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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24363
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INTERPLAY ENTERTAINMENT CORP.
(Exact name of the registrant as specified in its charter)
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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)
Securities registered pursuant of Section 12(b) of the Act: None
Securities registered pursuant of Section 12(g) of the Act:
Common Stock, $0.001 par value
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 22, 1999, 20,808,861 shares of Common Stock of the Registrant
were issued and outstanding and the aggregate market value of voting common
stock held by non-affiliates was $19,956,470.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Company's 1999 Annual
Meeting of Stockholders, to be held in June 1999, are incorporated by
reference into Part III.
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INTERPLAY ENTERTAINMENT CORP.
INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
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PART I
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ITEM 1. BUSINESS...................................................... 4
ITEM 2. PROPERTIES.................................................... 12
ITEM 3. LEGAL PROCEEDINGS............................................. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................... 13
ITEM 6. SELECTED FINANCIAL DATA....................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 36
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 37
ITEM 11. EXECUTIVE COMPENSATION........................................ 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..................................................... 37
SIGNATURES.............................................................. 38
EXHIBIT INDEX........................................................... 39
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This Form 10-K 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-K 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, failure of the Company's products to be and remain accepted
within their respective markets, material adverse changes in competitive
conditions within the Company's markets, failure of the Company to retain key
development and management personnel, failure of the Company to accurately
anticipate market demand, and material adverse changes in the Company's
operations or business. Additional factors that may affect future operating
results are discussed in more detail in "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors Affecting Future
Performance". 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-K 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.
Interplay(TM), Interplay Productions(R) and certain of the Company's product
names and publishing labels referred to herein are trademarks of the Company.
This Annual Report on Form 10-K also contains trademarks of other companies.
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PART I
ITEM 1. BUSINESS
Overview
Interplay Entertainment Corp., a Delaware corporation, (together with its
subsidiaries, the "Company" or "Interplay") is a leading developer, publisher
and distributor of interactive entertainment software for both core gamers and
the mass market. Interplay was incorporated in the State of California in 1982
and was reincorporated in the State of Delaware in May 1998. The Company,
which commenced operations in 1983, is most widely known for its titles in the
action/arcade, adventure/RPG, strategy/puzzle and sports categories. The
Company has produced titles for many of the most popular interactive
entertainment software platforms, and currently balances its development
efforts by publishing interactive entertainment software for PCs and current
generation video game consoles, such as the PlayStation and Nintendo 64.
The Company seeks to publish interactive entertainment software titles that
are, or have the potential to become, franchise software titles that can be
leveraged across several releases and/or platforms, and has published many
such successful franchise titles to date. In addition, the Company secures
licenses to use popular intellectual properties, such as Star Trek, Caesars
Palace and Major League Baseball, for incorporation into certain of its
products. Of the more than 40 titles currently in development by the Company,
more than half are sequels to successful titles or incorporate licensed
intellectual properties.
In February 1999, in connection with the Company's acquisition of a minority
membership interest in the parent entity of Virgin Interactive Entertainment
Limited ("Virgin"), the Company entered into an International Distribution
Agreement with Virgin (the "Virgin Distribution Agreement"). Pursuant to the
Virgin Distribution Agreement, Virgin will hire the Company's European sales
and marketing personnel and will distribute substantially all of the Company's
titles in Europe, CIS, Africa and the Middle East. See "Business--
Distribution--International" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Distribution Agreement."
Products
The Company develops, publishes and distributes interactive entertainment
software titles that provide immersive game experiences by combining advanced
technology with engaging content, vivid graphics and rich sound. The Company
utilizes the experience and judgment of the avid gamers in its product
development group to select and produce the products it publishes. This has
resulted in the publication of a wide variety of games that have received
numerous awards, including the Academy of Interactive Arts & Sciences' Best
Title, Computer Game Review's Gold and Platinum Triads and PC Entertainment's
Editor's Choice Awards.
The Company's strategy is to develop products for those platforms, whether
PC or video game console, that have or will have sufficient installed bases
for such development to be economically viable. The Company currently
publishes products for multiple PC platforms, including Windows 95 and 98, and
for the current generation of video game consoles, including the PlayStation
and Nintendo 64. The Company assesses the potential acceptance and success of
emerging platforms and the anticipated continued viability of existing
platforms based on many factors, including the number of competing titles, the
ratio of software sales to hardware sales with respect to such platform, the
installed base of the platform, the change in the rate of sales of the
platform and the cost and timing of development for the platform. The Company
must continually anticipate and assess the emergence of, and market acceptance
of, new interactive entertainment software platforms well in advance of the
time the platform is introduced to consumers. Because product development
cycles are difficult to predict, the Company is required to make substantial
product development and other investments in a particular platform well in
advance of introduction of the platform. If the platforms for which the
Company develops software are not released on a timely basis or do not attain
significant market penetration, the Company's business, operating results and
financial condition could be materially adversely affected.
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Alternatively, if the Company fails to develop products for a platform that
does achieve significant market penetration, then the Company's business,
operating results and financial condition could also be materially adversely
affected.
The Company has entered into license agreements with Sony Computer
Entertainment and Nintendo pursuant to which the Company is granted the right
to develop, sublicense and distribute products for such platforms in specified
territories, which products are manufactured by the licensor for the Company
and the Company is currently negotiating a similar license for Sega's new
Dreamcast platform. The Company pays the licensor a royalty and/or
manufacturing fee in exchange for such license and manufacturing services.
Such agreements grant the licensor certain approval rights over the products
developed for such platforms, as well as over the packaging and marketing
materials for such products. There can be no assurance that the Company will
be able to obtain future licenses from hardware companies on acceptable terms
or that any existing or future licenses will be renewed by the licensors. The
inability of the Company to obtain such approvals could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Future Performance--Dependence on
Licenses from and Manufacturing by Hardware Companies."
Product Development
The Company develops or acquires its products from a variety of sources,
including its four internal development divisions, Shiny, Interplay Europe and
publishing relationships with leading independent developers.
The Development Process. The Company develops original products both
internally, using its in-house development staff, and externally, using third
party software developers working under contract with the Company. Producers
on the Company's internal staff monitor the work of both inside and third
party development teams through design review, progress evaluation, milestone
review and quality assurance. In particular, each milestone submission is
thoroughly evaluated by the Company's product development staff to ensure
compliance with the product's design specifications. The Company enters into
consulting or development agreements with third party developers which are
generally on a flat-fee, work-for-hire basis or on a royalty basis, whereby
advances are paid based on the achievement of milestones. In royalty
arrangements, the Company ultimately pays continuation royalties to developers
once the Company's advances have been recouped. In addition, in certain cases,
the Company will utilize third party developers to port products to new
platforms.
The Company's products typically have short life cycles, and the Company
depends on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously
released products to additional platforms, to generate net revenues to fund
operations and to replace declining net revenues from existing products. The
development cycle of new products is difficult to predict, and involves a
number of risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Dependence on New Product Introductions; Risk of Product Delays and Product
Defects."
During the year ended December 31, 1998, the eight months ended December 31,
1997 and the fiscal years ended April 30, 1997 and 1996, the Company spent
$24.5 million, $14.3 million, $21.4 million and $15.1 million, respectively,
on product research and development activities. Those amounts represented
19.3%, 16.6%, 25.7% and 15.6%, respectively, of revenue in each of those
years.
Internal Product Development
U.S. Product Development. The Company's U.S. internal product development
group (excluding Shiny's development group) consisted of approximately 204
people at December 31, 1998. Once a design is selected by the Company, a
production team, development schedule and budget are established. The
Company's internal development process includes initial design and concept
layout, computer graphic design, 2D and 3D artwork,
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programming, prototype testing, sound engineering and quality control. The
development process for an original, internally developed product typically
takes from 12 to 24 months, and another six to 12 months for the porting of a
product to a different technology platform. The Company utilizes a variety of
advanced hardware and software development tools, including animation, sound
compression utilities, clay modeling and video compression for the production
and development of its interactive entertainment software titles. The
Company's internal development organization is divided into four divisions,
each dedicated to the production and development of products for a particular
product category. The Company also undertakes development activities through
its subsidiary, Shiny. Within each division, development teams are assigned to
a particular project. These teams are generally led by a producer or associate
producer and include game designers, software programmers, artists, product
managers and sound technicians. The Company believes that this divisional
approach promotes the creative and entrepreneurial environment necessary to
develop innovative and successful titles. In addition, the Company believes
that breaking down the development function into divisions enables it to
improve its software design capabilities, to better manage its internal and
external development processes and to create and enhance its software
development tools and techniques, thereby enabling the Company to obtain
greater efficiency and improved predictability in the software development
process.
Shiny. David Perry, Shiny's President and founder, has produced a number of
highly successful interactive entertainment software titles, including
CoolSpot, Aladdin, Earthworm Jim, Earthworm Jim II and MDK. Shiny developed
Wild 9, which was released in September, 1998 for the PlayStation and
currently has three original titles under development, including Sacrifice and
Messiah. The Company will distribute Sacrifice and Messiah worldwide under the
Shiny label. Shiny's development group presently consists of approximately 28
people.
International Development. The Company is building international development
resources through Interplay Europe, whose software producers manage the
efforts of local third party developers in European countries. Historically,
the Company's international product development efforts have consisted
primarily of the localization of existing Company products. The Company
currently has several original products, including Earthworm Jim 3D, under
development through Interplay Europe. Interplay Europe's development group
presently consists of approximately 10 people.
External Product Development
In order to expand its product offerings to include hit titles created by
third party developers, and to leverage its sales and distribution
capabilities, the Company enters into publishing arrangements with third party
developers, including foreign developers and publishers who wish to utilize
the Company's sales and distribution network in North America. In February
1999, the Company entered into a Product Publishing Agreement with Virgin
Interactive Entertainment Limited pursuant to which the Company will publish
substantially all of Virgin's titles in North and South America and Japan. In
the year ended December 31, 1998, the eight months ended December 31, 1997,
and the fiscal years ended April 30, 1997 and 1996, approximately 70%, 50%,
33% and 67%, respectively, of new products released by the Company which the
Company believes are or will become franchise titles were developed by third
party developers. The Company expects that the proportion of its new products
which are developed externally may vary significantly from period to period as
different products are released. The Company's focus in obtaining publishing
products is to select titles that combine advanced technologies with creative
game design. The publishing agreements usually provide the Company with the
exclusive right to distribute a product on a worldwide basis (however, in
certain instances the agreement provides for a specified territory). The
Company typically funds external development through the payment of advances
upon the completion of milestones, which advances are credited against
royalties based on sales of the products. Further, the Company's publishing
arrangements typically provide the Company with ownership of the trademarks
relating to the product as well as exclusive rights to sequels to the product.
The Company manages the production of external development projects by
appointing a producer from one of its internal product development divisions
to oversee the product's development and work with the third party developer
to design, develop and test the game.
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The Company believes this strategy of cultivating relationships with
talented third party developers, such as the developers of Descent and
TombRaider, provides an excellent source of quality products, and a number of
the Company's commercially successful products have been developed under this
strategy. However, the Company's reliance on third party software developers
for the development of a significant number of its interactive software
entertainment products involves a number of risks. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Dependence on Third Party Software
Developers."
Sales And Distribution
The Company's sales and distribution efforts are designed to broaden product
distribution and to increase the penetration of the Company's products in
domestic and international markets. The Company supplements its direct
distribution efforts in North America with third party distributors and
affiliate label relationships. Over the past several years, the Company has
increased its sales and distribution efforts in international markets through
the formation of Interplay Europe, and most recently through the International
Distribution Agreement discussed below, and through licensing and third party
distribution strategies elsewhere. The Company also distributes its software
products through Interplay OEM in bundling transactions with hardware and
peripheral companies and through on-line services.
North America. In North America, the Company sells its products primarily to
mass merchants, warehouse club stores, large computer and software specialty
retail chains and through catalogs. A majority of the Company's North American
retail sales are to direct accounts, and a lesser percentage are to third
party distributors. The Company's principal direct retail accounts include
CompUSA, Best Buy, Electronics Boutique, Toys "R" Us, Wal-Mart and Software
Acquisitions. The Company's principal distributors in North America include GT
Interactive, Ingram Micro, Beamscope and Merisel. The Company also distributes
product catalogs and related promotional material to end-users who can order
products by direct mail, by using a toll-free number, or by accessing the
Company's web site. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Dependence on Distribution Channels; Risk of Customer Business Failures;
Product Returns."
The Company sells to retailers and distributors through its North American
sales organization. The Company's North American sales force is largely
responsible for generating retail demand for the Company's products by
presenting new products to the Company's retail customers in advance of the
products' scheduled release dates, by providing technical advice with respect
to the Company's products and by working closely with retailers and
distributors to sell the Company's products. The Company typically ships its
products within a short period of time after acceptance of purchase orders
from distributors and other customers. Accordingly, the Company typically does
not have a material backlog of unfilled orders, and net sales in any quarter
are substantially dependent on orders booked in that quarter. Any significant
weakening in customer demand would therefore have a material adverse impact on
the Company's operating results and on the Company's ability to maintain
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Fluctuations in Operating Results; Uncertainty of Future Results;
Seasonality."
The Company seeks to extend the life cycle and financial return of many of
its products by marketing those products differently along the product's sales
life. Although the product life cycle for each title varies based on a number
of factors, including the quality of the title, the number and quality of
competing titles, and in certain instances seasonality, the Company typically
considers a title as "back catalog" six months after its initial release. The
Company utilizes marketing programs appropriate for the particular title,
which generally include progressive price reductions over time to increase the
product's longevity in the retail channel as the Company shifts its
advertising support to newer releases.
The Company has acquired the right to distribute certain products on an
affiliate label basis whereby it distributes products that are produced and
published by a third party and are marketed under the third party's name with
the package bearing a notation that the product is being distributed by the
Company. The Company's
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focus in obtaining affiliate label products is to select titles that
complement the Company's product families. Products that are distributed
through the Company's affiliate label program are generally purchased directly
from the third party and sold based on a distribution mark- up. These products
generally have a lower gross margin than internally and externally developed
products.
The Company provides terms of sale comparable to competitors in its
industry. In addition, the Company provides technical support in North America
for its products through its customer support department and a 90-day limited
warranty to end-users that its products will be free from manufacturing
defects. While to date the Company has not experienced any material warranty
claims, there can be no assurance that the Company will not experience
material warranty claims in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Distribution Channels; Risk of Customer
Business Failures; Product Returns."
International. Prior to February 1999, the Company distributed its titles in
Europe through Interplay Europe, and employed approximately 21 persons
dedicated to sales and marketing in the European market. Interplay Europe had
an agreement with Infogrames U.K. and Virgin Interactive Entertainment Limited
to pool resources in order to distribute PC and video game console software to
independent software retailers in the United Kingdom, and had distribution
agreements with Acclaim Entertainment pursuant to which Acclaim Entertainment
distributes certain of the Company's titles in selected European countries.
Net revenues from such distribution agreements with Acclaim Entertainment
represented 9.6%, 7.4%, 14.9% and 7.0% of the Company's net revenues in the
year ended December 31, 1998, the eight months ended December 31, 1997 and the
fiscal years ended April 30, 1997 and 1996, respectively. On February 16,
1999, the Company completed an agreement to acquire, together with two members
of Interplay Europe management, a 49.9% membership interest in VIE Acquisition
Group LLC, the parent entity of Virgin. In connection with such acquisition,
the Company entered into the Virgin Distribution Agreement, pursuant to which
Virgin will hire Interplay Europe's sales and marketing personnel and will
distribute substantially all of the Company's titles in Europe, CIS, Africa
and the Middle East for a seven year period. Under such agreement, the Company
will pay Virgin a distribution fee for its marketing and distribution of the
Company's products, subject to a minimum amount, as well as a fixed overhead
fee that is subject to reduction in certain events. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Distribution Agreement."
The Company has built a distribution capability in certain of the developed
markets in Asia and the Americas utilizing third party distribution
arrangements for specified products and platforms. In 1995 the Company
established operations in Japan in order to expand its Japanese sales. In July
1997, the Company initiated a licensing strategy in Japan and terminated its
operations there. The Company has also licensed a number of its titles to Sony
Computer Entertainment to publish in Japan on the PlayStation. In Australia
and New Zealand, the Company has entered into an agreement with Roadshow
Entertainment Pty. Ltd., pursuant to which Roadshow Entertainment Pty. Ltd.
has the exclusive right to market and distribute the Company's ongoing PC and
video game console products.
OEM. Interplay OEM employs approximately 13 people focused on the
distribution of interactive entertainment software in bundling transactions to
computer hardware. Under these arrangements, one or more software titles,
which are typically limited feature versions of the retail version of a game,
are bundled with hardware or peripheral devices and are sold by the OEM so
that the purchaser of the hardware device obtains the software on a discounted
basis as part of the hardware purchase. In addition, Interplay OEM has
established a development capability in order to create modified versions of
titles which support its customers' technologies. Although it is customary for
OEM customers to pay a lower per unit price on sales through OEM bundling
arrangements, such arrangements typically involve a high unit volume
commitment. OEM net revenues generally are incremental net revenues and do not
have significant additional product development or sales and marketing costs,
and accordingly have a more significant impact on the Company's operating
results. There can be no assurance, however, that OEM sales will continue to
generate consistent profits for the Company, and a decrease in OEM sales or
margins could have a material adverse effect on the Company's business,
operating results and financial condition. In addition to distributing the
Company's titles, Interplay OEM serves as an OEM distributor
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for a number of interactive entertainment software publishers, including
LucasArts Entertainment Company, Take Two Interactive, Fox Interactive,
Westwood Studios and Virgin Interactive Entertainment. Interplay OEM's
hardware customers include many of the industry's largest computer and
peripheral manufacturers including IBM, Compaq, Apple Computer, 3Dfx, Diamond
Multimedia, Packard Bell, Dell and Logitech. The Company devotes five
employees to modifying existing products into suitable OEM products. Interplay
OEM also handles licensing and merchandising activities on behalf of Interplay
and Shiny including novelizations, strategy guides and other merchandise tied
to Interplay's entertainment properties.
The Company's North American and international distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retail channels such as warehouse chains, mass merchants,
computer superstores and Internet commerce sites. The Company is exposed to
the risk of product returns and markdown allowances with respect to its
distributors and retailers. The Company allows distributors and retailers to
return defective, shelf-worn and damaged products in accordance with
negotiated terms. The Company considers return requests on a case-by-case
basis, taking into consideration factors such as the products involved, the
customer's historical sales volume and the customer's credit status. The
Company also offers a 90-day limited warranty to its end users that its
products will be free from manufacturing defects. In addition, the Company
provides markdown allowances, which consist of credits given to customers to
lower the sales price of certain products in an effort to increase sales to
its customers to help manage its customers' inventory levels in the
distribution channel. Although the Company maintains a reserve for returns and
markdown allowances, and although the Company manages its returns and markdown
allowances through its authorization procedure, the Company could be forced to
accept substantial product returns and provide markdown allowances to maintain
its relationships with retailers and its access to distribution channels. The
Company's reserve for estimated returns, exchanges, markdowns, price
concessions, and warranty costs was $18.4 million and $14.5 million at
December 31, 1998 and 1997, respectively. Product returns and markdown
allowances that exceed the Company's reserves could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Performance--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."
Marketing
The Company's marketing department is organized into product groups aligned
with its four internal development divisions and Shiny to promote a focused
marketing strategy and brand image for each division. Integrated into these
product groups is public relations for each division. In addition, the
marketing department has four functional groups (web department, event
coordination, creative services and advertising) that support these five
product groups.
The Company's marketing department develops and implements marketing
programs and campaigns for each of the Company's titles and product groups.
The Company's marketing activities in preparation for a product launch include
print advertising, game reviews in consumer and trade publications, retail in-
store promotions, attendance at trade shows and public relations. The Company
sends direct and electronic mail promotional materials to its large database
of gamers. The Company has also selectively used radio and television
advertisements in connection with the introduction of certain of its products.
The Company budgets a portion of each product's sales for cooperative
advertising and market development funds with retailers. Every title and brand
is launched with a multi-tiered marketing campaign that is developed on an
individual basis to promote product awareness and customer pre-orders. The
Company anticipates that over time, as the market for its products matures and
competition becomes more intense, it will become necessary to devote more
overall resources to marketing its products but marketing costs for its
products will remain proportional to revenues.
The Company maximizes on-line marketing through web advertising and the
maintenance of several web sites. These sites provide news and information of
interest to its customers through free demonstration versions, contests,
games, tournaments and promotions. Also, to generate interest in new product
introductions, the Company provides
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free demonstration versions of upcoming titles both through magazine cover
mounts and through game samples that consumers can download from the Company's
web site. In addition, marketing hosts on-line events and maintains a vast
collection of message boards to keep customers informed on shipped and
upcoming titles.
Competition
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and
software products. The Company's competitors vary in size from small companies
to very large corporations with significantly greater financial, marketing and
product development resources than those of the Company. Due to these greater
resources, certain of the Company's competitors are able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, pay
higher fees to licensors of desirable motion picture, television, sports and
character properties and pay more to third party software developers than the
Company. The Company believes that the principal competitive factors in the
interactive entertainment software industry include product features, brand
name recognition, access to distribution channels, quality, ease of use,
price, marketing support and quality of customer service.
The Company competes primarily with other publishers of PC and video game
console interactive entertainment software. Significant competitors include
Electronic Arts, GT Interactive Software Corp., Mattel, Activision, Inc.,
Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc.,
Acclaim Entertainment Inc., Havas Interactive and Hasbro Inc. In addition,
integrated video game console hardware/software companies such as Sony
Computer Entertainment, Nintendo and Sega compete directly with the Company in
the development of software titles for their respective platforms. Large
diversified entertainment companies, such as The Walt Disney Company, many of
which own substantial libraries of available content and have substantially
greater financial resources than the Company, may decide to compete directly
with the Company or to enter into exclusive relationships with competitors of
the Company. The Company also believes that the overall growth in the use of
the Internet and on-line services by consumers may pose a competitive threat
if customers and potential customers spend less of their available home PC
time using interactive entertainment software and more on the Internet and on-
line services.
Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among
consumer software producers, and in particular interactive entertainment
software products, for high quality retail shelf space and promotional support
from retailers. To the extent that the number of consumer software products
and computer platforms increases, competition for shelf space may intensify
and may require the Company to increase its marketing expenditures. Due to
increased competition for limited shelf space, retailers and distributors are
in an increasingly better position to negotiate favorable terms of sale,
including price discounts, price protection, marketing and display fees and
product return policies. The Company's products constitute a relatively small
percentage of any retailer's sales volume, and there can be no assurance that
retailers will continue to purchase the Company's products or to provide the
Company's products with adequate levels of shelf space and promotional
support, and a prolonged failure in this regard may have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Performance--Industry Competition;
Competition for Shelf Space."
Manufacturing
The Company's PC-based products consist primarily of CD-ROMs, user manuals
and packaging. Substantially all of the Company's CD-ROM duplication is
performed by unaffiliated third parties. Printing of the user manual and
packaging, manufacturing of related materials and assembly of completed
packages are performed to the Company's specifications by unaffiliated third
parties. To date, the Company has not experienced any material difficulties or
delays in the manufacture and assembly of its CD-ROM-based products, and has
not experienced significant returns due to manufacturing defects.
Sony Computer Entertainment and Nintendo manufacture the Company's products
that are compatible with their respective video game consoles, as well as the
manuals and packaging for such products, and ship finished
10
<PAGE>
products to the Company for distribution. PlayStation products consist of CD-
ROMs and are typically delivered by Sony Computer Entertainment within a
relatively short lead time. Manufacturers of Nintendo and other video game
cartridges typically deliver software to the Company within 45 to 60 days
after receipt of a purchase order. If the Company experiences unanticipated
delays in the delivery of manufactured software products, its net sales and
operating results could be materially adversely affected. Furthermore, the
long manufacturing cycle associated with video game cartridges requires that
the Company forecast retailer and consumer demands for its manufactured titles
further in advance of shipment than for PC-based products or PlayStation CD-
ROMs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Future Performance--Dependence on
Licenses from and Manufacturing by Hardware Companies."
Intellectual Property And Proprietary Rights
The Company holds copyrights on its products, product literature and
advertising and other materials, and holds trademark rights in the Company's
name, the Interplay logo, its "By Gamers. For Gamers.(TM)" slogan and certain
of its product names and publishing labels. The Company also holds rights
under a patent application related to the software engine for its Messiah
product. The Company has licensed certain products to third parties for
distribution in particular geographic markets or for particular platforms, and
receives royalties on such licenses. The Company also outsources some of its
product development to third party developers, contractually retaining all
intellectual property rights related to such projects. The Company also
licenses certain products developed by third parties and pays royalties on
such products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Product Development."
The Company regards its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee
and third party nondisclosure agreements and other methods to protect its
proprietary rights. The Company owns or licenses various copyrights and
trademarks. While the Company provides "shrinkwrap" license agreements or
limitations on use with its software, the enforceability of such agreements or
limitations is uncertain. The Company is aware that unauthorized copying
occurs within the computer software industry, and if a significantly greater
amount of unauthorized copying of the Company's interactive entertainment
software products were to occur, the Company's operating results could be
materially adversely affected. While the Company does not generally copy
protect its products, it does not provide source code to third parties, unless
they have signed nondisclosure agreements with respect thereto.
The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such countries, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-
line services, the ability of the Company to protect its intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. In addition, the intellectual property laws are less
clear with respect to such emerging technologies. There can be no assurance
that existing intellectual property laws will provide adequate protection to
the Company's products in connection with such emerging technologies.
As the number of software products in the interactive entertainment software
industry increases and the features and content of these products further
overlap, interactive entertainment software developers may increasingly become
subject to infringement claims. Although the Company makes reasonable efforts
to ensure that its products do not violate the intellectual property rights of
others, there can be no assurance that claims of infringement will not be
made. Any such claims, with or without merit, can be time consuming and
expensive to defend. From time to time, the Company has received communication
from third parties asserting that features or content of certain of its
products may infringe upon the intellectual property rights of such parties.
There can be no assurance that existing or future infringement claims against
the Company will not result in costly litigation
11
<PAGE>
or require the Company to license the intellectual property rights of third
parties, either of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Protection of Proprietary Rights."
Employees
As of December 31, 1998, the Company had 443 full time employees, including
204 in product development, 87 in sales and marketing and 57 in finance,
general and administrative. This includes 32 full time employees of Shiny, 13
full time employees of Interplay OEM and 50 full time employees of Interplay
Europe. Subsequent to year end, in connection with the signing of an
International Distribution Agreement with Virgin, the Company reduced its full
time employees of Interplay Europe to 12, 10 of whom are engaged in product
development. The Company also retains independent contractors to provide
certain services, primarily in connection with its product development
activities. The Company and its full time employees are not subject to any
collective bargaining agreements and the Company believes that its relations
with its employees are good.
From time to time the Company has retained actors and/or "voice over" talent
to perform in certain of the Company's products, and the Company expects to
continue this practice in the future. These performers are typically members
of the Screen Actors Guild ("SAG") or other performers' guilds, which guilds
have established collective bargaining agreements governing their members'
participation in interactive media projects. The Company or an affiliated
entity may be required to become subject to the jurisdiction of SAG's
collective bargaining agreement, or some other applicable performers guild,
with respect to the Company's development projects in the future in order to
engage the services of performers in the development of the Company's
products.
ITEM 2. PROPERTIES
The Company's headquarters are located in Irvine, California, where the
Company leases approximately 81,000 square feet of office space. This lease
expires in June 2006 and provides the Company with one five year option to
extend the term of the lease and expansion rights, on an "as available basis,"
to approximately double the size of the office space. Interplay Europe leases
approximately 10,000 square feet of space in Buckinghamshire, England. This
lease expires, at Interplay Europe's option, either in November 2000 or in
November 2005, and the Company is currently seeking to sublease such space.
