all of such Equity Securities within such
ninety (90) days, the Company shall not thereafter issue or sell any
27
<PAGE>
of such Equity Securities, without first offering such securities to Investor in
the manner provided above.
12.4 Excluded Securities. The rights of first refusal established
-------------------
by this Section 12 shall have no application to (a) any shares of Common Stock
issued in accordance with the stock option plans and warrants currently reserved
for issuance to employees, directors and advisors, as described in Sections 5.3
and 5.6, and Schedule 5.6, (b) shares of Common Stock issued as consideration to
------------
third parties for product development services or publishing or distribution
rights, not to exceed 500,000 shares, (c) shares of Common Stock issued in
connection with any stock split, stock dividend or reverse stock split, and (d)
shares of Common Stock issued in connection with acquisitions of other entities
by way of merger, share exchange, sale of assets or otherwise.
12.5 Termination of Rights. The Company's obligations set forth in
this Section 12 shall be deemed to relieve the Company of its obligations set
forth in Section 13 of the Initial Purchase Agreement; provided, however, that
-------- -------
if this Agreement is terminated prior to the Closing Date, then the Company's
obligations in Section 13 of the Initial Purchase Agreement shall be reinstated
as set forth therein.
13. Definitions. Unless the context otherwise requires, the terms
-----------
defined in this Section 13 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms herein defined. All accounting terms defined in this Section
13 and those accounting terms used in this Agreement not defined in this Section
13 shall, except as otherwise provided for herein, be construed in accordance
with those generally accepted accounting principles that the Company is required
to employ by the terms of this Agreement. If and so long as the Company has any
Subsidiary, the accounting terms defined in this Section 13 and those accounting
terms appearing in this Agreement but not defined in this Section 13 shall be
determined on a consolidated basis for the Company and its Subsidiaries, and the
financial statements and other financial information to be furnished by the
Company pursuant to this Agreement shall be consolidated and presented with
consolidating financial statements of the Company and its Subsidiaries.
Capitalized terms not otherwise defined herein shall have their respective
meanings in the Initial Purchase Agreement.
"Action" shall have the meaning assigned to it in Section 11.2(a).
------
"Affiliate" shall have the meaning assigned to it in Rule 405 of the
---------
Commission under the Securities Act.
"Agreement" shall mean this Agreement.
---------
"Balance Sheet" and "Balance Sheet Date" shall have the meanings
------------- ------------------
assigned to these terms in Section 5.12 hereof.
"Board" shall mean the Board of Directors of the Company.
-----
"Claim" shall have the meaning assigned to it in Section 11.2(b).
-----
"Closing" and "Closing Date" shall have the meanings assigned to
------- ------------
these terms in Section 3.1.
28
<PAGE>
"Common Stock" shall have the meaning assigned to it in Section 1
------------
hereof.
"Commission" shall mean the Securities and Exchange Commission.
----------
"Damages" shall have the meaning assigned to it in Section 11.2(a).
-------
"Default" shall mean a default or failure in the due observance or
-------
performance of any covenant, condition or agreement on the part of the Company
or any of its Subsidiaries to be observed or performed under the terms of this
Agreement, if such default or failure in performance shall remain unremedied for
ten (10) days.
"Deposit" shall have the meaning assigned to it in Section 2.
-------
"Designated Key Employees" shall have the meaning assigned to it in
------------------------
Section 5.15.
"Designee" shall have the meaning assigned to it in Section 7.6(a).
--------
"Developing Software" shall have the meaning assigned to it in
-------------------
Section 5.27(b).
"Equity Security" shall mean any stock or similar security of the
---------------
Company or any security (whether stock or Indebtedness for Borrowed Money)
convertible or exchangeable, with or without consideration, into or for any
stock or similar security, or any security (whether stock or Indebtedness for
Borrowed Money) carrying any warrant or right to subscribe to or purchase any
stock or similar security, or any such warrant or right.
"Event of Default" shall mean (a) the failure of either the Company or
----------------
any Subsidiary to pay any Indebtedness for Borrowed Money, or any interest or
premium thereon, within ten (10) days after the same shall become due, whether
such Indebtedness shall become due by scheduled maturity, by required
prepayment, by acceleration, by demand or otherwise, (b) an event of default
under any agreement or instrument evidencing or securing or relating to any such
Indebtedness, or (c) the failure of either the Company or any Subsidiary to
perform or observe any material term, covenant, agreement or condition on its
part to be performed or observed under any agreement or instrument evidencing or
securing or relating to any such Indebtedness when such term, covenant or
agreement is required to be performed or observed.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Final Valuation Date" shall have the meaning assigned to it in the
--------------------
Initial Purchase Agreement.
"Form 10-Q" shall have the meaning assigned to it in Section 5.12.
---------
"Form S-1" shall have the meaning assigned to it in Section 5.12.
--------
"GAAP" shall have the meaning assigned to it in Section 5.12.
----
29
<PAGE>
"Indebtedness" shall mean any obligation of the Company or any
------------
Subsidiary which under GAAP is required to be shown on the balance sheet of the
Company or such Subsidiary as a liability. Any obligation secured by a Lien on,
or payable out of the proceeds of production from, property of the Company or
any Subsidiary shall be deemed to be Indebtedness even though such obligation is
not assumed by the Company or Subsidiary.
"Indebtedness for Borrowed Money" shall mean (a) all Indebtedness in
-------------------------------
respect of money borrowed including, without limitation, Indebtedness which
represents the unpaid amount of the purchase price of any property and is
incurred in lieu of borrowing money or using available funds to pay such amounts
and not constituting an account payable or expense accrual incurred or assumed
in the ordinary course of business of the Company or any Subsidiary, (b) all
Indebtedness evidenced by a promissory note, bond or similar written obligation
to pay money, or (c) all such Indebtedness guaranteed by the Company or any
Subsidiary or for which the Company or any Subsidiary is otherwise contingently
liable.
"Initial Purchase Agreement" shall have the meaning assigned to it in
--------------------------
the Recitals.
"Investor Counsel" shall have the meaning assigned to it in Section
----------------
7.1(g)(3).
"Investor Financing" shall have the meaning assigned to it in Section
------------------
9.2.
"Investor Stock" shall have the meaning assigned to it in Section 1.
--------------
"Letter of Intent" shall have the meaning assigned to it in the
----------------
Recitals.
"Lien" shall mean any mortgage, pledge, security interest,
----
encumbrance, lien or charge of any kind, including, without limitation, any
conditional sale or other title retention agreement, any lease in the nature
thereof and the filing of or agreement to give any financing statement under the
Uniform Commercial Code of any jurisdiction and including any lien or charge
arising by statute or other law.
"Line of Credit" shall have the meaning assigned to it in Section
--------------
9.2.
"Material Adverse Effect" on a Person means a material adverse effect,
-----------------------
or any condition, situation or set of circumstances that could reasonably be
expected to have an adverse effect, on such Person and its Subsidiaries, taken
as a whole.
"Note" shall have the meaning assigned to it in Section 3.
----
"Operational Software" shall have the meaning assigned to it in
--------------------
Section 5.27(a).
"Permitted Liens" shall mean (a) Liens for taxes and assessments or
---------------
governmental charges or levies not at the time due or in respect of which the
validity thereof shall currently be contested in good faith by appropriate
proceedings; (b) Liens in respect of pledges or deposits under workers'
compensation laws or similar legislation,
30
<PAGE>
carriers', warehousemen's, mechanics', laborers' and materialmen's and similar
Liens, if the obligations secured by such Liens are not then delinquent or are
being contested in good faith by appropriate proceedings; and (c) Liens
incidental to the conduct of the business of the Company or any Subsidiary which
were not incurred in connection with the borrowing of money or the obtaining of
advances or credits and which do not in the aggregate materially detract from
the value of its property or materially impair the use thereof in the operation
of its business.
