<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 September 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 November 12, 1999
----- -------------------------------------------
Common Stock, $0.001 par value 29,904,396
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1999
TABLE OF CONTENTS
_____________
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the Three and
Nine Months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 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 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 906 $ 614
Restricted cash 1,567 -
Trade receivables, net of allowances
of $10,234 and $18,431, respectively 22,546 36,407
Inventories 9,245 6,303
Prepaid licenses and royalties 19,058 18,128
Deferred income taxes 4,000 5,358
Other 1,069 685
-------- --------
Total current assets 58,391 67,495
Property and Equipment, net 4,212 5,679
Other Assets 1,505 1,792
-------- --------
$ 64,108 $ 74,966
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities:
Accounts payable $ 29,168 $ 23,403
Accrued liabilities 19,664 22,300
Current portion of long-term debt 27,114 24,521
Income taxes payable 268 254
-------- --------
Total current liabilities 76,214 70,478
Long-Term Debt, net of current portion 5,567 130
Deferred Income Taxes - 22
Minority Interest 69 143
Commitments and Contingencies (Note 4)
Stockholders' 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
23,654,396 shares as of September 30, 1999
and 18,292,431 shares as of December 31, 1998 23 18
Paid-in capital 62,247 51,918
Accumulated deficit (80,279) (48,097)
Accumulated comprehensive income adjustments 267 354
-------- --------
Total stockholders' deficit (17,742) 4,193
-------- --------
$ 64,108 $ 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 23,636 $ 24,504 $ 74,582 $ 106,225
Cost of goods sold 15,333 19,141 45,441 58,653
---------- ---------- ---------- ----------
Gross profit 8,303 5,363 29,141 47,572
Operating expenses:
Marketing and sales 7,304 9,797 21,763 27,411
General and administrative 8,375 3,739 14,206 9,516
Product development 5,424 6,615 16,110 18,555
Other 3,308 - 4,940 -
---------- ---------- ---------- ----------
Total operating expenses 24,411 20,151 57,019 55,482
---------- ---------- ---------- ----------
Operating income (loss) (16,108) (14,788) (27,878) (7,910)
Other income (expense):
Interest expense, net (925) (810) (2,647) (3,590)
Other income (expense), net 68 (1) (273) (83)
---------- ---------- ---------- ----------
Total other expense (857) (811) (2,920) (3,673)
Loss before provision for income taxes (16,965) (15,599) (30,798) (11,583)
Provision (benefit) for income taxes 11 (468) 1,384 8
---------- ---------- ---------- ----------
Net loss $ (16,976) $ (15,131) $ (32,182) $ (11,591)
========== ========== ========== ==========
Net loss per share:
Basic and diluted $ (0.75) $ (0.83) $ (1.55) $ (0.85)
========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic and diluted 22,689,285 18,230,673 20,785,031 13,591,820
========== ========== ========== ==========
</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>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(32,182) $(11,591)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 2,334 2,634
Noncash expense for stock options 26 134
Deferred income taxes 1,336 606
Minority interest in loss of subsidiary (74) (82)
Changes in assets and liabilities:
Trade receivables 13,861 (10,605)
Inventories (2,942) 517
Income taxes receivable 1,427
Other current assets (384) (548)
Other assets 410 (5)
Prepaid licenses and royalties (930) (5,450)
Accounts payable 5,765 6,717
Accrued liabilities (2,636) (2,777)
Income taxes payable 14 (316)
-------- --------
Net cash used in operating activities (15,402) (19,339)
Cash flows from investing activities:
Purchase of property and equipment (990) (1,527)
-------- --------
Net cash used in investing activities (990) (1,527)
Cash flows from financing activities:
Net borrowings on line of credit 2,483 1,956
Net proceeds from issuance of common stock 10,300 24,349
Net proceeds from issuance of notes payable 5,547
Proceeds from exercise of stock options 8 -
Additions to restricted cash (1,567) -
Repayment of promissory notes and warrants (6,072)
Other 214
-------- --------
Net cash provided by financing activities 16,771 20,447
-------- --------
Effect of exchange rate changes on cash and cash equivalents (87) 113
-------- --------
Net increase (decrease) in cash and cash equivalents 292 (306)
Cash and cash equivalents, beginning of period 614 1,536
-------- --------
Cash and cash equivalents, end of period $ 906 $ 1,230
======== ========
Supplemental cash flow information:
Cash paid for:
Interest $ 2,607 $ 3,659
Income taxes - 3
======== ========
Supplemental disclosures of noncash transactions:
Issuance of common stock in exchange for development
of intellectual properties $ 1,000 -
Issuance of note payable in exchange for put rights 1,000 -
======== ========
</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 (8.25 percent at September 30, 1999)
less three percent, or 5.25 percent at September 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 nine months ended September 30, 1999, the Company incurred a net
loss of $32.2 million and used cash in operating activities of $15.4 million.
Partially because of these losses, the Company's liquidity deteriorated during
the period ended September 30, 1999. At September 30, 1999, the Company had
negative working capital of $17.8 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 completed an equity transaction with an investor which provided for the
issuance of 4,545,455 shares of the Company's Common Stock for $10 million (See
Note 5), and in November 1999, the Company issued another 6.25 million shares of
Common Stock to the same investor for consideration of $25 million (See Note
11).
The Company believes that funds available under its line of credit, funds
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 this Quarterly Report on Form 10-Q.
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 nine months ended September 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>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Packaged software $ 7,404 $ 4,070
CD-ROMs, cartridges, manuals, packaging and supplies 1,841 2,233
------------- -----------
$ 9,245 $ 6,303
============= ===========
</TABLE>
7
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loan Agreement $ 26,958 $ 24,475
Convertible Loans (See Note 5) 5,000 -
Other 723 176
------------- ------------
32,681 24,651
Less--current portion (27,114) (24,521)
------------- ------------
$ 5,567 $ 130
============= ============
</TABLE>
Loan Agreement
Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (5.4 percent at September 30, 1999 and 5.62 percent at
December 31, 1998) plus 4.87 percent (10.27 percent at September 30, 1999 and
10.49 percent at December 31, 1998). At various times during 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 November 4, 1999, $7 million
through November 29, 1999 and $5 million in excess thereafter. Under the
amended line of credit the Company has been required to place a cash collateral
deposit from time to time, which was $1.5 million at September 30, 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 is required to maintain the $5 million personal guarantee by the
Company's Chairman and Chief Executive Officer 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 completed an equity transaction with an investor
which provided for the issuance of 4,545,455 shares of the Company's Common
Stock for $10 million.
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
bearing interest at the rate of 6 percent per annum 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 was subject
to standard conditions, including stockholders approval which was obtained at
the August 24, 1999 stockholders meeting. In November 1999, the Company
completed the transaction with the investor and issued 6,250,000 of the
Company's Common Stock in exchange for a total consideration of $25 million,
including the conversion of the $5 million note payable, $15 million in cash and
a note receivable for $5 million due on November 30, 1999, bearing interest at
the rate of six percent per annum.
8
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 and $0.2 million for the three and nine months
ended September 30, 1999, respectively, in connection with the assumption of the
put right, and an additional $0.1 million will be amortized as interest expense
over the remaining term of the Loan Agreement. In May 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. As of September 30, 1999, the Company had not
repurchased any shares under this Agreement.
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 and 2000 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 subject to forfeiture until such products are
delivered and accepted by the Company. The arrangement also includes certain
penalties to the developer in the event of noncompliance.
Note 6. Other Operating Expenses
In February 1999, the Company acquired a minority interest in Virgin
Interactive Entertainment Limited ("Virgin") and entered into a Distribution
Agreement with Virgin (See Note 9). The new distribution and operating
arrangements required the termination of the then existing Distribution
Agreements with third parties and caused the re-organization of the Company's
operations in Europe, including a reduction in the work force and a facilities
move. The Company has recorded asset valuation, restructuring charges and
severance expenses of $0.6 and $2.3 million during the three and nine-month
periods ended September 30, 1999, respectively in connection with these
arrangements.
The Distribution Agreement with Virgin requires the Company to pay certain
minimum operating charges in 1999, and the Company has recorded a provision
of $2.7 million charged to operations in the three month period ended September
30, 1999 to cover these charges. In addition, the Company recorded severance
expense of $0.3 and $0.8 million during the three and nine months ended
September 30, 1999 respectively.
9
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Net Loss Per Share
Basic net loss per share is calculated by dividing net 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 loss per share is the same as basic because the effect
of outstanding stock options and warrants is anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
BASIC and DILUTED (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net loss $ (16,976) $ (15,131) $ (32,182) $ (11,591)
Average common shares outstanding 22,689,285 18,230,673 20,785,031 13,591,820
------------ ----------- ----------- -----------
Net loss per common share $ (0.75) $ (0.83) $ (1.55) $ (0.85)
============ =========== =========== ===========
</TABLE>
There were options and warrants outstanding to purchase 3,224,580 shares of
common stock and there were 484,848 shares of restricted common stock at
September 30, 1999 which were excluded from the loss per share computation. The
weighted average exercise price of the outstanding options and warrants at
September 30, 1999 and 1998 was $3.46 and $4.80, respectively.
Note 8. Comprehensive Loss
Comprehensive loss consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net loss $ (16,976) $ (15,131) $ (32,182) $ (11,591)
Other comprehensive loss, net of income taxes:
Foreign currency translation adjustments 23 (113) 87 (113)
----------- ----------- ----------- -----------
Other comprehensive loss 23 (113) 87 (113)
----------- ----------- ----------- -----------
Total comprehensive loss $ (16,953) $ (15,244) $ (32,095) $ (11,704)
=========== =========== =========== ===========
</TABLE>
During the three and nine months ended September 30, 1999, the Company had
a pre-tax increase in foreign currency translation adjustments of $23,000 and
$83,000, respectively, compared to a pre-tax decrease of $116,500 and $112,900
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 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, certain minimum operating charges and a
distribution fee based on net sales, and Virgin provides certain market
preparation, warehousing, sales and fulfillment services on behalf of the
Company. In connection with this arrangement the Company paid $1.1 million in
distribution fees and $2.0 million in overhead fees to Virgin for the three
months ended September 30, 1999 and paid $2.1 million in distribution fees and
$3.8 million in overhead fees for the nine months ended September 30, 1999. In
addition, the Company has accrued $2.7 million to cover certain minimum
operating charges in 1999 payable to Virgin.
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 nine months
ended September 30, 1999, the Company recognized revenue of $390,000 and a gross
profit of $58,000 for performing distribution services on behalf of Virgin.
In April 1999, the Company entered into an exclusive North American
distribution agreement with Titus Interactive S.A. ("Titus") 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 and nine months
ended September 30, 1999, the Company recognized revenue of $0.5 and $1.4
million and gross profit of $0.1 and $0.2 million, respectively, for performing
distribution services on behalf of Titus.
During the three and nine months ended September 30, 1999, the Company
executed publishing agreements with Titus for $0.4 and $2.6 million,
respectively. As a result of these agreements, the Company has delivered the
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 its investment in VIE for the three and nine months
ended September 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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net revenues:
United States $ 23,809 $ 17,471 $ 64,888 $ 81,485
United Kingdom (173) 7,033 9,694 24,740
-------- -------- -------- --------
Consolidated net revenues $ 23,636 $ 24,504 $ 74,582 $106,225
======== ======== ======== ========
Operating income (loss):
United States $(15,287) $(12,141) $(24,494) $ (7,543)
United Kingdom (821) (2,647) (3,384) (367)
-------- -------- -------- --------
Consolidated loss from operations $(16,108) $(14,788) $(27,878) $ (7,910)
======== ======== ======== ========
Expenditures made for the acquisition
of long-lived assets:
United States $ 77 $ 44 $ 986 $ 740
United Kingdom - 204 - 446
-------- -------- -------- --------
Total expenditures for long-lived assets $ 77 $ 248 $ 986 $ 1,186
======== ======== ======== ========
</TABLE>
Net revenues by geographic regions were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 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 $10,895 46.1% $15,472 63.1% $35,242 47.4% $ 63,379 59.6%
Europe 4,815 20.4 6,179 25.2 17,846 23.9 23,064 21.7
Rest of World 1,203 5.1 856 3.5 4,532 6.1 5,273 5.0
OEM, royalty and
licensing 6,723 28.4 1,997 8.2 16,962 22.6 14,509 13.7
------- ----- ------- ----- ------- ----- -------- -----
$23,636 100.0% $24,504 100.0% $74,582 100.0% $106,225 100.0%
======= ===== ======= ===== ======= ===== ======== =====
</TABLE>
Net investments in long-lived assets by geographic regions were as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
North America $5,492 97.0% $6,621 89.6%
Europe 81 2.0 723 9.8
Rest of World - - - -
OEM, royalty and licensing 62 1.0 44 0.6
------ ----- ------ -----
$5,635 100.0% $7,388 100.0%
====== ===== ====== =====
</TABLE>
12
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Subsequent Events
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, which were consummated in November 1999, pursuant to which the Company
issued 6.25 million shares of the Company's Common Stock in exchange for total
consideration of $25 million, including the conversion of the $5 million note
payable, $15 million in cash and a note receivable for $5 million due on
November 30, 1999, bearing interest at the rate of six percent per annum. These
transactions follow 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
exchanged 2 million shares of the Company's Common Stock held by him for shares
of Titus Common Stock. Following the completed transactions, Titus holds
approximately 43 percent of the outstanding Common Stock of the Company. In the
event Titus exercises its option to purchase Universal's holdings of Common
Stock of the Company, Titus is expected to hold approximately 58 percent of the
outstanding Common Stock of the Company, resulting in a change of control of the
Company in favor of Titus. At the closing of the transaction, the Company, Titus
and the Company's chairman and chief executive officer entered 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 entered 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 also
entered 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 are 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. In addition, two
members of Titus' management have joined 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 Nine Months Ended
September 30, September 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 $ 23,636 100.0% $ 24,504 100.0% $ 74,582 100.0% $106,225 100.0%
Cost of goods sold 15,333 64.9% 19,141 78.1% 45,441 60.9% 58,653 55.2%
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit 8,303 35.1% 5,363 21.9% 29,141 39.1% 47,572 44.8%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Marketing and sales 7,304 30.9% 9,797 40.0% 21,763 29.2% 27,411 25.8%
General and administrative 8,375 35.4% 3,739 15.3% 14,206 19.0% 9,516 9.0%
Product development 5,424 22.9% 6,615 27.0% 16,110 21.6% 18,555 17.5%
Other 3,308 14.0% - 0.0% 4,940 6.6% - 0.0%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 24,411 103.2% 20,151 82.3% 57,019 76.4% 55,482 52.3%
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss) (16,108) -68.1% (14,788) -60.3% (27,878) -37.3% (7,910) -7.5%
Other income (expense) (857) -3.6% (811) -3.3% (2,920) -3.9% (3,673) -3.5%
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) before income taxes (16,965) -71.7% (15,599) -63.7% (30,798) -41.2% (11,583) -11.0%
Provision for income taxes 11 0.0% (468) -1.9% 1,384 1.9% 8 0.0%
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss) $(16,976) -71.7% $(15,131) -61.8% $(32,182) -43.1% $(11,591) -11.0%
======== ===== ======== ===== ======== ===== ======== =====
Net revenues by geographic region:
North America $ 10,895 46.1% $ 15,472 63.1% $ 35,242 47.4% $ 63,379 59.6%
International 6,018 25.5% 7,035 28.7% 22,378 30.0% 28,337 26.7%
OEM, royalty and licensing 6,723 28.4% 1,997 8.2% 16,962 22.6% 14,509 13.7%
Net revenues by platform:
Personal computer $ 13,192 55.9% $ 7,652 31.2% $ 46,096 61.9% $ 52,638 49.5%
Video game console 3,721 15.7% 14,855 60.6% 11,524 15.5% 39,078 36.8%
</TABLE>
Net Revenues
Net revenues for the three months ended September 30, 1999 decreased 3.5
percent to $23.6 million from $24.5 million in the comparable 1998 quarter.