Shiny leases approximately 4,100 square feet of space in Laguna Beach,
California, which lease expires in October 1999 and which provides Shiny with
an option to extend the term for an additional five years. The Company
believes that its facilities are adequate for its current needs and that
suitable additional or substitute space will be available in the future to
accommodate expansion of the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is occasionally involved in various legal proceedings, claims
and litigation arising in the ordinary course of business, including disputes
arising over the ownership of intellectual property rights and collection
matters. In the opinion of management, the outcome of such routine claims will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on The NASDAQ Stock Market National Market System
under the symbol "IPLY". As of December 31, 1998, there were approximately
2,900 holders of the Common Stock.
The following table sets forth the range of high and low sales prices for
the Common Stock for each of the periods indicated during the year ended
December 31, 1998 since the Company's initial public offering in June 1998:
<TABLE>
<CAPTION>
Period High Low
------ ----- -----
<S> <C> <C>
Second Quarter................................................. $6.19 $5.75
Third Quarter.................................................. 7.50 3.19
Fourth Quarter................................................. 3.00 1.50
</TABLE>
Dividend Policy
The Company anticipates that all future earnings will be retained to finance
future growth, and the Company does not anticipate paying any dividends on its
Common Stock in the foreseeable future. The Company's current credit agreement
currently restricts the Company from paying cash dividends without the prior
written consent of the lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Liquidity; Future Capital Requirements".
The following is a summary of transactions by the Company during the fiscal
year ended December 31, 1998 involving sales of the Company's securities that
were not registered under the Securities Act:
During the year ended December 31, 1998, the Company issued an aggregate of
451,100 nonqualified stock options to purchase Common Stock pursuant to the
Company's 1997 Stock Incentive Plan (the "1997 Plan") to officers, directors
and employees of the Company at a weighted average exercise price of $6.91.
Such options were issued but not sold, in the view of the Company, and,
therefore, registration thereof was not required. During the same period, the
Company issued an aggregate of 1,200 shares of Common Stock upon the exercise
of options under the Incentive Stock Option and Nonqualified Stock Option
Plan--1994 to one terminated employee at a purchase price of $8.50 per share.
Such shares were issued in reliance upon the exemption provided by Rule 701
promulgated under the Securities Act, as well as other exemptions. During the
period referred to above, no options issued pursuant to the 1997 Plan were
exercised. The Company issued the Company's Chairman and Chief Executive
Officer Warrants to purchase 400,000 shares of the Company's Common Stock at
an exercise price of $3.00 per share as consideration for making a personal
guarantee in the amount of $5.0 million of the Company's line of credit. Such
warrants were issued in reliance upon the exemption provided by Section 4(2)
of the Securities Act.
Subsequent to the year ended December 31, 1998, the Company issued and sold
2.5 million shares of the Company's Common Stock for $10.0 million. Such
shares were issued in reliance upon the exemption provided by Section 4(2) of
the Securities Act.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for the year ended
December 31, 1998, the eight months ended December 31, 1997 and the former
fiscal years ended April 30, 1997 and 1996, and the selected consolidated
balance sheets data as of December 31, 1998 and 1997 are derived from the
Company's audited consolidated financial statements included elsewhere in this
Form 10-K. The selected consolidated statements of operations data for the
former fiscal years ended April 30, 1995 and 1994, and the selected
consolidated balance sheets data as of April 30, 1997, 1996, 1995 and 1994 are
derived from the Company's audited consolidated financial statements not
included in this Form 10-K. The selected consolidated statements of operations
data for the year ended December 31, 1997 is derived from the Company's
unaudited consolidated financial statements. The Company's historical results
are not necessarily indicative of the results that may be achieved for any
other period. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
Years Ended Eight Months
December 31, Ended Years Ended April 30,
--------------------- December 31, ----------------------------------
1998 1997 1997 1997 1996 1995 1994
-------- ----------- ------------ -------- ------- ------- -------
(unaudited)
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data(1):
Net revenues............ $126,862 $120,053 $85,961 $ 83,262 $96,952 $79,546 $52,668
Cost of goods sold...... 71,928 68,353 44,864 62,480 49,939 45,491 31,223
-------- -------- ------- -------- ------- ------- -------
Gross profit............ 54,934 51,700 41,097 20,782 47,013 34,055 21,445
Operating expenses:
Marketing and sales.... 39,471 28,443 20,603 24,627 23,285 14,280 7,698
General and
administrative........ 12,841 13,503 8,989 9,408 9,025 5,528 4,805
Product development.... 24,472 22,317 14,291 21,431 15,120 8,200 3,646
-------- -------- ------- -------- ------- ------- -------
Total operating
expenses.............. 76,784 64,263 43,883 55,466 47,430 28,008 16,149
-------- -------- ------- -------- ------- ------- -------
Operating income
(loss)................. (21,850) (12,563) (2,786) (34,684) (417) 6,047 5,296
Other income (expense).. (4,933) (3,640) (2,273) (1,600) (807) 1,046 68
-------- -------- ------- -------- ------- ------- -------
Income(loss)before
income taxes........... (26,783) (16,203) (5,059) (36,284) (1,224) 7,093 5,364
Provision (benefit) for
income taxes........... 1,437 (1,782) -- (9,065) (480) 2,844 2,161
-------- -------- ------- -------- ------- ------- -------
Net income (loss)....... $(28,220) $(14,421) $(5,059) $(27,219) $ (744) $ 4,249 $ 3,203
======== ======== ======= ======== ======= ======= =======
Net income (loss) per
share (2):
Basic.................. $ (1.91) $ (1.30) $ (0.45) $ (2.46) $ (0.07) $ 0.40 $ 0.37
Diluted................ $ (1.91) $ (1.30) $ (0.45) $ (2.46) $ (0.07) $ 0.35 $ 0.32
======== ======== ======= ======== ======= ======= =======
Selected Operating Data:
Net revenues by
geographic region:
North America.......... $ 73,865 $ 64,106 $51,833 $ 38,606 $54,702 $51,892 $40,094
International.......... 35,793 41,922 24,642 32,006 24,579 13,829 2,227
OEM, royalty and
licensing............. 17,204 14,025 9,486 12,650 17,671 13,825 10,347
Net revenues by
platform:
Personal computer...... $ 67,406 $ 65,922 $42,520 $ 45,192 $60,254 $36,804 $20,314
Video game console..... 42,252 40,106 33,955 25,420 19,027 28,917 22,007
<CAPTION>
December 31, April 30,
--------------------- ---------------------------------------
1998 1997 1997 1996 1995 1994
-------- ----------- ------------ -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheets Data:
Working capital......... $ (2,864) $ 13,616 $ 7,890 $ 18,485 $25,227 $22,775
Total assets............ 75,085 77,821 69,005 68,511 44,226 35,450
Total long-term debt
(including current
portion)............... 24,651 38,154 14,970 108 262 384
Stockholders' equity
(deficit).............. 4,193 (1,267) 3,401 30,195 30,069 25,053
</TABLE>
- --------
(1) Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31.
(2) See Note 8 of Notes to Consolidated Financial Statements for an
explanation of the number of shares used in computing net income (loss)
per share.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto and other information
included or incorporated by reference herein.
General
The Company derives net revenues primarily from direct sales of interactive
entertainment software for PCs and video game consoles to retailers and mass
merchants, from indirect sales to software distributors in North America and
internationally, from the distribution by the Company on an affiliate label
basis of titles published by third parties, and from direct sales to end-users
through the Company's catalogs and the Internet. The Company also derives
royalty-based revenues from licensing arrangements, from the sale of products
by third party distributors in international markets, and from OEM bundling
transactions.
Revenues are recorded when products are delivered to customers in accordance
with Statement of Position (SOP) 97-2, Software Revenue Recognition. For those
agreements that provide the customers the right to multiple copies in exchange
for guaranteed amounts, revenue is recognized at the delivery of the product
master or the first copy. Per copy royalties on sales that exceed the
guarantee are recognized as earned. The Company is generally not contractually
obligated to accept returns, except for defective product. However, the
Company permits customers to return or exchange product and may provide price
protection on products unsold by a customer. In accordance with SFAS No. 48,
revenue is recorded net of an allowance for estimated returns, exchanges,
markdowns, price concessions, and warranty costs. Such reserves are based upon
management's evaluation of historical experience, current industry trends and
estimated costs. The amount of reserves ultimately required could differ
materially in the near term from the amounts included in the accompanying
consolidated financial statements. Postcontract customer support provided by
the Company is limited to telephone support. These costs are not material and
are charged to expenses as incurred.
In order to expand the Company's distribution channels and engage in
software development in overseas markets, in 1995 the Company established
operations in the United Kingdom and in Japan. In July 1997, the Company
initiated a licensing strategy in Japan and terminated its operations there.
International net revenues accounted for approximately 28.2%, 28.7%, 38.4% and
25.4% of the Company's net revenues during the years ended December 31, 1998,
the eight months ended December 31, 1997 and the fiscal years ended April 30,
1997 and 1996, respectively.
In January 1997, the Company formed a wholly owned subsidiary, Interplay
OEM, Inc. ("Interplay OEM"), which had previously operated as a division of
the Company. Interplay OEM distributes the Company's interactive entertainment
software titles, as well as those of other software publishers, to computer
hardware and peripheral device manufacturers for use in bundling arrangements.
The Company also derives net revenues from the licensing of certain of its
intellectual properties and certain of its products to third parties for
distribution in markets and through channels which are outside the Company's
primary focus. OEM, royalty and licensing net revenues accounted for 13.6%,
11.0% and 15.2% of the Company's total net revenues for the years ended
December 31, 1998, the eight months ended December 31, 1997 and the fiscal
year ended April 30, 1997, respectively. OEM, royalty and licensing net
revenues generally are incremental net revenues and do not have significant
additional product development or sales and marketing costs, and accordingly
have a more significant impact on the Company's operating results. The Company
expects that OEM, royalty and licensing net revenues may decline, both in
dollars and as a percentage of net revenues, as a larger proportion of OEM,
royalty and licensing net revenues are generated from royalty-based licensing
transactions, as opposed to the shipment of finished goods, and as the OEM
channel of distribution becomes more competitive. Cost of goods sold related
to PC and video game console net revenues represents the manufacturing and
related costs of interactive entertainment software products, including costs
of media, manuals, duplication, packaging materials, assembly, freight and
royalties paid to developers, licensors and hardware manufacturers. Cost of
goods sold related to royalty-based net revenues primarily represents third
party licensing fees and royalties paid by the Company.
15
<PAGE>
Typically, cost of goods sold as a percentage of net revenues for video game
console products and affiliate label products are higher than cost of goods
sold as a percentage of net revenues for PC based products due to the
relatively higher manufacturing and royalty costs associated with these
products. Also included in the cost of goods sold is the amortization of
prepaid royalty and license fees paid to third party software developers.
Prepaid royalties are expensed over a period of six months from initial
shipment. The Company evaluates the likelihood of future realization of
prepaid royalties quarterly, on a product by product basis, and charges cost
of goods sold for any amounts that it deems unlikely to be realized through
future product sales.
For the year ended December 31, 1998, the Company's net loss was $28.2
million. The Company's results from operations were adversely affected by
several factors. The Company was unable to ship two important titles, Messiah
and Earthworm Jim 3D in 1998. In addition, Baldur's Gate, the number one
selling PC game in January 1999 according to PC Data, did not ship until the
last days of 1998. The Company experienced higher product returns and markdown
allowances than usual during the year ended December 31, 1998 due to certain
title releases that did not gain broad market acceptance. Net revenues were
also negatively impacted by lower than expected OEM activity and softness in
the Asia markets. The Company has taken certain actions with the objective of
improving its operating results in the future. During 1998, the Company
reduced its headcount approximately 20% which will reduce operating expenses
in 1999. The Company is also reducing its sell-in unit quantities to limit
potential price protection and product return exposure. On February 16, 1999,
the Company announced it had completed agreements to acquire, together with
two members of Interplay Europe management, a 49.9% membership interest in VIE
Acquisition Group LLC, the parent entity of Virgin Interactive. Under the
agreements, Virgin Interactive will hire the Company's sales and marketing
personnel and distribute substantially all of the Company's titles in Europe.
In return, the Company will distribute substantially all of Virgin
Interactive's titles in North America, South America and certain other
territories, including Japan.
Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31. Accordingly, the discussion of financial results set forth
below compares the year ended December 31, 1998 to the comparable 1997 period,
the Company's previous fiscal year ended April 30, 1997 to the comparable 1996
period, and compares the eight months ending December 31, 1997 to the
comparable 1996 period.
The Company's operating results have fluctuated significantly in the past
and will likely fluctuate significantly in the future, both on a quarterly and
an annual basis. A number of factors may cause or contribute to such
fluctuations, and many of such factors are beyond the Company's control. There
can be no assurance that the Company will be profitable in any particular
period. It is likely that the Company's operating results in one or more
future periods will fail to meet or exceed the expectations of securities
analysts or investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality.
16
<PAGE>
Results of Operations
The following table sets forth certain consolidated statements of operations
data and segment and platform data for the periods indicated expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
Eight Months
Years Ended Ended Years Ended
December 31, December 31, April 30,
------------------- ------------------ -------------
1998 1997 1997 1996 1997 1996
----- ----------- ----- ---------- ----- -----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold...... 56.7 56.9 52.2 70.9 75.0 51.5
----- ----- ----- ----- ----- -----
Gross profit............ 43.3 43.1 47.8 29.1 25.0 48.5
Operating expenses:
Marketing and sales... 31.1 23.7 24.0 31.3 29.6 24.0
General and
administrative....... 10.1 11.2 10.5 17.3 11.3 9.3
Product development... 19.3 18.6 16.6 24.8 25.7 15.6
----- ----- ----- ----- ----- -----
Total operating
expenses............. 60.5 53.5 51.1 73.4 66.6 48.9
----- ----- ----- ----- ----- -----
Operating income
(loss)................. (17.2) (10.4) (3.3) (44.3) (41.6) (0.4)
Other income (expense).. (3.9) (3.0) (2.6) (2.2) (1.9) (0.9)
----- ----- ----- ----- ----- -----
Loss before income
taxes.................. (21.1) (13.4) (5.9) (46.5) (43.5) (1.3)
Provision (benefit) for
income taxes........... 1.1 (1.5) -- (11.8) (10.9) (0.5)
----- ----- ----- ----- ----- -----
Net loss................ (22.2)% (11.9)% (5.9)% (34.7)% (32.6)% (0.8)%
===== ===== ===== ===== ===== =====
Selected Operating Data:
Net revenues by segment:
North America......... 58.2 % 53.4 % 60.3 % 55.1 % 46.4 % 56.4 %
International......... 28.2 34.9 28.7 27.7 38.4 25.4
OEM, royalty and
licensing............ 13.6 11.7 11.0 17.2 15.2 18.2
----- ----- ----- ----- ----- -----
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
===== ===== ===== ===== ===== =====
Net revenues by
platform:
Personal computer..... 53.1 54.9 49.5 50.9 54.3 62.2
Video game console.... 33.3 33.4 39.5 31.9 30.5 19.6
OEM, royalty and
licensing............ 13.6 11.7 11.0 17.2 15.2 18.2
----- ----- ----- ----- ----- -----
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
===== ===== ===== ===== ===== =====
</TABLE>
Year Ended December 31, 1998 Compared To The Year Ended December 31, 1997
Net Revenues
Net revenues for the twelve months ended December 31, 1998 increased 5.7% to
$126.9 million from $120.1 million in the comparable 1997 period. North
American net revenues increased to $73.9 million from $64.1 million in the
1997 period, and international net revenues decreased to $35.8 million from
$41.9 million in the 1997 period. OEM, royalty and licensing net revenues
increased to 13.6% of net revenues in the 1998 period from 11.7% in the 1997
period.
The increase in net revenues for the twelve months ended December 31, 1998
was primarily due to increased title releases across multiple platforms and
resulting increases in unit sales volume in the 1998 period, offset in part by
a high level of product returns and markdowns due to certain title releases
that did not gain broad market acceptance. Significant title releases in 1998
included Baldur's Gate (PC), Caesars Palace II
17
<PAGE>
(PlayStation), Crime Killer (PlayStation), Die By The Sword (PC), Descent:
Freespace The Great War (PC), Fallout 2 (PC), Heart of Darkness (PlayStation),
VR Sports Powerboat Racing (PC and PlayStation), Redneck Deer Huntin' (PC),
Redneck Rides Again (PC), VR Baseball 99 (PlayStation), and Wild 9
(PlayStation). The decrease in international net revenues was due primarily to
decreased net revenues in Europe due to a decrease in the number of titles
that achieved broad market acceptance and an increase in product returns
during 1998, as well as decreased sales in Asia due to unfavorable economic
conditions in that market. The Company expects that OEM, royalty and licensing
net revenues may decline, both in dollars and as a percentage of net revenues
during future periods as a larger proportion of OEM, royalty and licensing net
revenues are generated from royalty-based licensing transactions, as opposed
to the shipment of finished goods, and as such distribution channels become
more competitive.
Cost of Goods Sold; Gross Profit
Cost of goods sold increased 5.2% to $71.9 million, or 56.7% of net revenues
in the twelve months ended December 31, 1998, from $68.4 million, or 56.9% of
net revenues, in the comparable 1997 period. Gross profit as a percentage of
net revenue remained consistent, increasing slightly to 43.3% in the 1998
period from 43.1% in the 1997 period.
Gross profits in both periods were adversely impacted by the effects of
additional write-offs of prepaid royalties relating to titles or platform
versions of titles which had been canceled or which were expected to achieve
lower unit sales than were originally anticipated.
Operating Expenses
Total operating expenses increased 19.5% to $76.8 million, or 60.5% of net
revenues, in the twelve months ended December 31, 1998 from $64.3 million, or
53.5% of net revenues, for the comparable 1997 period. In an effort to reduce
operating expenses, during 1998 the Company cut its workforce by approximately
20%.
Marketing and Sales. Marketing and sales expenses primarily include
advertising and retail marketing support, sales commissions, marketing and
sales personnel, customer support services, fulfillment and other costs.
Marketing and sales expenses increased 38.8% to $39.5 million, or 31.1% of net
revenues, for the twelve months ended December 31, 1998 from $28.4 million, or
23.7% of net revenues, for the comparable 1997 period. The increase was
primarily due to increases in advertising and other marketing costs associated
with the increase in major titles launched and products sold, including
increased cooperative advertising and marketing development funds, increased
advertising and commissions on product releases in the U.S. and the European
markets during the 1998 period as well as television advertising for Wild 9
and Heart of Darkness, two titles launched during the 1998 period. In February
1999, the Company entered into agreements with Virgin Interactive
Entertainment Limited and its parent entity, pursuant to which Virgin
Interactive will hire the Company's European sales and marketing personnel and
will distribute substantially all of the Company's titles in Europe, CIS,
Africa and the Middle East. The Company expects that marketing and sales
expenses will decrease in 1999, both in absolute dollars and as a percentage
of net revenues, due to the actions discussed above.
General and Administrative. General and administrative expenses primarily
include administrative personnel expenses, facilities costs, professional
expenses and other overhead charges. General and administrative expenses
decreased 4.9% to $12.8 million, or 10.1% of net revenues, in the twelve
months ended December 31, 1998 from $13.5 million, or 11.2% of net revenues,
in the comparable 1997 period. The decrease in the twelve months ended
December 31, 1998 was primarily attributable to lower overhead costs offset in
part by a $0.8 million provision for uncollectible amounts owed to the Company
by Engage Games Online, which is majority-owned by the company's Chairman and
Chief Executive Officer. The Company may in the future be required to make
additional payments of approximately $0.5 million in the aggregate under a
lease of equipment originally utilized by Engage, and the Company is
attempting to mitigate this potential expense by using or subleasing a portion
of the equipment. The Company expects that general and administrative expenses
will decrease slightly in 1999 due to the cost reduction efforts discussed
above, but will increase in absolute dollars and vary as a percentage of net
revenues in future periods.
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Product Development. Product development expenses, which primarily include
personnel and support costs, are charged to operations in the period incurred.
Product development expenses increased 9.7% to $24.5 million, or 19.3% of net
revenues, in the twelve months ended December 31, 1998 from $22.3 million, or
18.6% of net revenues, in the comparable 1997 period. The increase was
primarily due to an increase in the number of products under development,
offset in part by cost efficiencies achieved as a result of the reorganization
of the development process. The increase as a percentage of net revenues in
the twelve months ended December 31, 1998 was primarily due to higher labor
and operations costs combined with a less than expected increase in net
revenues base. The Company expects that product development expenses will
remain relatively consistent in 1999 in absolute dollars, but will increase in
absolute dollars and vary as a percentage of net revenues in future periods.
Other Income (Expense)
Other expense increased to $4.9 million in the twelve months ended December
31, 1998 from $3.6 million in the comparable 1997 period. The increase in the
twelve months ended December 31, 1998 was primarily due to increased
borrowings under the Company's line of credit to support increased working
capital requirements prior to the completion of the IPO in June 1998 and
interest on the Subordinated Secured Promissory Notes. The Company used the
proceeds of the IPO to repay those Subordinated Secured Promissory Notes that
were not converted into Common Stock and to pay down the bank line of credit,
both of which resulted in lower interest expense in the second half of 1998.
Provision (Benefit) for Income Taxes
The Company recorded a tax provision of $1.4 million in the twelve months
ended December 31, 1998, as compared with a tax benefit of $1.8 million in the
comparable 1997 period. The $1.4 million tax provision for 1998 consists
primarily of an increase in the deferred tax valuation of $2.0 million, offset
by a foreign tax benefit of $0.6 million.
Eight Months Ended December 31, 1997 Compared To The Eight Months Ended
December 31, 1996
Net Revenues
Net revenues for the eight months ended December 31, 1997 increased 70.7% to
$86.0 million from $50.4 million in the comparable 1996 period. North American
net revenues increased to $51.8 million from $27.7 million in the 1996 period,
and international net revenues increased to $24.6 million from $14.0 million
in the 1996 period. The increase in net revenues in the 1997 period was
primarily due to increased title releases across multiple platforms in the
eight months ended December 31, 1997 as compared with the eight months ended
December 31, 1996, including significant title releases, such as Clay Fighter
63 1/3 and Star Trek: Starfleet Academy, in the calendar fourth quarter of
1997, and a higher than expected level of product returns and markdowns
recorded during the 1996 period. OEM, royalty and licensing net revenues
decreased to 11.0% of net revenues in the 1997 period from 17.2% in the 1996
period.
Cost of Goods Sold; Gross Profit
Cost of goods sold increased 25.6% in the eight months ended December 31,
1997 to $44.9 million, or 52.2% of net revenues, from $35.7 million, or 70.9%
of net revenues, in the comparable 1996 period. Gross profit as a percentage
of net revenue increased to 47.8% in the 1997 period from 29.1% in the 1996
period. The increase in gross profit was primarily due to reductions in sales
by the Company on an affiliate label basis of titles published by third
parties, reductions in OEM royalty expenses as a percentage of net revenues,
and changes in the product mix of externally developed products released
during the periods, offset in part by greater manufacturing costs attributable
to an increased number of video game console products released during the 1997
period. The 1996 period also included the effects of additional write-offs of
prepaid royalties relating to titles or platform versions of titles which had
been canceled or which were expected to achieve lower unit sales than were
originally forecast.
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Operating Expenses
Total operating expenses increased 18.8% to $43.9 million, or 51.1% of net
revenues, in the eight months ended December 31, 1997 from $36.9 million, or
73.4% of net revenues, for the comparable 1996 period.
Marketing and Sales. Marketing and sales expenses increased 30.8% to $20.6
million, or 24.0% of net revenues, for the eight months ended December 31,
1997 from $15.7 million, or 31.3% of net revenues, for the comparable 1996
period. The increase in absolute dollars was primarily due to advertising and
other marketing costs associated with the increase in products launched during
the period. The decrease as a percentage of net revenues was primarily
attributable to operating efficiencies gained as a result of an increased net
revenues base.
General and Administrative. General and administrative expenses increased
3.0% to $9.0 million, or 10.5% of net revenues, in the eight months ended
December 31, 1997 from $8.7 million, or 17.3% of net revenues, in the
comparable 1996 period. The increase in absolute dollars was primarily
attributable to increased personnel and operations and facilities costs both
in North America and Europe in support of increased net revenues. The decrease
as a percentage of net revenues was primarily attributable to operating
efficiencies gained as a result of an increased net revenues base.
Product Development. Product development expenses increased 14.7% to $14.3
million, or 16.6% of net revenues, in the eight months ended December 31, 1997
from $12.5 million, or 24.8% of net revenues, in the comparable 1996 period.
The increase in absolute dollars was primarily due to the addition of
personnel in the Company's product development group, an increase in the
number of products under development and the initiation of European and OEM
product development in the 1997 period. The decrease as a percentage of net
revenues primarily reflected operating efficiencies gained as a result of
increased net revenues.
Other Income (Expense)
Other expense increased to $2.3 million in the eight months ended December
31, 1997 from $1.1 million in the comparable 1996 period. This increase was
primarily due to increased borrowings under the Company's line of credit to
support increased working capital requirements in the 1997 period and interest
on the Subordinated Secured Promissory Notes, which were issued from October
1996 through February 1997 and were outstanding throughout the 1997 period.
Provision (Benefit) for Income Taxes
The Company recorded no tax provision in the eight months ended December 31,
1997, compared to a tax benefit of $5.9 million in the comparable 1996 period.
No tax benefit was recorded in the 1997 period due to the uncertainty of
realization in future periods.
Year Ended April 30, 1997 Compared To The Year Ended April 30, 1996
The Company's net loss for the former fiscal year ended April 30, 1997
increased to $27.2 million from $0.7 million in the comparable 1996 period.
The Company's results of operations for the former fiscal year ended April 30,
1997 were adversely affected by a number of factors, including delays in the
completion of certain products, which led the Company to release alternative
titles developed by third parties which did not achieve broad market
acceptance, and a sharp decline in the market for titles for the Macintosh and
Sega Saturn platforms, both of which resulted in a higher than expected level
of product returns and markdown allowances. The Company increased its reserves
by approximately $5.4 million during fiscal 1997 in response to these
increased returns and markdown allowances. Operating results for the period
were also negatively affected by (i) the Company's decision to write-off $5.9
million in prepayments to third party developers relating to titles or
platform versions of titles which had been canceled or which were expected to
achieve lower unit sales than were originally forecast, (ii) an excessive
reliance on development projects utilizing new technologies in the face of
increasing development costs (total development costs were $21.4 million in
fiscal 1997 as compared with $15.1 million in fiscal 1996) , (iii) slower than
expected growth in sales in the Japanese market, and (iv) investments in new
product lines in the sports and edutainment categories.
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Net Revenues
Net revenues in the year ended April 30, 1997 decreased 14.1% to $83.3
million from $97.0 million in the comparable 1996 period. North American net
revenues decreased to $38.6 million in the 1997 period from $54.7 million in
the 1996 period and international net revenues increased to $32.0 million in
the 1997 period from $24.6 million in the 1996 period. OEM, royalty and
licensing net revenues accounted for 15.2% of total net revenues for the 1997
period, compared to 18.2% for the 1996 period. The decrease in net revenues
for the 1997 period was primarily due to a decreased number of title releases
resulting from certain product delays across multiple platforms, lower unit
sales of the titles released during the period and a higher than expected
level of product returns and markdowns recorded during the period.
Cost of Goods Sold; Gross Profit
Cost of goods sold increased 25.1% to $62.5 million, or 75.0% of net
revenues, in the year ended April 30, 1997 from $49.9 million, or 51.5% of net
revenues, in the comparable 1996 period. Gross profit as a percentage of net
revenue decreased to 25.0% in the 1997 period from 48.5% in the 1996 period.
The decrease in gross profit in the 1997 period was primarily due to an
increase in royalty expenses attributable to the write-off of $5.9 million in
prepaid royalties relating to titles or platform versions of titles which had
been canceled or which were expected to achieve lower unit sales than
originally forecast, increased sales of video game console titles and
affiliate label products and disproportionate returns and markdowns in the
1997 period, offset in part by increased OEM volumes.