"Person" shall include any natural person, corporation, trust,
------
association, company, partnership, limited liability company, joint venture and
other entity and any government, governmental agency, instrumentality or
political subdivision.
"Purchase Payment" shall have the meaning assigned to it in Section
----------------
2.
"Restricted Period" shall have the meaning assigned to it in Section
-----------------
8.5.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Stock Purchase Agreement" shall have the meaning assigned to it in
------------------------
the Recitals.
"Subsidiary" shall mean any corporation, association or other business
----------
entity at least fifty percent (50%) of the outstanding voting stock of which is
at the time owned or controlled directly or indirectly by the Company or by one
or more of such subsidiary entities or both, where "voting stock" means any
shares of stock having general voting power in electing the board of directors
(irrespective of whether or not at the time stock of any other class or classes
has or might have voting power by reason of any contingency).
"Universal Agreement" shall mean the letter agreement dated as of
-------------------
March 18, 1999, by and among the Company, Investor and Universal Studios, Inc.
"Web Site" shall have the meaning assigned to it in Section 5.28(a).
--------
14. Miscellaneous.
-------------
14.1 Waivers and Amendments. With the written consent of Investor,
----------------------
the obligations of the Company and the rights of Investor under this Agreement
may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board, may enter into a supplementary agreement for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of any supplemental agreement or
modifying in any manner the rights and obligations hereunder of Investor and the
Company. Neither this Agreement, nor any provision hereof, may be amended,
waived, discharged or terminated orally or by course of dealing, but only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, as provided in this Section
14.1. Specifically, but without limiting the generality of the foregoing, the
failure of Investor at any time or times to require performance of any provision
hereof by the Company shall in no manner affect the right of Investor at a later
time to enforce the same. No waiver by any party of the breach of any term or
provision contained in this Agreement, in any one or more
31
<PAGE>
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other term or
covenant contained in the Agreement.
14.2 Rights of Investor. Investor shall have the absolute right to
------------------
exercise or refrain from exercising any right or rights which Investor may have
by reason of this Agreement or any Investor Stock, including, without
limitation, the right to consent to the waiver of any obligation of the Company
under this Agreement and to enter into an agreement with the Company for the
purpose of modifying this Agreement or any agreement effecting any such
modification, and Investor shall not incur any liability to any other
shareholder of the Company with respect to exercising or refraining from
exercising any such right or rights.
14.3 Notices. All notices, requests, consents and other
-------
communications required or permitted hereunder shall be in writing (including
telecopy or similar writing) and shall be given,
if to the Company to:
Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Attention: Mr. Brian Fargo, Chairman and
Chief Executive Officer
Telecopier: (949) 252-0667
with a copy to:
K.C. Schaaf, Esq.
Stradling Yocca Carlson & Rauth, a professional corporation
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Telecopier: (949) 725-4100
if to Investor to:
Titus Interactive SA
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, California 91311
Attention: Mr. Herve Caen, Chairman and
Chief Executive Officer
Telecopier: (818) 709-6537
32
<PAGE>
with copies to:
Titus Interactive SA
Parc de l'esplanade
12, Rue Enrico Fermi
Saint Thibault des Vignes
77462 Lagny sur Marne Cedex
France
Telecopier: 011-33-1-60-31-59-60
and
Robert A. Miller, Jr., Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street - 23/rd/ Floor
Los Angeles, California 90071
Telecopier: (213) 627-0705
if to Fargo to:
Mr. Brian Fargo
c/o Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Telecopier: (949) 252-0667
or to such other address or telecopier number as such party may specify for the
purpose by notice to the other party or parties to this Agreement, as the case
may be. Any notice, request, consent or other communication hereunder shall be
deemed to have been given and received on the day on which it is delivered (by
any means including personal delivery, overnight air courier, United States or
French mail) or telecopied (or, if such day is not a business day or if the
notice, request, consent or communication is not telecopied during business
hours of the intended recipient, at the place of receipt, on the next following
business day).
14.4 Severability. Should any one or more of the provisions of
------------
this Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement,
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.
14.5 Assignment; Parties in Interest. Neither this Agreement nor
-------------------------------
any interest herein may be assigned by either party hereto without the written
consent of the other parties hereto, except that Investor may assign all of its
rights hereunder to any Subsidiary of Investor. Subject to the foregoing, all
the terms and provisions of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, whether so expressed or not. Subject to the immediately
preceding sentence, this Agreement shall not run to the benefit of or be
enforceable by any Person other than a party to this Agreement and its
successors and assigns.
33
<PAGE>
14.6 Headings. The headings of the Sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
14.7 Choice of Law; Jurisdiction and Venue. The internal
-------------------------------------
substantive laws, and not the laws of conflicts, of the State of California
shall govern the enforceability and validity of this Agreement, the construction
of its terms and the interpretation of the rights and duties of the parties.
The parties hereby consent and agree that the United States District Court for
the Central District of California, or the Superior Court of California for the
County of Orange will have exclusive jurisdiction over any legal action or
proceeding arising out of or relating to this Agreement, and each party consents
to the in personam jurisdiction of such courts for the purpose of any such
-- --------
action or proceeding and agrees that venue is proper in such courts.
14.8 Publicity. Without the prior consent of the other parties, no
---------
party shall, and each party shall cause its directors, officers, employees,
representatives and agents not to, make any public statement or press release
with respect to the transactions contemplated by this Agreement or otherwise
disclose to any Person the existence, terms, content or effect of this
Agreement; provided, however, that if a disclosure is required by law, the party
--------
required to make such disclosure shall be permitted to make such disclosure but
shall use best efforts to consult with the other parties hereto before making
the required disclosure. The foregoing restriction shall not limit the
applicability of the Nondisclosure Agreements between the Company and Investor
dated November 10, 1998, and March 3, 1999, which shall continue in full force
and effect in accordance with their respective terms.
14.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts (including by facsimile) and by different parties hereto in
separate counterparts, with the same effect as if all parties had signed the
same document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument.
14.10 Entire Agreement; Effect on Initial Purchase Agreement. This
------------------------------------------------------
Agreement, and the Exhibits, Schedules, certificates, and documents referred to
herein, together with the Initial Purchase Agreement, and all exhibits,
schedules, certificates and documents referred to therein, constitute the entire
agreement of the parties hereto with respect to the subject matter hereof, and
supersede all prior understandings (including the Letter of Intent, except and
solely to the extent that such Letter of Intent, by its terms, is binding upon
the parties) with respect to the subject matter hereof, and no representation or
warranty not included herein has been relied upon by any party hereto. Without
limiting the generality of the foregoing, the Initial Purchase Agreement shall
continue in full force and effect in accordance with its terms, as expressly
amended hereby; provided, that in the event of any inconsistency between the
--------
terms of this Agreement and the terms of the Initial Purchase Agreement, the
terms of this Agreement shall control; and provided, further, that upon the
-------- -------
Closing, Section 10.3 of the Initial Purchase Agreement shall be deleted in its
entirety, and shall have no further force or effect.
14.11 Attorneys' Fees. In the event of any dispute, controversy, or
---------------
proceeding between the parties concerning this Agreement or the transactions
contemplated hereby, the prevailing party shall be entitled to receive from the
non-prevailing party its costs and expenses, including attorneys' fees.