North America net revenues decreased to $10.9 million, or 46.1 percent of net
revenues, from $15.5 million, or 63.1 percent of net revenues, in the 1998
quarter. International net revenues decreased to $6.0 million, or 25.5 percent
of net revenues, from $7.0 million, or 28.7 percent of net revenues in the 1998
quarter. OEM, royalty and licensing net revenues increased 236.7 percent to
$6.7 million, or 28.4 percent of net revenues, in the 1999 quarter from $2.0
million, or 8.2 percent of net revenues, in the 1998 quarter.
Net revenues for the nine months ended September 30, 1999 decreased 29.8
percent to $74.6 million from $106.2 million in the comparable 1998 period.
North America net revenues decreased to $35.2 million, or 47.4 percent of net
revenues, from $63.4 million, or 59.6 percent of net revenues, in the 1998
period. International net revenues decreased to $22.4 million, or 30 percent of
net revenues, from $28.3 million, or 26.7 percent of net revenues in the 1998
period. OEM, royalty and licensing net revenues increased to $17 million, or
22.6 percent of net revenues, in the 1999 period from $14.5 million, or 13.7
percent of net revenues, in the 1998 period.
The decrease in North America and International net revenues for the three
and nine months ended September 30, 1999 was primarily due to decreased major
title releases, lower initial ship-ins on new titles and higher reserves for
product returns and price protection, which were partially offset by increases
in OEM, royalty and licensing revenues. The increase in OEM, royalty and
licensing during the three months ended September 30, 1999, is primarily
attributable to OEM revenue increasing by $1.7 million over the same period in
1998 with $1 million pertaining to a single transaction with a customer and the
recognition of $2.2 million in deferred revenue for the shipment of title to a
customer. The increase in OEM, royalty and licensing during the nine months
ended September 30, 1999 is primarily due to the licensing deals with Titus
Interactive SA.
15
<PAGE>
Cost of Goods Sold; Gross Margin
Cost of goods sold decreased 19.9 percent in the three months ended
September 30, 1999 to $15.3 million, or 64.9 percent of net revenues, from $19.1
million, or 78.1 percent of net revenues in the comparable 1998 quarter. Gross
margin increased to 35.1 percent in the 1999 quarter from 21.9 percent in the
1998 quarter.
Cost of goods sold decreased 22.5 percent in the nine months ended
September 30, 1999 to $45.4 million, or 60.9 percent of net revenues, from $58.7
million, or 55.2 percent of net revenues in the comparable 1998 period. Gross
margin decreased to 39.1 percent in the 1999 period from 44.8 percent in the
1998 period.
The increase in gross margin during the three months ended September 30,
1999 was primarily a result of the change in the product mix from lower margin
console titles to higher margin PC titles. The decrease in gross margin during
the nine months ended September 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 that had been canceled, and a higher percentage of externally
developed titles as well as higher royalty rates on such titles. Additionally,
gross margin was adversely affected by the fact that the Company had more
externally developed titles in 1999 as compared with 1998.
Operating Expenses
Total operating expenses increased 21.1 percent to $24.4 million, or 103.2
percent of net revenues, in the three months ended September 30, 1999 from $20.2
million, or 82.3 percent of net revenues, for the comparable 1998 quarter.
Total operating expenses increased 2.8 percent to $57 million, or 76.4
percent of net revenues, in the nine months ended September 30, 1999 from $55.5
million, or 52.3 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 25.4 percent to $7.3 million, or 30.9 percent of net
revenues, for the three months ended September 30, 1999 from $9.8 million, or 40
percent of net revenues for the comparable 1998 quarter and decreased 20.6
percent to $21.8 million, or 29.2 percent of net revenues, for the nine months
ended September 30, 1999 from $27.4 million, or 25.8 percent of net revenues for
the comparable 1998 period. The decreases are primarily attributable to
decreased advertising, specifically television 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 by
increased marketing development funds with U.S. retailers.
General and Administrative. General and administrative expenses primarily
include administrative personnel expenses, facilities costs, professional
expenses, bad debt provisions and other overhead charges. General and
administrative expenses increased 124 percent to $8.4 million, or 35.4 percent
of net revenues, in the three months ended September 30, 1999 from $3.7 million,
or 15.3 percent of net revenues in the comparable 1998 quarter and increased
49.3 percent to $14.2 million, or 19 percent of net revenues, for the nine
months ended September 30, 1999 from $9.5 million, or 9 percent of net revenues
for the comparable 1998 period. The Company recorded bad debt provisions of $6.0
and $6.9 million during the three and nine months ended September 30, 1999,
respectively, in response to the deteriorating financial condition of certain
customers, which placed serious doubt on their ability and intent to pay.
Excluding the provision for bad debt expense, the Company's general and
administrative expense decreased 36.5 and 27.4 percent for the three and nine
months ended September 30, 1999, respectively. This decrease is primarily due to
the reorganization of the Company's European operations and efforts to reduce
North American overhead.
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 percent to $5.4 million, or 22.9
percent of net revenues, in the three month period ended September 30, 1999 from
$6.6 million, or 27 percent of net revenues, in the comparable 1998 quarter and
decreased 13.2 percent to $16.1 million, or 21.6 percent of net revenues, for
the nine months ended September 30, 1999 from $18.6 million, or 17.5 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.
16
<PAGE>
Other Operating Expense. Other operating expenses are primarily non-
recurring or unusual expenses associated with the operations of the Company.
Other operating expenses of $3.3 million and $4.9 million for the three and nine
months ended September 30, 1999, respectively, include restructuring and
severance charges of $616,000 and $1.6 million for the three and nine months
ended September 30, 1999, respectively, incurred primarily in connection with
the new distribution arrangements in Europe whereby Virgin replaced the third
party distribution arrangements and the Company recorded provisions for the
costs of reductions in work force and facilities move, including asset
valuation, severance expenses, and estimated facility lease termination charges.
In addition, in the three month period ended September 30, 1999 the Company
recorded a $2.7 million provision to cover certain minimum operating charges
payable to Virgin.
Other Expense
Other expense for the three and nine month periods ended September 30, 1999
primarily included interest expense on the Company's line of credit. Other
expense increased to $0.9 million in the three months ended September 30, 1999
from $0.8 million in the comparable 1998 quarter and decreased to $2.9 million
in the nine months ended September 30, 1999 from $3.7 million in the comparable
1998 period. The slight increase for the three month period was due to higher
interest expense resulting from a slightly higher balance on the Company's line
of credit. The decreases for the nine month period was primarily due to
decreased interest expense resulting from the repayment of the Subordinated
Secured Promissory Notes with the proceeds of the IPO in June 1998.
Provision (Benefit) for Income Taxes
The Company recorded no tax benefit in the three months ended September 30,
1999 compared to $0.5 million in the three months ended September 30, 1998 and
recorded a tax provision of $1.4 million in the nine months ended September 30,
1999 compared to no provision in the nine months ended September 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 September 30, 1999 the Company's principal sources of
liquidity included cash and short-term investments of approximately $0.9 million
and the Company's line of credit bearing interest at the London Interbank
Offered Rate plus 4.87 percent (10.27 percent as of September 30, 1999),
expiring January 1, 2000. Under the terms of the line of credit, the Company has
maximum availability for borrowings and letters of credit up to $37.5 million
through November 29, 1999, $30.0 million through December 30, 1999 and $25.0
million thereafter, based in part upon qualifying receivables and inventory.
Within the overall credit limit, the line of credit also provides that the
Company may borrow up to $14.0 million in excess of its borrowing base through
November 4, 1999, $7.0 million through November 29, 1999, and up to $5.0 million
in excess of its borrowing base thereafter. Under the line of credit the Company
is required to maintain a cash collateral deposit of $1.5 million as of
September 30, 1999 and place an additional $1 million with the lender on
November 5, 1999. As amended, the Company is additionally subject to certain
borrowing limitations beginning August 16, 1999 which limit the Company's actual
borrowings to $35.0 million with various month end limitations, generally
decreasing to $25.0 million at December 31, 1999 and is required to maintain the
$5.0 million personal guarantee by the Company's Chairman and Chief Executive
Officer in place throughout the term. The Company is currently in compliance
with the terms of the Loan Agreement. As of September 30, 1999, the Company's
balance on the line of credit was $27.0 million with no stand by letters of
credit outstanding. The amount available for borrowing under the line of credit
was $0.5 million as of September 30, 1999. Based upon certain assumptions,
including without limitation, the Company's ability to achieve anticipated
operating results, and the completion of 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.
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, the acquisition or lease of
equipment and other assets used in the product development process and fund the
Company's operating losses. The Company's operating activities used cash of
$15.4 million and $19.3 million during the nine months ended
17
<PAGE>
September 30, 1999 and 1998, respectively. The cash used by operating activities
in the nine months ended September 30, 1999 was primarily attributable to the
net loss incurred and a decrease in accrued liabilities as well as increases in
inventories and prepaid licenses and royalties and was partially offset by a
decrease in trade receivables and an increase in accounts payable.
Cash provided by financing activities of $16.8 million in the nine months
ended September 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 $20.4 million in the nine
months ended September 30, 1998 resulted primarily from the proceeds from the
Company's initial public offering and borrowings on the line of credit offset in
part by repayments on the promissory notes and warrants.
Cash used in investing activities of $1.0 and $1.5 million during the nine
months ended September 30, 1999 and 1998, respectively, 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 nine months of 1999, including a reduction
of personnel, a decrease in management compensation and the delay, cancellation
or scaling back of certain product development and marketing programs, among
other actions. In addition, the Company entered into two Stock Purchase
agreements with Titus Interactive SA. The first Stock Purchase Agreement was
consummated in March 1999, and the second Stock Purchase Agreement was
consummated in November 1999. 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. 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. In addition, such measures may adversely affect the Company's
operation results in future periods.
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 potential 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 anticipated operating results and the completion of
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 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
18
<PAGE>
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 has assessed 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. 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 has completed its assessment of its products for Year 2000
compliance. 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
products are not Year 2000 compliant, such non-compliance could adversely affect
the consumers' ability to use such products.
The Company has substantially completed the implementation of its Year 2000
plan. 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 does not
currently have any contingency plans in place to address the failure of timely
conversion of its and/or third-party systems in respect of the Year 2000 issue.
The Company's failure to address any unforeseen Year 2000 issues could
negatively impact its results of operations.
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
19
<PAGE>
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
We used net cash in operations of $15.4 million in the nine months ended
September 30, 1999 and $19.3 million in the nine months ended September 30,
1998. We cannot assure you that we will ever generate positive cash flow from
operations. Our ability to fund our capital requirements out of our available
cash, line of credit and cash generated from our operations depends on a number
of factors. Some of these factors include the progress of our product
development programs, the rate of growth of our business, and our products'
commercial success. We may have to seek additional funds through debt or equity
financings, product licensing or distribution transactions or other sources of
financing in order to provide ourselves with enough working capital. If we issue
additional equity securities, our existing stockholders could suffer a large
amount of dilution in their ownership. In the event we have to raise additional
working capital from other sources, we cannot assure you that we will be able to
raise additional working capital on acceptable terms, if at all. In the event we
cannot raise additional working capital, we would have to take certain actions
to reduce our costs, including selling or consolidating certain operations,
delaying, canceling or scaling back product development and marketing programs
and other actions. These measures could materially and adversely affect our
ability to publish successful titles, and these measures may not be enough to
generate operating profits. We might have to get the approval of other parties,
including our financial lender, for some of these measures, and we cannot assure
you that we would be able to obtain those approvals.
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality
Our operating results have fluctuated a great deal in the past and will
probably continue to fluctuate significantly in the future, both on a quarterly
and an annual basis. Many factors may cause or contribute to these fluctuations,
and many of these factors are beyond our control. Some of these factors include
the following:
. delays in shipping our products
. demand for our products
. demand for our 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 us and
our competitors
. changes in our product mix
. the number of our products which are returned
. the timing of orders placed by our distributors and dealers
. delays in shipping our products
. the timing of our development and marketing expenditures
. price competition
. the level of our international and OEM, royalty and licensing net
revenues.
Many factors make it difficult to accurately predict the quarter in which
we will ship our products. Some of these factors include:
. the uncertainties associated with the interactive entertainment software
development process
. long manufacturing lead times for Nintendo-compatible products
. possible production delays
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. the approval process for products compatible with the Sony Computer
Entertainment, Nintendo and Sega video game consoles
. approvals required from other licensors.
Because of the limited number of products we introduce in any particular
quarter, a delay in the introduction of a product may materially and adversely
affect our operating results for that quarter, and may not be recaptured in
later quarters. A significant portion of our operating expenses is relatively
fixed, and planned expenditures are based largely on sales forecasts. If net
revenues do not meet our 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 occur
ring during the year-end holiday buying season, followed by demand during the
first calendar quarter. As a result, our net revenues, gross profits and
operating income have historically been highest during the fourth and the
following first calendar quarters, and have declined from those levels in the
following second and third calendar quarters.
Our failure or inability to introduce products on a timely basis to meet
these seasonal increases in demand may have a material adverse effect on our
business, operating results and financial condition.
We may over time become increasingly affected by the industry's seasonal
patterns. Although we seek to reduce the effect of such seasonal patterns on our
business by distributing our product release dates more evenly throughout the
year, we cannot assure you that these efforts will be successful. We cannot
assure you that we 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 our net revenues.
As a result of the foregoing factors it is likely that our operating
results in one or more future periods will fail to meet or exceed the
expectations of securities analysts or investors. In that event, the trading
price of our Common Stock would likely be materially adversely affected.