Operating Expenses
Total operating expenses increased 16.9% to $55.5 million, or 66.6% of net
revenues, in the year ended April 30, 1997 from $47.4 million, or 48.9% of net
revenues, in the comparable 1996 period.
Marketing and Sales. Marketing and sales expenses increased 5.8% to $24.6
million, or 29.6% of net revenues, in the 1997 period from $23.3 million, or
24.0% of net revenues, in the 1996 period. The increase in absolute dollars
was primarily due to increased commissions expense on European sales offset in
part by lower marketing and advertising expenses due to a decrease in titles
released during the period.
General and Administrative. General and administrative expenses increased
4.2% to $9.4 million, or 11.3% of net revenues, in the 1997 period from $9.0
million, or 9.3% of net revenues, in the 1996 period. The increase in absolute
dollars was primarily attributable to increased personnel and facilities costs
in North America, Europe and Japan.
Product Development. Product development expenses increased 41.7% to $21.4
million, or 25.7% of net revenues, in the 1997 period from $15.1 million, or
15.6% of net revenues, in the 1996 period. The increase in absolute dollars
was primarily attributable to an increase in the number of products under
development, the inclusion of a full year of operations of Shiny, an
interactive entertainment software developer in which the Company acquired a
91% interest in 1995, localization and development costs in Japan, initiation
of European and OEM product development and increased product development
personnel and facilities costs.
Other Income (Expense)
Other expense increased to $1.6 million in the 1997 period from $0.8 million
in the 1996 period. The increase was primarily due to interest expense related
to borrowings under the Company's bank line of credit to support increased
working capital requirements and interest on the Subordinated Secured
Promissory Notes which were issued from October 1996 through February 1997.
Provision (Benefit) for Income Taxes
The Company's income tax benefit in the 1997 period was $9.1 million,
compared to an income tax benefit of $0.5 million in the 1996 period. The
benefit for income taxes as a percentage of pre-tax income declined from 39.2%
to 25.0% due to the recording of a valuation allowance of $2.9 million in the
1997 period.
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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 and the initial public offering and from operations. As of
December 31, 1998 the Company's principal sources of liquidity included cash
and short term investments of approximately $614,000 and the Company's line of
credit bearing interest at the London Interbank Offered Rate plus 4.87%
(10.49% as of December 31, 1998), expiring May 31, 1999. The line of credit
also provides for a personal guarantee by the Company's Chairman and Chief
Executive Officer, Brian Fargo, in the amount of $5.0 million secured by
certain of Mr. Fargo's personal assets. As consideration for making such
guarantee, the Company issued Mr. Fargo Warrants to purchase 400,000 shares of
the Company's Common Stock at an exercise price of $3.00 per share. The
Warrants have a three year term and include a cashless exercise provision. In
addition, the Warrants are not exercisable in the event the Company enters
into an agreement to merge or combine the Company prior to May 1999. The
shares issuable upon exercise of the Warrants are subject to the twelve month
lockup agreement Mr. Fargo entered into in connection with the Company's
initial public offering. In connection with the issuance of the Warrants, the
Company was required to record an expense equal to the fair market value of
the Warrants, which is estimated to be approximately $316,000, with such
expense being amortized as additional interest expense over the term of the
guarantee. In addition, the issuance of such Warrants by the Company may
result in dilution to stockholders. As of December 31, 1998, the Company's
balance on the line of credit was $24.5 million with stand-by letters of
credit outstanding totaling $4.6 million.
In March 1999, the Company amended its credit agreement to extend its
current line of credit through January 1, 2000 and thereafter, on a year to
year basis, unless either party gives 30 day notice prior to expiration of the
current term, based on qualifying receivables and inventory. Under the terms
of the Amendment the Company's credit limit will be $37.5 million through
November 29, 1999, $30.0 million through December 30, 1999 and $25.0 million
thereafter. Within the total credit limit, the Company may borrow up to $14.0
million in excess of its borrowing base through July 30, 1999, $10.0 million
in excess through September 29, 1999, $7.0 million through November 29, 1999
and $5.0 million in excess thereafter. Under the amended line of credit the
Company is required to place a cash collateral deposit of $0.5 million on
April 15, 1999. In addition, the Company is required to maintain certain
borrowing limitations beginning July 30, 1999 where actual borrowings are
limited to $35.0 million with various month end limitations, generally
decreasing to $25.0 million at December 31, 1999 and the $5.0 million personal
guarantee by Mr. Fargo must remain in place throughout the term. All other
terms and conditions remain in full force and effect. As consideration for the
extension of Mr. Fargo's guaranty through January 1, 2000, the Company has
agreed to assume Mr. Fargo's obligations under an agreement between Mr. Fargo
and Christopher J. Kilpatrick, the Company's President, pursuant to which
Mr. Fargo granted certain put rights to Mr. Kilpatrick with respect to the
271,528 common stock options held by Mr. Kilpatrick. The amount of the
obligation assumed is presently unknown, but will be between zero and
$1.0 million, with such expense to be amortized as additional interest expense
over the extended term of Mr. Fargo's guaranty. The Company is currently in
compliance with all terms of its amended credit agreement.
The Company's primary capital needs have historically been to fund working
capital requirements necessitated by its net losses, its sales growth, the
development and introduction of products and related technologies and the
acquisition or lease of equipment and other assets used in the product
development process. The Company's operating activities used cash of $18.8
million during the year ended December 31, 1998, primarily attributable to
increased prepaid licenses and royalties and the net loss for the year, offset
in part by an increase in accounts payable. Cash provided by financing
activities of $19.4 million for the year ended December 31, 1998 consisted
primarily of the proceeds from the Company's initial public offering, offset
partially by the payoff of the Subordinated Secured Promissory Notes and
Warrants. On June 24, 1998 the Company completed its initial public offering
of 5,000,000 shares of Common Stock at $5.50 per share which raised
approximately $24.3 million, net of expenses. In connection with the offering,
$8.7 million of Notes and Warrants were converted to Common Stock and $6.3
million were repaid in cash. Cash used in investing activities of $1.7 million
for the year ended December 31, 1998 consisted of capital expenditures,
primarily for office and computer equipment used in Company operations. The
Company does not currently have any material commitments with respect to any
capital expenditures.
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On February 10, 1999, the Company entered into an agreement to acquire,
together with two members of Interplay Europe management, a 49.9% membership
interest in VIE Acquisition Group LLC, the parent entity of Virgin
Interactive. Under the terms of an International Distribution Agreement
entered into between the Company and Virgin Interactive in connection with the
acquisition of that interest, the Company must pay a fixed monthly overhead
fee, subject to reduction in certain events, and a distribution fee for the
marketing and distribution of the Company's products based on net sales,
subject to a minimum annual payment. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors Affecting Future
Performance--Distribution Agreement".
To reduce the Company's working capital needs, the Company has implemented
certain measures including an approximately 20% reduction of personnel, a
significant reduction of fixed overhead commitments, a decrease in management
compensation and the delay, cancellation or scale back of certain product
development and marketing programs. In addition, in February 1999 the Company
executed an International Distribution Agreement which the Company believes
will reduce its international costs and expenses in future periods ( see
"Notes to Consolidated Financial Statements--Subsequent Events"). The Company
is pursuing various alternatives, including further expense reductions, in an
effort to continue to reduce operating expenses. There can be no assurance
that the Company will be able to undertake such measures, or that such
measures would not materially and adversely affect the Company's ability to
publish commercially viable titles, or that such measures would be sufficient
to generate operating profits. In addition, the Company's long term liquidity
will be materially dependent on its ability to develop and market successful
titles for the hardware platforms that dominate the interactive entertainment
market.
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, that the increased line of credit will
be sufficient to finance any negative cash flow from operations or that such
line of credit will be renewed or replaced on reasonable terms, if at all. In
addition, no assurance can be given that the cost reduction measures
undertaken by the Company 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.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Liquidity; Future Capital Requirements".
To provide working capital to support the Company's future operations, the
Company took several actions during 1998, including entering into certain
product licensing and distribution agreements which in the aggregate provided
approximately $10.8 million in advance cash payments. In addition, in March
1999, the Company extended the expiration of its line of credit to January 1,
2000 and entered into a Stock Purchase Agreement with an investor which
provides for the issuance of 2.5 million shares of the Company's Common Stock
for $10 million. Under the terms of the Stock Purchase Agreement up to 2.5
million additional shares of the Company's common stock may be issued without
additional consideration based on the average closing price per share of the
Company's Common Stock as of certain specified future dates; provided,
however, the investor will not be issued a total number of shares equaling or
exceeding 20% of the Company's current outstanding Common Stock without the
approval of the Company's stockholders.
The Company believes that funds available under its line of credit, amounts
to be received under various product license and distribution agreements and
anticipated funds from operations 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, 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
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that the Company will not be required to raise additional working capital
through debt or equity financing 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Liquidity; Future Capital Requirements".
Year 2000 Issue
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. Therefore, they do not
properly recognize a year that begins with "20" rather than "19". Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. The
Company relies on its systems and applications in operating and monitoring all
major aspects of its business, including financial systems (such as general
ledger, accounts payable and payroll modules), customer services, networks and
telecommunications systems equipment and end products. The Company also
relies, directly and indirectly, on external systems of suppliers for the
management and control of product development and of business enterprises such
as developers, customers, suppliers, creditors, financial organizations, and
governmental entities, both domestic and international, for accurate exchange
of data. The Company could be affected through disruptions in the operation of
the enterprises with which the Company interacts or from general widespread
problems or an economic crisis resulting from non-compliant Year 2000 systems.
Despite the Company's efforts to address the Year 2000 impact on its internal
systems and business operations, there can be no assurance that such impact
will not result in a material disruption of its business or have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company is currently in the process of assessing the potential impact of
the Year 2000 issue on its business and the related foreseeable expenses that
may be incurred in attempting to remedy such impact. The Company is employing
a combination of internal resources and outside consultants to evaluate and
address Year 2000 issues. The Company's Year 2000 plan includes (i)
Assessment: Conducting an evaluation of the Company's computer based systems,
facilities and products (and those of significant dealers, vendors and other
third parties with which the Company does business) to determine their Year
2000 compliance, (ii) Remediation: Coordinating the replacement and/or upgrade
of non-compliant systems, as necessary, and (iii) Test and Implement:
Developing and overseeing the implementation of all of the initiatives in the
Company's Year 2000 compliance plan. For example, the Company is in the
process of upgrading its internal accounting software and expects such upgrade
to be completed prior to the commencement of the 3rd quarter in 1999. Although
the Company has identified certain systems and applications that are not Year
2000 compliant and the Company is in the process of upgrading its software to
address the Year 2000 issue, there can be no assurance that such upgrades will
be completed on a timely basis at reasonable costs, or that such upgrades will
be able to anticipate all of the problems triggered by the actual impact of
the year 2000. In addition, the inability of any internal system to achieve
Year 2000 compliance could result in material disruption to the Company's
operations. With respect to customers, developers, suppliers and other
enterprises upon which the Company relies, even where assurances are received
from such third parties, there remains a risk that failure of systems and
applications of such third parties could have a material adverse effect on the
Company.
The Company is currently assessing its products for Year 2000 compliance and
anticipates such assessment to be complete prior to the end of the 3rd quarter
in 1999. However, there can be no assurance that any of the
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Company's products are or will be Year 2000 compliant. The failure of any of
the Company's products to achieve Year 2000 compliance would result in
increased warranty costs, customer satisfaction issues, potential lawsuits and
other material costs and liabilities. In addition, if the computer systems on
which the consumers use the Company's products are not Year 2000 compliant,
such non compliance could adversely affect the consumers ability to use such
products.
The Company believes that it will substantially complete the implementation
of its Year 2000 plan prior to the commencement of the 3rd quarter in 1999.
However, if the Company does not complete its Year 2000 plan prior to the
commencement of the year 2000, or if the Company fails to identify and
remediate all critical Year 2000 problems or if major suppliers, developers or
customers experience material Year 2000 problems, the Company's results of
operations or financial condition could be materially adversely effected.
The Company has estimated that the total cost of Year 2000 compliance will
be less than $500,000, $36,000 of which had been spent. The costs of
compliance have been included in the Company's 1999 budget. The Company
currently does not have a formal contingency plan in the event that an area of
its operations does not become Year 2000 compliant. The Company will consider
adopting a formal plan upon completion of the Year 2000 assessment or if,
pending such completion, it becomes more evident that there will be an area of
non-compliance in its systems or at a critical third party.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no assurance that these
estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, the nature and amount of programming required to upgrade or replace
each of the affected programs, the rate and magnitude of related labor and
consulting costs and the success of the Company's external customers,
developers and suppliers in addressing the Year 2000 issue. The Company's
evaluation is ongoing and it expects that new and different information will
become available to it as the evaluation continues. Consequently, there can be
no assurance that all material elements will be Year 2000 compliant in time.
FACTORS AFFECTING FUTURE PERFORMANCE
Future operating results of the Company depend upon many factors and are
subject to various risks and uncertainties. Some of the risks and
uncertainties which may cause the Company's operating results to vary from
anticipated results or which may materially and adversely affect its operating
results are as follows:
Liquidity; Future Capital Requirements
The Company used net cash in operations of $18.8 million and $15.3 million,
respectively, in the year ended December 31, 1998 and the eight months ended
December 31, 1997. There can be no assurance that the Company will ever
generate positive cash flow from operations. The Company's ability to fund its
capital requirements out of available cash, its line of credit and cash
generated from operations will depend on numerous factors, including the
progress of the Company's product development programs, the rate of growth of
the Company's business, and the commercial success of the Company's products.
The Company may be required to seek additional funds through debt or equity
financings, product licensing or distribution transactions or some other
source of financing in order to provide sufficient working capital for the
Company. The issuance of additional equity securities by the Company could
result in substantial dilution to stockholders. If the Company is required to
raise additional working capital, there can be no assurance that the Company
will be able to raise such additional working capital on acceptable terms, if
at all. In the event the Company is unable to raise additional working
capital, further cost reduction measures would be necessary including, without
limitation, the
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sale or consolidation of certain operations, the delay, cancellation or scale
back of product development and marketing programs and other actions. No
assurance can be given that such measures would not materially adversely
affect the Company's ability to publish commercially viable titles, or that
such measures would be sufficient to generate operating profits. Certain of
such measures may require third party approvals, including the Company's
financial institution, and there can be no assurance that such consents or
approvals can be obtained.
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality
The Company's operating results have fluctuated significantly in the past
and will likely fluctuate significantly in the future, both on a quarterly and
an annual basis. A number of factors may cause or contribute to such
fluctuations, and many of such factors are beyond the Company's control. Such
factors include, but are not limited to, delays in shipment, demand for the
Company's and its competitors' products, the size and rate of growth of the
market for interactive entertainment software, changes in computing platforms,
the number of new products and product enhancements released by the Company
and its competitors during the period, changes in product mix, product
returns, the timing of orders placed by distributors and dealers, delays in
shipment, the timing of development and marketing expenditures, price
competition and the level of the Company's international and OEM, royalty and
licensing net revenues. The uncertainties associated with the interactive
entertainment software development process, lengthy manufacturing lead times
for Nintendo-compatible products, possible production delays, and the approval
process for products compatible with the Sony Computer Entertainment, Nintendo
and Sega video game consoles, as well as approvals required from other
licensors, make it difficult to accurately predict the quarter in which
shipments will occur. Because of the limited number of products introduced by
the Company in any particular quarter, a delay in the introduction of a
product may materially adversely affect the Company's operating results for
that quarter and may not be recaptured in subsequent quarters. A significant
portion of the Company's operating expenses is relatively fixed, and planned
expenditures are based primarily on sales forecasts. If net revenues do not
meet the Company's expectations in any given quarter, operating results may be
materially adversely affected. The interactive entertainment software industry
is highly seasonal, with the highest levels of consumer demand occurring
during the year-end holiday buying season, followed by demand during the first
calendar quarter. As a result, net revenues, gross profits and operating
income for the Company have historically been highest during the fourth and
the following first calendar quarters, and have declined from those levels in
subsequent second and third calendar quarters.
The failure or inability of the Company to introduce products on a timely
basis to meet such seasonal increases in demand may have a material adverse
effect on the Company's business, operating results and financial condition.
The Company may over time become increasingly affected by the industry's
seasonal patterns. Although the Company seeks to reduce the effect of such
seasonal patterns on its business by distributing its product release dates
more evenly throughout the year, there can be no assurance that such efforts
will be successful. There can be no assurance that the Company will be
profitable in any particular period given the uncertainties associated with
software development, manufacturing, distribution and the impact of the
industry's seasonal patterns on the Company's net revenues.
As a result of the foregoing factors and the other factors discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance," it is likely that the
Company's operating results in one or more future periods will fail to meet or
exceed the expectations of securities analysts or investors. In such event,
the trading price of the Common Stock would likely be materially adversely
affected.
Significant Recent Losses
The Company has experienced significant losses in recent periods, including
losses of $28.2 million, $5.1 million and $27.2 million, respectively, in the
years ended December 31, 1998, the eight months ended December 31, 1997 and in
the fiscal year ended April 30, 1997. The losses for the year ended December
31, 1998 resulted primarily from delays in the completion of certain products,
a higher than expected level of product
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returns and markdowns on products released during the year and lower than
expected worldwide sales of certain releases, as well as from operating
expense levels that were higher than appropriate for the Company's revenue
level. There can be no assurance that the Company will not experience similar
problems in current or future periods or that the Company will be able to
generate sufficient net revenues or adequate working capital, or bring its
costs into line with revenues, so as to attain or sustain profitability in the
future.
Dependence on New Product Introductions; Risk of Product Delays and Product
Defects
The Company's products typically have short life cycles, and the Company
depends on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously
released products to additional platforms, to generate net revenues to fund
operations and to replace declining net revenues from older products. In the
year ended December 31, 1998, the Company's results of operations were
adversely affected by a number of factors, including delays in the completion
of certain new products including Messiah, Earthworm Jim 3D and Baldur's Gate.
If in the future for any reason net revenues from new products were to fail to
replace declining net revenues from existing products, the Company's business,
operating results and financial condition could be materially adversely
affected. The timing and success of new interactive entertainment software
product releases remains unpredictable due to the complexity of product
development, including the uncertainty associated with new technology. The
development cycle of new products is difficult to predict but typically ranges
from 12 to 24 months and another six to 12 months for the porting of a product
to a different technology platform. In the past, the Company has frequently
experienced significant delays in the introduction of new products, including
certain products currently under development. Because net revenues associated
with the initial shipments of a new product generally constitute a high
percentage of the total net revenues associated with a product, any delay in
the introduction of, or the presence of a defect in, one or more new products
expected in a period could have a material adverse effect on the ultimate
success of such products and on the Company's business, operating results and
financial condition. The costs of developing and marketing new interactive
entertainment software have increased in recent years due to such factors as
the increasing complexity and content of interactive entertainment software,
increasing sophistication of hardware technology and consumer tastes and
increasing costs of obtaining licenses for intellectual properties, and the
Company expects this trend to continue. There can be no assurance that new
products will be introduced on schedule, if at all, or that, if introduced,
they will achieve significant market acceptance or generate significant net
revenues. In addition, software products as complex as those offered by the
Company may contain undetected errors when first introduced or when new
versions are released. There can be no assurance that, despite testing by the
Company, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Uncertainty of Market Acceptance; Dependence on Hit Titles
Consumer preferences for interactive entertainment software are continually
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved sustained market acceptance.
Rather, a limited number of releases have become "hits" and have accounted for
a substantial portion of revenues in the industry. Further, publishers with a
history of producing hit tittles have enjoyed a significant marketing
advantage because of their heightened brand recognition and consumer loyalty.
The Company expects the importance of introducing hit titles to increase in
the future. There can be no assurance that new products introduced by the
Company will achieve significant market acceptance, that such acceptance, if
achieved, will be sustainable for any significant period, or that product life
cycles will be sufficient to permit the Company to recover development and
other associated costs. Most of the Company's products have a relatively short
life cycle and sell for a limited period of time after their initial release,
usually less than one year. The Company believes that these trends will
continue and that the Company's future revenue will continue to be dependent
on the successful production of hit titles on a continuous basis. Because the
Company introduces a relatively limited number of new products in a given
period, the failure of one or more of such products to achieve market
acceptance could have a material adverse effect on the Company's business,
operating results
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and financial condition. Further, if market acceptance is not achieved, the
Company could be forced to accept substantial product returns or grant
significant markdown allowances to maintain its relationship with retailers
and its access to distribution channels. For example, the Company had higher
than expected product returns and markdowns in the year ended December 31,
1998 and there can be no assurance that higher than expected product returns
and markdowns will not continue in the future. In the event that the Company
is forced to accept significant product returns or grant significant markdown
allowances, its business, operating results and financial condition could be
materially adversely affected.
Continued Listing on the NASDAQ National Market
The Company's Common Stock is currently quoted on the NASDAQ National Market
under the symbol "IPLY." For continued inclusion on the NASDAQ National
Market, a company must meet certain tests, such as a minimum bid price of
$1.00 and net tangible assets of at least $2.0 million. As of December 31,
1998 the Company had net tangible assets of approximately $2.5 million. In the
event that the Company fails to satisfy the listing standards on a continuous
basis, the Company's Common Stock may be removed from listing on the NASDAQ
National Market. If the Company's Common Stock is delisted from the NASDAQ
National Market, trading of the Company's Common Stock, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
available, the NASD's "Electronic Bulletin Board." In such event, investors
could find it more difficult to dispose of, or to obtain accurate quotations
as to the value of, the Company's Common Stock and the trading price per share
would most likely be reduced as a result.
Distribution Agreement
In February 1999 in connection with the Company's acquisition, together with
two members of Interplay Europe management, of a 49.9% membership interest in
Virgin's parent entity, the Company signed an International Distribution
Agreement with Virgin. Under this Agreement, the Company appointed Virgin as
the exclusive distributor for substantially all of the Company's products in
Europe, CIS, Africa and the Middle East, subject to certain reserved rights,
for a seven year period. Because of the exclusive nature of the Agreement, if
Virgin were to experience problems with its business, or were to fail to
perform as expected, the Company's business, operating results and financial
condition could be materially and adversely affected. In connection with this
Agreement, Virgin will hire the Company's European sales and marketing
personnel, and the Company will pay Virgin a distribution fee for its
marketing and distribution of the Company's products, subject to a minimum
amount, as well as a fixed overhead fee, subject to reduction in certain
events. Because of the minimum distribution fee, in the event the Company's
European sales are lower than expected, the Company may effectively pay a
higher distribution fee on the units sold, which could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, due to the fixed nature of the overhead fee, the Company will not
be able to reduce its European sales and marketing expenses in response to
downturns in the Company's sales in Europe, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Third Party Software Developers
The Company relies on third party interactive entertainment software
developers for the development of a significant number of its interactive
entertainment software products. As reputable and competent third party
developers continue to be in high demand, there can be no assurance that third
party software developers that have developed products for the Company in the
past will continue to be available to develop products for the Company in the
future. Many third party software developers have limited financial resources,
which could expose the Company to the risk that such developers may go out of
business prior to completing a project. In addition, due to the limited
control that the Company exercises over third party software developers, there
can be no assurance that such developers will complete products for the
Company on a timely basis or within acceptable quality standards, if at all.
Increased competition for skilled third party software developers has required
the Company to enter into agreements with licensors of intellectual property
and developers of games that involved advance payments by the Company of
royalties and guaranteed minimum royalty payments, and
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the Company expects to continue to enter into such arrangements. If the sales
volumes of products subject to such arrangements are not sufficient to recover
such royalty advances and guarantees, the Company would be required to write-
off unrecovered portions of such payments, which could have a material adverse
effect on its business, operating results and financial condition. Further,
there can be no assurance that third party developers will not demand
renegotiation of their arrangements with the Company.
Rapidly Changing Technology; Platform Risks
The interactive entertainment software industry is subject to rapid
technological change. The introduction of new technologies, including
operating systems such as Microsoft Windows 95 and 98, technologies that
support multi-player games, new media formats such as on-line delivery and
digital video disks ("DVDs") and as yet unreleased video game platforms could
render the Company's current products or products in development obsolete or
unmarketable. The Company must continually anticipate and assess the emergence
of, and market acceptance of, new interactive entertainment software platforms
well in advance of the time the platform is introduced to consumers. Because
product development cycles are difficult to predict, the Company is required
to make substantial product development and other investments in a particular
platform well in advance of introduction of the platform. If the platforms for
which the Company develops software are not released on a timely basis or do
not attain significant market penetration, the Company's business, operating
results and financial condition could be materially adversely affected.
Alternatively, if the Company fails to develop products for a platform that
does achieve significant market penetration, then the Company's business,
operating results and financial condition could also be materially adversely
affected.
The emergence of new interactive entertainment software platforms and
technologies and the increased popularity of new products and technologies may
materially and adversely affect the demand for products based on older
technologies. In this regard, the Company's results of operations in its
former fiscal year ended April 30, 1997 were adversely affected by a sharp
decline in the market for titles for the Macintosh and Sega Saturn platforms,
which declines resulted in a high level of product returns and markdown
allowances. The broad range of competing and incompatible emerging
technologies may lead consumers to postpone buying decisions with respect to
products until one or more of such technologies gain widespread acceptance.
Such postponement could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is currently
actively developing products for the Microsoft Windows 95 and 98, PlayStation
and Nintendo 64 platforms, as well as for the Sega Dreamcast platform
scheduled for release in Fall 1999. The Company's success will depend in part
on its ability to anticipate technological changes and to adapt its products
to emerging game platforms. There can be no assurance that the Company will be
able to anticipate future technological changes, to obtain licenses to develop
products for those platforms on terms favorable to the Company or to create
software for those new platforms, and any failure to do so could have a
material adverse effect on the Company's business, operating results and
financial condition.
Industry Competition; Competition for Shelf Space
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new interactive entertainment
software platforms and software platforms. The Company's competitors vary in
size from small companies to very large corporations with significantly
greater financial, marketing and product development resources than those of
the Company. Due to these greater resources, certain of the Company's
competitors are able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies, pay higher fees to licensors of desirable
motion picture, television, sports and character properties and pay more to
third party software developers than the Company. The Company believes that
the principal competitive factors in the interactive entertainment software
industry include product features, brand name recognition, access to
distribution channels, quality, ease of use, price, marketing support and
quality of customer service.
The Company competes primarily with other publishers of PC and video game
console interactive entertainment software. Significant competitors include
Electronic Arts, GT Interactive Software Corp., Mattel, Activision, Inc.,
Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc.,
Acclaim Entertainment Inc., Havas
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Interactive and Hasbro Inc. In addition, integrated video game console
hardware/software companies such as Sony Computer Entertainment, Nintendo and
Sega compete directly with the Company in the development of software titles
for their respective platforms. Large diversified entertainment companies,
such as The Walt Disney Company, many of which own substantial libraries of
available content and have substantially greater financial resources than the
Company, may decide to compete directly with the Company or to enter into
exclusive relationships with competitors of the Company. The Company also
believes that the overall growth in the use of the Internet and on-line
services by consumers may pose a competitive threat if customers and potential
customers spend less of their available home PC time using interactive
entertainment software and more on the Internet and on-line services.
Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among
consumer software producers, and in particular interactive entertainment
software products, for high quality retail shelf space and promotional support
from retailers. To the extent that the number of consumer software products
and computer platforms increases, competition for shelf space may intensify
and may require the Company to increase its marketing expenditures. Due to
increased competition for limited shelf space, retailers and distributors are
in an increasingly better position to negotiate favorable terms of sale,
including price discounts, price protection, marketing and display fees and
product return policies. The Company's products constitute a relatively small
percentage of any retailer's sale volume, and there can be no assurance that
retailers will continue to purchase the Company's products or to provide the
Company's products with adequate levels of shelf space and promotional
support, and a prolonged failure in this regard may have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence on Distribution Channels; Risk of Customer Business Failures;
Product Returns
The Company currently sells its products directly through its own sales
force to mass merchants, warehouse club stores, large computer and software
specialty chains and through catalogs in the U.S. and Canada, as well as to
certain distributors. Outside North America, the Company generally sells to
third party distributors. The Company's sales are made primarily on a purchase
order basis, without long-term agreements. The loss of, or significant
reduction in sales to, any of the Company's principal retail customers or
distributors could materially adversely affect the Company's business,
operating results and financial condition.