34
<PAGE>
14.12 Arbitration. Except for actions to obtain injunctions or
-----------
other equitable remedies, all disputes between the parties hereto shall be
determined solely and exclusively by arbitration under, and in accordance with
the rules then in effect of, the American Arbitration Association, or any
successors thereto ("AAA"), in Los Angeles, California, unless the parties
---
otherwise agree in writing. The parties shall, in connection with such
arbitration, in addition to any discovery permitted under AAA rules, be
permitted to conduct discovery in accordance with Section 1283.05 of the
California Code of Civil Procedure, the provisions of which are incorporated
herein by this reference. The parties shall jointly select an arbitrator. In
the event the parties fail to agree upon an arbitrator within ten (10) days,
then each party shall select an arbitrator and such arbitrators shall then
select a third arbitrator to serve as the sole arbitrator; provided, that if
--------
either party, in such event, fails to select an arbitrator within seven (7)
days, such arbitrator shall be selected by the AAA upon application of either
party. Judgment upon the award of the agreed upon arbitrator or the so chosen
third arbitrator, as the case may be, shall be binding and may be entered in any
court of competent jurisdiction.
35
<PAGE>
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective duly authorized officers as of the day and year
first above written.
INTERPLAY ENTERTAINMENT CORP., a Delaware
corporation
By: /s/ Brian Fargo
------------------------
An Authorized Officer
TITUS INTERACTIVE SA, a French corporation
By: /s/ Herve Caen
------------------------
An Authorized Officer
/s/ Brian Fargo
------------------------
Brian Fargo
36
<PAGE>
EXHIBIT 10.2
EXECUTION COPY
EXCHANGE AGREEMENT
------------------
This EXCHANGE AGREEMENT (this "Agreement") is made and entered into as of
----------
the 20th day of July, 1999, by and among TITUS INTERACTIVE SA, a French
corporation ("Titus"), BRIAN FARGO, an individual ("Fargo"), HERVE CAEN, an
------ ------
individual, and ERIC CAEN, an individual (together, the "Caens").
------
RECITALS
--------
WHEREAS, Interplay Entertainment Corp., a Delaware corporation
("Interplay"), Titus and Fargo are entering into a Stock Purchase Agreement (the
----------
"Stock Purchase Agreement") whereby Interplay will issue and sell and Titus will
-------------------------
purchase 6,250,000 shares of common stock of Interplay for an aggregate purchase
price of $25,000,000;
WHEREAS, it is a condition to the closing of the transactions contemplated
by the Stock Purchase Agreement that Titus, Fargo and the Caens enter into this
Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Exchange of Shares. Upon the terms and subject to the conditions
------------------
herein contained, at the Closing (as hereinafter defined) on the Closing Date
(as hereinafter defined), Fargo will exchange Two Million (2,000,000) shares of
common stock, no par value, of Interplay (the "Interplay Common Stock") owned by
-----------------------
him (the "Interplay Shares") for Ninety-Six Thousand Six Hundred Sixty-Six
-----------------
(96,666) shares of common stock, par value Twenty-Five (25) Francs per share, of
Titus (the "Titus Common Stock") (such shares of Titus Common Stock shall be
-------------------
referred to as the "Exchanged Shares"). Such exchange ratio is calculated based
-----------------
upon a valuation of Interplay Common Stock of Four Dollars ($4.00) per share and
a valuation of Titus Common Stock of Eighty-Two and 76/100 Dollars ($82.76) per
share.
2. Restrictions on Transfer; Holding Period; Lock-Up Period. Fargo hereby
--------------------------------------------------------
agrees that the Exchanged Shares will be subject to the following restrictions
upon Transfer (as defined below), in addition to the restrictions set forth in
Section 3:
2.1 Restrictions on Transfer.
------------------------
(a) Fargo understands and agrees that the Exchanged Shares have not
been registered under any French or United States securities laws, and that
accordingly they will not be fully transferable except as permitted under
various exemptions contained in such laws. Fargo acknowledges that he must bear
the economic risk of its investment in the Exchanged Shares for an indefinite
period of time (subject, however, to Titus' obligation under Section 3.1(b) of
this Agreement) since they have not been registered under French or United
States securities laws and therefore cannot be sold unless they are subsequently
registered or an exemption from registration is available.
<PAGE>
(b) Fargo hereby represents and warrants to Titus that he is acquiring
the Exchanged Shares for investment purposes only, for his own account, and not
as nominee or agent for any other any natural person, corporation, trust,
association, company, partnership, limited liability company, joint venture and
other entity and any government, governmental agency, instrumentality or
political subdivision (collectively, "Person"), and not with the view to, or for
-------
resale in connection with, any distribution thereof.
(c) Fargo hereby agrees with Titus as follows:
(i) Subject to Section 2.1(d) below, the certificates
evidencing the Exchanged Shares and each certificate issued in transfer thereof,
will bear such legend or legends as may be appropriate to effectuate the
purposes of this Agreement, and as may be required under any applicable law.
(ii) Fargo will not sell, transfer, assign, pledge, hypothecate
or otherwise dispose of any or all of the Exchanged Shares without first
providing Titus with an opinion of counsel to the effect that such sale,
transfer, assignment, pledge, hypothecation or other disposition will be exempt
from any registration, disclosure, qualification or other like requirements
under French or United States securities laws.
(iii) Fargo consents to Titus' making a notation on its records
or giving instructions to any transfer agent of the Exchanged Shares in order to
implement the restrictions on transfer of the Exchanged Shares mentioned in this
subsection (c).
(d) Any legend endorsed on a certificate evidencing Exchanged Shares
pursuant to Section 2.1(c)(i) hereof and any stop transfer instructions and
record notations with respect to such Exchanged Shares shall be removed and
Titus shall issue a certificate without such legend to the holder of such
Exchanged Shares (a) if such Exchanged Shares are registered under French
securities laws or (b) if Fargo provides Titus with an opinion of counsel (which
may be counsel for Titus) reasonably acceptable to Titus to the effect that a
public sale or transfer of such Exchanged Shares may be made without
registration under French securities laws.
2.2 Holding Period. Fargo understands and agrees that, pursuant to
--------------
the restrictions of Le Nouveau Marche (the "Stock Exchange"), he will not be
---------------
permitted to sell, transfer or otherwise dispose of, or pledge, collateralize or
hypothecate any of the Exempt Exchanged Shares, or enter into any contract,
option, or other arrangement with respect to any of the foregoing (each, a
"Transfer"), any of the Restricted Exchanged Shares for a period (the "Holding
- ---------- -------
Period") commencing on the date of the issuance of the Exchanged Shares and
- -------
ending on July 8, 2000. The "Restricted Exchanged Shares" shall mean those
shares representing eighty percent (80%) of the Exchanged Shares.
2.3 Lock-Up Period. With respect to the Exchanged Shares which are
--------------
not subject to the restrictions set forth in Section 2.2 (the "Exempt Exchanged
----------------
Shares"), Fargo agrees not to Transfer any of such Exempt Exchanged Shares for a
- -------
period (the "Lock-Up Period") commencing on the date of the issuance of the
---------------
Exchanged Shares and ending on the date which is two hundred seventy (270) days
following the Closing Date.
2
<PAGE>
3. Sale of Exchanged Shares; Right of First Refusal; Tag-Along Rights.
------------------------------------------------------------------
3.1 Sale of Exchanged Shares. Following the expiration of the
------------------------
Holding Period or Lock-Up Period, as applicable:
(a) Fargo shall have the right, from time to time, to elect, by
written notice to Titus, to require Titus to arrange for the sale of all or any
portion of such Exchanged Shares on the Stock Exchange on Fargo's behalf;
provided, however, that Titus shall have the right to elect that such sale of
- -------- -------
the Exchanged Shares be to Titus, or to Herve Caen and/or Eric Caen on the terms
and conditions set forth in Section 3.2 with respect to the right of first
refusal; provided, however, that notwithstanding the provisions of Section 3.2,
-------- -------
such sale shall be made at the then-current trading price of Titus Common Stock.