Significant Recent Losses
We have experienced significant net losses in recent periods, including
losses of $32.2 million and $28.2 million for the nine months ended September
30, 1999 and the year ended December 31, 1998, respectively. These losses
resulted largely 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 the cost of restructuring our international distribution
arrangements. These losses also resulted from lower than expected worldwide
sales of certain releases, as well as from operating expense levels that were
high relative to our revenue level. We may experience similar problems in
current or future periods and we may not be able to generate sufficient net
revenues or adequate working capital, or bring our 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
Our products typically have short life cycles, and we depend on the timely
introduction of successful new products to generate net revenues, to fund
operations and to replace declining net revenues from older products. These new
products include enhancements of or sequels to our existing products and
conversions of previously released products to additional platforms. If in the
future, for any reason, net revenues from new products fail to replace declining
net revenues from existing products, our business, operating results and
financial condition could be materially adversely affected. The timing and
success of new interactive entertainment software product releases remains
unpredictable due to the complexity of product development, including the
uncertainty associated with new technology. The development cycle of new
products is difficult to predict but typically ranges from 12 to 24 months with
another six to 12 months for adapting a product to a different technology
platform. In the past, we have 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 these products and on our business,
operating results and financial condition. The cost of developing and marketing
new interactive entertainment software has increased in recent years due to such
factors as the increasing complexity and content of interactive entertainment
software, the increasing sophistication of hardware technology and consumer
tastes and the increasing costs of obtaining licenses for intellectual
properties. We expect this trend to continue. We cannot assure you that our new
products will be introduced on schedule, if at
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all, or that, if introduced, these products will achieve significant market
acceptance or generate significant net revenues for us. In addition, software
products as complex as the ones we offer may contain undetected errors when
first introduced or when new versions are released. We cannot assure you that,
despite testing prior to release, errors will not be found in new products or
releases after shipment, resulting in loss of or delay in market acceptance.
This loss or delay could have a material adverse effect on our business,
operating results and financial condition.
Uncertainty of Market Acceptance; Dependence on Hit Titles
Consumer preferences for interactive entertainment software are always
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved continued market acceptance.
Instead, a limited number of releases have become "hits" and have accounted for
a substantial portion of revenues in our industry. Further, publishers with a
history of producing hit titles have enjoyed a significant marketing advantage
because of their heightened brand recognition and consumer loyalty. We expect
the importance of introducing hit titles to increase in the future. We cannot
assure you that our new products will achieve significant market acceptance, or
that we will be able to sustain this acceptance for a significant length of time
if we achieve it. We also cannot assure you that product life cycles will be
sufficient to permit us to recover product development and other associated
costs. Most of our products have a relatively short life cycle and sell for a
limited period of time after their initial release, usually less than one year.
We believe that these trends will continue in our industry and that our future
revenue will continue to be dependent on the successful production of hit titles
on a continuous basis. Because we introduce a relatively limited number of new
products in a given period, the failure of one or more of these products to
achieve market acceptance could have a material adverse effect on our business,
operating results and financial condition. Further, if we do not achieve market
acceptance, we could be forced to accept substantial product returns or grant
significant markdown allowances to maintain our relationship with retailers and
our access to distribution channels. For example, we had higher than expected
product returns and markdowns in the three months ended June 30, 1999 and we
cannot assure you that higher than expected product returns and markdowns will
not continue in the future. In the event that we are forced to accept
significant product returns or grant significant markdown allowances, our
business, operating results and financial condition could be materially
adversely affected.
Potential for Control by Titus
Titus currently owns approximately 42.9 percent of our outstanding Common
Stock. In connection with Titus' investment, Herve Caen, Titus' president and
chief executive officer, serves as our president and as a member of our Board of
Directors, and Herve's brother Eric Caen, also serves on our Board. As a
consequence, Titus holds significant voting power with respect to the election
of our Board of Directors and the approval of significant corporate actions, and
Herve and Eric Caen have substantial authority over our operations. As the
Company's capital structure currently stands, in the event that the Stockholder
Agreement pursuant to which our Board is currently nominated terminates, Titus
would be able to elect 3 of 7 members of the Board. In the event Titus acquires
enough additional shares of our common stock so that it owns more than 50% of
our total outstanding common stock, Titus would be able to elect a majority of
our Board, set our dividend policy and otherwise exercise substantial control
over our management. This control could prevent or hinder a sale of the Company
on terms which are not acceptable to Titus.
Continued Listing on the NASDAQ National Market
Our 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, including a minimum bid price of $1.00 and net
tangible assets of at least $4.0 million. In the event that we fail to satisfy
the listing standards on a continuous basis, our Common Stock may be removed
from listing on the NASDAQ National Market. If our Common Stock were delisted
from the NASDAQ National Market, trading of our Common Stock, if any, would be
conducted on the NASDAQ Small Cap Market, in the over-the-counter market on the
so-called "pink sheets" or, if available, the NASD's "Electronic Bulletin
Board." In any of those cases, investors could find it more difficult to dispose
of, or to obtain accurate quotations as to the value of, our Common Stock. The
trading price per share of our Common Stock would most likely be reduced as a
result.
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Distribution Agreement
In February 1999, in connection with our acquisition of a 43.9 percent
membership interest in Virgin's parent entity, we signed an International
Distribution Agreement with Virgin. Under this Agreement, we appointed Virgin as
our exclusive distributor for substantially all of our products in Europe, the
CIS, Africa and the Middle East, subject to certain reserved rights, for a seven
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,
our business, operating results and financial condition could be materially and
adversely affected. In connection with this Agreement, Virgin hired our European
sales and marketing personnel, and we pay Virgin a distribution fee for
marketing and distributing our products, certain minimum operating charges, as
well as a fixed overhead fee, subject to reduction in certain events. In the
quarter ended September 30, 1999, we recorded a $2.7 million provision to cover
certain minimum operating charges in 1999. In addition, due to the fixed nature
of the overhead fee, we will not be able to reduce our European sales and
marketing expenses in response to downturns in our sales in Europe, which could
have a material adverse effect on our business, operating results and financial
condition.
Dependence on Third Party Software Developers
We rely on third party interactive entertainment software developers for
the development of a significant number of our interactive entertainment
software products. As there continues to be high demand for reputable and
competent third party developers, we cannot assure you that third party software
developers that have developed products for us in the past will continue to be
available to develop products for us in the future. Many third party software
developers have limited financial resources, which could expose us to the risk
that such developers may go out of business prior to completing a project. In
addition, due to our limited control over third party software developers, we
cannot assure you that such developers will complete products for us on a timely
basis or within acceptable quality standards, if at all. Due to increased
competition for skilled third party software developers, we have had to agree to
make advance payments on royalties and guaranteed minimum royalty payments to
intellectual property licensors and game developers, and we expect to continue
to enter into these kinds of arrangements. If the products subject to these
arrangements do not have sufficient sales volumes to recover these royalty
advances and guaranteed payments, we would have to write-off unrecovered
portions of these payments, which could have a material adverse effect on our
business, operating results and financial condition. Further, we cannot assure
you 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. 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 our current products or products in
development obsolete or unmarketable. We must continually anticipate and assess
the emergence of, and market acceptance of, new interactive entertainment
software platforms well in advance of the time the platform is introduced to
consumers. Because product development cycles are difficult to predict, we must
make substantial product development and other investments in a particular
platform well in advance of introduction of the platform. If the platforms for
which we develop software are not released on a timely basis or do not attain
significant market penetration, our business, operating results and financial
condition could be materially adversely affected. Alternatively, if we fail to
develop products for a platform that does achieve significant market
penetration, then our 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 emerging technologies gain widespread acceptance.
This postponement could have a material adverse effect on our business,
operating results and financial condition. We are currently actively developing
products for the Microsoft Windows 2000, Sony PlayStation, Nintendo 64 and Sega
Dreamcast platforms. Our success will depend in part on our ability to
anticipate technological changes and to adapt our products to emerging game
platforms. We cannot assure you that we will be
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able to anticipate future technological changes, to obtain licenses to develop
products for those platforms on favorable terms or to create software for those
new platforms. Any failure to do so could have a material adverse effect on our
business, operating results and financial condition.
Industry Competition; Competition for Shelf Space
The interactive entertainment software industry is intensely competitive
and new interactive entertainment software programs and software platforms are
regularly introduced. Our competitors vary in size from small companies to very
large corporations with significantly greater financial, marketing and product
development resources than ours do. Due to these greater resources, certain of
our competitors can 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 we can. We believe that the main 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.
We compete 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
. Hasbro Inc.
In addition, integrated video game console hardware/software companies such
as Sony Computer Entertainment, Nintendo and Sega compete directly with us 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, may decide to compete directly with us or to enter
into exclusive relationships with our competitors. We 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
using the Internet and on-line services.
Retailers of our 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 us to increase our 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. Our
products constitute a relatively small percentage of any retailer's sale volume,
and we cannot assure you that retailers will continue to purchase our products
or to provide our products with adequate levels of shelf space and promotional
support. A prolonged failure in this regard may have a material adverse effect
on our business, operating results and financial condition.
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Dependence on Distribution Channels; Risk of Customer Business Failures; Product
Returns
We currently sell our products directly through our own sales force to mass
merchants, warehouse club stores, large computer and software specialty chains
through catalogs in the U.S. and Canada, as well as to certain distributors.
Outside North America, we generally sell products to third party distributors.
Our sales are made primarily on a purchase order basis, without long-term
agreements. The loss of, or significant reduction in sales to, any of our
principal retail customers or distributors could materially adversely affect our
business, operating results and financial condition.
The distribution channels through which publishers sell consumer software
products evolve continuously through a variety of means, 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 will likely
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 us from selling certain of our products directly to that mass merchant.
If the number of mass merchants entering into exclusive buying arrangements with
our competitors were to increase, our 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 our gross profit. This trend could increase
the material adverse impact on our 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 us to maintain access to these channels of distribution. We
cannot assure you that we will maintain access or that our access will allow us
to maintain our historical sales volume levels.
Distributors and retailers in the computer industry have from time to time
experienced significant fluctuations in their businesses, and a number have
failed. The insolvency or business failure of any significant distributor or
retailer of our products could have a material adverse effect on our business,
operating results and financial condition. We typically make sales to
distributors and retailers on unsecured credit, with terms that vary depending
upon the customer and the nature of the product. Although we have insolvency
risk insurance to protect against our customers' bankruptcy, insolvency or
liquidation, this insurance contains a significant deductible and a co-payment
obligation, and the policy does not cover all instances of non-payment. In
addition, while we maintain 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 our
business, operating results and financial condition.
We are exposed to the risk of product returns and markdown allowances with
respect to our distributors and retailers. We allow distributors and retailers
to return defective, shelf-worn and damaged products in accordance with
negotiated terms, and also offer a 90-day limited warranty to our end users that
our products will be free from manufacturing defects. In addition, we provide
markdown allowances to our customers to manage our customers' inventory levels
in the distribution channel. Although we maintain a reserve for returns and
markdown allowances, and although our agreements with certain of our customers
place certain limits on product returns and markdown allowances, we could be
forced to accept substantial product returns and provide markdown allowances to
maintain our relationships with retailers and our access to distribution
channels. Product return and markdown allowances that exceed our reserves could
have a material adverse effect on our business, operating results and financial
condition. In this regard, our results of operations for the three months ended
September 30, 1999 were adversely affected by a higher than expected level of
product returns and markdown allowances, which reduced our net revenues. We may
continue to experience such high levels of product returns and markdown
allowances in future periods, which could have a material adverse effect on our
business, operating results and financial condition.
Shares Eligible for Future Sale
In March 1999, we entered into a Stock Purchase Agreement with Titus
Interactive S.A. ("Titus"), pursuant to which Titus purchased 4,545,455 shares
of our Common Stock from us for an aggregate purchase price of $10 million. In
connection with this agreement, Titus was granted an option to purchase all of
the shares of our common stock currently held by Universal Studios, Inc.
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We have agreed to register all of the unregistered shares held by Titus for
resale under the Securities Act of 1933, as amended. This registration could
temporarily impair our ability to raise capital through the sale of our equity
securities, and, if such registered shares are sold, could have a material
adverse effect on the market price of our Common Stock.
In May 1999, we signed a letter of intent with Titus pursuant to which
Titus loaned us $5 million, and we negotiated certain additional agreements with
Titus. In November 1999, we completed certain of the transactions contemplated
by the letter of intent, including the sale of 6.25 million shares of our Common
Stock at a purchase price of $4 per share to Titus for a total purchase price of
$25 million (including the conversion of the $5 million loan). As part of the
agreements, Titus' chairman and chief executive officer became our president,
and our chairman and chief executive officer exchanged 2 million personal shares
of our Common Stock for an agreed upon number of Titus shares. As a result of
these transactions, Titus currently owns approximately 42.9% of our outstanding
common stock. If Titus exercises its option to purchase Universal's holdings of
our Common Stock, Titus will own approximately 58 percent of our outstanding
Common Stock, resulting in a change of control in favor of Titus.
Dependence upon Third Party Licenses
Many of our products, such as our Star Trek, Major League Baseball and the
Caesar's Palace titles, are based on original ideas or intellectual properties
licensed from other parties. We cannot assure you that we 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
another party upon the expiration of our rights. If we are unable to obtain
licenses for the underlying content that we believe offers the greatest consumer
appeal, we would either have to seek alternative, potentially less appealing
licenses, or release the products without the desired underlying content, either
of which could have a material adverse effect on our business, operating results
and financial condition. We cannot assure you that acquired properties will
enhance the market acceptance of our products based on those properties. We
also cannot assure you that our 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
We are required to obtain a license to develop and distribute software for
each of the video game console platforms for which we develop products,
including a separate license for each of North America, Japan and Europe. We
have obtained licenses to develop software for the PlayStation in North America
and are currently negotiating agreements covering additional territories. In
addition, we have obtained a license to develop software for the Nintendo 64 in
North America, Europe and Australia and are currently negotiating with Nintendo
for licenses covering additional territories. We are currently negotiating
agreements to develop software for the Sega Dreamcast platform, which was
introduced in the United States and Europe in Fall 1999. We cannot assure you
that we 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,
we must make significant product development expenditures on a particular
product prior to the time it seeks those approvals. Our inability to obtain
these approvals could have a material adverse effect on our business, operating
results and financial condition.
Hardware companies such as Sony Computer Entertainment, Nintendo and Sega
may impose upon their licensees a restrictive selection and product approval
process, such that those licensees are restricted in the number of titles that
will be approved for distribution on the particular platform. While we have
prepared our future product release plans taking this competitive approval
process into consideration, if we incorrectly predict its impact and fail to
obtain approvals for all products in our development plans, this failure could
have a material adverse effect on our business, operating results and financial
condition. We depend upon Sony Computer Entertainment, Nintendo and Sega for the
manufacture of our 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 these products at any time and effectively control the timing of
our 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 us within 45 to 60 days after receipt of a purchase order. If we
experience unanticipated delays in the delivery of
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video game console products from Sony Computer Entertainment or Nintendo, or if
actual retailer and consumer demand for our interactive entertainment software
differs from our forecast, our business, operating results and financial
condition could be materially adversely affected.
Dependence on Key Personnel
Our success depends to a significant extent on the continued service of our
key product design, development, sales, marketing and management personnel, and
in particular on the leadership, strategic vision and industry reputation of our
founder and Chief Executive Officer, Brian Fargo. Our future success will also
depend upon our 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
we cannot assure you that we will be successful in attracting and retaining such
personnel. Specifically, we may experience increased costs in order to attract
and retain skilled employees. Our failure to retain the services of Brian Fargo
or other key personnel or to attract and retain additional qualified employees
could have a material adverse effect on our business, operating results and
financial condition.