The distribution channels through which consumer software products are sold
are characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retailers such as warehouse chains, mass merchants and
computer superstores. As more consumers own PCs, the distribution channels for
interactive entertainment software have changed are expected to continue to
change. Mass merchants have become the most important distribution channels
for retail sales of interactive entertainment software. A number of these mass
merchants, including Wal-Mart, have entered into exclusive buying arrangements
with other software developers or distributors, which arrangements prevent the
Company from selling certain of its products directly to that mass merchant.
If the number of mass merchants entering into exclusive buying arrangements
with software distributors other than the Company were to increase, the
Company's ability to sell to such merchants would be restricted to selling
through the exclusive distributor. Because sales to distributors typically
have a lower gross profit than sales to retailers, this would have the effect
of lowering the Company's gross profit. In addition, this trend could increase
the material adverse impact on the Company's business, operating results and
financial condition. In addition, emerging methods of distribution, such as
the Internet and on-line services, may become more important in the future,
and it will be important for the Company to maintain access to these channels
of distribution. There can be no assurance that the Company will maintain such
access or that the Company's access will allow the Company to maintain its
historical levels of sales volume.
Distributors and retailers in the computer industry have from time to time
experienced significant fluctuations in their businesses, and there have been
a number of business failures among these entities. The insolvency or business
failure of any significant distributor or retailer of the Company's products
could have a material adverse effect on the Company's business, operating
results and financial condition. Sales are typically
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made on unsecured credit, with terms that vary depending upon the customer and
the nature of the product. Although the Company has obtained insolvency risk
insurance to protect against any bankruptcy, insolvency or liquidation that
may occur involving its customers, such insurance contains a significant
deductible and a co-payment obligation, and the policy does not cover all
instances of non-payment. In addition, while the Company maintains a reserve
for uncollectible receivables, the actual reserve may not be sufficient in
every circumstance. As a result, a payment default by a significant customer
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company is exposed to the risk of product returns and markdown
allowances with respect to its distributors and retailers. The Company allows
distributors and retailers to return defective, shelf-worn and damaged
products in accordance with negotiated terms, and also offers a 90-day limited
warranty to its end users that its products will be free from manufacturing
defects. In addition, the Company provides markdown allowances to its
customers to manage its customers' inventory levels in the distribution
channel. Although the Company maintains a reserve for returns and markdown
allowances, and although the Company's agreements with certain of its
customers place certain limits on product returns and markdown allowances, the
Company could be forced to accept substantial product returns and provide
markdown allowances to maintain its relationships with retailers and its
access to distribution channels. Product return and markdown allowances that
exceed the Company's reserves could have a material adverse effect on the
Company's business, operating results and financial condition. In this regard,
the Company's results of operations for the fiscal year ended December 31,
1998 were adversely affected by a higher than expected level of product
returns and markdown allowances and consequently reduced net revenues. There
can be no assurance that the Company will not continue to experience such high
levels of product returns and markdown allowances in future periods, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
Dilution; Shares Eligible for Future Sale
In March 1999, the Company entered into a Stock Purchase Agreement with
Titus Interactive S.A. ("Titus"), pursuant to which Titus purchased from the
Company 2.5 million shares of the Company's Common Stock for an aggregate
purchase price of $10 million. Pursuant to such Agreement, the Company may
become obligated to issue additional shares of Common Stock to Titus without
additional consideration in certain events (see Note 15 to the Company's
Consolidated Financial Statements). Such issuance could result in material
dilution to the Company's stockholders.
In addition, the Company has agreed to register all of the shares held by
Titus (up to 9,658,216 shares if Titus exercises its option to acquire the
shares owned by Universal and the maximum number of additional shares are
issued) for resale under the Securities Act of 1933, as amended. Such
registration could temporarily impair the Company's ability to raise capital
through the sale of its equity securities, and, if such registered shares are
sold, could have a material adverse effect on the market price of the
Company's Common Stock.
Dependence Upon Third Party Licenses
Many of the Company's products, such as its Star Trek, Major League Baseball
and Caesars Palace titles, are based on original ideas or intellectual
properties licensed from third parties. There can be no assurance that the
Company will be able to obtain new licenses, or renew existing licenses, on
commercially reasonable terms, if at all. For example, Paramount has granted
the Star Trek license to a third party upon the expiration of the Company's
rights. Should the Company be unable to obtain licenses for the underlying
content that it believes offers the greatest consumer appeal, the Company
would either have to seek alternative, potentially less appealing licenses, or
release the products without the desired underlying content, either of which
events could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that
acquired properties will enhance the market acceptance of the Company's
products based on such properties, that the Company's new product offerings
will generate net revenues in excess of their costs of development and
marketing or minimum royalty obligations, or that net revenues from new
product sales will meet or exceed net revenues from existing product sales.
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Dependence on Licenses from and Manufacturing by Hardware Companies
The Company is required to obtain a license to develop and distribute
software for each of the video game console platforms for which the Company
develops products, including a separate license for each of North America,
Japan and Europe. The Company has obtained licenses to develop software for
the PlayStation in North America and is currently negotiating agreements
covering additional territories. In addition, the Company has obtained a
license to develop software for the Nintendo 64 in North America, Europe and
Australia and is currently negotiating with Nintendo for licenses covering
additional territories. There can be no assurance that the Company will be
able to obtain licenses from hardware companies on acceptable terms or that
any existing or future licenses will be renewed by the licensors. In addition,
each of Sony Computer Entertainment, Nintendo and Sega have the right to
approve the technical functionality and content of the Company's products for
such platform prior to distribution. Due to the nature of the approval
process, the Company must make significant product development expenditures on
a particular product prior to the time it seeks such approvals. The inability
of the Company to obtain such approvals could have a material adverse effect
on the Company's business, operating results and financial condition.
Hardware companies such as Sony Computer Entertainment, Nintendo and Sega
may impose upon their licensees a restrictive selection and product approval
process, such that licensees are restricted in the number of titles that will
be approved for distribution on the particular platform. While the Company has
prepared its future product release plans taking this competitive approval
process into consideration, if the Company has incorrectly predicted the
impact of this restrictive approval process, and as a result the Company fails
to obtain approvals for all products in the Company's development plans, such
failure could have a material adverse effect on the Company's business,
operating results and financial condition. The Company depends upon Sony
Computer Entertainment and Nintendo for the manufacture of the Company's
products that are compatible with their respective video game consoles. As a
result, Sony and Nintendo have the ability to raise prices for supplying such
products at any time and effectively control the timing of the Company's
release of new titles for those platforms. PlayStation products consist of CD-
ROMs and are typically delivered by Sony Computer Entertainment within a
relatively short lead time. Manufacturers of Nintendo and other video game
cartridges typically deliver software to the Company within 45 to 60 days
after receipt of a purchase order. If the Company experiences unanticipated
delays in the delivery of video game console products from Sony Computer
Entertainment or Nintendo, or if actual retailer and consumer demand for its
interactive entertainment software differs from that forecast by the Company,
its business, operating results and financial condition could be materially
adversely affected.
Dependence on Key Personnel
The Company's success depends to a significant extent on the continued
service of its key product design, development, sales, marketing and
management personnel, and in particular on the leadership, strategic vision
and industry reputation of its founder and Chief Executive Officer, Brian
Fargo. The Company's future success will also depend upon the Company's
ability to continue to attract, motivate and retain highly qualified employees
and contractors, particularly key software design and development personnel.
Competition for highly skilled employees is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Specifically, the Company may experience increased costs in order
to attract and retain skilled employees. The Company's failure to retain the
services of Brian Fargo or its other key personnel or to attract and retain
additional qualified employees could have a material adverse effect on the
Company's business, operating results and financial condition.
Risks Associated with International Operations; Currency Fluctuations
International net revenues accounted for 28.2%, 28.7%, 38.4% and 25.4% of
the Company's total net revenues in the year ended December 31, 1998, the
eight months ended December 31, 1997 and the fiscal years ended April 30, 1997
and 1996, respectively. Additionally, in February 1999, the Company entered
into an International Distribution Agreement with Virgin for the exclusive
distribution of its products in selected international territories (see
Note 15 to the Consolidated Financial Statements). The Company intends to
continue to expand its direct and
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indirect sales, marketing and product localization activities worldwide. Such
expansion will require significant management time and attention and financial
resources in order to develop improved international sales and support
channels. There can be no assurance, however, that the Company will be able to
maintain or increase international market demand for its products.
International sales and operations are subject to a number of inherent risks,
including the impact of possible recessionary environments in economies
outside the U.S., the time and financial costs associated with translating and
localizing products for foreign markets, longer accounts receivable collection
periods and greater difficulty in accounts receivable collection, unexpected
changes in regulatory requirements, difficulties and costs of staffing and
managing foreign operations, and political and economic instability. For
example, the Company has recently experienced difficulties selling products in
certain Asian countries as a result of economic instability in such countries,
and there can be no assurance that such difficulties will not continue or
occur in other countries in the future. There can be no assurance that the
foregoing factors will not have a material adverse effect on the Company's
future international net revenues and, consequently, on the Company's
business, operating results and financial condition. The Company currently
does not engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse effect on net revenues from international sales and licensing, and
thus on the Company's business, operating results and financial condition.
Risks Associated with New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("Participating Countries") established fixed conversion rates between
their existing sovereign currencies and a new European currency, the "euro".
The euro was adopted by the Participating Countries as the common legal
currency on that date. A significant portion of the Company's sales are made
to Participating Countries and consequently, the Company anticipates that the
euro conversion will, among other things, create technical challenges to adapt
information technology and other systems to accommodate euro-denominated
transactions and limit the Company's ability to charge different prices for
its producers in different markets. While the Company anticipates that the
conversion will not cause material disruption of its business, there can be no
assurance that the conversion will not have a material effect on the Company's
business or financial condition.
Protection of Proprietary Rights
The Company regards its software as proprietary and relies on a combination
of patent, copyright, trademark and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. The Company owns or licenses various copyrights and trademarks, and
holds the rights to one patent application related to the software engine for
its Messiah title. While the Company provides "shrinkwrap" license agreements
or limitations on use with its software, the enforceability of such agreements
or limitations is uncertain. The Company is aware that unauthorized copying
occurs within the computer software industry, and if a significantly greater
amount of unauthorized copying of the Company's interactive entertainment
software products were to occur, the Company's operating results could be
materially adversely affected. While the Company does not generally copy
protect its products, it does not provide source code to third parties unless
they have signed nondisclosure agreements with respect thereto.
The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such counties, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-
line services, the ability of the Company to protect its intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. There can be no assurance that existing intellectual
property laws will provide adequate protection to the Company's products in
connection with such emerging technologies.
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As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although the Company makes reasonable efforts to ensure that its products do
not violate the intellectual property rights of others, there can be no
assurance that claims of infringement will not be made. Any such claims, with
or without merit, can be time consuming and expensive to defend. From time to
time, the Company has received communications from third parties of such
parties. There can be no assurance that existing or future infringement claims
against the Company will not result in costly litigation or require the
Company to license the intellectual property rights of third parties, either
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
Entertainment Software Rating System; Governmental Restrictions
Legislation is periodically introduced at the state and federal levels in
the U.S. and in foreign countries to establish a system for providing
consumers with information about graphic violence and sexually explicit
material contained in interactive entertainment software products. Such a
system would include procedures with which interactive entertainment software
publishers would be expected to comply by identifying particular products
within defined rating categories and communicating such ratings to consumers
through appropriate package labeling and through advertising and marketing
presentations consistent with each products' rating. In addition, many foreign
countries have laws which permit governmental entities to censor the content
of certain works, including interactive entertainment software. In certain
instances, the Company may be required to modify its products to comply with
the requirements of such governmental entities, which could delay the release
of those products in such countries. Such delays could have a material adverse
effect on the Company's business, operating results and financial condition.
While the Company currently voluntarily submits its products to industry-
created review boards and publishes their ratings on its game packaging, the
Company believes that mandatory government-run integrative entertainment
software products rating systems eventually will be adopted in many countries
which represent significant markets or potential markets for the Company. Due
to the uncertainties inherent in the implementation of such a rating system,
confusion in the marketplace may occur, and the Company is unable to predict
what effect, if any, such a rating system would have on the Company's
business. In addition to such regulations, certain retailers have in the past
declined to stock certain of the Company's products because they believed that
the content of the packaging artwork or the products would be offensive to the
retailer's customer base. While to date such actions have not had a material
adverse effect on the Company's business, operating results or financial
condition, there can be no assurance that similar actions by the Company's
distributors or retailers in the future would not have a material adverse
effect on the Company's business, operating results and financial condition.
Control by Directors and Officers
The Company's directors and executive officers and Universal Studios, Inc.
("Universal"), which currently has two representatives on the Company's Board
of Directors, beneficially own, in the aggregate, approximately 52.5% of the
Company's outstanding Common Stock. In addition, Titus beneficially owns
approximately 12.1% of the Company's outstanding Common Stock, and may be
issued additional shares in certain events (see Note 15 to the Company's
Consolidated Financial Statements). Titus also holds an option to purchase the
4,658,216 shares of Common Stock held by Universal, which would increase its
ownership percentage to approximately 34.5%. These stockholders, if acting
together, would be able to control substantially all matters requiring
approval by the stockholders of the Company, including the election of
directors (subject to the cumulative voting rights of the Company's
stockholders) and the approval of mergers or other business combination
transactions. Such concentration of ownership could discourage or prevent a
change in control of the Company.
34
<PAGE>
Year 2000 Compliance
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. Therefore, they do not
properly recognize a year that begins with "20" rather than "19". Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. The
Company relies on its systems and applications in operating and monitoring all
major aspects of its business, including financial systems (such as general
ledger, accounts payable and payroll modules), customer services, networks and
telecommunications systems equipment and end products. The Company also
relies, directly and indirectly, on external systems of suppliers for the
management and control of product development and of business enterprises such
as developers, customers, suppliers, creditors, financial organizations, and
governmental entities, both domestic and international, for accurate exchange
of data. The Company could be affected through disruptions in the operation of
the enterprises with which the Company interacts or from general widespread
problems or an economic crisis resulting from non-compliant Year 2000 systems.
Despite the Company's efforts to address the Year 2000 impact on its internal
systems and business operations, there can be no assurance that such impact
will not result in a material disruption of its business or have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company is currently in the process of assessing the potential impact of
the Year 2000 issue on its business and the related foreseeable expenses that
may be incurred in attempting to remedy such impact. Although the Company has
identified certain systems and applications that are not Year 2000 compliant
and the Company is in the process of upgrading its software to address the
Year 2000 issue, there can be no assurance that such upgrades will be
completed on a timely basis at reasonable costs, or that such upgrades will be
able to anticipate all of the problems triggered by the actual impact of the
year 2000. In addition, the inability of any internal system to achieve Year
2000 compliance could result in material disruption to the Company's
operations. With respect to customers, developers, suppliers and other
enterprises upon which the Company relies, even where assurances are received
from such third parties, there remains a risk that failure of systems and
applications of such third parties could have a material adverse effect on the
Company.
Development of Internet/On-Line Services or Products
The Company seeks to establish an on-line presence by creating and
supporting sites on the Internet. The Company's future plans envision
conducting and supporting on-line product offerings through these sites or
others. The ability of the Company to successfully establish an on-line
presence and to offer on-line products will depend on several factors that are
outside the Company's control, including the emergence of a robust on-line
industry and infrastructure and the development and implementation of
technological advancements to the Internet to increase bandwidth and the speed
of responsiveness to the point that will allow the Company to conduct and
support on-line product offerings. Because global commerce and the exchange of
information on the Internet and other similar open, wide area networks are
relatively new and evolving, there can be no assurance that a viable
commercial marketplace on the Internet will emerge from the developing
industry infrastructure, that the appropriate complementary products for
providing and carrying Internet traffic and commerce will be developed, that
the Company will be able to create or develop a sustainable or profitable
on-line presence or that the Company will be able to generate any significant
revenue from on-line product offerings in the near future, it at all. If the
Internet does not become a viable commercial marketplace, or if such
development occurs but is insufficient to meet the Company's needs or if such
development is delayed beyond the point where the Company plans to have
established an on-line service, the Company's business, operating results and
financial condition could be materially adversely affected.
Risks Associated with Acquisitions
As part of its strategy to enhance distribution and product development
capabilities, the Company intends to review potential acquisitions of
complementary businesses, products and technologies. Some of these
acquisitions could be material in size and scope. While the Company will
continue to search for appropriate
35
<PAGE>
acquisition opportunities, there can be no assurance that the Company will be
successful in identifying suitable acquisition opportunities. If any potential
acquisition opportunity is identified, there can be no assurance that the
Company will consummate such acquisition, and if such acquisition does occur,
there can be no assurance that it will be successful in enhancing the
Company's business or will be accretive to the Company's earnings. As the
interactive entertainment software industry continues to consolidate, the
Company may face increased competition for acquisition opportunities, which
may inhibit its ability to complete suitable transactions or increase the cost
thereof. Future acquisitions could also divert substantial management time,
could result in short term reductions in earnings or special transaction or
other charges and may be difficult to integrate with existing operations or
assets.
The Company may, in the future, issue additional shares of Common Stock in
connection with one or more acquisitions, which may dilute its stockholders.
Additionally, with respect to future acquisitions, the Company's stockholders
may not have an opportunity to review the financial statements of the entity
being acquired or to vote on such acquisitions.
Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws, as well as Delaware
corporate law, contain certain provisions that could have the effect of
delaying, deferring or preventing a change in control of the Company and could
materially adversely affect the prevailing market price of the Common Stock.
Certain of such provisions impose various procedural and other requirements
that could make it more difficult for stockholders to effect certain corporate
actions.
Stock Price Volatility
The trading price of the Company's Common Stock has been and could continue
to be subject to wide fluctuations in response to quarter to quarter
variations in results of operations, announcements of new products by the
Company or its competitors, product development or release schedule, general
conditions in the computer, software, entertainment, media or electronics
industries, changes in earnings estimates or buy/sell recommendations by
analysts, investor perceptions and expectations regarding the products, plans
and strategic position of the Company, its competitors and its customers, or
other events or factors. In addition, the public stock markets have
experienced extreme price and trading volume volatility, particularly in high
technology sectors of the market. This volatility has significantly affected
the market prices of securities of many technology companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
December 31, 1998. 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. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements begin on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE>
PART III
Certain information required by Part III is omitted from this report, as the
Company will file a definitive proxy statement (the "Proxy Statement") within
120 days after the end of its fiscal year pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for its Annual Meeting of Shareholders to be
held in June 1999 and the information included therein is incorporated herein
by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Compensation of Executive Officers" in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management
Directors and Nominees" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions appears
under the caption "Certain Transactions Between Management and the Company or
its Subsidiaries" in the Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The list of financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by the Report of Independent
Auditors is herein incorporated by reference.
(2) Financial Statement Schedules
The list of financial statement schedules contained in the accompanying
Index to Consolidated Financial Statements covered by the Report of
Independent Auditors is herein incorporated by reference.
All other schedules are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
The list of exhibits on the accompanying Exhibit Index is herein
incorporated by reference.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K on January 2, 1999, which reported
that the Company announced its acceptance of the resignation of David Dukes as
a Director of the Company. The Report also stated that Mr. Dukes' resignation
was not due to any disagreement with the Company on any matter relating to the
Company's operations, policies or practices.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized, at Irvine,
California this 30th day of March, 1999.
INTERPLAY ENTERTAINMENT CORP.
/s/ Brian Fargo
By: _________________________________
Brian Fargo
Chairman of the Board and Chief
Executive Officer (Principal
Executive Officer)
POWER OF ATTORNEY
The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Brian Fargo and James C. Wilson, or either of
them, with full power of substitution and resubstitution, as their true and
lawful attorneys and agents, to do any and all acts and things in our name and
behalf in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorney and agent, may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto, and we do hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report and Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Brian Fargo Chairman of the Board of March 30, 1999
____________________________________ Directors and Chief Executive
Brian Fargo Officer (Principal Executive
Officer)
President and Director March 30, 1999
____________________________________
Christopher J. Kilpatrick
/s/ James C. Wilson Chief Financial Officer March 30, 1999
____________________________________ (Principal Financial and
James C. Wilson Accounting Officer)
/s/ Richard S.F. Lehrberg Executive Vice President and March 30, 1999
____________________________________ Director
Richard S.F. Lehrberg
/s/ Mark Pinkerton Director March 30, 1999
____________________________________
Mark Pinkerton
/s/ Charles S. Paul Director March 30, 1999
____________________________________
Charles S. Paul
/s/ Kenneth J. Kay Director March 30, 1999
____________________________________
Kenneth J. Kay
</TABLE>
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization and Merger, dated May 29, 1998,
between the Company and Interplay Productions. (incorporated herein
by reference to Exhibit 2.1 to the Company's Registration Statement
on Form S-1, No. 333-48473 (the "Form S-1"))
3.1 Amended and Restated Certificate of Incorporation of the Company.
(incorporated herein by reference to Exhibit 3.1 to the Form S-1)
3.2 Amended and Restated Bylaws of the Company. (incorporated herein by
reference to Exhibit 3.2 to the Form S-1)
4.1 Specimen form of stock certificate for Common Stock. (incorporated
herein by reference to Exhibit 4.1 to the Form S-1)
4.2 Shareholders' Agreement among MCA Inc., the Company, and Brian Fargo,
dated March 30, 1994, as amended. (incorporated herein by reference
to Exhibit 4.2 to the Form S-1)
4.3 Investors' Rights Agreement dated October 10, 1996, as amended, among
the Company and holders of its Subordinated Secured Promissory Notes
and Warrants to purchase Common Stock. (incorporated herein by
reference to Exhibit 4.3 to the Form S-1)
10.1 Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan").
(incorporated herein by reference to Exhibit 10.1 to the Form S-1)
10.2 Form of Stock Option Agreement pertaining to the 1997 Plan.
(incorporated herein by reference to Exhibit 10.2 to the Form S-1)
10.3 Form of Restricted Stock Purchase Agreement pertaining to the 1997
Plan. (incorporated herein by reference to Exhibit 10.3 to the Form
S-1)
10.4 Incentive Stock Option and Nonqualified Stock Option Plan--1994, as
amended (the "1994 Plan"). (incorporated herein by reference to
Exhibit 10.4 to the Form S-1)
10.5 Form of Nonqualified Stock Option Agreement pertaining to the 1994
Plan. (incorporated herein by reference to Exhibit 10.5 to the Form
S-1)
10.6 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan--1991, as amended (the "1991 Plan"). (incorporated
herein by reference to Exhibit 10.6 to the Form S-1)
10.7 Form of Incentive Stock Option Agreement pertaining to the 1991 Plan.
(incorporated herein by reference to Exhibit 10.7 to the Form S-1)
10.8 Form of Nonqualified Stock Option Agreement pertaining to the 1991
Plan. (incorporated herein by reference to Exhibit 10.8 to the Form
S-1)
10.9 Employee Stock Purchase Plan. (incorporated herein by reference to
Exhibit 10.10 to the Form S-1)
10.10 Form of Indemnification Agreement for Officers and Directors of the
Company. (incorporated herein by reference to Exhibit 10.11 to the
Form S-1)
10.11 Von Karman Corporate Center Office Building Lease between the Company
and Aetna Life Insurance Company of Illinois, dated September 8,
1995, together with amendments thereto. (incorporated herein by
reference to Exhibit 10.14 to the Form S-1)
10.12 Loan and Security Agreement among Greyrock Business Credit, a Division
of NationsCredit Commercial Corporation ("Greyrock"), the Company,
and Interplay OEM, Inc. ("Interplay OEM"), dated June 16, 1997, as
amended, with Schedules. (incorporated herein by reference to Exhibit
10.15 to the Form S-1)
10.13 Letter of Credit Agreement among Greyrock, the Company and Interplay
OEM, dated September 10, 1997. (incorporated herein by reference to
Exhibit 10.18 to the Form S-1)
10.14 Letter of Credit Agreement among Greyrock, the Company and Interplay
OEM, dated September 24, 1997. (incorporated herein by reference to
Exhibit 10.19 to the Form S-1)
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.15 Master Equipment Lease between Brentwood Credit Corporation and the
Company, dated March 28, 1996, with Schedules. (incorporated herein
by reference to Exhibit 10.20 to the Form S-1)
10.16 Master Equipment Lease Agreement between General Electric Capital
Computer Leasing Corporation and the Company, dated December 14,
1994, as amended, with Schedules. (incorporated herein by reference
to Exhibit 10.22 to the Form S-1)
10.17 Confidential License Agreement for Nintendo 64 Video Game System,
between the Company and Nintendo of America, Inc., dated October 7,
1997. (Portions omitted pursuant to a request for confidential
treatment.) (incorporated herein by reference to Exhibit 10.23 to the
Form S-1)
10.18 PlayStation License Agreement, between Sony Computer Entertainment of
America and the Company, dated February 16, 1995. (Portions omitted
pursuant to a request for confidential treatment.) (incorporated
herein by reference to Exhibit 10.24 to the Form S-1)
10.19 Master Merchandising License Agreement between Paramount Pictures
Corporation and the Company, dated as of June 16, 1992. (Portions
omitted pursuant to a request for confidential treatment.)
(incorporated herein by reference to Exhibit 10.25 to the Form S-1)
10.20 Employment Agreement between the Company and Brian Fargo, dated March
28, 1994, as amended. (incorporated herein by reference to Exhibit
10.26 to the Form S-1)
10.21 Employment Agreement between the Company and Christopher J.
Kilpatrick, dated May 1, 1994, as amended. (incorporated herein by
reference to Exhibit 10.27 to the Form S-1)
10.22 Employment Agreement between the Company and Richard S.F. Lehrberg,
dated March 28, 1994, as amended. (incorporated herein by reference
to Exhibit 10.28 to the Form S-1)
10.23 Heads of Agreement concerning Sales and Distribution between the
Company and Activision, Inc., dated November 19, 1998, as amended.
(Portions omitted pursuant to a request for confidential treatment.)
10.24 Stock Purchase Agreement between the Company and Titus Interactive SA,
dated March 18, 1999.
10.25 Second Amendment to Employment Agreement between the Company and Brian
Fargo, dated March 18, 1999.
10.26 International Distribution Agreement between the Company and Virgin
Interactive Entertainment Limited, dated February 10, 1999. (Portions
omitted pursuant to a request for confidential treatment.)
10.27 Termination Agreement among the Company, Virgin Interactive
Entertainment Limited, VIE Acquisition Group, LLC and VIE Acquisition
Holdings, LLC, dated February 10, 1999. (Portions omitted pursuant to
a request for confidential treatment.)
10.28 Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
Greyrock, dated March 18, 1999.
10.29 Fifth Amendment to Lease for Von Karman Corporate Center Office
Building between the Company and Arden Realty Finance IV, L.L.C.,
dated December 4, 1998.
21.1 Subsidiaries of the Company. (incorporated herein by reference to
Exhibit 21.1. to the Form S-1)
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included as page 37 to this Form 10-K).