(b) If Titus (or either of the Caens) does not exercise the right
of first refusal pursuant to Section 3.2, or if Titus is unable to arrange a
sale of such Exchanged Shares within sixty (60) days following receipt of notice
from Fargo, then Titus shall, at Fargo's option, either (i) repurchase such
Exchanged Shares for cash at a purchase price equal to the average closing
trading price per share of Titus Common Stock for the ten (10) trading days
immediately preceding the date of such notice or (ii) exchange such Exchanged
Shares for shares of Interplay Common Stock at an exchange rate based upon the
average closing trading price per share of Interplay Common Stock and Titus
Common Stock for the ten (10) trading days immediately preceding the date of
such notice.
3.2 Right of First Refusal. If after expiration of the Holding
----------------------
Period or Lock-Up Period, as applicable, Fargo desires in good faith to Transfer
any of the Exchanged Shares, he shall deliver a written notice of such intent
(the "Refusal Notice") to Titus. The Refusal Notice shall contain (a) a
---------------
description of the proposed Transfer transaction and the terms thereof including
the number of Exchanged Shares proposed to be transferred (collectively, the
"Refusal Securities"), (b) the name of each Person to whom or in favor of whom
- --------------------
the proposed Transfer is to be made (the "Refusal Transferee"), (c) a
-------------------
description of the consideration to be received by Fargo upon Transfer of the
Refusal Securities and (d) an offer to sell to Titus or its nominee all, but not
less than all, of such Refusal Securities which are the subject of the Refusal
Notice (the "Refusal Offer"). The Refusal Notice shall be accompanied by a copy
--------------
of any written offer by the Refusal Transferee relating to such proposed
Transfer (e.g. any executed letter of intent stating the terms of such offer).
----
Each Refusal Offer shall contain the same terms and conditions, and shall be for
the same consideration, as described in the Refusal Notice. In the event that
the Refusal Offer provides payment of non-cash consideration for all or a
portion of the Refusal Securities, Titus shall have the right to pay the
purchase price in the form of cash equal in amount to the value of the non-cash
consideration. If Fargo and Titus cannot agree on such cash value within ten
(10) days following delivery of the Refusal Offer, the valuation (the
"Valuation") shall be made by an appraiser of recognized standing selected by
- -----------
mutual agreement of Fargo and Titus or, if the parties cannot agree on an
appraiser within twenty (20) days after delivery of the Refusal Offer, each
shall select an appraiser of recognized standing and the two appraisers so
selected shall designate a third appraiser of recognized standing, whose
Valuation shall be determinative of such value of the non-cash consideration.
Within ten (10) business days after the Refusal Notice is delivered by Fargo to
Titus (or, if later, the delivery of the
3
<PAGE>
Valuation), Titus may, by written notice delivered to Fargo (the "Refusal
-------
Acceptance Notice"), accept the offer to acquire all, but not less than all, of
- -----------------
the Refusal Securities as described in the Refusal Notice. If Titus does not
deliver a Refusal Acceptance Notice to Fargo within ten (10) business days after
the Refusal Notice is delivered by Fargo to Titus, then Fargo may proceed with
the Transfer of the Refusal Securities to the Refusal Transferee without any
further obligations under this Section 3.2. Transfers pursuant to the Refusal
Acceptance Notice shall occur not more than ninety (90) calendar days after the
date on which the Refusal Acceptance Notice has been delivered to Fargo by
Titus. Titus shall have the right, in its sole discretion, to transfer all or a
portion of its right of first refusal set forth in this Section 3.2 to Herve
Caen and/or Eric Caen.
3.3 Binding Upon Transferee. The obligations of Fargo under Section
-----------------------
3.2 shall be binding upon each Transferee to whom shares of the applicable
Exchanged Shares are Transferred by Fargo. Prior to the consummation of any
Transfer, Fargo shall cause the Transferee to execute an agreement in form and
substance reasonably satisfactory to Titus, providing that such Transferee shall
fully comply with the terms of this Agreement.
3.4 Fargo Tag-Along Rights.
----------------------
(a) Tag-Along Right. Neither Herve Caen nor Eric Caen (in such
---------------
case, a "Selling Stockholder") shall, directly or indirectly, sell, assign,
-------------------
pledge, encumber, hypothecate, gift, bequest or otherwise transfer, whether for
value or no value and whether voluntarily or involuntarily (including, without
limitation, by operation of law or by judgment, levy, attachment, garnishment,
bankruptcy or other legal or equitable proceedings, (in each case, a "Transfer")
--------
value to any transferee (a "Transferee") shares of Titus Common Stock which in
----------
the aggregate equal or exceed fifty percent (50%) of the aggregate holdings of
Titus Common Stock held by the Caens on the date prior to such proposed Transfer
(the "Transfer Shares") held by such Stockholder (a "Selling Stockholder")
--------------- -------------------
unless the terms and conditions of such Transfer shall include an offer (the
"Offer") to Fargo (the "Tag-Along Stockholder"), at the same price and on the
----- ---------------------
same terms and conditions as the Selling Stockholder has agreed to sell the
Transfer Shares, to include in the Transfer to the third party Transferee an
amount of Titus Common Stock determined in accordance with this Section 3.4.
(b) Obligation of Transferee to Purchase. The Transferee of the
------------------------------------
Selling Stockholder shall purchase from the Tag-Along Stockholder the number of
shares of Titus Common Stock owned or controlled by the Tag-Along Stockholder
that the Tag-Along Stockholder desires to require the Transferee to purchase
(the "Tag-Along Shares"); provided, however, that the number of Tag-Along Shares
----------------- -------- -------
to be sold by each Tag-Along Stockholder shall not exceed the number of shares
of Titus Common Stock derived by multiplying (i) the aggregate number of shares
of Titus Common Stock covered by the Offer by (ii) a fraction the numerator of
which is the number of shares of Titus Common Stock owned by the Tag-Along
Stockholder at the time of the Transfer and the denominator of which is the
total number of shares of Titus Common Stock held by the Stockholders at the
time of the Transfer (the "Tag-Along Formula").
------------------
(c) Notice. In the event a Selling Stockholder proposes to
------
Transfer any Transfer Shares, it shall notify, or cause to be notified, in
writing, the Tag-Along Stockholder of each such proposed Transfer. Such notice
shall be given not more than sixty (60) nor less than twenty (20) calendar days
prior to the proposed sale date and
4
<PAGE>
set forth: (i) the name of the Transferee and the number of Transfer Shares
proposed to be transferred, (ii) the proposed amount and form of consideration
and terms and conditions of payment offered by the Transferee (the "Transferee
----------
Terms"), (iii) that the Transferee has been informed of the "tag-along right"
- -----
provided for in this Section 3.4, and has agreed to purchase any Tag-Along
Shares from the Tag-Along Stockholder in accordance with the terms hereof, and
(iv) the proposed sale date.