Risks Associated with International Operations; Currency Fluctuations
Our international net revenues accounted for 25.5 percent and 28.7 percent
of our total net revenues for the three months ended September 30, 1999 and
1998, and 30 percent and 26.7 percent of our total net revenues for the nine
months ended September 30, 1999 and 1998, respectively. In February 1999, we
entered into an International Distribution Agreement with Virgin for the
exclusive distribution of its products in selected international territories. We
intend to continue to expand our direct and indirect sales, marketing and
product localization activities worldwide. This expansion will require a great
deal of management time and attention and financial resources in order to
develop improved international sales and support channels. We cannot assure you,
however, that we will be able to maintain or increase international market
demand for our products. Our international sales and operations are subject to a
number of inherent risks, including the following:
. the impact of recessions in foreign economies
. the time and financial costs associated with translating and localizing
products for international markets
. longer accounts receivable collection periods
. greater difficulty in accounts receivable collection
. unexpected changes in regulatory requirements
. difficulties and costs of staffing and managing foreign operations
. political and economic instability.
For example, we have recently experienced difficulties selling products in
certain Asian countries as a result of economic instability in such countries,
and we cannot assure you that these difficulties will not continue or occur in
other countries in the future. These factors may have a material adverse effect
on our future international net revenues and, consequently, on our business,
operating results and financial condition. We currently do not engage in
currency hedging activities. Although exposure to currency fluctuations to date
has been insignificant, we cannot assure you 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 our business,
operating results and financial condition.
Risks Associated with New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and a new European currency, the euro. These eleven countries
adopted the euro as the common legal currency on that date. We make a
significant portion of our sales to these countries. Consequently, we
anticipate that the euro conversion will, among other things, create technical
challenges to adapt information technology and other systems to accommodate
euro-denominated transactions. The euro conversion may also limit our ability
to charge different prices for our products in different markets. While we
anticipate that the conversion will not cause major disruption of our business,
the conversion may have a material effect on our business or financial
condition.
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Protection of Proprietary Rights
We regard our software as proprietary and rely on a combination of patent,
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights.
We own or license various copyrights and trademarks, and hold the rights to one
patent application related to the software engine for our Messiah title. While
we provide "shrinkwrap" license agreements or limitations on use with our
software, it is uncertain to what extent these agreements and limitations are
enforceable. We are aware that some unauthorized copying occurs within the
computer software industry, and if a significantly greater amount of
unauthorized copying of our interactive entertainment software products were to
occur, our operating results could be materially adversely affected. While we
do not generally copy protect our products, we do not provide source code to
third parties unless they have signed nondisclosure agreements with respect to
that source code.
We rely on existing copyright laws to prevent unauthorized distribution of
our software. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy can be a
persistent problem, especially in certain international markets. Further, the
laws of certain countries where our products are or may be distributed either do
not protect our products and intellectual property rights to the same extent as
the laws of the U.S. or are weakly enforced. Legal protection of our rights may
be ineffective in such countries, and as we leverage our software products using
emerging technologies, such as the Internet and on-line services, our ability to
protect our intellectual property rights and to avoid infringing others'
intellectual property rights becomes more difficult. We cannot assure you that
existing intellectual property laws will provide adequate protection for our
products in connection with these emerging technologies.
As the number of interactive entertainment software products in the
industry increases and the features and content of these products continues to
overlap, software developers may increasingly become subject to infringement
claims. Although we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, we cannot assure you 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, we receive
communications from third parties regarding such claims. We cannot assure you
that existing or future infringement claims against us will not result in costly
litigation or require us to license the intellectual property rights of third
parties, either of which could have a material adverse effect on our 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 for interactive entertainment software publishers to identify
particular products within defined rating categories and communicate these
ratings to consumers through appropriate package labeling and through
advertising and marketing presentations. In addition, many foreign countries
have laws that permit governmental entities to censor the content of certain
works, including interactive entertainment software. In certain instances, we
may be required to modify our products to comply with the requirements of these
governmental entities, which could delay the release of those products in those
countries. Those delays could have a material adverse effect on our business,
operating results and financial condition. While we currently voluntarily submit
our products to industry-created review boards and publish their ratings on our
game packaging, we believe that mandatory government-run interactive
entertainment software products rating systems eventually will be adopted in
many countries which represent significant markets or potential markets for our
products. Due to the uncertainties inherent in the implementation of such rating
systems, confusion in the marketplace may occur, and we are unable to predict
what effect, if any, such rating systems would have on our business. In addition
to such regulations, certain retailers have in the past declined to stock
certain of our products because they believed that the content of the packaging
artwork or the products would be offensive to the retailer's customer base.
While to date these actions have not had a material adverse effect on our
business, operating results or financial condition, we cannot assure you that
similar actions by our distributors or retailers in the future would not have a
material adverse effect on our business, operating results and financial
condition.
28
<PAGE>
Control by Directors and Officers
Including Titus, our directors and executive officers beneficially own an
aggregate of about 58 percent of our outstanding Common Stock. These
stockholders, if acting together with Universal Studios, Inc. ("Universal"),
would be able to control substantially all matters requiring our stockholders'
approval, including the election of directors (subject to our stockholders'
cumulative voting rights) and the approval of mergers or other business
combination transactions. This concentration of ownership could discourage or
prevent a change in control.
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, these systems and
applications could fail or create incorrect results unless corrected so that
they can correctly process data related to the Year 2000 and beyond. We rely on
our systems and applications in operating and monitoring all major aspects of
our business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, networks and telecommunications
systems equipment and end products. We also rely, 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. We could be affected
through disruptions in the operation of the enterprises with which we interact
or from general widespread problems or an economic crisis resulting from
noncompliant Year 2000 systems. Despite our efforts to address the Year 2000
impact on our internal systems and business operations, we cannot assure you
that such impact will not result in a material disruption of our business or
have a material adverse effect on our business, operating results and financial
condition.
We have assessed the potential impact of the Year 2000 issue on our
business and the related foreseeable expenses that may be incurred in attempting
to remedy that impact. Although we have identified certain systems and
applications that are not Year 2000 compliant and have upgraded substantially
all of our software to address the Year 2000 issue, we cannot assure you that
these 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 of
our operations. With respect to customers, developers, suppliers and other
enterprises upon which we rely, even where these enterprises give assurances
that they are Year 2000 compliant, there remains a risk that failure of their
systems and applications could have a material adverse effect on us.
Development of Internet/On-Line Services or Products
We seek to establish an on-line presence by creating and supporting sites
on the Internet. Our future plans envision conducting and supporting on-line
product offerings through these sites or others. Our ability to successfully
establish an on-line presence and to offer online products will depend on
several factors outside our control. These factors include the emergence of a
robust online industry and infrastructure and the development and implementation
of technological advancements to the Internet to increase bandwidth and speed to
the point that will allow us 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, we
cannot assure you that a viable commercial marketplace on the Internet will
emerge from the developing industry infrastructure or that the appropriate
complementary products for providing and carrying Internet traffic and commerce
will be developed. We also cannot assure you that we will be able to create or
develop a sustainable or profitable on-line presence or that we 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 this development occurs but is insufficient to meet our needs
or if such development is delayed beyond the point where we plan to have
established an on-line service, our business, operating results and financial
condition could be materially adversely affected.
Risks Associated with Acquisitions
As part of our strategy to enhance distribution and product development
capabilities, we intend to review potential acquisitions of complementary
businesses, products and technologies. Some of these acquisitions could be
29
<PAGE>
material in size and scope. While we will continue to search for appropriate
acquisition opportunities, we cannot assure you that the Company will be
successful in identifying suitable acquisition opportunities. If we do identify
any potential acquisition opportunity, we cannot assure you that we will
consummate the acquisition, and if the acquisition does occur, we cannot assure
you that it will be successful in enhancing our business or will increase our
earnings. As the interactive entertainment software industry continues to
consolidate, we may face increased competition for acquisition opportunities,
which may inhibit our ability to complete suitable transactions or increase
their cost. Future acquisitions could also divert substantial management time,
result in short term reductions in earnings or special transactions or other
charges and may be difficult to integrate with existing operations or assets.
We may, in the future, issue additional shares of Common Stock in
connection with one or more acquisitions, which may dilute our stockholders.
Additionally, with respect to future acquisitions, our stockholders may not have
an opportunity to review the financial statements of the entity being acquired
or to vote on these acquisitions.
Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions
Our Certificate of Incorporation and Bylaws, as well as Delaware corporate
law, contain certain provisions that could delay, defer or prevent a change in
control and could materially adversely affect the prevailing market price of our
common stock. Certain of these provisions impose various procedural and other
requirements that could make it more difficult for stockholders to take certain
corporate actions.
Stock Price Volatility
The trading price of our Common Stock has been and could continue to be
subject to wide fluctuations in response certain factors, including:
. quarter to quarter variations in results of operations
. our announcements of new products
. our competitors' announcements of new products
. our 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 our products, plans and
strategic position and those of our competitors and customers
. other events or factors
In addition, the public stock markets experience 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 often unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect
the market price of our Common Stock.
30
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
September 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 known
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 August 20, 1999, the Company issued 883,684 shares of the Company's
Common Stock without additional consideration to Titus Interactive
S.A., a French corporation under the terms of the Stock Purchase
Agreement signed in March 1999.
Item 4. Submission of Matters to a Vote of Security Holders
On August 24, 1999, the Company held its annual stockholders' meeting.
There were 22,727,008 shares of common stock outstanding entitled to
vote and a total of 17,251,750 shares (75.9%) were represented at the
meeting in person or by proxy. The following summarizes vote results of
proposals submitted to the Company's stockholders.
1. Proposal to elect directors, each for a term extending until the
next annual meeting of Stockholders or until their successors are duly
elected and qualified.
For Withheld
---------- --------
Brian Fargo 17,085,414 166,336
Richard S.F. Lehrberg 16,862,208 389,542
Charles S. Paul 17,160,856 90,894
Herve Caen 17,158,939 92,811
Eric Caen 17,158,019 93,731
2. Proposal for the issuance of up to 5,000,000 shares of the
Company's common stock to Titus Interactive S.A., pursuant to the terms
of the Stock Purchase Agreement dated March 18, 1999.
For Against Withheld Broker Non-vote
--- ------- -------- ---------------
13,151,790 130,331 93,315 3,876,314
3. Proposal for the sale and issuance of 6,250,000 shares of the
Company's common stock to Titus Interactive S.A., in exchange for
aggregate consideration of $25,000,000 pursuant to the terms of the
Stock Purchase Agreement dated July 20, 1999.
For Against Withheld Broker Non-vote
--- ------- -------- ---------------
13,282,477 74,424 18,535 3,876,314
4. Proposal to ratify the appointment of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 1999.
For Against Withheld Broker Non-vote
--- ------- -------- ---------------
17,229,070 8,945 13,735 --
32
<PAGE>
Item 5. Other Information
On November 2, 1999, the Company closed a strategic equity investment
by Titus Interactive SA ("Titus") resulting in the issuance of 6.25
million shares of the Company's Common Stock in exchange for total
consideration of $25 million, including the conversion of the $5
million note payable that was issued when the letter of intent was
entered into in May 1999, $15 million in cash and a note receivable for
$5 million due on November 30, 1999, bearing interest at the rate of
six percent. The Company used the Cash proceeds to pay down its line of
credit. The pro forma information on the accompanying balance sheet
(see Exhibit 99.1) reflects the transaction as if it had been
consummated on September 30, 1999.
Effective November 2, 1999, the Company's Board of Directors elected
James Barnett as a director, and appointed James Barnett and Herve Caen
to the Board of Directors' Audit Committee. The Company's Board of
Directors now consists of Mr. Barnett, Brian Fargo, Herve Caen, Richard
S.F. Lehrberg, and Charles S. Paul. The Audit Committee of the Board of
Directors consists of James Barnett, Herve Caen and Charles S. Paul.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Title
------- -------------
10.1 Stockholder Agreement dated November 2, 1999 by and among the
Company, Titus Interactive SA, Brain Fargo and Herve Caen.
10.2 Employment Agreement dated November 2, 1999 between the
Company and Brian Fargo.
10.3 Employment Agreement dated November 2, 1999 between the
Company and Herve Caen.
27.1 Financial data schedule for the three-month period ended
September 30, 1999.
99.1 Pro forma Balance Sheet
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K, dated July 20, 1999,
reporting that it had entered into a stock purchase with Titus Interactive
SA ("Titus") and Brian Fargo ("Fargo") regarding the purchase of 6.25
million shares of the Company's Common Stock by Titus at a purchase price
of $4 per share. The Company also reported that, in connection with the
Stock Purchase Agreement, Fargo and Titus have entered into an Exchange
Agreement pursuant to which Fargo will exchange 2,000,000 of his share of
the Company's Common Stock for 96,666 shares of Titus Common Stock, and
that the Company, Titus and Fargo had negotiated a voting agreement which
provides for certain restrictions on the voting of the shares of Company
Common Stock held by Titus and Fargo, and gives Titus and Fargo certain
rights and imposes certain obligations with respect to transfers or sales
of such shares. The Company also reported that it had negotiated
employment agreements with Fargo and with Titus President Herve Caen,
which provide that, following the closing of the Stock Sale and the
transaction contemplated thereby, Messrs. Fargo and Caen would serve as
the Company's Chief Executive Officer and President, respectively.
33
<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: November 12, 1999 By: /s/ BRIAN FARGO
-----------------------
Brian Fargo,
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ MANUEL MARRERO
---------------------
Manuel Marrero,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
34
<PAGE>
EXHIBIT 10.1
EXECUTION COPY
STOCKHOLDER AGREEMENT
---------------------
This STOCKHOLDER AGREEMENT (this "Agreement") is entered into as of
---------
November 2, 1999, by and among INTERPLAY ENTERTAINMENT CORP., a Delaware
corporation (the "Company"), TITUS INTERACTIVE SA, a French corporation
-------
("Titus"), and BRIAN FARGO, an individual ("Fargo"; and together with Titus, the
----- -----
"Stockholders").
------------
RECITALS
--------
WHEREAS, the Company, Titus and Fargo have entered into a Stock
Purchase Agreement dated as of July 20, 1999 (the "Stock Purchase Agreement"),
------------------------
whereby the Company will issue and sell and Titus will purchase 6,250,000 shares
of common stock of the Company for an aggregate purchase price of $25,000,000;
WHEREAS, the parties hereto further deem it in their best interests
and in the best interest of the Company to provide for the consistent and
uniform management of the Company, to regulate certain of their rights in
connection with their interests in the Company and to restrict the sale,
assignment, transfer, encumbrance or other disposition of the Company Stock (as
hereinafter defined), and desire to enter into this Agreement in order to
effectuate those purposes and the transactions contemplated by the Stock
Purchase Agreement; and
WHEREAS, as a condition to the closing of the transactions
contemplated by the Stock Purchase Agreement, the Company, Titus and Fargo have
agreed to 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:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings:
"Accredited Investor" shall have the meaning set forth for such term
-------------------
in Regulation D.
"Act" shall mean the Securities Act of 1933, as amended, and the rules
---
and regulations promulgated thereunder.
<PAGE>
"Affiliate" shall mean with respect to a Person, any other Person that
---------
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person. For the purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities or by agreement or otherwise.
"Board of Directors" shall mean the Board of Directors of the Company.
------------------
"Caen Employment Agreement" shall mean the Employment Agreement dated
-------------------------
as of the Closing Date between the Company and Herve Caen.