27.1 Financial Data Schedule.
</TABLE>
40
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1998 and 1997............... F-3
Consolidated Statements of Operations for the year ended December 31,
1998, the eight months ended December 31, 1997 and the fiscal years
ended April 30, 1997 and 1996.......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) or
the year ended December 31, 1998, the eight months ended December 31,
1997 and the fiscal years ended April 30, 1997 and 1996................ F-5
Consolidated Statements of Cash Flows for the year ended December 31,
1998, the eight months ended December 31, 1997 and the fiscal years
ended April 30, 1997 and 1996.......................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interplay Entertainment Corp.:
We have audited the accompanying consolidated balance sheets of INTERPLAY
ENTERTAINMENT CORP. (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1998, the eight months ended December 31, 1997, and the fiscal years ended
April 30, 1997 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interplay Entertainment
Corp. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year ended December 31, 1998, the eight months ended December
31, 1997 and the fiscal years ended April 30, 1997 and 1996, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
March 29, 1999
F-2
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(Dollars in
thousands)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................................ $ 614 $ 1,536
Trade receivables, net of allowances of $18,431 and
$14,461, respectively................................... 33,991 34,684
Inventories.............................................. 6,303 6,338
Prepaid licenses and royalties........................... 18,128 12,628
Income taxes receivable.................................. -- 1,427
Deferred income taxes.................................... 5,477 7,792
Other.................................................... 3,101 4,218
-------- --------
Total current assets................................... 67,614 68,623
Property and Equipment, net................................ 5,679 7,026
Other Assets............................................... 1,792 2,172
-------- --------
$ 75,085 $ 77,821
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable......................................... $ 23,403 $ 17,121
Accrued liabilities...................................... 22,300 22,549
Current portion of long-term debt........................ 24,521 14,767
Income taxes payable..................................... 254 570
-------- --------
Total current liabilities.............................. 70,478 55,007
Long-Term Debt, net of current portion..................... 130 23,387
Deferred Income Taxes...................................... 141 434
Minority Interest.......................................... 143 260
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 18,292,431 shares in 1998
and 10,951,828 shares in 1997........................... 18 11
Paid-in capital.......................................... 51,918 18,408
Retained earnings (accumulated deficit).................. (48,097) (19,877)
Foreign currency translation adjustments................. 354 191
-------- --------
Total stockholders' equity (deficit)................... 4,193 (1,267)
-------- --------
$ 75,085 $ 77,821
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended Years Ended April 30,
December 31, December 31, ----------------------
1998 1997 1997 1996
------------ ------------ ---------- ----------
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Net revenues................ $ 126,862 $ 85,961 $ 83,262 $ 96,952
Cost of goods sold.......... 71,928 44,864 62,480 49,939
---------- ---------- ---------- ----------
Gross profit................ 54,934 41,097 20,782 47,013
Operating expenses:
Marketing and sales....... 39,471 20,603 24,627 23,285
General and
administrative........... 12,841 8,989 9,408 9,025
Product development....... 24,472 14,291 21,431 15,120
---------- ---------- ---------- ----------
Total operating
expenses............... 76,784 43,883 55,466 47,430
---------- ---------- ---------- ----------
Operating loss.......... (21,850) (2,786) (34,684) (417)
Other income (expense):
Interest income........... 6 92 190 102
Interest expense.......... (4,620) (3,009) (1,907) (531)
Other..................... (319) 644 117 (378)
---------- ---------- ---------- ----------
Total other income
(expense).............. (4,933) (2,273) (1,600) (807)
Loss before provision
(benefit) for income
taxes...................... (26,783) (5,059) (36,284) (1,224)
Provision (benefit) for
income taxes............... 1,437 -- (9,065) (480)
---------- ---------- ---------- ----------
Net loss.................... $ (28,220) $ (5,059) $ (27,219) $ (744)
========== ========== ========== ==========
Net loss per share:
Basic/Diluted............. $ (1.91) $ (0.45) $ (2.46) $ (0.07)
Weighted average number of
common shares outstanding:
Basic/Diluted............. 14,762,644 11,123,327 11,085,632 10,661,944
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other
------------------ Paid-in Earnings Comprehensive Comprehensive
Shares Amount Capital (Deficit) Income Loss
---------- ------ ------- --------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, April 30,
1995................... 10,741,899 $ 11 $16,913 $ 13,145 $ --
Exercise of stock
options............... 177,104 -- 140 -- --
Repurchase of common
stock................. (89,222) -- -- -- --
Tax benefit from
exercise of stock
options............... -- -- 424 -- --
Compensation for stock
options granted....... -- -- 306 -- --
Net loss............... -- -- -- (744) -- $ (744)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- --
--------
Other comprehensive
income............... -- -- -- -- -- --
---------- ---- ------- -------- ----- --------
Comprehensive loss... -- -- -- -- -- $ (744)
---------- ---- ------- -------- ----- ========
Balance, April 30,
1996................... 10,829,781 11 17,783 12,401 --
Exercise of stock
options............... 313,403 -- 58 -- --
Repurchase of common
stock................. (29,124) -- (275) -- --
Proceeds from
warrants.............. -- -- 148 -- --
Compensation for stock
options granted....... -- -- 306 -- --
Net loss............... -- -- -- (27,219) -- $(27,219)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- 188
--------
Other comprehensive
income............... -- -- -- -- 188 188
--------
Comprehensive loss... -- -- -- -- -- $(27,031)
---------- ---- ------- -------- ----- ========
Balance, April 30,
1997................... 11,114,060 11 18,020 (14,818) 188
Issuance of common
stock................. 16,362 -- 184 -- --
Repurchase of common
stock................. (178,594) -- -- -- --
Compensation for stock
options granted....... -- -- 204 -- --
Net loss............... -- -- -- (5,059) -- $ (5,059)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- 3
--------
Other comprehensive
income............... -- -- -- -- 3 3
--------
Comprehensive loss... -- -- -- -- -- $ (5,056)
---------- ---- ------- -------- ----- ========
Balance, December 31,
1997................... 10,951,828 11 18,408 (19,877) 191
Issuance of common
stock, net of issuance
costs................. 5,056,102 5 24,390 -- --
Issuance of warrants... -- -- 316 -- --
Exercise of warrants... 2,272,417 2 8,599 -- --
Exercise of stock
options............... 12,084 -- 15 -- --
Compensation for stock
options granted....... -- -- 190 -- --
Net loss............... -- -- -- (28,220) -- $(28,220)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- 163
--------
Other comprehensive
income............... -- -- -- -- 163 163
--------
Comprehensive loss... -- -- -- -- -- $(28,057)
---------- ---- ------- -------- ----- ========
Balance, December 31,
1998................... 18,292,431 $ 18 $51,918 $(48,097) $ 354
========== ==== ======= ======== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, -----------------
1998 1997 1997 1996
------------ ------------ -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(28,220) $ (5,059) $(27,219) $ (744)
Adjustments to reconcile net loss
to the cash provided by (used
in) operating activities--
Depreciation and amortization... 3,415 2,138 3,172 1,985
Gain on sale of property and
equipment...................... -- -- -- (21)
Noncash expense for stock
options........................ 190 204 306 306
Noncash interest expense........ 68 184 -- --
Write-off of non-current
assets......................... -- -- 250 388
Deferred income taxes........... 2,022 128 (6,649) (335)
Minority interest in earnings
(loss) of subsidiary........... (117) (66) 28 25
Changes in assets and
liabilities:
Trade receivables............... 693 (12,338) 3,926 (3,229)
Inventories..................... 35 1,066 (1,508) (2,193)
Income taxes receivable......... 1,427 174 (176) (1,403)
Other current assets............ 1,657 (1,864) 5,732 (2,232)
Other assets.................... (3) 543 5,610 (467)
Prepaid licenses and royalties.. (5,501) (1,714) (4,102) (5,966)
Accounts payable................ 6,282 146 (1,999) 7,589
Accrued liabilities............. (166) 1,449 5,618 9,223
Income taxes payable............ (607) (310) -- (467)
-------- -------- -------- -------
Net cash provided by (used in)
operating activities.......... (18,825) (15,319) (17,011) 2,459
Cash flows from investing
activities:
Purchase of property and
equipment....................... (1,684) (792) (3,451) (4,585)
Proceeds from sales of property
and equipment................... -- -- -- 14
Acquisitions of subsidiary, net
of cash acquired of $119........ -- -- -- (3,196)
Proceeds from sale of investment
in affiliate.................... -- -- -- 200
Proceeds from sale of marketable
securities...................... -- -- -- 69
-------- -------- -------- -------
Net cash used in investing
activities.................... (1,684) (792) (3,451) (7,498)
Cash flows from financing
activities:
Net borrowings on line of
credit.......................... 1,229 12,296 5,900 5,050
Issuances (payments) of
subordinated secured promissory
notes and warrants.............. (6,054) -- 14,803 --
Repayments on notes payable...... (76) (62) (75) (117)
Net proceeds from issuance of
common stock.................... 24,310 -- -- --
Proceeds from exercise of stock
options......................... 15 -- 58 140
Tax benefit from stock option
exercise........................ -- -- -- 424
Other financing activities....... -- -- -- (11)
-------- -------- -------- -------
Net cash provided by financing
activities.................... 19,424 12,234 20,686 5,486
-------- -------- -------- -------
Effect of exchange rate changes on
cash and cash equivalents........ 163 3 263 (58)
-------- -------- -------- -------
Net increase (decrease) in cash
and cash equivalents............. (922) (3,874) 487 389
Cash and cash equivalents,
beginning of year................ 1,536 5,410 4,923 4,534
-------- -------- -------- -------
Cash and cash equivalents, end of
year............................. $ 614 $ 1,536 $ 5,410 $ 4,923
======== ======== ======== =======
Supplemental cash flow
information:
Cash paid during the year for:
Interest........................ $ 4,671 $ 2,936 $ 1,638 $ 480
Income taxes.................... -- -- -- 526
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Line of Business; Risk Factors
Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(collectively with Interplay Productions, a California corporation, the
"Company"), develop, publish, and distribute interactive entertainment
software. In addition, the Company distributes certain titles to hardware or
peripheral device manufacturers for use in bundling arrangements. The
Company's software is developed for use on various interactive entertainment
software platforms, including personal computers and current generation video
game consoles, such as the PlayStation and Nintendo 64.
For the year ended December 31, 1998 the Company incurred a net loss of
$28.2 million and used cash in operating activities of $18.8 million.
Partially because of these losses, the Company's liquidity significantly
deteriorated during the second half of 1998. At December 31, 1998, the Company
had negative working capital of $2.9 million, although the Company did have
borrowing availability under its line of credit (See Note 5).
To provide working capital to support the Company's future operations, the
Company took several actions during 1998, including entering into certain
product licensing and distribution agreements which in the aggregate provided
approximately $10.8 million in advance cash payments. In addition, in March
1999, the Company extended 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, the Company entered into a Stock Purchase Agreement with
an investor which provides for the issuance of 2.5 million shares of the
Company's Common Stock for $10 million. Under the terms of the Stock Purchase
Agreement up to 2.5 million additional shares of the Company's common stock
may be issued without additional consideration based on the average closing
price per share of the Company's Common Stock as of certain specified future
dates; provided, however, the investor will not be issued a total number of
shares equaling or exceeding 20% of the Company's current outstanding Common
Stock without the approval of the Company's stockholders. Additional steps
taken by Management include reductions in personnel, reductions in management
compensation, cutbacks in overhead costs and modifications in product
development plans to preserve cash resources.
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, 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 15). Based upon the Company's estimates, including
the Company's ability to achieve anticipated operating results, the Company
believes that it will be able to renew its line of credit or obtain alternate
financing on reasonable terms.
F-7
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
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 delays,
rapidly changing technology, intense competition, dependence on distribution
channels and risk of customer returns. Certain additional risks are discussed
on pages 25-36 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
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.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions Pty Ltd
(Australia), Interplay Co., Ltd., (Japan) and its 91 percent-owned subsidiary
Shiny Entertainment, Inc. All significant intercompany accounts and
transactions have been eliminated.
Change of Fiscal Year End
Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31.
Reincorporation
On March 2, 1998, the Board of Directors of Interplay Productions approved a
reincorporation plan. Under the reincorporation plan Interplay Productions
formed a new entity in Delaware into which Interplay Productions was merged on
May 29, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents and Noncash Activities
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
During the fiscal year ended April 30, 1997, in a noncash financing
transaction, the Company acquired 29,124 shares of common stock in exchange
for a $275 note payable.
Inventories
Inventories consist of CD-ROMs, video game console cartridges (cartridges),
manuals, packaging materials, supplies and packaged software ready for
shipment and are valued at the lower of cost (first-in, first-out) or market.
F-8
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Prepaid Licenses and Royalties
Prepaid licenses and royalties consist of payments for intellectual property
rights, payments to celebrities and sports leagues and advanced royalty
payments to outside developers. In addition such costs include certain other
outside production costs generally consisting of film cost and amounts paid
for digitized motion data with alternative future uses. Payments to developers
represent contractual advanced payments made for future royalties. These
payments are contingent upon the successful completion of milestones, which
generally represent specific deliverables. Royalty advances are recoupable
against future sales based upon the contractual royalty rate. The Company
amortizes the cost of licenses, prepaid royalties and other outside production
costs to cost of sales over six months commencing with the initial shipment of
the title at a rate based upon the number of units shipped. Management
evaluates the future realization of such costs quarterly and charges to cost
of goods sold any amounts that management deems unlikely to be fully realized
through future sales. Such costs are classified as current and noncurrent
assets based upon estimated net product sales.
Property and Equipment
Property and equipment are stated at cost. Depreciation of computers,
equipment and furniture and fixtures is provided using the straight-line
method over a five year period. Leasehold improvements are amortized on a
straight line basis over the lesser of the estimated useful life or the
remaining lease term.
Other Non-current Assets
Other non-current assets consist primarily of goodwill which the Company is
amortizing on a straight-line basis over seven years (see Note 3). Accumulated
amortization as of December 31, 1998 and 1997 was $1,300 and $1,000,
respectively.
Long-lived Assets
As prescribed by Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of," the Company assesses the recoverability of its long-lived
assets (including goodwill) by determining whether the asset balance can be
recovered over the remaining depreciation or amortization period through
projected undiscounted future cash flows. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximates the fair value. In addition,
the carrying value of all borrowings approximate fair value based on interest
rates currently available to the Company.
Revenue Recognition
Revenues are recorded when products are delivered to customers in accordance
with Statement of Position (SOP) 97-2, Software Revenue Recognition. For those
agreements that provide the customers the right to multiple copies in exchange
for guaranteed amounts, revenue is recognized at the delivery of the product
master or the first copy. Per copy royalties on sales that exceed the
guarantee are recognized as earned. The Company is generally not contractually
obligated to accept returns, except for defective product. However, the
Company
F-9
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
permits customers to return or exchange product and may provide price
protection on products unsold by a customer. In accordance with SFAS No. 48,
revenue is recorded net of an allowance for estimated returns, exchanges,
markdowns, price concessions, and warranty costs. Such reserves are based upon
management's evaluation of historical experience, current industry trends and
estimated costs. The amount of reserves ultimately required could differ
materially in the near term from the amounts included in the accompanying
consolidated financial statements. Postcontract customer support provided by
the Company is limited to telephone support. These costs are not material and
are charged to expenses as incurred.
Product Development
Product development expenses are charged to operations in the period
incurred and consist primarily of payroll and payroll related costs.
Advertising Costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and
charged to expense at the first run of the ad. Cooperative advertising with
distributors and retailers is accrued when revenue is recognized. Cooperative
advertising credits are reimbursed when qualifying claims are submitted.
Income Taxes
The Company accounts for income taxes using the liability method as
prescribed by the SFAS No. 109, "Accounting for Income Taxes." The statement
requires an asset and liability approach for financial accounting and
reporting of income taxes. Deferred income taxes are provided for temporary
differences in the recognition of certain income and expense items for
financial reporting and tax purposes given the provisions of the enacted tax
laws.
Foreign Currency Translation
The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at
the weighted average exchange rate prevailing during the period. Gains or
losses arising from the translation of the foreign subsidiaries' financial
statements are included in the accompanying consolidated balance sheets as a
separate component of stockholders' equity (deficit). (Losses) gains resulting
from foreign currency transactions amounted to ($288), $246, $364 and $325
during the year ended December 31, 1998, the eight months ended December 31,
1997 and the fiscal years ended April 30, 1997 and 1996, respectively, and are
included in other income (expense) in the consolidated statements of
operations.
Net Loss Per Share
The Company accounts for net loss per share in accordance with SFAS No. 128
"Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." Basic net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding plus the effect of any dilutive stock options and common
stock warrants.
F-10
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
For year ended December 31, 1998, the eight months ended December 31, 1997
and the years ended April 30, 1997 and 1996, all options and warrants to
purchase common stock were excluded from the diluted loss per share
calculation as the effect of such inclusion would be antidilutive (see Note
8).
Stock-Based Compensation
As permitted under generally accepted accounting principles, the Company
accounts for employee stock options in accordance with the Accounting
Principles Board Opinion No. 25 and makes the necessary pro forma disclosures
mandated by SFAS No. 123 (see Note 11).
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". In addition, in November 1997, the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition". SFAS Nos. 130 and 131
and certain provisions of SOP 97-2 became effective for fiscal years beginning
after December 15, 1997. The adoption of these standards did not have a
material impact on the Company's results of operations.
In April 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. Additionally,
the AICPA issued SOP 98-4, "Deferral of the Effective Date of SOP 97-2,
Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition", which effectively modified and delayed the
application of certain provisions of SOP 97-2 until fiscal years beginning
after March 15, 1999. The Company does not believe that adoption of these
standards will have a material impact on the Company's results of operations.
3. Acquisition
Effective June 24, 1995, the Company acquired a 91 percent interest in Shiny
Entertainment, Inc. (Shiny) for $3,624 in cash and stock. The acquisition was
accounted for using the purchase method. The allocation of purchase price is
summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents.......................................... $ 119
Receivables........................................................ 107
Other current assets............................................... 6
Property and equipment............................................. 417
Goodwill........................................................... 3,057
Accounts payable and accrued liabilities........................... (82)
------
Total purchase price............................................. $3,624
======
</TABLE>
The purchase agreement requires the Company to pay the former owner of Shiny
additional cash payments of up to $5,625 upon the delivery and acceptance of
five future Shiny interactive entertainment software titles, as defined. As of
December 31, 1998, the Company had not been required to make any additional
payments.
F-11
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
4. Detail of Selected Balance Sheet Accounts
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Packaged software........................................... $4,070 $4,171
CD-ROMs, cartridges, manuals, packaging
and supplies............................................... 2,233 2,167
------ ------
$6,303 $6,338
====== ======
</TABLE>
Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Prepaid expenses............................................. $ 639 $1,640
Royalties receivables........................................ -- 1,644
Deposits..................................................... 46 162
Other receivables............................................ 2,416 772
------ ------
$3,101 $4,218
====== ======
</TABLE>
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Computers and equipment.................................. $13,944 $12,383
Furniture and fixtures................................... 588 474
Leasehold improvements................................... 1,135 1,125
------- -------
15,667 13,982
Less: accumulated depreciation and amortization.......... (9,988) (6,956)
------- -------
$ 5,679 $ 7,026
======= =======
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Royalties payable......................................... $ 6,758 $ 6,901
Accrued payroll........................................... 2,552 2,707
Payable to distributor.................................... 216 4,240
Accrued bundling and affiliate costs...................... 1,409 2,923
Deferred income........................................... 9,786 3,442
Other..................................................... 1,579 2,336
------- -------
$22,300 $22,549
======= =======
</TABLE>
Included in deferred income for the year ended December 31, 1998 is $9,000
related to distribution and other advances on future products.
F-12
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
5. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Subordinated Secured Promissory Notes.................. $ -- $ 14,655
Loan Agreement......................................... 24,475 23,246
Other.................................................. 176 253
-------- --------
24,651 38,154
Less--current portion.................................. (24,521) (14,767)
-------- --------
$ 130 $ 23,387
======== ========
</TABLE>
Subordinated Secured Promissory Notes
From October 1996 through February 1997, the Company issued $14,800 in
Subordinated Secured Promissory Notes ("Notes") and nondetachable Warrants to
purchase Common Stock, of which employees, officers, and directors of the
Company held $2,600 of the total Notes outstanding. The principal amount of
the Notes was $14,700 and the purchase price of the Warrants was $148. The
amount paid for the Warrants approximates management's estimate of the fair
market value of the Warrants at the date of issuance and is included in paid-
in capital in the accompanying consolidated balance sheets.
The Notes provided for interest at a rate of 12.0 percent per year, payable
quarterly, beginning May 1, 1997. Interest expense related to the Notes was
$863, $1,200 and $856 for the year ended December 31, 1998, the eight months
ended December 31, 1997 and the fiscal year ended April 30, 1997,
respectively.
Each Warrant holder had the right to purchase from the Company the number of
shares of Common Stock equal to the investor's aggregate investment (including
Notes and Warrants) divided by the product of 0.70 multiplied by the initial
public offering ("IPO") price per share.
Total interest due on the Notes at May 1, 1997 was $856. The Company offered
to pay the interest in cash or offered to issue one share of common stock for
each $11.25 of interest due (management's estimate of fair value of the
Company's common stock at the time). Interest of $672 was paid in cash and
$184 of interest was paid with 16,362 shares of common stock.
In accordance with the terms of the Notes, the Company requested that each
holder elect to either convert the outstanding principal amount to Common
Stock upon the closing of the IPO or receive full payment in cash from the
proceeds of the IPO. At the IPO completion, the holders of approximately
$8,700 of Notes and Warrants elected to exercise their Warrants by converting
their Notes to Common Stock. The remaining Note holders with a balance of
approximately $6,300 requested payment in cash inclusive of interest of $277.
This amount was paid by the Company in July 1998.
Loan Agreement
In June 1997, the Company entered into a Loan and Security Agreement ("Loan
Agreement") with a financial institution which was amended in February 1998.
Borrowings under the Loan Agreement bear interest at LIBOR (5.62 percent at
December 31, 1998 and 5.72 percent at December 31, 1997) plus 4.87 percent
(10.49 percent at December 31, 1998 and 10.59 percent at December 31, 1997).
The agreement provides for a line of
F-13
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
credit based in part on qualified receivables and inventory. Borrowings under
this Loan Agreement were to up to a maximum of $35,000 through August 30,
1998; $30,000 from August 31 to December 30, 1998; and $25,000 thereafter.
Within the total credit limits, the Company may borrow up to $10,000 in excess
of its borrowing base through August 1998 and up to $5,000 in excess of its
borrowing base thereafter through December 30, 1998. The line of credit is
secured by cash, accounts receivable and inventory and by a security interest
in certain of the Company's assets and was to expire on May 31, 1999.
In November 1998, the Company further amended the Loan Agreement to provide
for a $37,500 maximum credit limit through May 31, 1999, based in part on
qualifying receivables and inventory. The amended line of credit also provides
for a personal guarantee by the Company's Chairman and Chief Executive Officer
in the amount of $5,000 secured by certain personal assets. As consideration
for making such guarantee, the employee received warrants to purchase 400,000
shares of the Company's Common Stock at an exercise price of $3.00 per share
(see Note 10). Subsequent to year end, on March 18, 1999, the Company entered
into amendments to the Loan Agreement which, among other things, extended the
expiration date to January 1, 2000 (see Note 15). The Company is in compliance
with the terms of the Loan Agreement.
6. Income Taxes
The Company files a consolidated U.S. Federal income tax return which
includes substantially all of its domestic operations. The Company files
separate tax returns for each of its foreign subsidiaries in the countries in
which they reside.
Loss before provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, -----------------
1998 1997 1997 1996
------------ ------------ -------- -------
<S> <C> <C> <C> <C>
Domestic........................ $(25,038) $(2,784) $(32,888) $(1,890)
Foreign......................... (1,745) (2,275) (3,396) 666
-------- ------- -------- -------
Total........................... $(26,783) $(5,059) $(36,284) $(1,224)
======== ======= ======== =======
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, --------------
1998 1997 1997 1996
------------ ------------ ------- -----
<S> <C> <C> <C> <C>
Current:
Federal.......................... $ -- $(179) $(1,689) $(275)
State............................ 8 -- -- 10
Foreign.......................... (571) 51 153 456
------ ----- ------- -----
(563) (128) (1,536) 191
Deferred:
Federal.......................... 2,000 128 (7,303) (653)
State............................ -- -- (226) (18)
------ ----- ------- -----
2,000 128 (7,529) (671)
------ ----- ------- -----
$1,437 $ -- $(9,065) $(480)
====== ===== ======= =====
</TABLE>
F-14
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The Company's available net operating loss (NOL) carryforward for federal
tax reporting purposes approximates $46,400 and may be subject to certain
limitations as defined under Section 382 of the Internal Revenue Code. The
federal NOL carryforwards expire through the year 2018. The Company's NOL's
for state tax reporting purposes approximate $27,900 and expire through the
year 2003.
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax loss is as follows:
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, -------------
1998 1997 1997 1996
------------ ------------ ----- -----
<S> <C> <C> <C> <C>
Statutory income tax rate......... (34.0)% (34.0)% (34.0)% (34.0)%
State and local income taxes, net
of
federal income tax benefit....... (3.0) (3.0) (3.0) (3.0)
Valuation allowance............... 39.8 39.7 8.0 --
Other............................. 2.6 (2.7) 4.0 (2.2)
----- ----- ----- -----
5.4 % -- % (25.0)% (39.2)%
===== ===== ===== =====
</TABLE>
The components of the Company's net deferred income tax asset (liability)
are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Current deferred tax asset (liability):
Prepaid royalties...................................... $ (5,621) $(2,760)
Nondeductible reserves................................... 5,013 5,603
Accrued expenses....................................... 853 1,015
Foreign loss and credit carryforward................... 1,962 1,008
Federal and state net operating losses................. 17,796 6,668
Research and development credit carryforward........... 831 831
Other.................................................. 461 330
-------- -------
21,295 12,695
Valuation allowance...................................... (15,818) (4,903)
-------- -------
$ 5,477 $ 7,792
======== =======
Non-current deferred tax asset (liability):
Depreciation expense................................... $ (342) $ (625)
Nondeductible reserves................................. 223 191
Other.................................................. (22) --
-------- -------
$ (141) $ (434)
======== =======
</TABLE>
The valuation allowance relates primarily to net operating loss and tax
credit carryforward. Due to the uncertainty surrounding the realization of the
favorable tax attributes in future years, the Company has placed a valuation
allowance against its net deferred tax assets.
F-15
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
7. Commitments and Contingencies
Leases
The Company leases office space in Irvine, California for its corporate
offices. The lease expires in June 2006 with one five-year option to extend
the term of the lease. The Company has also entered into various computer
equipment operating leases. Future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999........................................................... $ 2,132
2000........................................................... 1,531
2001........................................................... 1,318
2002........................................................... 1,322
2003........................................................... 1,332
Thereafter..................................................... 3,649
-------
$11,284
=======
</TABLE>
Total rent expense was $2,400, $1,300, $2,100 and $697 for the year ended
December 31, 1998, the eight months ended December 31, 1997, and the years
ended April 30, 1997 and 1996, respectively.
Pending Internal Revenue Service Examination
The Internal Revenue Service (the IRS) is currently examining the Company's
consolidated federal income tax returns for the years ended April 30, 1992
through 1997. The IRS has challenged the timing of certain tax deductions
taken by the Company, and has asserted that an additional tax liability is
due. The Company disagrees with and is currently contesting such challenges.
The potential losses to the Company, as a result of these challenges are not
reasonably estimable. Accordingly, no reserve has been established in the
accompanying financial statements. Any losses which might be suffered by the
Company as a result of this examination could impact the Company's future
profitability.
Litigation
The Company is involved in litigation arising from the normal course of
business. Management believes that the final outcome of all legal matters will
not have a material adverse effect on the Company's financial position or
results of operations.
Employment Agreements
The Company has entered into employment agreements with three of its
officers providing for, among other things, salary, bonuses and the right to
participate in certain incentive compensation and other employee benefit plans
established by the Company. Under these agreements, upon termination without
cause or resignation for good reason, as defined, the employees are entitled
to 150 percent of their annual salary and 75 percent of the imputed bonus, as
defined. These agreements expire in 1999.