(d) Exercise. The tag-along right may be exercised by the Tag-Along
--------
Stockholder by delivery of a written notice to the Selling Stockholder (the
"Tag-Along Notice") within fifteen (15) business days following receipt of the
- ------------------
notice specified in the preceding subsection. The Tag-Along Notice shall state
the number of Tag-Along Shares that the Tag-Along Stockholder wishes to include
in such Transfer to the Transferee, which number may exceed the total number of
Transfer Shares proposed to be transferred but which may not exceed the total
number of shares of Titus Common Stock owned or controlled by the Tag-Along
Stockholder. Upon the giving of a Tag-Along Notice, the Tag-Along Stockholder
shall be entitled and obligated to sell the number of Tag-Along Shares set forth
in the Tag-Along Notice, subject to adjustment pursuant to the Tag-Along
Formula, to the Transferee on the Transferee Terms; provided, however, the
-------- -------
Selling Stockholder shall not consummate the sale of any Transfer Shares offered
by them if the Transferee does not purchase all Tag-Along Shares which the Tag-
Along Stockholder is entitled and desires to sell pursuant hereto. After
expiration of the fifteen (15) business day period referred to above, if the
provisions of this Section 3.4 have been complied with in all respects, the
Selling Stockholder shall have the right, for a period of forty-five (45)
calendar days from the expiration of the fifteen (15) business day period
referred to above, to Transfer the Transfer Shares to the Transferee on the
Transferee Terms without further notice to any other party.
(e) Proportional Indemnity. Anything to the contrary contained herein
----------------------
notwithstanding, any indemnity provided by any Stockholder making a Transfer
pursuant to this Section 3.4 shall be in proportion to and limited to the
consideration received by such Stockholder for the Titus Common Stock
transferred by such Stockholder, as a percentage of all consideration received
by all Stockholders for all Titus Common Stock transferred pursuant to this
Section 3.4.
(f) No Limitation on Section 3.1. Nothing in this Section 3.4 shall
----------------------------
in any way limit Fargo's rights under Section 3.1 hereof.
(g) No Limitation on Permitted Transfers. The foregoing
------------------------------------
notwithstanding, the rights and obligations set forth in Section 2 and this
Section 3 shall not apply to any Permitted Transfer. For purposes of this
Agreement, a "Permitted Transfer" shall mean (i) any Transfer by a Stockholder
-------------------
to such Stockholder's ancestors, descendants or spouse or to a trust for the
benefit of such individuals or (ii) any bona fide gift or (iii) any Transfer by
a Stockholder to an entity that is wholly owned, and will remain wholly owned,
by such Stockholder (or such Stockholder and one or more of the individuals
referred to in the preceding clause (i)); provided, that (a) as a condition
--------
precedent to any Transfer made pursuant to one of the exemptions provided in
clause (i), (ii) or (iii), (1) the Stockholder proposing the Permitted Transfer
shall inform the other Stockholders of such Transfer or gift prior to effecting
it, and (2) the transferee or donee shall furnish the other Stockholders and
Titus with a written agreement to be bound by and comply with all provisions of
this Agreement, and such transferee or donee shall be treated as a "Stockholder"
for all purposes of this Agreement, (b) in the case of a Transfer
5
<PAGE>
in trust, such Stockholder shall become the trustee or, with such Stockholder's
spouse, a co-trustee of such trust, (c) in the case of a Transfer not in trust,
as a condition precedent to such Transfer such Stockholder shall retain an
irrevocable proxy to vote the transferred shares of Titus Common Stock and (d)
in the case of a Transfer described in clause (iii), as a condition precedent to
the Transfer all holders of equity or other ownership interests in such entity
shall enter into an agreement with the other Stockholders and Titus, which shall
be mutually satisfactory to the other Stockholders, Titus and the transferee,
under which the outstanding equity or other ownership interests in such
transferee shall be subjected to the same restrictions against Transfer that
appear in this Agreement.
4. Closing; Satisfaction of Conditions to Closing; Escrow Arrangement.
------------------------------------------------------------------
4.1 Closing. Subject to satisfaction of the conditions set forth in
-------
Section 4.2, the closing of the exchange of the Interplay Shares for the
Exchanged Shares (the "Closing") shall occur at the offices of Paul, Hastings,
--------
Janofsky & Walker LLP, 555 South Flower Street, Twenty-Third Floor, Los Angeles,
California, concurrently with the closing of the other transactions contemplated
by the Stock Purchase Agreement (the "Closing Date"). At the Closing, Titus
-------------
will deliver to Fargo a certificate evidencing the Exchanged Shares, which shall
be registered in Fargo's name, against surrender to Titus by Fargo of the
Interplay Shares.
4.2 Satisfaction of Conditions to Closing; Interim Closing.
------------------------------------------------------
Notwithstanding the provisions of Section 4.1, Fargo acknowledges and agrees
that, in order for Titus to issue the Exchanged Shares: (a) an independent
auditor appointed by a court sitting in France shall have issued a report with
respect to the adequacy of consideration received by Titus for the Exchanged
Shares; (b) the shareholders of Titus shall have duly approved the issuance of
the Exchanged Shares after receipt of the report described in clause (a) above;
and (c) the Agreement shall have been duly executed and delivered by all the
respective parties thereto. If the conditions set forth in clauses (a) through
(c) of this Section 4.2 have not been satisfied on or before the Closing Date,
then, notwithstanding the provisions of Section 4.1, on the Closing Date the
parties shall consummate an interim closing (the "Interim Closing") whereby
---------------
Fargo shall deliver (i) to Titus a proxy (the "Proxy") in the form attached
------
hereto as Exhibit A and (ii) to the escrow agent the Interplay Shares pursuant
---------
to the Escrow Agreement attached hereto as Exhibit B (the "Escrow Agreement").
--------- -----------------
Upon the consummation of the Interim Closing, Titus shall be deemed to be the
beneficial owner of the Interplay Shares. Upon the satisfaction of the
conditions set forth in clauses (a) through (c) of this Section 4.2, the parties
shall use their reasonable best efforts to consummate the transactions
contemplated hereby as promptly as practicable. In the event that Titus has not
satisfied the conditions set forth in Section clauses (a) and (b) hereof which
are applicable to it on or prior to December 31, 1999, then the Escrow Agent
shall on the first business day thereafter return to Fargo the Interplay Shares
and this Agreement shall be null and void unless otherwise agreed by the
parties.
5. Representations and Warranties by Fargo. In order to induce Titus to
---------------------------------------
enter into this Agreement, Fargo hereby covenants with, and represents and
warrants to, Titus as follows:
5.1 Binding Obligations. This Agreement has been duly executed and
-------------------
delivered by Fargo and constitutes the legal, valid and binding obligations of
Fargo and is enforceable against Fargo in accordance with its terms, except as
such enforcement is
6
<PAGE>
limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditors' rights generally.
5.2 Ownership of Interplay Shares. Fargo owns of record and
-----------------------------
beneficially the Interplay Shares, free and clear of any and all mortgages,
pledges, security interests, encumbrances, liens or charges of any kind
(collectively, "Liens"), and upon the delivery to Titus of the Interplay Shares,
------
Titus will be the record and beneficial owner of the Interplay Shares, free and
clear of any and all Liens.
5.3 Compliance with Laws and Other Instruments. The execution,
------------------------------------------
delivery and performance by Fargo of this Agreement (a) will not require from
the board of directors or stockholders of Interplay any consent or approval that
has not been validly and lawfully obtained, (b) will not require any
authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality of government, except such as shall have
lawfully and validly obtained prior to the Closing, (c) will not cause Fargo to
violate or contravene (i) any provision of law, (ii) any rule or regulation of
any agency or government, domestic of foreign, (iii) any order, writ, judgment,
injunction, decree, determination or award binding upon Fargo.
5.4 No Proxy. Fargo has not granted nor is Fargo a party to any
--------
proxy, voting trust or other agreement which is inconsistent with, conflicts
with or violates any provision of this Agreement.
6. Representations and Warranties by Titus. In order to induce Fargo to
---------------------------------------
enter into this Agreement, Titus hereby covenants with, and represents and
warrants to, Fargo as follows:
6.1 Organization, Standing, etc. Titus is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of France, and
has all requisite corporate power and authority to enter into this Agreement,
and to carry out the provisions hereof and thereof.