"Change of Control" shall mean a transaction or series of transactions
-----------------
after the consummation of which Titus holds less than fifty percent (50%) of the
Fully-Diluted Common Stock of the Company (or the voting securities of the
surviving Person or parent of such surviving Person).
"Closing" shall mean the closing of the transactions contemplated by
-------
the Stock Purchase Agreement.
"Closing Date" shall mean the date on which the Closing occurs.
------------
"Common Stock" shall mean, at any time, the common stock, no par
------------
value, of the Company.
"Company Stock" shall mean, at any time, the then outstanding shares
-------------
of capital stock of the Company, including without limitation the shares of
Common Stock.
"Effective Date" shall mean the date on which the Closing occurs.
--------------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
"Fargo Employment Agreement" shall mean the Employment Agreement dated
--------------------------
as of the Closing Date between the Company and Fargo.
"Fully-Diluted Common Stock" shall mean, at any time, the then
--------------------------
outstanding Common Stock of the Company plus (without duplication) all shares of
Common Stock issuable, whether at such time or upon the passage of time or the
occurrence of future events, upon the exercise, conversion or exchange of all
then-outstanding securities of the Company which can be converted or exchanged
into Common Stock.
"Holder of Securities" shall have the meaning set forth in Section
--------------------
3.1.
"Indebtedness" shall mean any obligation of the Company or any
------------
Subsidiary which under generally accepted accounting principles 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
<PAGE>
be deemed to be Indebtedness even though such obligation is not assumed by the
Company or Subsidiary.
"Initial Stock Purchase Agreement" shall mean the Stock Purchase
--------------------------------
Agreement dated as of March 18, 1999, by and among the Company, Titus and Fargo,
as amended through the date hereof.
"issuance" shall have the meaning set forth in Section 4.1.
--------
"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.
"New Securities" shall have the meaning set forth in Section 4.1.
--------------
"Notice" shall have the meaning set forth in Section 7.4.
------
"Notice of Issuance" shall have the meaning set forth in Section 4.1.
------------------
"Permitted Transfer" shall mean any Transfer pursuant to Section 3.3.
------------------
"Person" shall mean an individual, partnership, limited liability
------
company, association, joint venture, corporation, trust or unincorporated
organization, a government or any department, agency or political subdivision
thereof or other entity.
"Purchase Agreements" shall mean the Stock Purchase Agreement and the
-------------------
Initial Stock Purchase Agreement.
"Regulation D" shall mean Regulation D as promulgated under the Act,
------------
as amended from time to time.
"SEC" shall mean the Securities and Exchange Commission.
---
"Stock Purchase Agreement" shall have the meaning set forth in the
------------------------
Recitals.
"Subsidiary" shall mean any Person a majority of the voting equity of
----------
which is, at the time as of which any determination is being made, owned by the
Company directly or through one or more Subsidiaries.
"Tag-Along Formula" shall have the meaning set forth in Section
-----------------
5.1(b).
"Tag-Along Notice" shall have the meaning set forth in Section 5.1(d).
----------------
"Tag-Along Shares" shall have the meaning set forth in Section 5.1(b).
----------------
"Tag-Along Stockholder" shall have the meaning set forth in Section
---------------------
5.1(b).
"Transfer" shall have the meaning set forth in Section 3.1.
--------
3
<PAGE>
"Transferee" shall have the meaning set forth in Section 3.2.
----------
"Transferee Terms" shall have the meaning set forth in Section 5.1(c).
----------------
"Transfer Shares" shall have the meaning set forth in Section 5.1(a).
---------------
ARTICLE II
BOARD OF DIRECTORS; VOTING OF CAPITAL STOCK;
CERTAIN OTHER MATTERS
---------------------
2.1 Board of Directors. Immediately following the Closing, until the
------------------
earliest of (a) the termination of Fargo's employment with the Company for
"Cause" or Fargo's resignation other than for "Good Reason" (each, as defined in
the Fargo Employment Agreement), or (b) the termination of Caen's employment
with the Company other than for "Cause" or Caen's resignation for "Good Reason"
(each, as defined in the Caen Employment Agreement), or (c) the date that Fargo
ceases to hold at least Two Million (2,000,000) shares of Common Stock, the
parties hereto shall take all action within their respective powers as
stockholders, including the voting of Common Stock, required to cause the Board
of Directors to consist of seven (7) directors, who shall be designated as
follows:
(a) Titus shall designate, in the aggregate, two (2) directors of the
Company;
(b) Fargo shall designate, in the aggregate, two (2) directors of the
Company;
(c) the Stockholders shall mutually designate, in the aggregate, three
(3) directors of the Company.
Each Stockholder hereby agrees to vote all shares of voting Common
Stock owned beneficially or of record by it to effect the election of all
directors so designated.
2.2 Removal. If a director designated and elected pursuant to Section
-------
2.1 hereof:
(a) has been designated by Titus and Titus requests that such director
be removed (with or without cause) by written notice thereof to the Company and
Fargo;
(b) has been designated by Fargo and Fargo requests that such director
be removed (with or without cause) by written notice thereof to the Company and
Titus,
then such director shall be removed, with or without cause, upon the affirmative
vote of holders of a majority of the outstanding shares of voting Common Stock,
and each Stockholder hereby agrees to vote all shares of voting Common Stock
owned beneficially or of record by such Stockholder to effect such removal upon
such request.
2.3 Vacancies. In the event that a vacancy is created on the Board of
---------
Directors at any time by the death, disability, retirement, resignation, removal
(with or without cause) or otherwise, or if for any other reason there shall
exist or occur any vacancy on the Board of
4
<PAGE>
Directors, each Stockholder hereby agrees to cause the directors designated by
such Stockholder to vote for that individual designated to fill such vacancy and
serve as a director by whichever of the Stockholders that had designated
(pursuant to Section 2.1 hereof) the director whose death, disability,
retirement, resignation or removal (with or without cause) resulted in such
vacancy on the Board of Directors (in the manner set forth in Section 2.1) or,
if the vacancy is filled by Stockholders of the Company, to vote and cause to be
voted all shares of voting Common Stock owned beneficially or of record by such
Stockholder to elect the individual designated to fill such vacancy; provided,
--------
however, that such other individual so designated may not previously have been
- -------
a director of the Company who was removed for cause from its Board of Directors.
2.4 Actions of the Board of Directors. The parties shall take all actions
---------------------------------
necessary to provide that:
(a) The By-Laws of the Company shall provide that the presence of a
majority of the directors shall be necessary to constitute a quorum at any
meeting of the Board of Directors.
(b) The By-Laws of the Company shall also provide that any action of
the Board of Directors requires the vote of a majority of the directors present
at a meeting with respect to which a quorum is in attendance.
(c) The By-Laws of the Company shall further provide that the Board of
Directors may only take actions with respect to matters described as proposed
subjects for action in the written notice of meeting circulated as provided in
the By-Laws; provided, however, that the By-Laws shall also provide that this
-------- -------
limitation can be waived by the majority vote of the directors in attendance at
a meeting of the Board of Directors with respect to which (i) a quorum, (ii) at
least one designee of Titus and (iii) at least one designee of Fargo are
present.
2.5 Covenant to Vote. Each Stockholder hereby agrees to take all
----------------
actions necessary to call, or to cause the Company and the appropriate officers
and directors of the Company to call, a special or annual meeting of
Stockholders of the Company and to vote and cause to be voted all shares of
voting stock of the Company owned beneficially or of record by such Stockholder
at any such annual or special meeting in favor of, or take all action by written
consent in lieu of any such meeting, necessary to ensure that the number of
directors constituting the entire Board of Directors is consistent with, and
that the election as members of the Board of Directors of those individuals so
designated is in accordance with, and to otherwise effect the intent of, this
Article II. In addition, each Stockholder agrees to vote and cause to be voted
the shares of such voting stock owned beneficially or of record by such
Stockholder upon any other matter arising under this Agreement submitted to a
vote of the stockholders of the Company in a manner so as to implement the terms
of this Agreement.
2.6 Interested Party Transactions. At any time after the date hereof, in
-----------------------------
the event that any matter is submitted to a vote of the Company's stockholders
in which either Stockholder or any Affiliate of either Stockholder has any
material interest, other than an interest as a stockholder of the Company that
is proportional to the interests of all other stockholders of the Company, then,
unless a majority of the members of the Board of Directors not nominated by or
otherwise affiliated with such Stockholder have approved such matter, such
Stockholder shall abstain from voting his shares of Common Stock with respect to
such matter.
5
<PAGE>
2.7 Other Activities of Titus; No Fiduciary Duties. It is understood
----------------------------------------------
and accepted that Titus and its Affiliates have or may hereafter have interests
in other business ventures that are or may be competitive with the activities of
the Company and that, to the fullest extent permitted by law, nothing in this
Agreement shall limit the current or future business activities of Titus or any
of its Affiliates, whether or not such activities are competitive with those of
the Company or otherwise. Nothing in this Agreement shall limit in any manner
the ability of Titus to exercise its rights under this Agreement or (except as
expressly set forth herein) as a stockholder of the Company and this Agreement
shall not create, or be deemed or interpreted to create, any fiduciary or
similar duty of Titus owing to Stockholder or the Company. The foregoing
provision shall not be deemed to limit any obligations of any party under
applicable law.
ARTICLE III
TRANSFERS OF COMPANY STOCK AND WARRANTS
---------------------------------------
3.1 General. No party to this Agreement who is a holder of any Company
-------
Stock (a "Holder of Securities") 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")) Company Stock except in accordance with this Agreement. The
--------
Company shall not, and shall not permit any transfer agent or registrar for the
Company Stock to, Transfer upon the books of the Company any shares of Company
Stock by any Holder of Securities to any Transferee (as hereinafter defined), in
any manner, except in accordance with this Agreement, and any purported Transfer
not in compliance with this Agreement shall be void.
3.2 Legends; Shares Subject to this Agreement. In the event a Holder of
-----------------------------------------
Securities shall Transfer any shares of Company Stock (including any such
Company Stock acquired after the date hereof) pursuant to Section 3.3(a), 3.3(b)
or 3.3(c) to any Person (all Persons acquiring shares of Company Stock pursuant
to any such Section, regardless of the method of Transfer, shall be referred to
herein collectively as "Transferees" and individually as a "Transferee") in
----------- ----------
accordance with this Agreement, such securities shall nonetheless bear legends
as provided in the Stock Purchase Agreement and in Section 7.1 hereof.
3.3 Permitted Transfers by the Holders of Securities. No Holder of
------------------------------------------------
Securities shall, directly or indirectly, Transfer any shares of Company Stock
except under the following conditions:
(a) any Holder of Securities may make a Transfer of Company Stock to
any Affiliate of such Holder of Securities; provided that such Transferee agrees
--------
to be bound by this Agreement in the same manner as such Holder of Securities;
(b) pursuant to an exercise of the tag-along rights set forth in
Article V hereof;
(c) any Stockholder may make a Transfer after such Stockholder has
complied with (i) the provisions of Section 3.4 and (ii) (if applicable) the
terms of Article V hereof with respect to the provisions of tag-along rights;
and
6
<PAGE>
(d) any Stockholder may make one or more Transfers of an aggregate of
One Million (1,000,000) shares of Company Stock held by such Stockholder during
any consecutive twelve-month period, so long as such Transfers do not exceed, in
the aggregate, Eighty-Three Thousand Three Hundred Thirty-Three (83,333) shares
in any calendar month (each, a "De Minimis Transfer"); provided, that such
------------------- --------
Stockholder has complied with the provisions of Section 3.4 hereof. Any
Transferee of a De Minimis Transfer shall not be bound by the terms of this
Agreement.
In the event of any Transfer pursuant to Section 3.3(a), 3.3(b) or 3.3(c), the
Company shall cause the Transferee to execute a copy of this Agreement and the
Transferee shall be subject to this Agreement and may further Transfer shares of
Company Stock to Transferees only in compliance with this Agreement as if such
Transferee were the original transferor. A Transferee of a Holder of Securities
pursuant to Section 3.3(a), 3.3(b) or 3.3(c) shall be treated for purposes of
this Agreement as if such Transferee is the same category of Person (Fargo or
Titus) as is the transferor on the date of this Agreement and shall in all
respects be bound by the actions taken pursuant to Section 7.10.
3.4 Right of First Refusal.
----------------------
(a) A Stockholder that desires in good faith to Transfer any Company
Stock (other than a Transfer covered by Section 3.3(a) or 3.3(b) (the "Offeror
-------
Stockholder") shall deliver a written notice of such intent (the "Refusal
- ----------- -------
Notice") to the Company, if the transferor is Titus, and to Titus, if the
transferor is Fargo. The party receiving the Refusal Notice shall be referred
to herein as the "Offeree." The Refusal Notice shall contain (i) a description
-------
of the proposed Transfer transaction and the terms thereof including the number
and type of securities proposed to be transferred (collectively, the "Refusal
-------
Securities"), (ii) the name of each Person to whom or in favor of whom the
- ----------
proposed Transfer is to be made (the "Refusal Transferee"), (iii) a description
------------------
of the consideration to be received by the Offeror Stockholder upon Transfer of
the Refusal Securities and (iv) an offer to sell to the Offeree 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, the Offeree 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 the Offeror Stockholder and the Offeree 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 the Offeror Stockholder and the Offeree 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 the Offeror Stockholder to the Offeree (or, if later, the delivery
of the Valuation), the Offeree may, by written notice delivered to the Offeror
Stockholder (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 the Offeree does not deliver a Refusal Acceptance Notice to the
Offeror Stockholder within such ten business day period, then the Offeror
Stockholder may proceed with the Transfer of the Refusal Securities to the
Refusal Transferee without any further obligations under this Section
7
<PAGE>
3.4. 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 the Offeror Stockholder by the Offeree. Titus may
freely assign all or a portion of its right of first refusal pursuant to this
Section 3.4 to Herve Caen and/or Eric Caen, and the Company may freely assign
all or a portion of its right of first refusal pursuant to this Section 3.4 to
Fargo.
(b) Notwithstanding paragraph (a) of this Section 3.4, Titus
acknowledges and agrees (i) that its right of first refusal with respect to
Fargo's transfer of Company Stock set forth in paragraph (a) of this Section 3.4
(the "Titus Right of First Refusal") is subordinate to the right of first
refusal with respect to certain transfers of common stock of the Company by
Fargo (the "Universal Right of First Refusal") granted to Universal Studios,
Inc., a Delaware corporation ("Universal") pursuant to Section 2.3 of that
certain Shareholders' Agreement dated as of March 30, 1994 (the "Shareholders'
Agreement") by and among Interplay Productions, Inc., a California corporation,
and the predecessor in interest to the Company, MCA Inc., a Delaware
corporation, and the predecessor in interest to Universal and Fargo, until such
time as the Universal Right of First Refusal has terminated and is of no further
force or effect, and (ii) that the Titus Right of First Refusal shall
consequently only apply to a Transfer of Company Stock by Fargo at such time as
Fargo has satisfied the requirements of Section 2.3 of the Shareholders'
Agreement with respect to the Universal Right of First Refusal and Universal
elects not to exercise such right pursuant to the terms of Section 2.3 of the
Shareholders' Agreement.