New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("Participating Countries") established fixed conversion rates between
their existing sovereign currencies and a new European
F-16
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
currency, the "euro". The euro was adopted by the Participating Countries as
the common legal currency on that date. A significant portion of the Company's
sales are made to Participating Countries and consequently, the Company
anticipates that the euro conversion will, among other things, create
technical challenges to adapt information technology and other systems to
accommodate euro-denominated transactions and limit the Company's ability to
charge different prices for its producers in different markets. While the
Company believes that the conversion will not cause material disruption of its
business, there can be no assurance that the conversion will not have a
material effect on the Company's business or financial condition.
8. Loss Per Share
Basic 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 loss per share is arrived at by dividing the weighted
average number of shares outstanding, adjusted for the dilutive effect of
outstanding stock options.
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, ----------------------
1998 1997 1997 1996
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Net loss.................... $ (28,220) $ (5,059) $ (27,219) $ (744)
Average common shares
outstanding................ 14,762,644 11,123,327 11,085,632 10,661,944
---------- ---------- ---------- ----------
Net loss per common share--
basic...................... $ (1.91) $ (0.45) $ (2.46) $ (0.07)
========== ========== ========== ==========
DILUTED
Net loss.................... $ (28,220) $ (5,059) $ (27,219) $ (744)
Average common shares
outstanding................ 14,762,644 11,123,327 11,085,632 10,661,944
Stock option adjustment..... -- -- -- --
---------- ---------- ---------- ----------
Average common shares
outstanding................ 14,762,644 11,123,327 11,085,632 10,661,944
---------- ---------- ---------- ----------
Net loss per common share--
diluted.................... $ (1.91) $ (0.45) $ (2.46) $ (0.07)
========== ========== ========== ==========
</TABLE>
Options to purchase 2,132,738, 1,838,972, 1,627,522 and 1,824,025 shares of
common stock at December 31, 1998, December 31, 1997, April 30, 1997 and April
30, 1996, respectively, were not included in the computation of diluted
earnings per share as the effect would be antidilutive. The weighted average
exercise price at December 31, 1998, December 31, 1997, April 30, 1997 and
April 30, 1996 was $4.73, $5.31, $4.57 and $3.16, respectively, for the
options outstanding.
9. Comprehensive Income
As of January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or stockholders
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
foreign currency translations adjustments which, prior to adoption, were
reported separately in stockholders, equity to be included in other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
F-17
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
For the year ended December 31, 1998, the eight months ended December 31,
1998 and the fiscal years ended April 30, 1997 and 1996, the Company had pre-
tax increase in foreign currency translations of $172, $3, $141 and $0,
respectively.
10. Stockholders' Equity (Deficit)
Common Stock
On February 1, 1997, the Company repurchased 29,124 shares of common stock
from an employee in exchange for a $275 note payable. The note bears interest
at 7 percent and is payable over 36 months.
On September 12, 1997, the Company entered into a Separation and Release
Agreement with a former employee whereby 178,594 shares of common stock were
canceled and the former employee's remaining shares of 149,500 shares were
retained by the former employee.
In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company issued its Chairman and Chief
Executive Officer, 400,000 warrants to purchase the Company's Common Stock
(the "Warrants") at an exercise price of $3.00 per share exercisable after May
20, 1999. The Warrants have a three year term, have no registration rights and
the Warrants are canceled in the event the Company enters into an agreement to
merge or combine the Company within six months after the issuance date of the
Warrants. The shares issuable upon exercise of the warrants are subject to the
twelve month lockup agreement the employee entered into in connection with the
Company's IPO. In connection with the issuance of the Warrants, the Company
recorded an expense equal to the fair market value of the Warrants, which is
approximately $316, with such expense being amortized as additional debt cost
over the term of the guarantee.
Subsequent to year end, the Company entered into a Stock Purchase Agreement
with an investor which provides for the issuance of up to 5 million shares of
the Company's Common Stock for $10,000 (see Note 15). This transaction closed
and the Company received the proceeds from the sale on March 19, 1999.
Employee Stock Purchase Plan.
The Company's Employee Stock Purchase Plan (the "Purchase Plan"), covering
an aggregate of 200,000 shares of Common Stock, was adopted by the Board of
Directors and approved by the Company's stockholders in March 1998. The
Purchase Plan, which is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"), will be implemented by twelve-month offerings with purchases
occurring at six-month intervals commencing on the date of this Prospectus.
The Purchase Plan will be administered by the Board of Directors. The Purchase
Plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation. The price
of stock purchased under the Purchase Plan will be 85% of the lower of the
fair market value of the Common Stock at the beginning of the offering period
or on the applicable purchase date. On December 31, 1998, the Purchase Plan
acquired 56,102 shares of the Company's common stock at $1.51 per share.
Initial Public Offering
On June 18, 1998, the Company effected a registration with the Securities
and Exchange Commission on Form S-1, Registration No. 333-48473 (the
"Registration Statement"), whereby the Company registered up to 5,750,000
shares of its Common Stock. On June 24, 1998, the Company completed its
initial public offering of 5,000,000 shares of Common Stock, at $5.50 per
share, that raised approximately $24,310, net of expenses of $3,200. In
addition, in connection with the offering, 750,000 shares of Common Stock of
the Company were sold by a selling stockholder at $5.50 per share, for which
the company received no proceeds.
F-18
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
11. Employee Benefit Plans
Stock Option Plans
The Company has three stock option plans. Under the Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan--1991 (1991
Plan), the Company may grant options to its employees to purchase up to
2,250,000 shares of common stock. Under the Incentive Stock Option and
Nonqualified Stock Option Plan--1994 (1994 Plan), the Company may grant
options to its employees to purchase up to 808,300 shares of common stock.
Under the 1997 Stock Incentive Plan the Company may grant options to its
employees, consultants and directors to purchase up to 700,000 shares of
common stock.
Options under all three plans generally vest over five years. Holders of
options under the 1991 Plan and the 1994 Plan shall be deemed 100 percent
vested in the event of a merger in which the Company is not the surviving
entity, a sale of substantially all of the assets of the Company, or a sale of
all shares of common stock of the Company. The Company has treated the
difference, if any, between the exercise price and the estimated fair market
value, as determined by the board of directors on the date of grant, as
compensation expense for financial reporting purposes. Compensation expense
for the vested portion aggregated $190, $204, $306 and $306 for the year ended
December 31, 1998, the eight months ended December 31, 1997, and the fiscal
years ended April 30, 1997 and 1996.
Effective February 9, 1998, the Company repriced substantially all
outstanding options with exercise prices greater than $8 per share and
subsequently reissued these options with exercise prices equal to $8 per
share, management's estimate of the fair value of the Company's common stock
as of the date of reissuance. These options were accounted for as new grants.
Effective March 2, 1998, the 1991 Plan and the 1994 Plan were terminated for
purposes of future grants. On February 23, 1998, the Company granted 240,100
stock options with an exercise price equal to the estimated fair market value
of $8 per share.
The following is a summary of option activity pursuant to the Company's
stock option plans:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 April 30, 1997 April 30, 1996
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 1,838,972 $5.29 1,630,022 $ 4.59 1,824,025 $ 3.16 1,665,479 $1.69
Granted................ 451,100 6.91 263,750 11.25 136,800 14.08 418,050 8.79
Exercised.............. (12,084) 1.27 -- -- (313,403) 0.18 (177,104) 0.79
Canceled............... (139,750) 8.44 (54,800) 12.50 (17,400) 8.50 (82,400) 7.16
Rescinded.............. (5,500) 8.00 -- -- -- -- -- --
--------- ----- --------- ------ --------- ------ --------- -----
Options outstanding at
end of year............ 2,132,738 $4.73 1,838,972 $ 5.29 1,630,022 $ 4.59 1,824,025 $3.16
========= ===== ========= ====== ========= ====== ========= =====
Options exercisable.... 1,448,143 1,324,132 1,218,102 1,434,775
========= ========= ========= =========
</TABLE>
The following outlines the significant assumptions used to calculate the
fair value information presented utilizing the Black-Scholes Single Option
approach with ratable amortization:
<TABLE>
<CAPTION>
December 31, April 30,
---------------------- ----------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Risk free rate............. 5.1% 6.1% 6.1% 6.1%
Expected life.............. 7.74 years 8.02 years 7.13 years 7.12 years
Expected volatility........ 0.70 -- -- --
Expected dividends......... -- -- -- --
Weighted-average grant-date
fair value of
options granted........... $ 2.95 $ 3.61 $ 3.68 $ 2.34
</TABLE>
F-19
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
A detail of the options outstanding and exercisable as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Number Exercise
Prices Number Outstanding Contract Life Price Outstanding Price
-------- ------------------ ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15 - $ 0.47 572,874 3.24 $0.15 572,874 $0.15
$2.00 - $ 4.44 367,814 4.78 $2.72 367,814 $2.72
$4.50 - $ 6.66 237,000 8.25 $5.08 84,700 $5.37
$7.00 - $10.00 955,050 7.50 $8.16 422,755 $8.22
--------- ---- ----- --------- -----
$0.15 - $10.00 2,132,738 5.97 $4.73 1,448,143 $3.46
========= ==== ===== ========= =====
</TABLE>
The following table shows pro forma net loss as if the fair value based
accounting method prescribed by SFAS No. 123 had been used to account for
stock based compensation cost:
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, ----------------
1998 1997 1997 1996
------------ ------------ -------- ------
<S> <C> <C> <C> <C>
Net loss as reported........... $(28,220) $(5,059) $(27,219) $ (744)
Pro forma compensation
expense....................... (1,011) (276) (348) (121)
-------- ------- -------- ------
Pro forma net loss............. $(29,231) $(5,335) $(27,567) $ (865)
======== ======= ======== ======
Basic and diluted net loss as
reported...................... $ (1.91) $ (0.45) $ (2.46) $(0.07)
Basic and diluted pro forma net
loss.......................... $ (1.98) $ (0.48) $ (2.49) $(0.08)
</TABLE>
Profit Sharing 401(k) Plan
The Company sponsors a 401(k) plan (the Plan) for most full-time employees.
The Company matches 50 percent of the participant's contributions up to the
first six percent of the participant's salary deferral. The profit sharing
contribution amount is at the sole discretion of the Company's board of
directors. Participants vest at a rate of 20 percent per year after the first
year of service for profit sharing contributions and 20 percent per year after
the first two years of service for matching contributions. Participants become
100 percent vested upon death, permanent disability or termination of the
Plan. Benefit expense for the year ended December 31, 1998, for the eight
months ended December 31, 1997 and for the years ended April 30, 1997 and 1996
was $256, $178, $229 and $160, respectively.
12. Related Parties
The Company has amounts due from a business controlled by the Chairman and
CEO of the Company. Net amounts due, prior to reserves, at December 31, 1998
and 1997 were $2,000 and $1,500, respectively. Such amounts at December 31,
1998 and 1997 are fully reserved. Through December 1997, the Company rented
office space from the Chairman and CEO of the Company. Rent expense paid to
the Chairman and CEO was $160, $191 and $248 for the eight months ended
December 31, 1997 and for the years ended April 30, 1997 and 1996,
respectively.
In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company's Chairman and Chief Executive
Officer, Brian Fargo, provided a personal guarantee in the amount of $5.0
million secured by certain of Mr. Fargo's personal assets. As consideration
for making such guarantee, Mr. Fargo received warrants to purchase 400,000
shares of the Company's Common Stock at an exercise price of $3.00 per share
exercisable after May 20, 1999 (see Note 10).
F-20
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
13. Concentration of Credit Risk
The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables may be affected by
changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential credit losses are maintained.
For the year ended April 30, 1997 one customer accounted for approximately
15 percent of net revenues. No single customer accounted for ten percent or
more of net revenues in the year ended December 31, 1998, the eight months
ended December 31, 1997 or the year ended April 30, 1996.
14. 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 presented
below:
<TABLE>
<CAPTION>
Eight Months Years Ended
Year Ended Ended April 30,
December 31, December 31, -----------------
1998 1997 1997 1996
------------ ------------ -------- -------
<S> <C> <C> <C> <C>
Net revenues:
United States............... $ 94,727 $65,199 $ 54,469 $78,823
United Kingdom.............. 32,135 20,689 27,867 18,127
Other....................... -- 73 926 2
-------- ------- -------- -------
Consolidated net
revenues................. $126,862 $85,961 $ 83,262 $96,952
======== ======= ======== =======
Income (loss) from operations:
United States............... $(20,315) $ 298 $(30,764) $(1,410)
United Kingdom.............. (1,535) (2,666) (3,871) 1,853
Other....................... -- (418) (49) (860)
-------- ------- -------- -------
Consolidated loss from
operations............... $(21,850) $(2,786) $(34,684) $ (417)
======== ======= ======== =======
Expenditures made for the acquisition
of long-lived assets:
United States............... $ 1,067 $ 459 $ 2,741 $ 3,859
United Kingdom.............. 422 175 382 149
Other....................... 195 158 328 577
-------- ------- -------- -------
Total expenditures for
long-lived assets........ $ 1,684 $ 792 $ 3,451 $ 4,585
======== ======= ======== =======
</TABLE>
Net revenues were made in geographic regions as follows:
<TABLE>
<CAPTION>
Year Ended Eight Months Years Ended April 30,
December 31, Ended December -------------------------------
1998 31, 1997 1997 1996
---------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America........... $ 73,865 58.2% $51,833 60.3% $38,606 46.4% $54,702 56.4%
Europe.................. 28,777 22.7 19,941 23.2 26,752 32.1 17,683 18.3
Rest of World........... 7,016 5.5 4,701 5.5 5,254 6.3 6,896 7.1
OEM, royalty and
licensing.............. 17,204 13.6 9,486 11.0 12,650 15.2 17,671 18.2
-------- ----- ------- ----- ------- ----- ------- -----
$126,862 100.0% $85,961 100.0% $83,262 100.0% $96,952 100.0%
======== ===== ======= ===== ======= ===== ======= =====
</TABLE>
F-21
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Long-lived assets by geographic regions, net:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997 April 30, 1997 April 30, 1996
-------------- -------------- --------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America........... $6,621 89.6% $8,380 91.9% $ 9,578 91.5% $7,149 91.2%
Europe.................. 723 9.8 685 7.5 616 5.9 480 6.1
Rest of World........... -- 0.0 -- 0.0 220 2.1 209 2.7
OEM, royalty and
licensing.............. 44 0.6 53 0.6 50 0.5 -- 0.0
------ ----- ------ ----- ------- ----- ------ -----
$7,388 100.0% $9,118 100.0% $10,464 100.0% $7,838 100.0%
====== ===== ====== ===== ======= ===== ====== =====
</TABLE>
15. Subsequent Events
Distribution Agreement
On February 10, 1999 the Company signed an International Distribution
Agreement with Virgin Interactive Entertainment Limited ("Virgin") which
provides for the exclusive distribution of substantially all of the Company's
products in Europe, CIS, Africa and the Middle East for a seven year period,
cancelable under certain conditions, subject to termination penalties and
costs. Under the Agreement, the Company will pay Virgin a monthly overhead fee
and a distribution fee based on net sales, subject to a minimum annual
payment, and Virgin will provide certain market preparation, warehousing,
sales and fulfillment services on behalf of the Company. In connection with
this arrangement and the associated reduction in the Company's European
operations, the Company anticipates recording an asset valuation and
restructuring charge of approximately $650 in the first quarter of 1999. In
connection with the International Distribution Agreement the Company has also
executed a Product Publishing Agreement 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. The Company has also executed an Operating Agreement, in
connection with the above agreements, which provides the Company, together
with two members of Interplay Europe's management, a 49.9% equity interest in
VIE Acquisition Group LLC, the parent entity of Virgin. The Company is not
obligated to make any other contributions to the working capital of Virgin.
Sale of Common Stock
On March 18, 1999, the Company entered into a Stock Purchase Agreement with
an investor which provides for the issuance of 2.5 million shares of the
Company's Common Stock for $10,000. Under the terms of the Stock Purchase
Agreement up to 2.5 million additional shares of the Company's common stock
may be issued without additional consideration based on the average closing
share price per share of the Company's Common Stock as of certain specified
future dates; provided, however, the investor will not be issued a total
number of shares equaling or exceeding 20% of the Company's current
outstanding Common Stock without the approval of the Company's stockholders.
Amendment to Credit Facility
On March 18, 1999 the Company amended its line of credit 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 $37,500 maximum credit line will continue through November
29, 1999, $30,000 through December 30, 1999 and $25,000 thereafter. Within the
total credit limit, the Company may borrow up to $14,000 in excess of its
borrowing base through July 30, 1999, $10,000 in excess through September 29,
1999, $7,000 through November 29, 1999 and $5,000 in excess thereafter. Under
the amended line of credit the Company is required to place a cash collateral
deposit of $1,000 on February 15, 1999 and March 15, 1999 and $500 on April
15, 1999. In addition, the Company is required to maintain certain borrowing
limitations beginning July 30, 1999 where actual borrowings are limited to
$35,000 with various month end limitations, generally decreasing to $25,000 at
December 31, 1999 and the $5,000 personal guarantee by the Company's Chairman
and Chief Executive Officer will remain in place throughout the term. All
other terms and conditions remain in full force and effect.
F-22
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Trade Receivables Allowances
------------------------------------------------
Balance at Provisions for Balance at
Beginning Returns and Returns and End of
Period of Period Discounts Discounts Period
------ ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended April 30,
1996..................... $ 5,032 $26,882 $(22,814) $ 9,100
======= ======= ======== =======
Year ended April 30,
1997..................... $ 9,100 $34,424 $(28,630) $14,894
======= ======= ======== =======
Eight months ended
December 31, 1997........ $14,894 $21,915 $(22,348) $14,461
======= ======= ======== =======
Year ended December 31,
1998..................... $14,461 $43,596 $(39,626) $18,431
======= ======= ======== =======
</TABLE>
F-23
<PAGE>
EXHIBIT 10.23
CONFIDENTIAL TREATMENT REQUESTED
HEADS OF AGREEMENT
November 19, 1998
Gentlemen:
Whereas it is the desire of both parties, Activision, Inc. ("Activision") and
Interplay Entertainment Corp. ("Interplay"), to engage in a Distribution and
Sales Agreement, this interim document shall serve to define the key points of
our understanding. When and if signed below, this document shall constitute a
legally binding "Heads of Agreement," and both parties agree that this Heads of
Agreement will be followed by the preparation and execution within sixty (60)
days of a more formal agreement to be developed from the items contained below.
If no formal agreement is executed, then the terms of this Heads of Agreement
will govern the relationship of the parties.
<TABLE>
<S> <C> <C>
1. Products: Two (2) Windows 95/98 operating system entertainment software
products, one based on the original "Star Trek" television
series universe owned and or controlled by Paramount Pictures
Corp. or its affiliates ("Paramount") entitled "Star Trek:
Klingon Academy" ("Klingon"), and the other currently being
developed by Xatrix Entertainment utilizing id Software's
"Quake 2" engine technology entitled "Kingpin: Life of Crime"
("Kingpin").
2. Territory: Worldwide.
3. Term: (a) With respect to each Product, [*] years from the
initial commercial shipment by Activision of such Product.
(b) At such time as the United States wholesale price for one
of the Products becomes less than [*] per unit (which pricing
shall be determined in accordance with the terms of Paragraph
11 below), [*] shall determine which one of the two Products
shall be removed from this Heads of Agreement upon its United
States wholesale price reaching less than $[*] per unit. Upon
the selected Product's reaching a United States wholesale
price of less than $[*] per unit, the Term of this Heads of
Agreement with respect to the selected Product shall expire
and all distribution rights (including sell-off rights, if any)
with respect to the selected Product shall revert to Interplay,
subject only to Activision's right to fulfill existing purchase
orders of its customers.
4. Rights Granted During the Interplay hereby grants to Activision the exclusive right and
Term: license to distribute, sub-distribute [*] and
</TABLE>
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
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sell the Products in the Territory during the Term,
through all currently known or hereafter developed retail and
direct channels of computer software distribution, but
specifically excluding OEM channels. [*]
5. Advance Payment: Within three (3) business days following: [*], Activision will
make a guaranteed cash payment to Interplay in the amount of
[*] Dollars ($[*]) as an advance fully recoupable against the
amounts required to be paid to Interplay pursuant to Paragraph
7(c) below (the "Advance"). [*]
6. Distribution Fee: Activision shall receive a distribution fee equal to [*]
percent ([*]%) with respect to Klingon, and [*] percent
([*]%) with respect to Kingpin, of all invoiced amounts
received by Activision from its distribution and sale of such
Products during the Term (the "Distribution Fee").
7. Order of Payments: Monies received by Activision from its distribution and sale
of the Products shall be disbursed between the parties in the
following order:
(a) First, to Activision for reimbursement of certain of its
costs and expenses, as specified in the last paragraph of
Paragraph 9 of this Heads of Agreement;
(b) Second, to Activision for payment of the Distribution Fee
set forth in Paragraph 6 above; and
(c) The balance to Interplay (subject to Activision's
recoupment in full of the Advance) in accordance with
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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Paragraph 8 of this Heads of Agreement. All amounts to be
paid or credited to Interplay will be adjusted to take into
account any actual price protections, mark-downs or returns of
Products.
8. Reporting and Payment: (a) Interplay will be provided with net sales reports on a
Product by Product basis, showing the price protections,
mark-downs and returns and market development program funds
(on both a consolidated and territory by territory basis) and
related net sales payments within [*] days after the end of
each month of sale of Products by Activision during the Term
and any applicable sell-off period.
(b) Interplay shall have customary audit and inspection
rights with respect to the net sales reports and net sales
payments referred to in Paragraph 8(a) above and, if
applicable, the manufacturing of the Products by Activision
pursuant to Paragraph 14(b). The specific terms of such audit
and inspection rights shall be set forth in the more formal
agreement.
9. Activision's Activision will be responsible for performing the following
Responsibilities: distribution activities in the Territory:
(a) Confirmation testing of the Gold Masters of the Products
for the limited purpose of confirming that the Gold Masters
are error-free. In such regard, Interplay shall deliver a
Gold Master of each Product to Activision at least two (2)
weeks prior to the intended initial duplication date of such
Product as reasonably scheduled by Activision. For purposes
of this Heads of Agreement, a "Gold Master" of a Product is
defined as one or more optical discs containing all of the
assets, content and programs needed to use the Product, and
which is ready to be utilized in the manufacturing of Finished
Goods (as defined in Paragraph 14(a));
(b) Selling Products and soliciting Product orders, which
solicitation shall begin upon receipt by Activision's sales
department of all sales materials as requested by Activision
pursuant to Paragraph 10(h) below;
(c) Administering mailings and trade marketing programs,
including co-op ads, trade ads, end caps, in-store promotions
and other comparable market development programs, not to
exceed [*]% of amounts invoiced by Activision, and subject to
the prior written approval of Interplay, which approval shall
not
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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be unreasonably withheld or delayed; and
(d) handling order entries, processing, warehousing, stock
balancing, shipping to customers, collection and reporting.
Activision shall bear all costs and expenses relating to such
distribution activities, except for (i) the costs of the
actual trade marketing programs pursuant to Paragraph 9(c),
and (ii) reasonable actual shipping and freight charges, which
shall be paid by Activision but then reimbursed to Activision
pursuant to Paragraph 7(a) from monies received by Activision
from its distribution and sale of the Products under this
Heads of Agreement.
10. Interplay's Responsibilities: Interplay will at its sole cost and expense perform the
following development and publishing activities during the
Term in the Territory:
(a) designing, developing and producing the Products,
including all software, programs, packaging, manuals and
associated user documentation and related materials required
to release the Products commercially, in conformance with
industry standards [*] as Interplay has done with its previously
released [*] PC products. Without limiting the foregoing,
Interplay shall be responsible for ensuring that the Products
receive all necessary approvals from Paramount (with respect to
Klingon) and id Software (with respect to Kingpin, if any
approval of id Software is applicable to Kingpin), and in this
regard, agrees to make any and all changes that may be
required by Paramount or id Software, if applicable, so as to
allow Activision to distribute the Products as set forth herein;
(b) correcting all significant bugs and errors found in the
Products as needed to have the Products deemed ready for "code
release" (i.e., the Product is in final form, without any
significant bugs or errors, and is ready to be manufactured
into Finished Goods) and at all times after the code release
of the Products during the Term;
(c) manufacturing Finished Goods for each Product in
accordance with the Purchase Orders submitted by Activision
pursuant to Paragraph 14(a);
(d) creating and executing advertising, marketing,
promotional and public relations programs for each Product in
</TABLE>
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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accordance with industry standards [*] entertainment
software products as Interplay has done with its
previously released [*] PC products;
(e) creating customary merchandising tools for specifically
targeted channels of distribution;
(f) localizing each Product and related packaging and
documentation into the [*] languages. Localizations into any
other languages shall be done to the extent deemed reasonably
and economically sensible by the mutual agreement of the
parties based upon the parties' good-faith sales forecasts for
the Products in those parts of the Territory in which such
localized versions of the Products would be distributed;
(g) providing complete end user support for all Products, the
level and quality of which is consistent with end user support
customarily provided by Interplay for its [*] entertainment
software products in the applicable country as Interplay has
done with its previously released [*] PC products; and
(h) providing to Activision at Activision's request a
reasonable number of demonstration units of the Products, not
to exceed [*] units per Product, and furnishing Activision, at
no cost, with reasonable quantities of descriptive materials,
product documentation and advertising literature, as
reasonably required to market and promote the sale of the
Products in the Territory.
11. Pricing of Products: Products will be priced in the Territory based upon the mutual
agreement of the parties after evaluating the pricing of
comparable products. If the parties are unable to agree upon
the pricing of a Product after good faith discussions, then
Activision will have the right to determine the pricing for
such Product in accordance with the standard practices by
which it generally determines the pricing for its own [*] PC
products (including, without limitation, the initial pricing
of such Product and any subsequent price reductions that take
into account the then current market conditions for such
Product); provided, however, that the Products may not be
initially priced less than Interplay's previously released
[*] PC products, which the parties agree to be $[*]
wholesale, without the mutual agreement of the parties.
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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12. Ownership: Interplay has and shall retain all rights of ownership in and
to the Products, any and all modifications, enhancements and
derivative works thereof and all intellectual property rights
embodied therein and related thereto; provided that except as
set forth in Paragraphs 3(b) and 13, Interplay shall not have
the right, during the Term of this Heads of Agreement, to
sell, lease, license, publish or otherwise distribute the
Products in the Territory to or through any person or business
entity other than Activision. Activision will not obscure
Interplay's intellectual property legal notices included on
the Products or marketing or promotional materials.
13. OEM Distribution by With respect to each Product hereunder, Interplay shall have
Interplay: the right to license the Products (including, without
limitation, abbreviated or so-called "OEM lite" versions of
the Products) for manufacture and distribution to third party
OEM hardware or peripheral product manufacturers, aggregators
and service providers (e.g., hotels, airlines or cruise ships)
solely for ultimate distribution of the Products in
pre-packaged combinations with such third party's (or such
third party's customers') hardware or peripheral products,
subject to Activision's sole and absolute right to approve of
such license in each instance where the distribution of the
Product under such OEM agreement will commence within the
first [*] days following the initial commercial shipment of
such Product by Activision. For OEM agreements where
distribution of the Product will commence after such [*] day
period, no approval from Activision shall be required;
provided, however, Interplay shall only enter into OEM
agreements in connection with the Products during such period
in accordance with the customary terms and conditions
(including, without limitation, per unit pricing after taking
into account the then current market conditions for the
applicable Product) pursuant to which it has entered into OEM
agreements for its previously released [*] PC products.
Without limiting the foregoing, in no event shall Interplay
enter into any agreement for the distribution of the Products
as a compilation in combination with other software products
or as part of a package containing optical disks or other
storage media incorporating any images or text or otherwise
for ultimate distribution to end users except in pre-packaged
combinations with third party hardware or peripheral products.