6.2 Capital Stock. The authorized capital stock of Titus consists of
-------------
10,100,000 shares of common stock, and Titus has no authority to issue any other
capital stock. 1,152,302 shares of common stock are issued and outstanding, and
such shares are duly authorized, validly issued, fully paid and nonassessable.
Except where the failure to do so would not result in a material adverse effect,
or any condition, situation or set of circumstances that could reasonably be
expected to have an adverse effect, on Titus and its Subsidiaries, taken as a
whole (a "Material Adverse Effect"), the offer, issuance and sale of the shares
------------------------
of common stock were registered or qualified under French law.
6.3 Exchanged Shares. On or before the Closing, the Exchanged Shares
----------------
will have been duly authorized and validly issued, and upon the consummation of
the transactions contemplated hereby, will be fully paid and nonassessable, free
and clear of all Liens and restrictions, other than Liens that might have been
created by Fargo and restrictions imposed by this Agreement and applicable law.
6.4 Corporate Acts and Proceedings . Except as disclosed on
------------------------------
Schedule 6.4 hereto, all corporate acts and proceedings required for the
- ------------
authorization, execution
7
<PAGE>
and delivery of this Agreement by Titus, and the performance of this Agreement
by Titus, have been lawfully and validly taken or will have been so taken prior
to the Closing.
6.5 Compliance with Laws and Other Instruments . Except as
------------------------------------------
disclosed on Schedule 6.5, and except as provided in Section 4.2 and the Stock
------------
Purchase Agreement, the execution, delivery and performance by Titus of this
Agreement (a) will not require from the board of directors or stockholders of
Titus any consent or approval that has not been validly and lawfully obtained,
(b) will not require any authorization, consent, approval, license, exemption of
or filing or registration with any court or governmental department, commission,
board, bureau, agency or instrumentality of government, except such as shall
have lawfully and validly obtained prior to the Closing, (c) will not cause
Titus to violate or contravene (i) any provision of law, (ii) any rule or
regulation of any agency or government, domestic of foreign, (iii) any order,
writ, judgment, injunction, decree, determination or award binding upon Titus,
or (iv) any provision of the charter documents of Titus, (d) will not violate or
be in conflict with, result in a breach of or constitute (with or without notice
or lapse of time or both) a default under, any indenture, loan or credit
agreement, note agreement, deed of trust, mortgage, security agreement or other
material agreement, lease or instrument, commitment or arrangement to which
Titus is a party or by which Titus or any of its properties, assets or rights is
bound or affected, which in any case would have a Material Adverse Effect.
6.6 Binding Obligations . This Agreement constitutes the legal,
-------------------
valid and binding obligations of Titus and is enforceable against Titus in
accordance with its terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally.
6.7 Financial Statements. Attached hereto as Schedule 6.7 is Titus'
-------------------- ------------
unaudited balance sheet (the "Balance Sheet") as of December 31, 1998 (the
--------------
"Balance Sheet Date") and the unaudited statement of operations for the twelve-
- --------------------
month period then ended. The foregoing financial statements (a) are in
accordance with the books and records of Titus, (b) present fairly the financial
condition of Titus at the Balance Sheet Date and the results of its operations
and cash flow for the period therein specified, and (c) have been prepared in
accordance with accounting principles generally accepted in France and applied
on a basis consistent with prior accounting periods, subject to normal year end
adjustments.
6.8 Litigation. Except as disclosed on Schedule 6.8 hereto, there is
---------- ------------
no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding (whether federal, state, local
or foreign) pending or, to Titus' knowledge, threatened against or affecting
Titus or its properties, assets or business (existing or contemplated), before
any court or governmental department, commission, board, bureau, agency or
instrumentality or any arbitrator, which if adversely determined would have a
Material Adverse Effect. Except as disclosed on Schedule 6.8 hereto, Titus is
------------
not aware of any fact which might result in or form the basis for any such
action, suit, arbitration, investigation, inquiry or other proceeding, which if
adversely determined would have a Material Adverse Effect. Titus is not in
default with respect to any order, writ, judgment, injunction, decree,
determination or award of any court or of any governmental agency or
instrumentality (whether federal, state, local or foreign), except where such
default would not have a Material Adverse Effect.
8
<PAGE>
6.9 Securities Laws. Based in part upon the representations of Fargo in
---------------
Sections 2.1 and 5, the offer, issue and sale of the Exchanged Shares are and
will be exempt from any registration, disclosure, qualification or other like
requirements under French securities laws.
6.10 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against
Titus or Fargo for any commission, fee or other compensation as a finder or
broker, or in any similar capacity, except for Concordia Capital Technology
Group, Inc., whose fees will be the responsibility of Titus.
6.11 Patents and Other Intangible Assets.
-----------------------------------
(a) Except as disclosed on Schedule 6.11 hereto, Titus (i) owns or has
-------------
the right to use all patents, trademarks, service marks, trade names,
copyrights, licenses and rights with respect to the foregoing, used in or
necessary for the conduct of its business as now conducted, (ii) to Titus"
actual knowledge, is not infringing upon or otherwise acting adversely to the
right or claimed right of any Person under or with respect to any patent,
trademark, service mark, trade name, copyright or license with respect thereto,
where such infringement would have a material adverse effect on Titus.
(b) Except for license, publishing and distribution agreements with
third parties entered into in the ordinary course of business, and except as
disclosed on Schedule 6.11 hereto, Titus has not sold, transferred, assigned,
-------------
licensed or subjected to any Lien, any intellectual property, trade secret,
know-how, invention, design, process, computer software or technical data, or
any interest therein, necessary for the development, manufacture, use, operation
or sale of any product listed on Schedules 6.13(a) and 6.13(b) hereto.
(c) Titus has not received any communication alleging or stating that
Titus or any of its employees or other agents has violated or infringed, or by
conducting business as proposed, would violate or infringe, any patent,
trademark, service mark, trade name, copyright, trade secret, proprietary right,
process or other intellectual property of any other Person, which could
reasonably be expected to have a material adverse effect on Titus.
6.12 Title to Property and Encumbrances; Leases. Except where failure
------------------------------------------
to do so would not have a Material Adverse Effect, Titus has good and marketable
title to all of its properties and assets, including without limitation the
properties and assets reflected in the Balance Sheet and the properties and
assets used in the conduct of its business, except for properties disposed of in
the ordinary course of business since the Balance Sheet Date and except for
properties held under valid and subsisting leases which are in full force and
effect and which are not in default, subject to no Lien, except those which are
shown and described on the Balance Sheet and except for Permitted Liens (as
hereinafter defined). "Permitted Liens" shall mean (a) Liens for taxes and
----------------
assessments or governmental charges or levies not at the time due or in respect
of which the validity thereof shall currently be contested in good faith by
appropriate proceedings; (b) Liens in respect of pledges or deposits under
workers' compensation laws or similar legislation, carriers', warehousemen's,
mechanics', laborers' and materialmen's and similar Liens, if the obligations
secured by such Liens are not then delinquent or are being contested in good
faith by appropriate proceedings; and (c) Liens incidental to the
9
<PAGE>
conduct of the business of Titus or any subsidiary of Titus which were not
incurred in connection with the borrowing of money or the obtaining of advances
or credits and which do not in the aggregate materially detract from the value
of its property or materially impair the use thereof in the operation of its
business.
6.13 Computer Software.
-----------------
(a) Except as set forth on Schedule 6.13(a) hereto, each of the
----------------
computer software programs developed by Titus that are listed on Schedule
--------
6.13(a) hereto (the "Operational Software") is functional, complete and
- ------- ---------------------
operational in all material respects in accordance with its specifications, has
been documented in accordance with Titus' standard practices, and Titus
possesses both the source code and object code versions thereof.