3.5 No Agreements. Except as set forth in Section 3.3, no Holder of
-------------
Securities shall grant any irrevocable proxy or any other proxy inconsistent
with this Agreement or enter into or agree to be bound by any voting trust with
respect to any shares of Company Stock nor shall any Holder of Securities enter
into any stockholder agreements or arrangements of any kind with any Person with
respect to any shares of Company Stock (whether or not such agreements and
arrangements are with the other parties to this Agreement or Holders of
Securities who are not parties to this Agreement), including agreements or
arrangements with respect to the acquisition, disposition or voting (if
applicable) of any shares of Company Stock, except this Agreement, nor shall any
Holder of Securities act, for any reason, as a member of a group or in concert
with any other persons in connection with the acquisition, disposition (other
than a disposition pursuant to the terms of this Agreement) or voting (if
applicable) of any shares of Company Stock, except to the extent consistent with
this Agreement.
3.6 Standstill. Each Stockholder agrees that for a period from and
----------
after the date hereof until the earlier of (a) the termination of the provisions
of Section 2.1 hereof in accordance with its terms or (b) the termination of
this Agreement in accordance with its terms, neither it nor any of its
Subsidiaries will, without the prior written consent of the other party: (i)
acquire, offer to acquire, or agree to acquire, directly or indirectly, by
purchase or otherwise, any voting securities or direct or indirect rights to
acquire any voting securities of the Company or Titus, as the case may be, or
any Subsidiary thereof, or any material amount of the assets of the Company or
Titus, as the case may be, or any Subsidiary or division thereof outside the
ordinary course of business; (ii) make, or in any way participate in, directly
or indirectly, any "solicitation" of "proxies" (as such terms are used in the
rules of the Securities and Exchange Commission) to vote, or seek to advise or
influence any Person with respect to the voting of, any voting securities of the
Company or Titus, as the case may be, for the purpose of changing or influencing
the control of the Company or Titus, as the case may be; or (iii) make any
public announcement with respect to, or submit a proposal for, or offer of (with
or without conditions) any merger, business combination, recapitalization,
restructuring, liquidation or other extraordinary transaction involving the
Company or Titus, as the case may be, or its securities or assets; provided,
--------
however, the foregoing restrictions shall not (x) preclude Titus from (A)
- -------
acquiring the securities
8
<PAGE>
contemplated by Article IV of this Agreement and the shares of Common Stock of
the Stock Purchase Agreement and the transactions contemplated hereby and
thereby, including without limitation the transactions contemplated by the
Initial Purchase Agreement and the Universal Agreement (each as defined in the
Stock Purchase Agreement), (B) filing a Schedule 13D in connection with the
transactions contemplated by the Stock Purchase Agreement or the Exchange
Agreement among Titus, Fargo, Herve Caen and Eric Caen of even date herewith
(the "Exchange Agreement"), (C) voting its shares of Common Stock within its
------------------
discretion on any matter submitted for a vote or consent of the Company's
stockholders, (D) taking any other action contemplated by the Stock Purchase
Agreement, or (E) purchasing shares of Company Stock pursuant to open-market
transactions on a national securities exchange or in the over-the-counter
market; provided, further, that the restrictions on Titus in this Section 3.6
-------- -------
shall lapse automatically to the extent any Person other than Titus or an
Affiliate of Titus takes any action with respect to the matters described in
clauses (ii) and (iii) above, or (y) preclude Fargo from (A) acquiring the
shares of Titus common stock pursuant to the Exchange Agreement or (B) filing a
Schedule 13D in connection with the transactions contemplated by the Stock
Purchase Agreement or the Exchange Agreement.
ARTICLE IV
PREEMPTION
----------
4.1 Certain Purchase Rights. If the Company proposes to issue, sell, or
-----------------------
grant (collectively, an "issuance") any equity securities or any securities
--------
convertible into or exchangeable for equity securities (collectively, the "New
---
Securities"), then the Company shall, no later than ten (10) business days prior
- ----------
to the consummation of such issuance, give written notice to each of the
Stockholders of such issuance (the "Notice of Issuance"). Such Notice of
------------------
Issuance shall describe such issuance, and contain an offer to each such
Stockholder to sell to such Stockholder, at the same price and for the same
consideration to be paid by the proposed purchasers, such Stockholder's pro rata
portion (which shall be a percentage, determined immediately prior to such
issuance, equal to the percentage of the Fully-Diluted Common Stock held by such
Stockholder). Subject to the foregoing, if Common Stock is being issued with
other securities as a unit, each Stockholder who desires to accept such offer
must purchase such unit in order for such acceptance to be valid. If any such
Stockholder fails to accept such offer by written notice within ten (10)
business days after its receipt of the Notice of Issuance, the Company shall
proceed with such issuance, free of any right on the part of such Stockholder
under this Section 4.1 in respect thereof. Any issuance of New Securities more
than forty-five (45) days after the expiration of such ten business day period,
or to a different issuee, or on terms and conditions less favorable to the
Company in any material respect than those described in the notice to the
Stockholders, shall be subject to a new notice to and new purchase rights by the
Stockholders under this Section 4.1. This Section 4.1 shall not apply to the
issuance of any Excluded Securities. For purposes of this Agreement, "Excluded
--------
Securities" shall mean: (a) issuances of securities which have been approved
- ----------
prior to the date hereof (including without limitation issuances under the
Company's employee stock purchase plans described under Section 5.3 of the Stock
Purchase Agreement), provided that such issuances are permitted under the
Purchase Agreements; (b) issuances of securities which have been approved by the
Board of Directors in accordance with this Agreement and by the stockholders;
(c) New Securities distributed or set aside to all holders of Common Stock on a
per share equivalent basis; (d) issuances pursuant to the Purchase Agreements;
and (e) issuances of New Securities upon the
9
<PAGE>
grant, exercise or conversion of (i) options or warrants to purchase shares of
Company Stock or (ii) securities which are convertible into shares of Company
Stock ((i) and (ii) shall be referred to collectively as "Convertible
-----------
Securities"), in each case where such Convertible Securities have been granted
- ----------
or issued prior to the date hereof or have been granted or issued in accordance
with this Agreement.
4.2 Purchase Rights Upon Issuance of Excluded Securities. In the event
----------------------------------------------------
that the Company proposes to issue, sell or grant any Excluded Securities
pursuant to subsections (a), (b) and (e) of Section 4.1 hereof, the Company
shall send a notice of such issuance to Titus in accordance with the provisions
concerning a Notice of Issuance as set forth in Section 4.1 hereof (an "Excluded
--------
Securities Notice"). Following receipt of an Excluded Securities Notice, Titus
- -----------------
shall have the option to purchase such number of Excluded Securities as are
necessary for Titus to maintain its percentage ownership of the Company's Fully
Diluted Common Stock at the same level as immediately prior to such issuance, at
the price and on the other terms and conditions upon which such Excluded
Securities are being issued, sold or granted (the "Excluded Securities Option").
--------------------------
The Excluded Securities Option shall be exercisable by Titus no later than
thirty (30) calendar days after Titus' receipt of an Excluded Securities Notice;
provided, however, that in the case of Excluded Securities which are Convertible
- -------- -------
Securities, Titus must exercise the Excluded Securities Option no later than
thirty (30) calendar days after Titus' receipt of notice from the Company of the
exercise or conversion, as applicable, of such Excluded Securities.
ARTICLE V
TAG-ALONG RIGHTS
----------------
5.1 Tag-Along Procedures.
--------------------
(a) Tag-Along Right. Subject to Section 5.3, no Stockholder shall
---------------
Transfer for value to any Person or group of Persons shares of Company Stock
(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 the other Stockholder (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 Company Stock determined in accordance with this Section
5.1.
(b) Obligation of Transferee to Purchase. The Transferee of the
------------------------------------
Selling Stockholder shall purchase from the Tag-Along Stockholder the number of
shares of Company 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
Company Stock derived by multiplying (i) the aggregate number of shares of
Company Stock covered by the Offer by (ii) a fraction the numerator of which is
the number of shares of Company 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 Company 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 set forth: (i) the name of the
10
<PAGE>
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 5.1, 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 Company 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 5.1 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 Article V shall be in proportion to and limited to the
consideration received by such Stockholder for the Company Stock transferred by
such Stockholder, as a percentage of all consideration received by all
Stockholders for all Company Stock transferred pursuant to this Article V.
5.2 Closing. At the closing of the purchase of the shares of Company
-------
Stock subject to this Article V, the holders of Company Stock who are making the
Transfer shall deliver certificates evidencing such shares, duly endorsed, or
accompanied by written instruments of transfer in form reasonably satisfactory
to the Transferee, free and clear of any adverse claim against payment of the
purchase price therefor.
5.3 Exceptions. The foregoing notwithstanding, this Article V shall not
----------
apply to any sale of shares of Company Stock pursuant to Section 3.3(a).
ARTICLE VI
RESTRICTIONS AND LIMITATIONS
----------------------------
6.1 Restrictions and Limitations Upon Major Decisions. Notwithstanding
-------------------------------------------------
the provisions of the Certificate of Incorporation and By-Laws of the Company,
the Company shall not, and shall not permit any Subsidiary to, engage in any of
the following actions or transactions, or enter into a contract or arrangement
to engage in any of such actions or transactions, without the written consent or
approval of Fargo and Titus:
11
<PAGE>
(a) Authorize or issue, or obligate itself to issue, any other equity
security, including any indebtedness convertible into or exchangeable for shares
of equity securities of the Company or issued with (i) shares of Company Stock
or (ii) warrants or other rights to purchase Company Stock or any other equity
security, without compliance with the provisions of Section 4.1 hereof;
(b) Effect any recapitalization, or any dissolution, liquidation, or
winding up of the Company;
(c) Permit any Subsidiary to issue or sell, or obligate itself to
issue or sell, except to the Company or any wholly-owned Subsidiary, any stock
of such Subsidiary, without first offering Titus the right to purchase such
stock on the same terms and conditions as those offered to the Company by any
third party;
(d) Amend its Certificate of Incorporation or amend or repeal its By-
Laws;
(e) Increase the number of members of the Board of Directors;
(f) Take any action that would constitute a bankruptcy or insolvency
event for the Company or any Subsidiary of the Company; or
(g) Guarantee or otherwise become contingently obligated for the
payment of Indebtedness of any Person (other than a wholly-owned Subsidiary),
where such obligation is not related to the Company's business.
ARTICLE VII
MISCELLANEOUS
-------------
7.1 Endorsement of Stock Certificates. Each certificate evidencing
---------------------------------
shares of the Company Stock held by any Stockholder will bear a legend reading
substantially as follows until the transfer restrictions with respect to such
shares contained in this Agreement are no longer effective:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
TRANSFER AND OTHER RESTRICTIONS SET FORTH IN A STOCKHOLDER AGREEMENT DATED
AS OF NOVEMBER 2, 1999, A COPY OF EACH OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, AND MAY NOT BE SOLD, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT COMPLYING WITH THE
TERMS AND CONDITIONS OF SUCH AGREEMENTS."
7.2 Term. Except as expressly provided in Section 2.1, this Agreement
----
shall commence on the date hereof and continue in full force and effect until
the earlier to occur of (a) a Change of Control or (b) the termination of Herve
Caen as President of the Company without Cause (as defined in the Employment
Agreement dated as of the date hereof by and between
12
<PAGE>
Caen and the Company), except for the provisions of Section 3.4, which shall
survive for a period of three (3) years following such termination.
7.3 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 Person will be irreparably
damaged and will not have an adequate remedy at law. Any such Person 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.
7.4 Notices. Any and all notices, designations, consents, offers,
-------
acceptances, or other communications provided for herein (each a "Notice") shall
------
be given in writing personally by hand-delivery, overnight courier, telegram, or
telecopy which shall be addressed, or sent, to the respective addresses or
telecopy numbers as follows (or such other address or telecopy number as the
Company or any Stockholder may specify for itself to the Company and all other
Stockholders by Notice):
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 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 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 - 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
All Notices shall be deemed effective, delivered and received (a) at the time
delivered by hand, if personally delivered; (b) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified above and receipt
thereof is confirmed; (c) if given by overnight courier, on the business day
immediately following the day on which such Notice is delivered to a reputable
overnight courier service; or (d) if given by telegram, when such Notice is
delivered at the address specified above.
Whenever pursuant to this Agreement any Notice is required to be given by any
Holder of Securities to any other Holder(s) of Securities, such Holder of
Securities may request from the Company a list of addresses of all Holders of
Securities of the Company, which list shall be promptly furnished to such Holder
of Securities.
7.5 Assignment. Except for transfers of Company Stock as set forth
----------
herein (including Permitted Transfers), neither this Agreement nor any of the
rights or obligations hereunder may be assigned by any party hereto without the
prior written consent of the other parties hereto. Subject to the foregoing
(and to the provisions of Section 7.10 hereof), this Agreement shall inure to
the benefit of and be binding upon the parties, and permitted successors and
assigns of each of the parties; and any transferees, successors and assigns of
any Stockholder shall be bound by the terms and conditions of this Agreement,
and any other agreement or commitment of such Stockholder to the other parties
hereto. If any Stockholder shall acquire any additional shares of
14
<PAGE>
Company Stock in any manner, whether by operation of law or otherwise, such
Company Stock shall be held subject to all of the terms of this Agreement.
7.6 Governing Law; Jurisdiction and Venue; Attorneys' Fees. This
------------------------------------------------------
Agreement shall be governed by and construed in accordance with the laws of the
State of Delaware without regard to the principles of conflicts of laws. The
parties hereto 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
Titus and Fargo 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.
7.7 Headings. The headings in this Agreement are inserted herein for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 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.
7.9 Entire Agreement. This Agreement, together with the other writings
----------------
referred to herein and therein, contain the entire agreement among the parties
hereto with respect to the subject matter contained herein, and supersede all
prior agreements, negotiations and understandings, whether written or oral, with
respect 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.
7.10 Amendments and Waiver. Any provision of this Agreement may be
---------------------
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Stockholders. Any amendment or waiver
effected in accordance with this Section 7.10 shall be binding upon each party
hereto. In the event of the amendment or modification of this Agreement in
accordance with its terms, the Stockholders shall cause the Board of Directors
to meet within thirty (30) calendar days following such amendment or
modification or as soon thereafter as is practicable for the purpose of adopting
any amendment to the Certificate of Incorporation and By-Laws of the Company
that may be required as a result of such amendment or modification to this
Agreement, and, if required, proposing such amendments to the Stockholders
entitled to vote thereon. No action taken pursuant to this Agreement shall be
deemed to constitute a waiver by the party taking such action of compliance with
any covenants or agreements contained herein. No failure to exercise and no
delay in exercising any right, power or privilege of a party hereunder shall
operate as a waiver or a consent to the modification of the terms hereof unless
given by that party in writing. The waiver by any party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any preceding or succeeding breach.
7.11 Inspection. So long as this Agreement shall be in effect, this
----------
Agreement shall be made available for inspection by any Stockholder at the
principal offices of the Company.
15
<PAGE>
7.12 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts each of which
when so executed shall be deemed to be an original and all of which together
shall constitute one and the same Agreement.
7.13 Not for Benefit of Third Parties. This Agreement is not made for
--------------------------------
the benefit of any third party.