14. Orders: (a) Finished goods for each Product will be requested by
Activision by means of a written purchase order (the "Purchase
Order") specifying the number of units of each Product so
ordered. Purchase Orders shall be based on the verbal or
written
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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orders or indications of interests for such Product that
are received by Activision from its customers, as well as
Activision's reasonable expectation of reorders. Interplay
shall supply Activision with such Product units on optical
discs in jewel cases contained inside a full retail box
packaging, including related product documentation, warranties
and a user guide ("Finished Goods") in accordance with the
specifications of such Purchase Order and consistent with the
terms of this Heads of Agreement. Finished Goods shall be
delivered by Interplay FOB Activision's warehouse or other
principal warehouse location designated by Activision in the
respective territory of Activision. Interplay shall use its
best commercial efforts to deliver the Finished Goods by the
reasonable delivery dates set forth in the corresponding
Purchase Order and failure to do so shall be deemed a material
breach by Interplay. [*]
(b) In addition to the foregoing, if Interplay does not
fulfill a Purchase Order on a timely basis, then in lieu of
canceling the Purchase Order, Activision may engage in good
faith discussions with Interplay regarding the reasons why the
Purchase Order was not timely fulfilled, the proposed
solutions for fulfilling such late Purchase Order and the
procedures to be implemented by Interplay in order to insure
that future Purchase Orders will be timely fulfilled. [*]
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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15. Product Completion: (a) Interplay shall provide to Activision an "Alpha" version
of each Product for review by no later than [*] for Klingon
and [*] for Kingpin, a "Beta" version by no later than [*]
for Klingon and [*] for Kingpin, and a "Code Release" version
ready for manufacturing into Finished Goods units by no later
than [*] for Klingon and [*] for Kingpin (as such terms "Alpha,"
"Beta" and "Code Release" are commonly understood in the entertainment
software industry). In the event Interplay fails to deliver to
Activision an acceptable Alpha, Beta or Code Release version of any
Product within [*] days of the date such version is due, then Activision
shall engage in good faith discussions with Interplay regarding the
reasons for the failed delivery and Interplay's plans for actually
delivering such acceptable version. [*]
(b) [*]
16. Representations, Warranties Interplay hereby represents and warrants that (a) Interplay is
and Covenants: duly incorporated, valid and existing and in good standing
under the laws of the jurisdiction in which it is
incorporated, and that it has the full rights, power, legal
capacity and authority to enter into this Heads of Agreement,
and to carry out the terms hereof; (b) this Heads of Agreement
has been executed by Interplay's duly authorized
representative and is a valid, legally binding and enforceable
obligation of Interplay; (c) no consent of any person or
entity not a party to this Agreement is required or necessary
for Activision to carry out
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
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its obligations hereunder; (d) [*]; (e) [*]; (f) it will
not grant distribution rights in, license or sell the Products
to any party other than Activision except as specified in
Paragraphs 3(b) and 13; (g) [*]; (h) Interplay will
provide a warranty for the end users of the Products, and
it will be solely responsible for fulfilling all duties
and obligations under such warranty; (i) Interplay has not
made an assignment for the benefit of creditors or filed a
petition in bankruptcy and will not make such assignment
or file such petition during the Term of this Heads of
Agreement; (j) [*]; (k) prior to the effectiveness of this
Heads of Agreement, Interplay has entered into an agreement
for a $37,500,000 line of credit, which effectively decreases
by $1,000,000 on each of February 15, March 15, and April 15,
without any other positive or negative financial covenants, [*];
and (l) the Products, whether completed or in any state of
development, are copyrightable and otherwise constitute
"intellectual property" within the meaning of Section 101(35a)
of the United States Bankruptcy Code. Except as set forth in this
Paragraph 16, Interplay disclaims any and all implied warranties.
17. Governing Law: Substantive laws of California shall apply, and the parties
consent to the exclusive jurisdiction of the courts in Los
Angeles County, USA.
18. Confidentiality: Any information, records, documents, descriptions or other
disclosures of whatsoever nature or kind which are made or
disclosed by one party to the other, or are learned or
discovered
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*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
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by a party in the course of performing its obligations
under this Heads of Agreement and not known by or available
to the public at large, including the terms of this Heads
of Agreement, shall be received by such party in
confidence. Such party shall not disclose or make use of
any such information nor shall it authorize anyone else to
make use thereof without the prior written consent of the
other party, unless required by law. Neither party shall
have any confidentiality obligation with regard to any
information independently developed by such party.
19. Termination: This Heads of Agreement may be terminated for breach upon
thirty (30) days prior notice to the breaching party. In case
of an expiration of the Term or an early termination of this
Heads of Agreement as a result of an uncured breach by
Interplay, Activision may continue to sell off Products in its
possession on a non-exclusive basis for a period of [*] from
such termination or early expiration date.
20. Indemnification. Each party (the "Indemnifying Party") hereby agrees to
indemnify, defend and hold the other party and its successors
harmless from any and all claims, demand, actions, losses,
liabilities, costs, expenses or damages of any kind or nature
(including, but not limited to reasonable attorneys fees)
arising out of any misrepresentation or breach or default in
connection with any of the representations, warranties,
agreements, covenants and obligations made by the Indemnifying
Party pursuant to this Heads of Agreement. Notwithstanding
anything herein to the contrary, in no event shall either
party be liable to the other for indirect, special or
consequential damages.
21. Entire Agreement: This Heads of Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof,
and any and all written or oral agreements previously existing
between the parties are expressly canceled. Each party
acknowledges that it is not entering into this Heads of
Agreement on the basis of any representations not expressly
contained herein. Any modifications of this Heads of Agreement
must be in writing and signed by both parties hereto. Any such
modification shall be binding only if and when signed by each
party's officers.
22. Bankruptcy: In the event Interplay is subject to a voluntary or
involuntary filing for protection under Federal bankruptcy
laws, Interplay agrees not to attempt to or actually reject,
rescind or terminate this Agreement or its obligations
hereunder. The parties
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* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
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acknowledge and agree that this Agreement is intended to and
shall be subject to the terms and conditions of Section 365(n)
of the United States Bankruptcy Code and Activision shall be
afforded all of the protections of a "licensee" under such
Section. [*]
23. Assignment: (a) The rights and obligations of either party under this
Heads of Agreement cannot be transferred, assigned to a third
party, by a third party, operation of law or otherwise,
without the prior written consent of the other party (not to
be unreasonably withheld), provided that an assignment by
either party of its rights and/or obligations hereunder to any
person acquiring such party by merger or acquiring all or
substantially all of such party's assets shall not require the
written consent of the other party. This Agreement shall
survive and be binding upon any successor or assign in the
event of a sale or change in control of a party or the merger
of a party with or into another party.
(b) Activision may grant some or all of its distribution
rights and/or obligations under this Heads of Agreement to one
or more wholly-owned subsidiaries without the consent of
Interplay, provided that Activision will remain liable for the
performance of any of the obligations of this Heads of
Agreement by such subsidiary and that Activision's
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Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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Distribution Fee as well as amounts payable to Interplay will
be paid on the basis of the price charged by such wholly-owned
subsidiary in connection with the Products irrespective of any
charges or allocations between Activision and such
wholly-owned subsidiary.
24. Additional Provisions: The more formal agreement to be executed by the parties will
contain additional representations, warranties and covenants
as are customary for a transaction of this nature and such
other provisions to which the parties may agree.
</TABLE>
If this Heads of Agreement sets forth your understanding, please sign this
document where indicated below. This Agreement may be signed in counterparts and
delivered by facsimile.
AGREED TO AND ACCEPTED:
ACTIVISION, INC. INTERPLAY ENTERTAINMENT CORP.
By: /s/ Brian G. Kelly By: /s/ Brian Fargo
----------------------------- --------------------------
Name: Brian G. Kelly Name: Brian Fargo
----------------------
Title: Co-Chairman Title: CEO
-----------------
Date: 11/20/98 Date: 11/20/98
----------------- ------------------
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<PAGE>
AMENDMENT NO. 1
TO
HEADS OF AGREEMENT
This Amendment No. 1 to Heads of Agreement ("Amendment No. 1") is entered
into effective as of November 23, 1998, by and between Interplay Entertainment
Corp. ("Interplay") and Activision, Inc. ("Activision"), as follows:
R E C I T A L S
A. Interplay and Activision entered into that certain Heads of Agreement
dated November 19, 1998 (the "Agreement").
B. The parties desire to modify the Agreement to provide Activision with
the right to assume control of the development and completion of one or more of
the Products in certain additional limited circumstances, on the terms and
conditions as more specifically set forth below.
C. Each term not otherwise defined in this Amendment No. 1 shall have the
meaning ascribed to it in the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. A new Paragraph 15(b) is added to the Agreement as follows:
"(b) Activision also shall have the right to assume control of the
development and completion of one or more of the Products (including,
without limitation, control by Activision in Interplay's stead of the
development of Kingpin by Xatrix Entertainment, which control shall
include, without limitation, the right to make all required payments to
Xatrix Entertainment in connection with such development), and to offset
all reasonable costs incurred by Activision in connection therewith against
payments due to Interplay hereunder, if the line of credit agreement
specified in Paragraph 16(k) expires or is terminated prior to the
completion of development of the Products and at the time of such
expiration or termination Interplay has not entered into a substitute line
of credit or other financing containing terms and conditions that are
sufficient to allow Interplay to fully perform its obligations hereunder."
2. Old Paragraph 15(b) is renumbered as Paragraph 15(c), and the following
words are added to the end of this Paragraph: "or Section 15(b)."
3. The parties agree that all other terms and conditions contained in the
Agreement shall remain in full force and effect.
1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
on the date specified below.
Activision, Inc. Interplay Entertainment Corp.
By /s/ Lawrence Goldberg By /s/ Christopher J. Kilpatrick
------------------------------- --------------------------------------
Name Lawrence Goldberg Name Christopher J. Kilpatrick
----------------------------- ----------------------------------
Title Senior Vice President, Title President
---------------------------- --------------------
Business Affairs and General
----------------------------
counsel
----------------------------
Date 11/23/98
------------------
2
<PAGE>
EXHIBIT 10.24
_________________________________________________________________
_________________________________________________________________
INTERPLAY ENTERTAINMENT CORP.
__________________________________________
STOCK PURCHASE AGREEMENT
__________________________________________
UP TO 5,000,000 SHARES OF COMMON STOCK
Dated as of March 18, 1999
_________________________________________________________________
_________________________________________________________________
<PAGE>
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TABLE OF CONTENTS
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Page No.
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1. Authorization of Investor Stock....................... 1
2. Sale and Purchase of Investor Stock................... 1
3. Closing; Calculation of Shares of Investor Stock;
Adjustment of Shares of Investor Stock................. 1
3.1 Closing............................................ 1
3.2 Sale of Shares of Investor Stock at Closing........ 1
3.3 Interim Valuation of Shares of Investor Stock...... 1
3.4 Final Valuation of Shares of Investor Stock........ 2
3.5 Limitations on Adjustments......................... 2
3.6 Collar............................................. 4
4. Register of Investor Stock; Restrictions on Transfer of
Securities; Removal of Restrictions on Transfer of
Investor Stock......................................... 4
4.1 Register of Investor Stock......................... 4
4.2 Restrictions on Transfer........................... 4
4.3 Removal of Transfer Restrictions................... 6
4.4 Standstill......................................... 6
5. Representations and Warranties by the Company......... 7
5.1 Organization, Standing, etc........................ 7
5.2 Qualification...................................... 7
5.3 Capital Stock...................................... 7
5.4 Investor Stock..................................... 8
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5.5 Indebtedness for Borrowed Money.................... 8
5.6 Shareholder List................................... 8
5.7 Corporate Acts and Proceedings..................... 9
5.8 Compliance with Laws and Other Instruments......... 9
5.9 Binding Obligations................................ 10
5.10 Securities Laws.................................... 10
5.11 No Brokers or Finders.............................. 10
5.12 Financial Statements............................... 10
5.13 Changes............................................ 10
5.14 Material Agreements of the Company................. 11
5.15 Employees.......................................... 12
5.16 Tax Returns and Audits............................. 12
5.17 Patents and Other Intangible Assets................ 12
5.18 Employment Benefit Plans; ERISA.................... 14
5.19 Title to Property and Encumbrances; Leases......... 14
5.20 Condition of Properties............................ 14
5.21 Insurance Coverage................................. 15
5.22 Litigation......................................... 15
5.23 Registration Rights................................ 15
5.24 Licenses........................................... 15
5.25 Interested Party Transactions...................... 15
5.26 Minute Books....................................... 16
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5.27 Computer Software.................................. 16
5.28 Interplay Web Site and Systems..................... 16
5.29 Product Returns.................................... 17
5.30 Disclosure......................................... 17
6. Representations and Warranties of Investor............ 17
6.1 Organization, Standing, etc........................ 17
6.2 Corporate Acts and Proceedings..................... 17
6.3 Compliance with Laws and Other Instruments......... 17
6.4 Binding Obligations................................ 17
6.5 No Brokers or Finders.............................. 18
7. Conditions of Parties' Obligations.................... 18
7.1 Conditions of Investor's Obligations at the Closing 18
(a) No Errors, etc................................ 18
(b) Compliance with Agreement..................... 18
(c) No Default.................................... 18
(d) Certificate of Company........................ 18
(e) Opinion of the Company's Counsel.............. 18
(f) Qualification Under State Securities Laws..... 18
(g) Supporting Documents.......................... 19
(h) Proceedings and Documents..................... 19
(i) Universal Agreement........................... 19
(j) Fargo Employment Agreement.................... 19
(k) Lender's Consent.............................. 19
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(l) Due Diligence................................. 20
(m) NASDAQ-NMS Approval........................... 20
(n) Waiver of Existing Rights Agreement........... 20
(o) Government and Other Consents................. 20
(p) Waiver by Fargo............................... 20
(q) Proxies from Fargo and Universal.............. 20
(r) Legal Fees.................................... 20
7.2 Conditions of Company's Obligations................ 20
8. Affirmative Covenants of the Company.................. 20
8.1 Maintain Corporate Rights and Facilities........... 21
8.2 Maintain Insurance................................. 21
8.3 Pay Taxes and Other Liabilities.................... 21
8.4 Records and Reports................................ 21
8.5 Notice of Litigation and Disputes.................. 22
8.6 Directors' Meetings; Election to Board............. 22
8.7 Conduct of Business................................ 23
8.8 Compliance with Legal Requirements................. 23
8.9 Replacement of Certificates........................ 23
8.10 Compliance with Section 7.......................... 23
8.11 Securities Law Filings............................. 23
8.12 Compliance With Amended and Restated Certificate
of Incorporation and Amended and Restated Bylaws... 24
8.13 Use of Proceeds.................................... 24
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8.14 Exclusivity........................................ 24
8.15 Restriction on Transfer of Fargo's Common Stock.... 24
8.16 Permitted Transaction.............................. 25
8.17 Break-Up Fee....................................... 25
8.18 Key Man Life Insurance............................. 25
8.19 HSR Filing......................................... 25
9. Negative Covenants of the Company..................... 26
9.1 Senior Securities.................................. 26
9.2 Changes in Type of Business........................ 26
9.3 Loans; Guarantees.................................. 26
9.4 Restrictive Agreements............................. 26
10. Affirmative Covenants of Investor.................... 26
10.1 Permitted Transaction.............................. 26
10.2 Compliance with Legal Requirements................. 26
10.3 Interplay Option................................... 26
11. Registration of Registrable Stock.................... 27
11.1 Required Registration.............................. 27
11.2 Registration Procedures............................ 27
11.3 Expenses........................................... 29
11.4 Indemnification.................................... 29
11.5 Reporting Requirements Under the Exchange Act...... 31
11.6 Investor Information............................... 31
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11.7 Transferability of Registration Rights............. 32
12. Enforcement.......................................... 32
12.1 Survival of Representations and Warranties......... 32
12.2 Indemnification.................................... 32
12.3 Injunctive Relief.................................. 35
12.4 No Implied Waiver.................................. 35
13. Rights of First Refusal.............................. 35
13.1 Subsequent Offerings............................... 35
13.2 Exercise of Rights................................. 35
13.3 Issuance of Equity Securities to Other Persons..... 35
13.4 Excluded Securities................................ 35
14. Definitions.......................................... 36
15. Miscellaneous........................................ 39
15.1 Waivers and Amendments............................. 39
15.2 Rights of Investor................................. 39
15.3 Notices............................................ 40
15.4 Severability....................................... 41
15.5 Assignment; Parties in Interest.................... 41
15.6 Headings........................................... 41
15.7 Choice of Law...................................... 41
15.8 Expenses........................................... 41
15.9 Publicity.......................................... 42
15.10 Counterparts..................................... 42
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C> <C>
15.11 Entire Agreement................................. 42
15.12 Attorneys' Fees.................................. 42
15.13 Arbitration...................................... 42
15.14 Partial and Conditional Termination of
Shareholders' Agreement.......................... 43
</TABLE>
vii
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of March
---------
18, 1999 among INTERPLAY ENTERTAINMENT CORP., a Delaware corporation (the
"Company"), TITUS INTERACTIVE SA, a French corporation ("Titus" or the
- -------- -----
"Investor"), and to the extent expressly provided herein, BRIAN FARGO, an
- ---------
individual ("Fargo"). Capitalized terms not otherwise defined herein shall have
-----
the meanings ascribed thereto in Section 14 hereof.
THE PARTIES hereby agree as follows:
1. Authorization of Investor Stock.
-------------------------------
The Company has authorized the issue and sale of up to Five Million
(5,000,000) shares (the "Investor Stock") of its Common Stock, par value $.001
--------------
per share ("Common Stock").
------------
2. Sale and Purchase of Investor Stock. Upon the terms and subject to the
-----------------------------------
conditions herein contained, the Company agrees to sell to Investor, and
Investor agrees to purchase from the Company, at the Closing (as hereinafter
defined) on the Closing Date (as hereinafter defined) the Investor Stock at a
price in the aggregate of Ten Million Dollars ($10,000,000) (the "Purchase
--------
Payment").
- -------
3. Closing; Calculation of Shares of Investor Stock; Adjustment of Shares
----------------------------------------------------------------------
of Investor Stock.
- -----------------
3.1 Closing. The closing of the sale to and purchase by Investor of
-------
the Investor Stock (the "Closing") shall occur at the offices of Paul, Hastings,
-------
Janofsky & Walker LLP, 555 South Flower Street, Twenty-Third Floor, Los Angeles,
California, at the hour of 10:00 A.M., Pacific time, on March 18, 1999 or at
such different time or day as the Investor and the Company shall agree (the
"Closing Date"). At the Closing, the Company shall deliver to Investor a
- -------------
certificate evidencing the Investor Stock which shall be registered in
Investor's name, against delivery to the Company of payment by check or wire
transfer in an amount equal to the Purchase Payment.
3.2 Sale of Shares of Investor Stock at Closing. The number of
-------------------------------------------
shares of Investor Stock to be issued to Investor and registered in Investor's
name at Closing shall be equal to Two Million Five Hundred Thousand (2,500,000)
(the "Initial Shares").
--------------
3.3 Interim Valuation of Shares of Investor Stock. On June 30, 1999
---------------------------------------------
(the "Interim Valuation Date"), additional shares of Investor Stock, if any (the
----------------------
"Interim Additional Shares"), shall be issued to Investor and registered in
-------------------------
Investor's
<PAGE>
name in an amount equal to the difference between (a) the quotient of (i) the
Purchase Payment divided by (ii) the price per share of Common Stock as of the
Interim Valuation Date, less (b) the number of Initial Shares. The "price per
share of Common Stock as of the Interim Valuation Date" shall be the average
closing price of the Common Stock on the NASDAQ National Market System, as
reported in The Wall Street Journal or other nationally recognized publication
-----------------------
or service that reports such data, for the ten (10) consecutive trading days
immediately preceding the Interim Valuation Date.
3.4 Final Valuation of Shares of Investor Stock. On August 20, 1999
-------------------------------------------
(the "Final Valuation Date"), the final number of shares of Investor Stock, if
--------------------
any, in addition to the Initial Shares (the "Final Additional Shares") shall be
-----------------------
determined. Such number shall be equal to the difference between (a) the
quotient of (i) the Purchase Payment divided by (ii) the price per share of
Common Stock as of the Final Valuation Date, less (b) the number of Initial
Shares. The price per share of Common Stock as of the Final Valuation Date shall
be the average closing price of the Common Stock on the NASDAQ National Market
System, as reported in The Wall Street Journal or other nationally recognized
-----------------------
publication or service that reports such data, for the ten (10) consecutive
trading days immediately preceding the Final Valuation Date. In the event that
the number of Interim Additional Shares is less than the number of Final
Additional Shares, the Company shall promptly deliver to Investor a certificate
evidencing the number of shares of Investor Stock, equal to the difference
between the Final Additional Shares and the Interim Additional Shares, which
shall be registered in Investor's name, and in the event that the number of
Interim Additional Shares is greater than the number of Final Additional Shares,
the Investor shall promptly return to the Company for cancellation the
certificate or certificates evidencing the Interim Additional Shares for a
certificate evidencing a number of shares equal to the Final Additional Shares.
3.5 Limitations on Adjustments.
--------------------------
(a) Notwithstanding Sections 3.3 or 3.4 hereof, in no event shall the
issuance of either the Interim Additional Shares or the Final Additional Shares
result in the Investor purchasing a number of shares hereunder (including the
Initial Shares) which exceeds 3,661,772 shares of Common Stock (the "Issuance
--------
Limit") (such occurrence, an "Excess Issuance") unless such issuance has been
- ----- ---------------
approved by vote of the Company's stockholders in accordance with Delaware law
prior to the date of such issuance (the "Required Approval"). Investor agrees
-----------------
to vote all shares of Common Stock held by it, and all shares of Common Stock
for which Investor holds proxies with respect to such issuance, in favor of such
issuance.
(b) In the event that the number of Interim Additional Shares
calculated pursuant to Section 3.3 hereof would result in an Excess Issuance and
the Required Approval is not obtained prior to the Interim Valuation Date, then,
in lieu of the actions required by such Section, (a) the Company shall issue to
Investor and register in Investor's name a number of shares of Common Stock
which, when added to the Initial Shares, equals the Issuance Limit, and (b) the
Company shall issue to the Investor an unsecured promissory note (the "Initial
-------
Note") in a principal amount equal to (x) Ten Million Dollars ($10,000,000),
- ----
less (y) the product of the Issuance Limit and the price per
2
<PAGE>
share of the Common Stock as of the Interim Valuation Date. The Initial Note
shall bear interest at the rate of ten percent (10%) per annum from the Closing
Date until the date paid, shall be payable on January 1, 2000 (subject to
subsections (d) and (e) below), and otherwise shall be in form reasonably
acceptable to the Investor.
(c) In the event that the number of Final Additional Shares calculated
pursuant to Section 3.4 hereof would result in an Excess Issuance and the
Required Approval is not obtained prior to the Final Valuation Date, then, in
lieu of the actions required by such Section:
(i) If the number of Final Additional Shares calculated pursuant
to Section 3.4 is greater than the number of Interim Additional Shares
calculated pursuant to Section 3.3, the Company shall, if applicable, issue to
Investor and register in Investor's name a number of shares of Common Stock
which, when added to the Initial Shares and the Interim Additional Shares,
equals the Issuance Limit, and (b) the Company shall issue to the Investor an
unsecured promissory note (the "Additional Note") in a principal amount equal to
---------------
(x) Ten Million Dollars ($10,000,000), less (y) the product of the Issuance
Limit and the price per share of the Common Stock as of the Final Valuation
Date, less (z) the principal amount of the Initial Note (if any).
(ii) If the number of Final Additional Shares calculated pursuant
to Section 3.4 is less than the number of Interim Additional Shares calculated
pursuant to Section 3.3, Investor shall promptly return the Initial Note to the
Company for cancellation in exchange for an unsecured promissory note (the
"Replacement Note") in a principal amount equal to (x) Ten Million Dollars
- -----------------
($10,000,000), less (y) the product of the Issuance Limit and the price per
share of the Common Stock as of the Final Valuation Date.
The Additional Note or the Replacement Note, as applicable, shall bear
interest at the rate of ten percent (10%) per annum from the Closing Date until
the date paid, shall be payable on January 1, 2000 (subject to subsection (e)
below), and otherwise shall be in form reasonably acceptable to the Investor.
(d) In the event that the Required Approval is obtained between the
Interim Valuation Date and the Final Valuation Date, then, in lieu of the
actions required by Section 3.3(c), the Investor shall promptly return the
Initial Note to the Company for cancellation (including cancellation of any
accrued interest thereon) in exchange for a certificate representing a number of
shares of Common Stock equal to (i) the sum of the Initial Shares and the Final
Additional Shares, less (ii) the Issuance Limit, which shares shall be
registered in Investor's name.
(e) In the event that the Required Approval is obtained between the
Final Valuation Date and January 1, 2000 then, in lieu of payment of the notes
set forth in this Section and any accrued interest thereon, the Company shall
issue to the Investor a certificate representing a number of shares of Common
Stock equal to (i) the sum of the Initial Shares and the Final Additional
Shares, less (ii) the Issuance Limit, which shares shall be registered in
Investor's name.
3
<PAGE>
3.6 Collar. Notwithstanding Sections 3.2, 3.3, 3.4 or 3.5 hereof, in
------
the event the price per share of Common Stock as so calculated would be less
than $2.00, the price per share in any event shall be deemed to be $2.00; and in
the event the price per share of Common Stock as so calculated would be more
than $4.00, the price per share in any event shall be deemed to be $4.00.
4. Register of Investor Stock; Restrictions on Transfer of Securities;
-------------------------------------------------------------------
Removal of Restrictions on Transfer of Investor Stock.
- -----------------------------------------------------
4.1 Register of Investor Stock. The Company or its duly appointed
--------------------------
agent shall maintain a register for the shares of Investor Stock, in which it
shall register the issue and sale of all such shares. All transfers of the
Investor Stock shall be recorded on the register maintained by the Company or
its agent, and the Company shall be entitled to regard the registered holder of
the Investor Stock as the actual holder of the Investor Stock so registered
until the Company or its agent is required to record a transfer of such Investor
Stock on its register. Subject to Section 4.2(c) hereof, the Company or its
agent shall be required to record any such transfer when it receives the shares
of Investor Stock to be transferred duly and properly endorsed by the registered
holder thereof or by its attorney duly authorized in writing.
4.2 Restrictions on Transfer.
------------------------
(a) Investor understands and agrees that the shares of Investor Stock
it will be acquiring have not been registered under the Securities Act, and that
accordingly they will not be fully transferable except as permitted under
various exemptions contained in the Securities Act, or upon satisfaction of the
registration and prospectus delivery requirements of the Securities Act.
Investor acknowledges that it must bear the economic risk of its investment in
the Investor Stock for an indefinite period of time (subject, however, to the
Company's obligation to effect the registration of the Investor Stock under the
Securities Act in accordance with this Agreement) since they have not been
registered under the Securities Act and therefore cannot be sold unless they are
subsequently registered or an exemption from registration is available.
(b) (i) Investor hereby represents and warrants to the Company that
it is acquiring the Investor Stock for investment purposes only, for its own
account, and not as nominee or agent for any other Person, and not with the view
to, or for resale in connection with, any distribution thereof within the
meaning of the Securities Act, and (ii) it is an "accredited investor" within
the meaning of Regulation D of the Commission under the Securities Act.
(c) Investor hereby agrees with the Company as follows:
(i) Subject to Section 4.3 hereof, the certificates evidencing
the Investor Stock it has agreed to purchase, and each certificate issued in
transfer thereof, will bear the following legend:
"The securities evidenced by this certificate have not been registered
4
<PAGE>
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and, except
as stated in an agreement between the holder of this certificate, or its
predecessor in interest, and the issuer corporation, such securities may
not be sold or transferred unless there is an effective registration
statement under such Act covering such securities or the issuer
corporation receives an opinion of counsel (which may be counsel for the
issuer corporation) stating that such sale or transfer is exempt from the
registration and prospectus delivery requirements of such Act."