(b) Attached as Schedule 6.13(b) hereto is a true and complete list of
----------------
all computer software games currently in active development by or on behalf of
Titus (the "Developing Software"). Schedule 6.13(b) also sets forth whether
-------------------- ----------------
each such game is being internally or externally developed and, if externally
developed, the name of the third party developer.
6.14 Disclosure. To the knowledge of Herve Caen, the information
----------
contained in this Agreement, the Balance Sheet, and in any writing furnished
pursuant hereto or in connection herewith, taken as a whole, is true, complete
and correct (except that with respect to the Balance Sheet, the information
contained therein shall be true, complete and correct as of the date thereof),
and does not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or herein or necessary to make
the statements therein or herein, in light of the circumstances under which they
were made, not misleading.
7. Certificates. The certificates evidencing the Exchanged Shares, and each
------------
certificate issued in transfer thereof, will bear appropriate legends as
required by this Agreement and applicable law and the rules and regulations of
the Stock Exchange.
8. Enforcement.
-----------
8.1 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties hereto
contained in this Agreement or in any writing delivered pursuant to the
provisions of this Agreement or at the Closing shall survive any examination by
or on behalf of any party hereto and shall survive the Closing and the
consummation of the transactions contemplated hereby until the date which is
twelve (12) months after the Closing Date; provided, however, that each of the
-------- -------
representations and warranties contained in Sections 5.1, 5.2, 6.3 and 6.6
hereof shall survive any examination by or on behalf of any party hereto and
shall survive the Closing and the consummation of the transactions contemplated
hereby until the expiration of any applicable statute of limitations with
respect to such representation and warranty.
8.2 Indemnification.
---------------
10
<PAGE>
(a) Subject to Section 8.2(e) hereof, Titus hereby covenants and
agrees to defend, indemnify and save and hold harmless Fargo from and against
any loss, cost, expense, liability, claim or legal damages (including, without
limitation, reasonable fees and disbursements of counsel and accountants and
other costs and expenses incident to any actual or threatened claim, suit,
action or proceeding (each, an "Action") and all costs of investigation)
-------
(collectively, the "Damages") arising out of or resulting from (i) any
--------
inaccuracy in or breach of, or failure to perform or observe, any
representation, warranty, covenant or agreement made by Titus in this Agreement
or in any writing delivered pursuant to this Agreement or at the Closing, or
(ii) any claims of third parties claiming compensation, commissions or expenses
for services as a broker or finder based upon obligations incurred by Titus.
(b) Subject to Section 8.2(e) hereof, Fargo hereby covenants and
agrees to defend, indemnify and save and hold harmless Titus, together with
officers, directors, shareholders, employees, attorneys and representatives and
each Person who controls Titus from and against any Damages arising out of or
resulting from (i) any inaccuracy in breach of, or failure to perform or
observe, any representation, warranty, covenant or agreement made by Fargo in
this Agreement or in any writing or other agreement delivered pursuant hereto,
or (ii) any claims of third parties claiming compensation, commissions or
expenses for services as a broker or finder based upon obligations incurred by
Fargo.
(c) In the event that any indemnified party is made a defendant in or
party to any action, suit, proceeding or claim, judicial or administrative,
instituted by any third party for Damages or other relief (any such third party
action, suit, proceeding or claim being referred to as a "Claim"), the
------
indemnified party (referred to in this clause (b) as the "notifying party")
----------------
shall give notice thereof (a "Notice of Claim") as soon as practicable and in
----------------
any event within thirty (30) days after the notifying party receives notice
thereof. The failure to give such notice shall not affect whether an
indemnifying party is liable for reimbursement unless such failure has resulted
in the loss of substantive rights with respect to the indemnifying party's
ability to defend such Claim, and then only to the extent of such loss. Notice
of the intention so to contest and defend shall be given by the indemnifying
party to the notifying party within twenty (20) business days after the
notifying party's notice of such Claim (but, in all events, at least ten (10)
business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the indemnifying party and approved by the indemnified party (which
approval will not be unreasonably withheld). The indemnifying party shall have
the sole right to control the contest and defense of such Claim. The notifying
party shall be entitled, at its own cost and expense (which expense shall not
constitute Damages unless the notifying party reasonably determines that the
indemnifying party because of a conflict of interest, may not adequately
represent, the interests of the indemnified parties, and has provided the
indemnifying party with notice of such determination, and only to the extent
that such expenses are reasonable), to participate in such contest and defense
and to be represented by attorneys of its or their own choosing. The notifying
party will cooperate with the indemnifying party in the conduct of such defense.
Neither the notifying party nor the indemnifying party may concede, settle or
compromise any Claim without the consent of the other party, which consent will
not be unreasonably withheld or delayed in light of all factors of importance to
such party; provided, however, that if the indemnified party shall fail to
consent to the settlement of any Claim where (i) such settlement includes an
unconditional release of all claims against the indemnified party and requires
no payment
11
<PAGE>
on the part of the indemnified party to the claimant or any other party, (ii)
such settlement does not require any action on the part of the indemnified party
and does not impose terms restricting or adversely affecting the indemnified
party's activity, and (iii) the claimant has affirmatively indicated that it
will accept such settlement, then the indemnifying party shall no liability with
respect to any payment to be made in respect of such claim in excess of the
proposed settlement amount.
(d) In the event any indemnified party shall have a claim against any
indemnifying party that does not involve a Claim, the indemnified party shall
deliver a notice of such claim with reasonable promptness to the indemnifying
party. The failure to give such notice shall not affect whether an indemnifying
party is liable for reimbursement unless such failure has resulted in the loss
of substantive rights with respect to the indemnifying party's ability to defend
such claim, and then only to the extent of such loss. If the indemnifying party
notifies the indemnified party that it does not dispute the claim described in
such notice or fails to notify the indemnified party within thirty (30) days
after delivery of such notice by the indemnified party whether the indemnifying
party disputes the claim described in such notice, the Damages in the amount
specified in the indemnified party's notice will be conclusively deemed a
liability of the indemnifying party and the indemnifying party shall pay the
amount of such Damages to the indemnified party on demand.
(e) Any claim for indemnity under this Section 8.2 shall be delivered
in writing to the indemnifying party and set forth with reasonable specificity
as to the amount claimed and the underlying facts supporting such claim. The
indemnifying party shall have thirty (30) days to accept or dispute such claim
by written notice to the indemnified party (a "Contest Notice"); provided,
---------------
however, that if, at the time a Notice of Claim is submitted to the indemnifying
party the amount of the Claim in respect thereof has not yet been determined,
such thirty (30) day period shall not commence until a further written notice (a
"Notice of Liability") has been sent or delivered by the indemnified party to
--------------------
the indemnifying party setting forth the amount of the Claim incurred by the
indemnified party that was the subject of the earlier Notice of Claim. Such
Contest Notice shall specify the reasons or bases for the objection of the
Indemnifying Party to the claim, and if the objection relates to the amount of
the Claim asserted, the amount, if any, which the indemnifying party believes is
due the indemnified party. If no such Contest Notice is given with such 30-day
period, the obligation of the indemnifying party to pay to the indemnified party
the amount of the Claim set forth in the Notice of Claim, or subsequent Notice
of Liability, shall be deemed established and accepted by the indemnifying
party. If, on the other hand, the indemnifying party contests a Notice of Claim
or Notice of Liability (as the case may be) within such 30-day period, the
indemnified party and the indemnifying party shall thereafter attempt in good
faith to resolve their dispute by agreement. If the parties are unable to so
resolve their dispute within the immediately succeeding thirty (30) days, such
dispute shall be resolved by binding arbitration in Orange County, California,
as provided in Section 9.4 below. The award of the arbitrator shall be final
and binding on the parties and may be enforced in any court of competent
jurisdiction. Upon final determination of the amount of the Claim that is the
subject of an indemnification claim (whether such determination is the result of
the indemnifying party's acceptance of, or failure to contest, a Notice of Claim
or Notice of Liability, or of a resolution of any dispute with respect thereto
by agreement of the parties or binding arbitration), such amount shall be
payable, in cash by the indemnifying party to the indemnified parties who have
been determined to be entitled thereto within fifteen (15) days of such final
12
<PAGE>
determination of the amount of the Claim due by the indemnifying party. Any
amount that becomes due hereunder and is not paid when due shall bear interest
at the maximum legal rate per annum from the date due until paid.