7.14 Recapitalizations, Exchanges, Etc., Affecting Company Stock. The
-----------------------------------------------------------
provisions of this Agreement shall apply, to the full extent set forth herein
with respect to shares of the Company Stock outstanding as of the date hereof,
and to any and all shares of capital stock of the Company or any successor or
assigns of the Company (whether by merger, consolidation, sale of assets, or
otherwise) which may be issued in respect of, or in substitution for, such
shares, and shall be approximately adjusted for any stock dividends, splits,
reverse splits, combinations, recapitalizations and the like occurring after the
date hereof.
7.15 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.
16
<PAGE>
[SIGNATURE PAGE TO VOTING AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be duly executed on their respective behalf by
their respective officers or partners thereunto duly authorized, as of the day
and year first above written.
INTERPLAY ENTERTAINMENT CORP.,
a Delaware corporation
By: /s/ Brian Fargo
-------------------------------
Name: Brian Fargo
Its: Chief Executive Officer
TITUS INTERACTIVE SA,
a French corporation
By: /s/ Herve Caen
-------------------------------
Name: Herve Caen
Its: Chairman & CEO
/s/ Brian Fargo
----------------------------------
Brian Fargo
17
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is hereby entered into by and between Interplay
Entertainment Corp., a Delaware corporation (the "Company"), and Brian Fargo
(the "Executive"), as of the 2nd day of November, 1999.
WHEREAS, the Company and the Executive propose to into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with Titus Interactive SA, a French
corporation ("Titus"), pursuant to which Titus will purchase 6,250,000 shares of
Common Stock of the Company from the Company ("the Stock Purchase");
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and conditions under which the Executive will continue to be
employed by the Company after the Stock Purchase; and
WHEREAS, it is a condition to the obligation of Titus to consummate the
Stock Purchase that the Executive and the Company enter into this Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
-----------------
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the period commencing on the date of consummation of the Stock
Purchase and ending on the third anniversary of such date (the "Employment
Period").
2. Position and Duties.
-------------------
(a) Executive shall be employed by the Company as Chief Executive
Officer and shall serve as Chairperson of the Board of Directors of the Company,
(i) in the case of Executive's position as Chief Executive Officer, with the
duties and responsibilities set forth on Exhibit A attached hereto and made a
---------
part hereof, and (ii) in the case of Executive's position as Chairperson of the
Board, with duties and responsibilities substantially similar to those assigned
to the Executive prior to the Stock Purchase.
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote full attention and time to the business and affairs of the Company, using
the Executive's reasonable best efforts to carry out faithfully and efficiently
the responsibilities assigned to the Executive under this Agreement. It shall
not be considered a violation of the foregoing for the Executive to (i) serve on
corporate boards with the approval of the Company, (ii) serve on civic or
charitable boards or committees, (iii) deliver lectures or fulfill speaking
engagements and (iv) manage personal investments, so long as such activities do
not interfere with the performance of the Executive's responsibilities under
this Agreement or otherwise violate the terms of this Agreement.
(c) The Executive's services shall be performed primarily at the
Company's corporate headquarters, located at 16815 Von Karman Ave., Irvine,
California 92606. Travel in connection with the business of the Company may be
reasonably requested from time to time by the Board of Directors of the Company
(the "Board").
<PAGE>
3. Compensation.
------------
(a) Base Salary. During the Employment Period, the Executive shall
-----------
receive an annual salary (the "Annual Base Salary") in an amount not less than
Two Hundred Fifty Thousand Dollars ($250,000), payable in accordance with the
Company's payroll for executives, as in effect from time to time. During the
Employment Period, the Annual Base Salary shall be reviewed for possible
increase at least annually. Any increase in the Annual Base Salary shall not
limit or reduce any other obligation of the Company under this Agreement. The
Annual Base Salary shall not be reduced after any such increase, unless the
annual base salaries of all executives of the Company are proportionately
reduced, and in any event shall not be reduced below Two Hundred Fifty Thousand
Dollars ($250,000). After any such increase (or decrease), the term "Annual Base
Salary" shall refer to the Annual Base Salary as so increased (or decreased).
(b) Annual Bonus. In addition to the Annual Base Salary, the
------------
Executive shall be eligible to receive annual bonuses (each, an "Annual Bonus")
at the discretion of the Board of Directors of the Company.
(c) Stock Options. Concurrently with the entering into of this
-------------
Agreement by the Company and the Executive, the Executive shall be granted
options to purchase 500,000 shares of the Common Stock of the Company pursuant
to the Company's Amended and Restated 1997 Stock Option Plan at an exercise
price equal to the closing price per share of the Company's Common Stock on the
date hereof as reported by Nasdaq (the "Options"). The Options shall vest over a
four-year period commencing with the date of grant of such options, with 25% of
the aggregate number of such options vesting each year during such four year
period. Such options shall immediately vest in full in the event that (i) a
Change in Control (as defined in that certain Stockholder Agreement of even date
herewith among the Company, the Executive and Titus Interactive SA) occurs, or
(ii) Executive is terminated without Cause (as such term is defined in Section
4.b.(i) below) or terminates his employment with Good Reason (as such term is
defined in Section 4.c.(i) below).
(d) Other Benefits. The Executive shall be entitled to participate in
--------------
any of the Company's medical, dental or other benefit plans approved by the
Company's Board of Directors.
(e) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all normal and customary expenses
incurred by the Executive in carrying out the Executive's duties under this
Agreement, provided that the Executive complies with the policies, practices and
procedures of the Company for submission of expense reports, receipts, or
similar documentation of such expenses.
(f) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to the fringe benefits provided by the Company from time to
time to its other executive officers.
(g) Vacation. During the Employment Period, the Executive shall be
--------
entitled to vacations in accordance with Company policies then in effect and, in
no event, shall such vacation time be less than four (4) weeks per calendar
year.
4. Termination of Employment.
-------------------------
2
<PAGE>
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. The
Company shall be entitled to terminate the Executive's employment because of the
Executive's Disability during the Employment Period. "Disability" means that (i)
the Executive has failed, over a period of 180 consecutive days, to perform the
Executive's duties under this Agreement, as a result of physical or mental
illness or injury, and (ii) a physician selected by the Company or its insurers,
and reasonably acceptable to the Executive or the Executive's legal
representative, has determined that the Executive's incapacity constitutes a
disability for purposes of the Company's long-term disability insurance
coverage. A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and shall
be effective upon receipt of such notice by the Executive (the "Disability
Effective Date").
(b) By the Company.
--------------
(i) The Company may terminate the Executive's employment during
the Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud,
embezzlement or willful misconduct materially injurious to the Company on the
part of the Executive, (B) the Executive's (x) persistent and continued failure
to substantially perform his material duties (as set forth on Exhibit A hereto)
---------
for the Company when and to the extent reasonably requested by the Board to do
so and (y) failure to correct same within thirty (30) days after notice from the
Board requesting the Executive to do so (it being understood that this standard
is intended to assure the Company of the reasonable attendance, efforts and good
faith business attention of the Executive to his duties on behalf of the
Company, but may not be relied upon by the Company to terminate the Executive
based upon the operating performance of the Company), or (C) the Executive's
breach of any material provision of this Agreement, which breach has not been
cured in all material respects within thirty (30) days after notice of such
breach is given to the Executive by the Company. No act or failure to act on the
part of the Executive shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of the
Company. Any act or failure to act that is based upon authority given pursuant
to a resolution duly adopted by the Board or the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The Executive
shall not be deemed to have been terminated for Cause unless such notice is
accompanied by a copy of a resolution duly adopted by the Board to such effect.
(ii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive written notice of the
termination.
(c) Good Reason.
-----------
(i) The Executive may terminate employment for Good Reason. "Good
Reason" means:
(A) removal of duties set forth on Exhibit A hereto from the
---------
the Executive, or the assignment to the Executive of duties inconsistent in any
material respect with the duties set forth on Exhibit A hereto, other than
---------
actions that are not taken in bad faith and are remedied by the Company within
five (5) business days after receipt of notice thereof from the Executive;
3
<PAGE>
(B) any failure by the Company to comply with any provision
of Section 3 of this Agreement other than failures that are not taken in bad
faith and are remedied by the Company within five (5) business days after
receipt of notice thereof from the Executive;
(C) any requirement by the Company that the Executive's
services be rendered primarily at a location or locations not complying with the
provisions of paragraph (c) of Section 2 of this Agreement; or
(D) any failure by the Company to require any successor
(whether direct or indirect by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company expressly
to assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be effective on
the tenth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given); provided,
that such termination of employment shall not become effective if the Company
shall have previously corrected to the reasonable satisfaction of the Executive
the circumstance giving rise to the Notice of Termination.
(d) Date of Termination. The "Date of Termination" means the date of
-------------------
the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Company gives
the Executive notice of a termination of employment without Cause, as the case
may be.
5. Obligations of the Company Upon Termination.
-------------------------------------------
(a) Death, Disability, Cause. If, during the Employment Period, the
------------------------
Executive's employment is terminated by the Company because of death,
Disability, or for Cause or by the Executive other than for Good Reason, then
except as provided in Section 8, the Executive shall not be entitled to any
compensation provided for under this Agreement, other than Annual Base Salary
through the effective date of any such termination or resignation, benefits
under the long-term disability insurance coverage in the case of termination
because of Disability, and (without limiting the provisions of Section 6 hereof)
vested benefits, if any, required to be paid or provided by law.
(b) Without Cause; Good Reason. If, during the Employment Period, the
--------------------------
Executive's employment is terminated by the Company without Cause or by the
Executive for Good Reason, the Executive shall not be entitled to any
compensation provided for under this Agreement except as set forth in the
following sentence. For the remainder of the Employment Period, the Executive
shall continue to be considered an employee of the Company, and the Company (i)
shall continue to pay the Executive for and with respect to the unexpired
portion of the Employment Period (in the same manner as specified herein) (A) an
amount equal to one hundred and fifty percent (150%) of his Annual Base Salary
and (B) an amount equal to seventy-five percent (75%) of the
4
<PAGE>
Executive's Imputed Annual Bonuses and (ii) shall continue during the unexpired
portion of the Employment Period the welfare benefits set forth in Section 3 (in
the same manner as specified herein); provided that (x) if any such benefits
cannot be provided under the terms of the applicable plans or applicable law,
the Company shall provide the Executive with substitute benefits that are
comparable and equal in value to such benefits, and (y) during any period when
the Executive is eligible to receive any such benefits under another employer-
provided plan, the benefits provided by the Company under this paragraph may be
made secondary to those provided under such other plan. As used herein, "Imputed
Annual Bonuses" shall mean the "target" bonuses or similar amounts under any
Company bonus plan then in effect approved by the Board that the Executive would
have received had he not been terminated.
6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company for which the Executive may qualify,
nor, subject to paragraph (f) of Section 10, shall anything in this Agreement
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company. Vested benefits and other amounts that
the Executive is otherwise entitled to receive under any plan, policy, practice
or program of, or any contract or agreement with, the Company on or after the
Date of Termination shall be payable in accordance with such plan, policy,
practice, program, contract or agreement, as the case may be, except as
explicitly modified by this Agreement.
7. No Mitigation or Reduction. In no event shall the Executive be
--------------------------
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
8. Confidential Information; Other Covenants.
-----------------------------------------
(a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company and its business that the Executive has obtained during
the Executive's employment by the Company and that is not public knowledge
(other than as a result of the Executive's violation of this paragraph (a) of
Section 8) ("Confidential Information"), unless disclosure of such information
is required by court order. The Executive shall not communicate, divulge or
disseminate Confidential Information at any time during or after the Executive's
employment with the Company, except with the prior written consent of the
Company or as otherwise required by law or legal process.
(b) During the full original term of the Employment Period, except as
otherwise provided in paragraph (d) of this Section 8, the Executive shall not,
without the prior written consent of the Board, engage in or become associated
with a Prohibited Activity. For purposes of this paragraph (b) of Section 8: (i)
a "Prohibited Activity" means any business or other endeavor in the interactive
software business, anywhere in the world, that is directly competitive with the
business in which the Company is engaged at the date hereof, or at any time
during the Employment Period; and (ii) except as provided on Exhibit B attached
---------
hereto and made a part hereof, the Executive shall be considered to have become
"associated with a Prohibited Activity" if he becomes directly or indirectly
involved as an owner, employee, officer, director, independent contractor,
agent, partner, advisor, lender, or in any other capacity with any individual,
partnership, corporation or other organization that is engaged in a Prohibited
Activity. Notwithstanding the foregoing: (i) the Executive may make and retain
investments during the Employment Period in not more than five
5
<PAGE>
percent (5%) of the equity of any entity engaged in a Prohibited Activity,
provided that the Executive does not engage in any of the other activities
listed in the preceding sentence with respect to such entity; and (ii) if the
Executive's employment is terminated because of Disability, the provisions of
this paragraph (b) of Section 8 shall only apply if, following notice from the
Executive that his disability has ended and that he intends to seek employment
in a Prohibited Activity, the Company commences payment and continues to pay
from the date of such notice throughout the remainder of the Employment Period
the compensation and benefits provided for hereunder in respect of such
remaining term.
(c) The Executive agrees that he will not, at any time during which he
is an employee of the Company and for a period of two (2) years thereafter,
without the prior written consent of the Company, whether directly or
indirectly, solicit the employment of, whether as an employee, officer,
director, agent, consultant or independent contractor, any person who was or is
at any time during the previous twelve (12) months an employee, representative,
officer or director of the Company or any of its affiliates. The foregoing shall
not be deemed to restrict the Executive's ability to hire any such person if
such person responds to a general solicitation of employment or otherwise seeks
on his own initiative employment by the Executive or any of his affiliates.
(d) The Executive acknowledges and agrees that the Company's remedy at
law for any breach of the Executive's obligations under this Section 8 would be
inadequate and agrees and consents that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision of such Section without the necessity of proof of actual damage. With
respect to any provision of this Section 8 finally determined by a court of
competent jurisdiction to be unenforceable, the Executive and the Company hereby
agree that such court shall have jurisdiction to reform this Agreement or any
provision hereof so that it is enforceable to the maximum extent permitted by
law, and the parties agree to abide by such court's determination.
9. Successors.
----------
(a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors.
10. Miscellaneous.
-------------
(a) The validity of this Agreement, the construction of its terms and
the determination of the rights and duties of the parties hereto shall all be
governed by the laws of the State of California, without reference to principles
of conflicts of laws. 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. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended, modified, terminated or waived except with the prior written consent of
(i) the parties hereto and (ii) so long as no Change in Control has occurred,
Titus, or (in either such case) their respective successors and legal
representatives.
6
<PAGE>
Titus and its successors and assigns are intended to be and shall be intended
third-party beneficiaries of the preceding sentence.
(b) All notices and other communications under this Agreement shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Brian Fargo
Interplay Productions, Inc.
16815 Von Karman Avenue
Irvine, CA 92606
If to the Company:
Interplay Productions, Inc.
16815 Von Karman Avenue
Irvine, CA 92606
Attention: President
with a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Attention: K.C. Schaaf, Esq.
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 10. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the Company
may withhold from amounts payable under this Agreement all federal, state, local
and foreign taxes that are required to be withheld by applicable laws or
regulations.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement except to the extent any
other party hereto is materially prejudiced by such failure.
(f) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them, including, without limitation, that
certain Employment Agreement dated March 28, 1994, as amended by amendments
dated March 2, 1998 and March 18, 1999, concerning the subject matter hereof.
7
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
INTERPLAY ENTERTAINMENT CORP.
By: /s/ MANUEL MARRERO
---------------------------------------
Manuel Marrero, Chief Financial Officer
/s/ BRIAN FARGO
---------------------------------------
Brian Fargo
8
<PAGE>
EXHIBIT A
Duties of Executive
-------------------
Executive shall have primary responsibility and authority in the Company
with respect to the following management functions:
1. Product Development. Supervision of all internal and external product
-------------------
development activities of the Company, including, without limitation, setting
product development strategy and management of developer relationships. The
Company's Vice President of Development will report to Executive.
2. Marketing. Supervision of all the Company's marketing functions. The
---------
Company's Vice President of Marketing will report to Executive.
3. Business Development/Corporate Strategy. Setting of global corporate
---------------------------------------
strategy for the Company and development of corporate relationships. The
Company's Vice President of Strategic Development and Vice President of Business
Development will report to the Executive.
4. Legal. Supervision of the Company's legal and contractual affairs.
-----
The Company's Vice President of Legal and Business Affairs will report to the
Executive.
5. Consultation With President. The Executive shall consult with the
---------------------------
President of the Company in the development of all operating plans for the
Company, and shall not take any action which constitutes a material deviation
from any operating plan without the concurrence of the President. The Executive
shall also consult with the President of the Company with respect to all
material decisions relating to Interplay Films.
<PAGE>
EXHIBIT B
Exceptions to Prohibited Activities
-----------------------------------
Fargo may serve as a consultant to Games On-Line, Inc. in the area of
online gaming, so long as Fargo's obligations under such consulting arrangement
do not exceed, on average, twenty (20) hours per month.
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is hereby entered into by and between Interplay
Entertainment Corp., a Delaware corporation (the "Company"), and Herve Caen (the
"Executive"), as of the 2nd day of November, 1999.
WHEREAS, the Company and the Executive are entering into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with Titus Interactive SA, a French
corporation ("Titus"), pursuant to which Titus will purchase 6,250,000 shares of
Common Stock of the Company from the Company (the "Stock Purchase");
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and conditions under which the Executive will continue to be
employed by the Company after the consummation of the Stock Purchase; and
WHEREAS, it is a condition to the obligation of Titus to consummate the
Stock Purchase that the Executive and the Company enter into this Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
-----------------
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the period commencing on the date of consummation of the Stock
Purchase and ending on the third anniversary of such date (the "Employment
Period").
2. Position and Duties.
-------------------
(a) Executive shall be employed by the Company as President of the
Company, with the duties and responsibilities set forth on Exhibit A attached
---------
hereto and made a part hereof.
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote full attention and time to the business and affairs of (i) the Company,
(ii) Titus and (iii) all subsidiaries and affiliates of the Company or Titus.
The Executive shall use his reasonable best efforts to carry out faithfully and
efficiently the responsibilities assigned to the Executive under this Agreement,
and shall devote such portion of his attention and time to the Company as
Executive reasonably determines necessary to carry out such responsibilities. It
shall not be considered a violation of the foregoing for the Executive to (i)
serve as an officer and director of Titus, and subsidiaries and affiliates of
Titus, (ii) serve on other corporate boards with the approval of the Company,
(iii) serve on civic or charitable boards or committees, (iv) deliver lectures
or fulfill speaking engagements, (v) manage his personal holdings in the capital
stock of Titus and (vi) manage other personal investments, so long as such
activities do not interfere with the performance of the Executive's
responsibilities under this Agreement or otherwise violate the terms of this
Agreement.
-1-
<PAGE>
3. Compensation.
------------
(a) Base Salary. During the Employment Period, subject to the
-----------
provisions of this Section 3(a), the Executive shall receive an annual salary
(the "Annual Base Salary") in an amount not less than Two Hundred Fifty Thousand
Dollars ($250,000), payable in accordance with the Company's payroll for
executives, as in effect from time to time. During the Employment Period, the
Annual Base Salary shall be reviewed for possible increase at least annually.
Any increase in the Annual Base Salary shall not limit or reduce any other
obligation of the Company under this Agreement. The Annual Base Salary shall not
be reduced after any such increase, unless the annual base salaries of all
executives of the Company are proportionately reduced, and in any event shall
not be reduced below Two Hundred Fifty Thousand Dollars ($250,000). After any
such increase (or decrease), the term "Annual Base Salary" shall refer to the
Annual Base Salary as so increased (or decreased). Executive shall have the
option to decline any portion of the Annual Base Salary otherwise payable during
any calendar month by giving notice thereof to the Company at least five (5)
business days prior to the beginning of such month.
(b) Annual Bonus. In addition to the Annual Base Salary, the
------------
Executive shall be eligible to receive annual bonuses (each, an "Annual Bonus")
at the discretion of the Board of Directors of the Company.
(c) Other Benefits. The Executive shall be entitled to participate
--------------
in any of the Company's medical, dental or other benefit plans approved by the
Company's Board of Directors.
(d) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all normal and customary expenses
incurred by the Executive in carrying out the Executive's duties under this
Agreement, provided that the Executive complies with the policies, practices and
procedures of the Company for submission of expense reports, receipts, or
similar documentation of such expenses.
(e) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to the fringe benefits provided by the Company from time to
time to its other executive officers.
(f) Vacation. During the Employment Period, the Executive shall be
--------
entitled to vacations in accordance with Company policies then in effect and, in
no event, shall such vacation time be less than four (4) weeks per calendar
year.
4. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. The
Company shall be entitled to terminate the Executive's employment because of the
Executive's Disability during the Employment Period. "Disability" means that
(i) the Executive has failed, over a period of one hundred eighty (180)
consecutive days, to perform the Executive's duties under this Agreement, as a
result of physical or mental illness or injury, and (ii) a physician selected by
the Company or its insurers, and reasonably acceptable to the Executive or the
Executive's legal representative, has determined that the Executive's incapacity
constitutes a disability for purposes of the Company's
-2-
<PAGE>
long-term disability insurance coverage. A termination of the Executive's
employment by the Company for Disability shall be communicated to the Executive
by written notice, and shall be effective upon receipt of such notice by the
Executive (the "Disability Effective Date").
(b) By the Company.
--------------
(i) The Company may terminate the Executive's employment during the
Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud,
embezzlement or willful misconduct materially injurious to the Company on the
part of the Executive, (B) the Executive's (x) persistent and continued failure
to substantially perform his material duties (as set forth on Exhibit A hereto)
---------
for the Company when and to the extent reasonably requested by the Board to do
so and (y) failure to correct same within thirty (30) days after notice from the
Board requesting the Executive to do so (it being understood that this standard
is intended to assure the Company of the reasonable attendance, efforts and good
faith business attention of the Executive to his duties on behalf of the
Company, but may not be relied upon by the Company to terminate the Executive
based upon the operating performance of the Company), or (C) the Executive's
breach of any material provision of this Agreement, which breach has not been
cured in all material respects within thirty (30) days after notice of such
breach is given to the Executive by the Company. No act or failure to act on the
part of the Executive shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of the
Company. Any act or failure to act that is based upon authority given pursuant
to a resolution duly adopted by the Board or the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The Executive
shall not be deemed to have been terminated for Cause unless such notice is
accompanied by a copy of a resolution duly adopted by the Board to such effect.
(ii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive one hundred eighty (180)
days' written notice of the termination.
(c) Good Reason.
-----------
(i) The Executive may terminate employment for Good Reason. "Good
Reason" means:
(A) removal of duties set forth on Exhibit A hereto from the
---------
Executive, or the assignment to the Executive of duties inconsistent in any
material respect with the duties set forth on Exhibit A hereto, other than
---------
actions that are not taken in bad faith and are remedied by the Company within
five (5) business days after receipt of notice thereof from the Executive;
(B) any failure by the Company to comply with any provision of
Section 3 of this Agreement other than failures that are not taken in bad faith
and are remedied by the Company within five (5) business days after receipt of
notice thereof from the Executive;
-3-
<PAGE>
(C) any failure by the Company to require any successor
(whether direct or indirect by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company expressly
to assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be effective on
the tenth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given); provided,
that such termination of employment shall not become effective if the Company
shall have previously corrected to the reasonable satisfaction of the Executive
the circumstance giving rise to the Notice of Termination.
(d) Date of Termination. The "Date of Termination" means the date of
-------------------
the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Company gives
the Executive notice of a termination of employment without Cause, as the case
may be.
5. Obligations of the Company Upon Termination. If, during the Employment
-------------------------------------------
Period, the Executive's employment is terminated by the Company or Executive for
any reason or no reason, the Executive shall not be entitled to any compensation
provided for under this Agreement, other than Annual Base Salary through the
effective date of any such termination or resignation, benefits under the long-
term disability insurance coverage in the case of termination because of
Disability, and (without limiting the provisions of Section 6 hereof) vested
benefits, if any, required to be paid or provided by law.
6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company for which the Executive may qualify,
nor shall anything in this Agreement limit or otherwise affect such rights as
the Executive may have under any contract or agreement with the Company. Vested
benefits and other amounts that the Executive is otherwise entitled to receive
under any plan, policy, practice or program of, or any contract or agreement
with, the Company on or after the Date of Termination shall be payable in
accordance with such plan, policy, practice, program, contract or agreement, as
the case may be, except as explicitly modified by this Agreement.
7. No Mitigation or Reduction. In no event shall the Executive be
--------------------------
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
-4-
<PAGE>
8. Confidential Information; Other Covenants.
-----------------------------------------
(a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company and its business that the Executive has obtained during
the Executive's employment by the Company and that is not public knowledge
(other than as a result of the Executive's violation of this paragraph (a) of
Section 8) ("Confidential Information"), unless disclosure of such information
is required by court order. The Executive shall not communicate, divulge or
disseminate Confidential Information at any time during or after the Executive's
employment with the Company, except with the prior written consent of the
Company or as otherwise required by law or legal process.
(b) The Executive acknowledges and agrees that the Company's remedy
at law for any breach of the Executive's obligations under this Section 8 would
be inadequate and agrees and consents that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision of such Section without the necessity of proof of actual damage. With
respect to any provision of this Section 8 finally determined by a court of
competent jurisdiction to be unenforceable, the Executive and the Company hereby
agree that such court shall have jurisdiction to reform this Agreement or any
provision hereof so that it is enforceable to the maximum extent permitted by
law, and the parties agree to abide by such court's determination.
9. Successors.
----------
(a) This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the Executive.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors.
10. Miscellaneous.
-------------
(a) The validity of this Agreement, the construction of its terms
and the determination of the rights and duties of the parties hereto shall all
be governed by the laws of the State of California, without reference to
principles of conflicts of laws. 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. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended, modified, terminated or waived except with the prior written consent of
the parties hereto.
(b) All notices and other communications under this Agreement shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
-5-
<PAGE>
If to the Executive:
Herve Caen
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, CA 91311
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street, 23rd Floor
Los Angeles, CA 90071
Attention: Robert A. Miller, Jr., Esq.
If to the Company:
Interplay Productions, Inc.
16815 Von Karman Avenue
Irvine, CA 92606
Attention: President
with a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Attention: K.C. Schaaf, Esq.
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 10. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement except to the extent any
other party hereto is materially prejudiced by such failure.
-6-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
INTERPLAY ENTERTAINMENT CORP.
By: /s/ MANUEL MARRERO
----------------------------------------
Manuel Marrero, Chief Financial Officer
EXECUTIVE:
/s/ HERVE CAEN
--------------------------------------------
Herve Caen
-7-
<PAGE>
EXHIBIT A
Duties of Executive
-------------------
Executive shall have primary responsibility and authority in the Company
with respect to the following management functions:
1. Finance. Supervision of all financial expenditures of the Company and
-------
related matters, including establishment of fiscal policies of the Company. The
Company's Chief Financial Officer will report to Executive.
2. Sales and Distribution. Supervision of all sales and distribution
----------------------
activities of the Company, including without limitation negotiation and
monitoring of distributor relationships. The Company's Vice President of Sales
will report to Executive.
3. Operations. Supervision of the operating activities of the Company. The
----------
Company's Chief Operating Officer will report to Executive.
4. International. Development and monitoring of the business relationships
-------------
with and operational activities of Interplay OEM. The President of Interplay OEM
will report to Executive.
5. Legal. Supervision of Company's legal affairs as they relate to the
-----
other management functions of Executive.
6. Consultation with Chief Executive Officer. The Executive shall consult
-----------------------------------------
with the Chief Executive Officer of the Company in the development of all
operating plans for the Company, and shall not take any action which constitutes
a material deviation from any operating plan without the concurrence of the
Chief Executive Officer.
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,473
<SECURITIES> 0
<RECEIVABLES> 22,546
<ALLOWANCES> 10,234
<INVENTORY> 9,245
<CURRENT-ASSETS> 58,391
<PP&E> 16,658
<DEPRECIATION> 12,445
<TOTAL-ASSETS> 64,108
<CURRENT-LIABILITIES> 76,214
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> (18,033)
<TOTAL-LIABILITY-AND-EQUITY> 64,108
<SALES> 20,136
<TOTAL-REVENUES> 23,636
<CGS> 15,333
<TOTAL-COSTS> 15,333
<OTHER-EXPENSES> 25,267
<LOSS-PROVISION> 4,654
<INTEREST-EXPENSE> 928
<INCOME-PRETAX> (16,965)
<INCOME-TAX> 11
<INCOME-CONTINUING> (16,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,976)
<EPS-BASIC> (.75)
<EPS-DILUTED> (.75)
</TABLE>
<PAGE>
EXHIBIT 99.1
<TABLE>
<CAPTION>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
ASSETS Actual Pro forma
------ -------- ---------
Current Assets: (Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents $ 906 $ 906
Restricted cash 1,567 1,567
Note receivable - 5,000
Trade receivables, net of allowances
of $10,234 and $18,431, respectively 22,546 22,546
Inventories 9,245 9,245
Prepaid licenses and royalties 19,058 19,058
Deferred income taxes 4,000 4,000
Other 1,069 1,069
-------- --------
Total current assets 58,391 63,391
Property and Equipment, net 4,212 4,212
Other Assets 1,505 1,505
-------- --------
$ 64,108 $ 69,108
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable $ 29,168 $ 29,168
Accrued liabilities 19,664 19,664
Current portion of long-term debt 27,114 12,114
Income taxes payable 268 268
-------- --------
Total current liabilities 76,214 61,214
Long-Term Debt, net of current portion 5,567 567
Deferred Income Taxes - -
Minority Interest 69 69
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, no par value, authorized 5,000,000 shares;
issued and outstanding, none - -
Common stock, $.001 par value, authorized 50,000,000 shares;
issued and outstanding 23,654,296 shares and pro forma 29,904,296 23 29
shares
Paid-in capital 62,247 87,241
Accumulated deficit (80,279) (80,279)
Accumulated comprehensive income adjustments 267 267
-------- --------
Total stockholders' equity (deficit) (17,742) 7,258
-------- --------
$ 64,108 $ 69,108
======== ========
</TABLE>
1