(f) Anything to the contrary notwithstanding, (i) Fargo shall not be
indemnified and held harmless in respect of any Damages unless and until the
aggregate amount of such Damages exceeds $100,000, in which event Fargo shall be
indemnified and held harmless in respect of all Damages without regard to the
foregoing $100,000 limit, and (ii) the liability of Titus to Fargo shall be
limited to an amount equal to the valuation of the Exchanged Shares as
calculated in accordance with Section 1 above.
(g) Except as provided in Section 8.3, the provisions of this Section
8.2 shall be the exclusive remedy or exclusive means to obtain relief, as the
case may be, of any party in the event of any breach of any representation,
warranty, covenant or agreement contained herein (or in any certificate or other
document delivered pursuant hereto) by another party, or with respect to any
Action or Claim; provided, however, that this subsection (g) shall not limit any
-------- -------
statutory claim, or any claim in tort, which any party may have against the
other party.
8.3 Injunctive Relief. (a) Any party may bring a claim seeking specific
-----------------
performance by way of injunctive relief before a court of competent
jurisdiction to enforce the provisions of this Agreement, and (b) any party
seeking to enforce a claim for indemnification may bring any claim of
indemnification which is not resolved within the thirty day period provided in
Section 8.2(b) before a court of competent jurisdiction.
8.4 No Implied Waiver. Except as expressly provided in this Agreement,
-----------------
no course of dealing between Titus and Fargo and no delay in exercising any such
right, power or remedy conferred hereby or now or hereafter existing at law in
equity, by statute or otherwise, shall operate as a waiver of, or otherwise
prejudice, any such right, power or remedy.
9. Miscellaneous.
-------------
9.1 Notices. All notices, requests, consents and other communications
-------
required or permitted hereunder shall be in writing (including telecopy or
similar writing) and shall be given,
if to Titus to:
Titus Interactive SA
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, California 91311
Attention: Mr. Herve Caen, Chairman and
Chief Executive Officer
Telecopier: (818) 709-6537
13
<PAGE>
with a copy to:
Robert A. Miller, Jr., Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street - 23rd Floor
Los Angeles, California 90071
Telecopier: (213) 627-0705
if to Fargo to:
Mr. Brian Fargo
c/o Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Telecopier: (949) 252-0667
with a copy to:
K.C. Schaaf, Esq.
Stradling Yocca Carlson & Rauth, a professional corporation
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Telecopier: (949) 725-4100
or to such other address or telecopier number as such party may specify for the
purpose by notice to the other party or parties to this Agreement, as the case
may be. Any notice, request, consent or other communication hereunder shall be
deemed to have been given and received on the day on which it is delivered (by
any means including personal delivery, overnight air courier, United States or
French mail, as the case may be) or telecopied (or, if such day is not a
business day or if the notice, request, consent or communication is not
telecopied during business hours of the intended recipient, at the place of
receipt, on the next following business day).
9.2 Injunctive Relief. It is hereby agreed and acknowledged that it
-----------------
will be impossible to measure in money the damages that would be suffered if the
parties fail to comply with any of the obligations herein imposed on them and
that in the event of any such failure, an aggrieved party will be irreparably
damaged and will not have an adequate remedy at law. Any such party shall,
therefore, be entitled to injunctive relief, including specific performance, to
enforce such obligations, and if any action should be brought in equity to
enforce any of the provisions of this Agreement, none of the parties hereto
shall raise the defense that there is an adequate remedy at law.
9.3 Survival of Representations and Warranties. Each party's
------------------------------------------
representations and warranties made in this Agreement shall survive the
execution and delivery of this Agreement and of the consummation of the
transactions contemplated hereby.
9.4 Governing Law; Jurisdiction and Venue; Attorneys' Fees. This
------------------------------------------------------
Agreement shall be governed by and construed in accordance with the internal
laws of the State of California, without regard to its conflicts of laws
principles. The parties hereto
14
<PAGE>
hereby consent and agree that the United States District Court for the Central
District of California, or the Superior Court of California for the County of
Orange, will have exclusive jurisdiction over any legal action or proceeding
arising out of or relating to this Agreement or the subject matter hereof, and
each party consents to the in personam jurisdiction of such courts for the
-- --------
purpose of any such action or proceeding and agrees that venue is proper in such
courts. In the event of any dispute, controversy or proceeding between or among
the parties concerning this Agreement or the subject matter hereof, the
prevailing party shall be entitled to receive from the non-prevailing party its
costs and expenses, including reasonable attorneys' fees.
9.5 Execution in Counterparts. This Agreement may be executed in one
-------------------------
or more counterparts each of which shall be deemed an original, but all of which
shall together constitute one and the same instrument.
9.6 Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
9.7 Entire Agreement; Amendments and Waiver. This Agreement
---------------------------------------
(including the Exhibits hereto) constitutes the entire agreement among Titus and
Fargo with respect to the subject matter hereof and supersedes all prior oral or
written agreements and understandings, if any, relating to the subject matter
hereof. There are no restrictions, promises, warranties or undertakings
relating to such subject matter other than those set forth in this Agreement and
such other writings. The terms and provisions of this Agreement may be waived,
or consent for the departure therefrom granted, only by a written document
executed by the party entitled to the benefits of such terms or provisions.
9.8 Limitation of Liability on Caens. It is acknowledged and agreed
--------------------------------
that Herve Caen and Eric Caen are entering into this Agreement solely in their
capacities as shareholders of Titus, and that they shall not be held personally
liable for any breaches of any representations and warranties of Titus
hereunder, or for any breaches of any obligations of Titus hereunder.
9.9 Arbitration. Except for actions to obtain injunctions or other
-----------
equitable remedies, all disputes among the parties hereto shall be determined
solely and exclusively by arbitration under, and in accordance with the rules
then in effect of, the American Arbitration Association, or any successors
thereto ("AAA"), in Los Angeles, California, unless the parties otherwise agree
----
in writing. The parties shall, in connection with such arbitration, in addition
to any discovery permitted under AAA rules, be permitted to conduct discovery in
accordance with Section 1283.05 of the California Code of Civil Procedure, the
provisions of which are incorporated herein by this reference. The parties
shall unanimously select an arbitrator; provided, that if the parties cannot
--------
agree upon an arbitrator within seven (7) days, such arbitrator shall be
selected by the AAA upon application of any party. Judgment upon the award of
the agreed upon arbitrator or the so chosen arbitrator, as the case may be,
shall be binding and may be entered in any court of competent jurisdiction.
15
<PAGE>
[EXCHANGE AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
TITUS INTERACTIVE SA, a French corporation
/s/ Herve Caen
By: _____________________________
An Authorized Officer
/s/ Brian Fargo
_____________________________
Brian Fargo
/s/ Herve Caen
_____________________________
Herve Caen
/s/ Eric Caen
_____________________________
Eric Caen
16
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