(ii) The certificates representing such Investor Stock, and each
certificate issued in transfer thereof, will also bear any legend required under
any applicable state securities law.
(iii) Absent an effective registration statement under the
Securities Act, covering the disposition of the Investor Stock which Investor
acquires, Investor will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of any or all of the Investor Stock without first providing
the Company with an opinion of counsel (which may be counsel for the Company) to
the effect that such sale, transfer, assignment, pledge, hypothecation or other
disposition will be exempt from the registration and the prospectus delivery
requirements of the Securities Act and the registration or qualification
requirements of any applicable state securities laws, except that no such
registration or opinion shall be required with respect to (A) a transfer not
involving a change in beneficial ownership, or (B) a sale to be effected in
accordance with Rule 144 of the Commission under the Securities Act (or any
comparable exemption).
(iv) Investor agrees that neither it nor any of its affiliates
will, during the period between the Closing Date and the Final Valuation Date,
(A) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any of the Initial Shares or the Interim Additional Shares or (B)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Initial Shares of
the Interim Additional Shares, whether any such transaction described in clause
(A) or (B) above is to be settled by delivery of the Initial Shares or the
Interim Additional Shares, in cash or otherwise. Investor agrees that the
certificates evidencing the Initial Shares and the Interim Additional Shares it
has agreed to purchase, and each certificate issued in transfer thereof during
the period between the Closing Date and the Final Valuation Date, will bear the
following legend:
"The sale, pledge, hypothecation or transfer of the securities
represented by this certificate is subject to the terms and
conditions (including certain adjustment provisions) of a certain
Stock Purchase Agreement by and between the Corporation and the
holder hereof.
5
<PAGE>
Copies of such agreement may be obtained upon written request to the
secretary of the Corporation."
(v) Investor consents to the Company's making a notation on its
records or giving instructions to any transfer agent of the Investor Stock in
order to implement the restrictions on transfer of the Investor Stock mentioned
in this subsection (c).
4.3 Removal of Transfer Restrictions. Any legend endorsed on a
--------------------------------
certificate evidencing shares of Investor Stock pursuant to Section 4.2(c)(i)
hereof and any stop transfer instructions and record notations with respect to
such Investor Stock shall be removed and the Company shall issue a certificate
without such legend to the holder of such Investor Stock (a) if such Investor
Stock is registered under the Securities Act, or (b) if such Investor Stock may
be sold under Rule 144(k) of the Commission under the Securities Act or (c) if
such holder provides the Company with an opinion of counsel (which may be
counsel for the Company) reasonably acceptable to the Company to the effect that
a public sale or transfer of such Investor Stock may be made without
registration under the Securities Act.
4.4 Standstill. Each of the Company and Investor agrees that, except
----------
as otherwise provided in or contemplated by this Agreement, including without
limitation the transactions contemplated by the Universal Agreement (as defined
below), for a period from and after the date hereof until December 31, 1999,
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 other party or any
Subsidiary thereof, or any material amount of the assets of the other party 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 Commission) to vote, or
seek to advise or influence any Person with respect to the voting of, any voting
securities of the other party for the purpose of changing or influencing the
control of the other party; 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 other party or its securities or
assets; provided, however, the foregoing restrictions shall not preclude
-------- -------
Investor from (A) acquiring the shares of Common Stock contemplated by this
Agreement or the Universal Agreement, (B) pursuing and consummating a Permitted
Transaction, (C) filing a Schedule 13D in connection with the transactions
contemplated by this Agreement, (D) voting its shares of Common Stock within its
discretion on any matter submitted for a vote or consent of the Company's
stockholders, or (E) taking any other action contemplated by this Agreement;
provided, further, that the restrictions on Investor in this Section 4.4 shall
- -------- -------
lapse automatically to the extent any Person other than Investor takes any
action with respect to the matters described in clauses (ii) and (iii) above.
5. Representations and Warranties by the Company. In order to induce
---------------------------------------------
Investor to enter into this Agreement and to purchase the Investor Stock, the
Company
6
<PAGE>
hereby covenants with, and represents and warrants to, Investor, as of the date
hereof, except as set forth on the Schedule of Exceptions delivered to Investor
concurrently herewith, as follows (unless the context otherwise requires, the
"Company" shall refer to the Company and its Subsidiaries, collectively):
5.1 Organization, Standing, etc. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite power and authority to carry on its business, to
own and hold its properties and assets, to enter into this Agreement, to issue
the Investor Stock and to carry out the provisions hereof and thereof. The
copies of the Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws of the Company which have been delivered to Investor prior to
the execution of this Agreement are true and complete and have not been amended
or repealed. Subsidiaries of the Company are set forth on Schedule 5.1.
------------
5.2 Qualification. The Company is duly qualified, licensed or
-------------
domesticated as a foreign corporation in good standing in each jurisdiction
wherein the nature of its activities or its properties owned or leased makes
such qualification, licensing or domestication necessary, except where the
failure to be so qualified would not have a Material Adverse Effect on the
Company.
5.3 Capital Stock. The authorized capital stock of the Company
-------------
consists of 50,000,000 shares of Common Stock, and 5,000,000 shares of Preferred
Stock, and the Company has no authority to issue any other capital stock. No
shares of Preferred Stock have been issued prior to the Closing; 18,308,861
shares of Common Stock are issued and outstanding, and such shares are duly
authorized, validly issued, fully paid and nonassessable. Except where the
failure to do so would not result in a Material Adverse Effect on the Company,
the offer, issuance and sale of the shares of Common Stock were (a) registered
or qualified under (or were exempt from the registration and prospectus delivery
requirements of) the Securities Act, (b) registered or qualified (or were exempt
from registration or qualification) under the registration or qualification
requirements of all applicable state securities laws, and (c) accomplished in
conformity with all other federal and applicable state securities laws, rules
and regulations. As of March 1, 1999, the Company has (A) reserved a total of
893,925 shares of Common Stock for issuance to employees, officers and directors
under a 1991 stock purchase plan, under which options to purchase a total of
270,384 shares have been granted, but neither exercised nor forfeited by the
holder thereof, (B) reserved a total of 603,750 shares of Common Stock for
issuance to employees, officers and directors under a 1994 stock option plan,
under which options to purchase a total of 602,550 shares have been granted, but
neither exercised nor forfeited by the holder thereof, and (C) reserved a total
of 2,259,425 shares of Common Stock for issuance to employees, officers and
directors under a 1997 stock incentive plan, under which options to purchase
622,300 shares have been granted, but neither exercised nor forfeited by the
holder thereof, (D) reserved a total of 200,000 shares of Common Stock for
issuance to employees and officers under an Employee Stock Purchase Plan, of
which 56,102 shares have been granted, but neither exercised nor forfeited by
the holder thereof, and (E) reserved a total of 861,156 shares of Common Stock
for issuance upon the exercise of options granted
7
<PAGE>
outside the Company's option plans, of which 572,874 shares have been granted,
but neither exercised nor forfeited by the holder thereof. The Company has
reserved a total of 400,000 shares for issuance upon exercise of outstanding
warrants issued by the Company. Under the terms thereof, to the extent that any
outstanding award under the 1991 stock purchase plan or 1994 stock option plan
expires or terminates prior to exercise of such award in full, or if shares
issued upon exercise are repurchased by the Company, the unexercised portion or
repurchased shares shall be added to the pool of shares under the 1997 stock
incentive plan and shall thereafter be available for grant under the terms of
such 1997 stock incentive plan. Each of the 1991 stock purchase plan and 1994
stock option plan has been terminated with respect to future grants of shares of
Common Stock. Except as expressly provided in this Agreement, the Company has no
outstanding subscription, option, warrant, call, contract, demand, commitment,
convertible security or other instrument, agreement or arrangement of any
character or nature whatsoever under which the Company is or may be obligated to
issue Common Stock, Preferred Stock or other Equity Security (as hereinafter
defined) of any kind. Neither the offer nor the issuance or sale of the Investor
Stock constitutes or will constitute an event, under any Equity Security or any
anti-dilution or similar provision of any agreement or instrument to which the
Company is a party or by which it is bound or affected, which shall either
increase the number of shares or units of Equity Securities issuable upon
conversion of any securities (whether stock or Indebtedness for Borrowed Money
(as hereinafter defined)) or upon exercise of any warrant or right to subscribe
to or purchase any stock or similar security (including Indebtedness for
Borrowed Money), or decrease the consideration per share or unit of Equity
Security to be received by the Company upon such conversion or exercise.
5.4 Investor Stock. The Investor Stock has been duly authorized and
--------------
validly issued, and upon payment to the Company of the Purchase Payment at the
Closing, will be fully paid and nonassessable Common Stock, free and clear of
all Liens and restrictions, other than Liens that might have been created by
Investor and restrictions imposed by (i) Section 4.2 hereof, (ii) applicable
state securities laws and (iii) the Securities Act.
5.5 Indebtedness for Borrowed Money. The Company has no Indebtedness
-------------------------------
for Borrowed Money except as disclosed on the Balance Sheet.
5.6 Shareholder List. Schedule 5.6 hereto contains a true and
---------------- ------------
complete list of the names and addresses of all persons or entities known to the
Company, based on Schedules 13D and/or 13G filed by such persons or entities or
otherwise based on the Company's actual knowledge, to be the beneficial holders
of more than five percent (5%) of the outstanding Common Stock and of the
holders of all outstanding options, warrants or other rights to purchase from
the Company more than five percent (5%) of Common Stock. With respect to holders
of more than 5% of Common Stock, Schedule 5.6 contains, to the Company's
------------
knowledge, a true and complete description of the number of shares held by each
such holder. With respect to each option set forth on such Schedule, Schedule
--------
5.6 sets forth the date of grant, the number of shares subject thereto, the
- ---
exercise price, vesting schedule and expiration date. With respect to the
warrants set forth on such Schedule, Schedule 5.6 sets forth the date of issue
------------
of each
8
<PAGE>
warrant, the number of shares of Common Stock subject to the warrant, the
exercise price and expiration date. Except as provided on Schedule 5.6, no
------------
holder of Common Stock or any other security of the Company or any other Person
is entitled to any preemptive right, right of first refusal or similar right
from the Company or, to the Company's knowledge, any Person as a result of the
issuance of the Investor Stock or otherwise. Except as provided on Schedule 5.6,
------------
there is no voting trust, agreement or arrangement among any of the beneficial
holders of Common Stock of the Company affecting the exercise of the voting
rights of such stock.
5.7 Corporate Acts and Proceedings. All corporate acts and
------------------------------
proceedings required for the authorization, execution and delivery of this
Agreement, the offer, issuance and delivery of the Investor Stock and the
performance of this Agreement have been lawfully and validly taken or will have
been so taken prior to the Closing.
5.8 Compliance with Laws and Other Instruments. The business and
------------------------------------------
operations of the Company have been and are being conducted in accordance with
all applicable federal, state and local laws, rules and regulations, except to
the extent that noncompliance with laws, rules and regulations would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The execution, delivery and performance by the Company of this Agreement (a)
will not require from the Board or stockholders of the Company any consent or
approval that has not been validly and lawfully obtained, (b) will not require
any authorization, consent, approval, license, exemption of or filing or
registration with any domestic or, to best of the Company's knowledge, foreign,
court or governmental department, commission, board, bureau, agency or
instrumentality of government, except such as shall have been lawfully and
validly obtained prior to the Closing, (c) will not cause the Company to violate
or contravene (i) any provision of law, (ii) any rule or regulation of any
agency or government, domestic or foreign, (iii) any order, writ, judgment,
injunction, decree, determination or award, or (iv) any provision of the Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws of the
Company, (d) will not violate or be in conflict with, result in a breach of or
constitute (with or without notice or lapse of time or both) a default under,
any indenture, loan or credit agreement, note agreement, deed of trust,
mortgage, security agreement or other agreement, lease or instrument, commitment
or arrangement to which the Company is a party or by which the Company or any of
its properties, assets or rights is bound or affected, which in any such case
would have a Material Adverse Effect on the Company, and (e) will not result in
the creation or imposition of any Lien, other than Liens in favor of the
Investor. The Company is not in violation of, or (with or without notice or
lapse of time or both) in default under, any term or provision of its Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws or of
any indenture, loan or credit agreement, note agreement, deed of trust,
mortgage, security agreement or other material agreement, lease or other
instrument, commitment or arrangement to which the Company is a party or by
which any of the Company's properties, assets or rights is bound or affected,
which in any such case would have a Material Adverse Effect on the Company. The
Company is not subject to any restriction of any kind or character which
prohibits the Company from entering into this Agreement or would prevent its
performance of or compliance with all or any part of this Agreement or the
consummation of the
9
<PAGE>
transactions contemplated hereby or thereby.
5.9 Binding Obligations. This Agreement constitutes the legal, valid
-------------------
and binding obligation of the Company and is enforceable against the Company in
accordance with its terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally.
5.10 Securities Laws. Based in part upon the representations of
---------------
Investor in Section 4.2, the offer, issue and sale of the Investor Stock are and
will be exempt from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
5.11 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against the
Company or the Investor for any commission, fee or other compensation as a
finder or broker, or in any similar capacity based upon obligations incurred by
the Company.
5.12 Financial Statements. Attached hereto as Schedule 5.12 is the
--------------------
Company's unaudited balance sheet (the "Balance Sheet") as of December 31, 1998
-------------
(the "Balance Sheet Date"), and the unaudited statement of operations for the
------------------
twelve-month period then ended. Included in the Company's Registration Statement
on Form S-1 effective June 19, 1998 (the "Form S-1") are the Company's audited
--------
balance sheets as of April 30, 1996 and 1997, and December 31, 1997, and the
audited statements of operations, cash flow and shareholders' equity for each of
the periods then ended, together with the related opinion thereon of Arthur
Andersen LLP, independent certified public accountants. Included in the
Company's Report on 10-Q for the quarterly period ended September 30, 1998 (the
"Form 10-Q") are the Company's unaudited balance sheet as of September 30, 1998
---------
and the unaudited statement of operations for the nine-month period then ended.
The foregoing financial statements (i) are in accordance with the books and
records of the Company, (ii) present fairly the financial condition of the
Company at the Balance Sheet Date and other dates therein specified and the
results of its operations and cash flow for the periods therein specified, and
(iii) have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior accounting periods.
Specifically, but not by way of limitation, the Balance Sheet discloses all of
the debts, liabilities and obligations of any nature (whether absolute, accrued,
contingent or otherwise and whether due or to become due) of the Company at the
Balance Sheet Date which must be disclosed on a balance sheet in accordance with
generally accepted accounting principles.
5.13 Changes. Since the Balance Sheet Date, except as disclosed on
-------
Schedule 5.13 hereto, the Company has not (a) incurred any debts, obligations or
- -------------
liabilities, absolute, accrued, contingent or otherwise, whether due or to
become due in excess of $250,000, except current liabilities incurred in the
usual and ordinary course of business, none of which (individually or in the
aggregate) materially and adversely affects the business, finances, properties
or prospects of the Company, (b) discharged or
10
<PAGE>
satisfied any Liens other than those securing, or paid any obligation or
liability other than, current liabilities shown on the Balance Sheet and current
liabilities incurred since the Balance Sheet Date, in each case in the usual and
ordinary course of business, (c) mortgaged, pledged or subjected to Lien any of
its assets, tangible or intangible, (d) sold, transferred or leased any of its
assets of value exceeding $250,000 except in the usual and ordinary course of
business, (e) canceled or compromised any debt or claim, or waived or released
any right, of value exceeding $250,000, (f) suffered any physical damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting the properties, business or prospects of the Company, (g)
encountered any labor difficulties or labor union organizing activities, (h)
made or granted any wage or salary increase to any executive officer other than
in the ordinary course of business or entered into any employment agreement, (i)
issued or sold any shares of capital stock or other securities or granted any
options with respect thereto, (j) modified any Equity Security, except to the
extent disclosed on Schedule 5.6 hereto, (k) declared or paid any dividends on
------------
or made any other distributions with respect to, or purchased or redeemed, any
of its outstanding Equity Securities, (l) suffered or experienced any change in,
or condition affecting, the condition (financial or otherwise) of the Company as
a whole other than changes, events or conditions in the usual and ordinary
course of its business, none of which (either by itself or in conjunction with
all such other changes, events and conditions) has been materially adverse, (m)
made any change in the accounting principles, methods or practices followed by
it or depreciation or amortization policies or rates theretofore adopted, or (n)
entered into any agreement, or otherwise obligated itself, to do any of the
foregoing.
5.14 Material Agreements of the Company. Except as expressly set
----------------------------------
forth in this Agreement, the Balance Sheet, as disclosed in the Index (compiled
pursuant to Item 601 of Regulation S-K of the Commission) to the Company's
filings under the Securities Act and the Exchange Act or as disclosed on
Schedule 5.14 hereto, the Company is not a party to any written or oral
- -------------
agreement, instrument or arrangement not made in the ordinary course of business
that is material to the Company and is either (a) an agreement with any labor
---
union, (b) an agreement for the purchase of fixed assets or for the purchase of
materials, supplies or equipment over $250,000, (c) an agreement for the
employment of any officer on other than an at-will basis, (d) an indenture, loan
or credit agreement, note agreement, deed of trust, mortgage, security
agreement, promissory note or other agreement or instrument relating to or
evidencing Indebtedness for Borrowed Money in excess of $250,000 or subjecting
any asset or property of the Company to any Lien, (e) a guaranty of any
Indebtedness, (f) a lease or agreement under which the Company is lessee of or
holds or operates any property, real or personal, owned by any other Person
under which payments to such Person exceed $250,000 per annum, (g) a lease or
agreement under which the Company is lessor or permits any Person to hold or
operate any property, real or personal, owned or controlled by the Company
having a value over $250,000 other than in the ordinary course of business, (h)
an agreement granting any preemptive right, right of first refusal or similar
right to any Person, (i) a covenant not to compete or other restriction on its
ability to conduct a business or engage in any other activity, or (j) an
agreement to register securities under the Securities Act. To the Company's
knowledge, all parties having material contractual arrangements with the Company
are in substantial compliance therewith, and none is in
11
<PAGE>
default in any material respect thereunder, except for noncompliance or defaults
which will not have a Material Adverse Effect on the Company.
5.15 Employees. The following individuals (collectively, "Designated
--------- ----------
Key Employees") are in the full-time employ of the Company and/or one or more of
- -------------
its Subsidiaries: Fargo, Richard S.F. Lehrberg and David Perry. To the best of
the Company's knowledge, no Designated Key Employee of the Company has any plans
to terminate his employment with the Company, and the Company has no intention
of terminating the employment of any Designated Key Employee. To the best of the
Company's knowledge, no Designated Key Employee or any other employee of the
Company is a party to or is otherwise bound by any agreement or arrangement
(including, without limitation, any license, covenant, or commitment of any
nature), or subject to any judgment, decree, or order of any court or
administrative agency, (a) that would conflict with such employee's obligation
diligently to promote and further the interests of the Company or (b) that would
conflict with the Company's business as now conducted or as proposed to be
conducted. The Company has complied in all material respects with all laws
relating to the employment of labor, including provisions relating to wages,
hours, equal opportunity, collective bargaining and payment of Social Security
and other taxes, and the Company has encountered no material labor difficulties.
5.16 Tax Returns and Audits. All required federal, state and local
----------------------
tax returns of the Company have been accurately prepared and duly and timely
filed, and all federal, state and local taxes required to be paid with respect
to the periods covered by such returns have been paid. The Company is not
delinquent in the payment of any material tax, assessment or governmental
charge. Except as set forth on Schedule 5.16 hereto, there is not currently
-------------
pending against the Company any tax deficiency proposed or assessed against it
and the Company has not executed any waiver of any statute of limitations on the
assessment or collection of any tax or governmental charge for any tax period
for which the statute of limitations has not expired. Except as set forth on
Schedule 5.16 hereto, none of the Company's federal income tax returns nor any
- -------------
state or foreign income or franchise tax returns has ever been audited by
governmental authorities in any of the last five (5) tax years. The reserves for
taxes, assessments and governmental charges reflected in the Balance Sheet are
and will be sufficient for the payment of all unpaid taxes, assessments and
governmental charges payable by the Company with respect to the period ended on
the Balance Sheet Date.
5.17 Patents and Other Intangible Assets.
-----------------------------------
(a) Except as disclosed on Schedule 5.17 hereto, the Company (i) owns
-------------
or has the right to use all patents, trademarks, service marks, trade names,
copyrights, licenses and rights with respect to the foregoing, used in or
necessary for the conduct of its business as now conducted and proposed to be
conducted, (ii) to the Company's knowledge, is not infringing upon or otherwise
acting adversely to the right or claimed right of any Person under or with
respect to any patent, trademark, service mark, trade name, copyright or license
with respect thereto, where such infringement would have a Material Adverse
Effect on the Company.
12
<PAGE>
(b) The Company owns or has the right to use all product rights,
manufacturing rights, trade secrets, including know-how, negative know-how,
formulas, patterns, compilations, programs, devices, methods, techniques,
processes, inventions, designs, technical data, computer software (in both
source code and object code forms and all documentation therefor), including
without limitation the Operational Software (as hereinafter defined) (all of the
foregoing of which are collectively referred to herein as "intellectual
------------
property") required for or incident to the conduct of the Company's business, as
- --------
it is presently conducted, in each case free and clear of any right, Lien or
claim of others, including without limitation former employers of its employees,
except for rights reserved by the licensors of such intellectual property and
rights granted by the Company pursuant to license, publishing and distribution
agreements, and except where such right, lien or claim would not have a Material
Adverse Effect on the Company.
(c) Since its organization, the Company has taken reasonable security
measures to protect the secrecy, confidentiality and value of all intellectual
property and all Inventions (as defined below). Without limiting the generality
of the foregoing, except as set forth on Schedule 5.17, each of the Company's
-------------
present employees has signed an agreement with the Company in the form provided
to Investor, and each of the Company's past employees has signed an agreement
with the Company substantially in the form provided to Investor, except, in
either such case, where the failure to do so would not have a Material Adverse
Effect on the Company. As used herein, "Inventions" means all inventions,
----------
developments and discoveries which during the period of an employee's or other
Person's service to the Company he or she makes or conceives of, either solely
or jointly with others, that relate to any subject matter with which his or her
work for the Company may be concerned, or relate to or are connected with the
business, products, services or projects of the Company, or relate to the actual
or demonstrably anticipated research or development of the Company or involve
the use of the Company's time, material, facilities or trade secret information.
(d) Except for license, publishing and distribution agreements with
third parties entered into in the ordinary course of business, and except as
disclosed on Schedule 5.17 hereto, the Company has not sold, transferred,
-------------
assigned, licensed or subjected to any Lien, any intellectual property, trade
secret, know-how, invention, design, process, computer software or technical
data, or any interest therein, necessary for the development, manufacture, use,
operation or sale of any product listed on Schedules 5.27(a) and 5.27 (b)
hereto.
(e) No director, officer, employee, agent or shareholder of the
Company owns or has any right in the intellectual property of the Company, or
any patents, trademarks, service marks, trade names, copyrights, licenses or
rights with respect to the foregoing, or any inventions, developments or
discoveries used in or necessary for the conduct of the Company's business as
now conducted and as proposed to be conducted, which could reasonably be
expected to have a Material Adverse Effect on the Company.
(f) The Company has not received any communication alleging or stating
that the Company or any of its employees or other agents has violated or
infringed, or by conducting business as proposed, would violate or infringe, any
patent,
13
<PAGE>
trademark, service mark, trade name, copyright, trade secret, proprietary right,
process or other intellectual property of any other Person, which could
reasonably be expected to have a Material Adverse Effect on the Company.
5.18 Employment Benefit Plans; ERISA. Except for the Interplay
-------------------------------
Productions 401(k) Profit Sharing Plan (the "Plan"), as described in Schedule
---- --------
5.18, the Company does not maintain or make contributions to any pension, profit
- ----
sharing or other employee retirement benefit plan. The Plan has been maintained
in compliance with all applicable laws, ordinances, rules, regulations, permits,
orders, writs, judgments, injunctions, decrees, determinations and awards of any
agency, government, or arbitrator. The Company has no material liability with
respect to the Plan or any other such plan (including, without limitation, any
unfunded liability or any accumulated funding deficiency) or any material
liability to the Pension Benefit Guaranty Corporation or under Title IV of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with
-----
respect to the Plan or any multi-employer pension benefit plan, nor would the
Company have any such liability if the Plan or any multi-employer plan were
terminated or if the Company withdrew, in whole or in part, from the Plan or any
multi-employer plan. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated by this Agreement will
constitute a termination of employment or other event entitling any person to
any additional or other benefits, or that would otherwise modify benefits or the
vesting of benefits, provided under the Plan.
5.19 Title to Property and Encumbrances; Leases. The Company has good
------------------------------------------
and marketable title to all of its properties and assets, including without
limitation the properties and assets reflected in the Balance Sheet and the
properties and assets used in the conduct of its business, except for properties
disposed of in the ordinary course of business since the Balance Sheet Date and
except for properties held under valid and subsisting leases which are in full
force and effect and which are not in default, subject to no Lien, except those
which are shown and described on the Balance Sheet and except for Permitted
Liens (as hereinafter defined). All material leases under which the Company is
lessee of any real or personal property are valid, enforceable and effective in
accordance with their terms; there is not under any such lease any existing or
claimed default by the Company or event or condition which with notice or lapse
of time or both would constitute a default by the Company. Except as disclosed
on Schedule 5.19 hereto, no material lease under which the Company is lessee of
-------------
any real property contains any provision which either (i) treats a sale or
transfer of any or all of the outstanding stock of the Company or a merger of
the Company with another Person as an assignment of the Company's leasehold
interest, or (ii) otherwise requires the consent of the lessor in the event of
any such sale, transfer or merger.
5.20 Condition of Properties. All facilities, machinery, equipment,
-----------------------
fixtures, vehicles and other properties owned, leased or used by the Company
with fair market value in excess of $250,000 are in good operating condition and
repair, subject to ordinary wear and tear, and are adequate and sufficient for
the Company's business.
5.21 Insurance Coverage. There is in full force and effect one or
------------------
14
<PAGE>
more policies of insurance issued by insurers of recognized responsibility,
insuring the Company and its properties and business against such losses and
risks, and in such amounts, as are customary in the case of corporations engaged
in the same or similar business and similarly situated. The Company has not been
refused any insurance coverage sought or applied for, and the Company has no
knowledge of any facts that cause it to believe that the Company will be unable
to renew its existing insurance coverage as and when the same shall expire upon
terms at least as favorable as those presently in effect, other than possible
increases in premiums that do not result from any act or omission of the
Company.
5.22 Litigation. Except as disclosed on Schedule 5.22 hereto, there
---------- -------------
is no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding (whether federal, state, local
or foreign) pending or, to the Company's knowledge, threatened against or
affecting (i) the Company or its properties, assets or business (existing or
contemplated), or (ii) any Designated Key Employee, before any court or
governmental department, commission, board, bureau, agency or instrumentality or
any arbitrator, which if adversely determined would have a Material Adverse
Effect on the Company. Except as disclosed on Schedule 5.22 hereto, the Company
-------------
is not aware of any fact which might result in or form the basis for any such
action, suit, arbitration, investigation, inquiry or other proceeding, which if
adversely determined would have a Material Adverse Effect on the Company.
Neither the Company nor, to the best of the Company's knowledge, neither Fargo
nor Perry is in default with respect to any order, writ, judgment, injunction,
decree, determination or award of any court or of any governmental agency or
instrumentality (whether federal, state, local or foreign).
5.23 Registration Rights. Except as set forth on Schedule 5.23, other
-------------------- -------------
than under this Agreement, the Company has not agreed to register under the
Securities Act any of its authorized or outstanding securities.
5.24 Licenses. The Company possesses from the appropriate agency,
--------
commission, board and governmental body and authority, whether state, local or
federal, all licenses, permits, authorizations, approvals, franchises and rights
which are necessary for the Company to engage in the business currently
conducted by it and proposed to be conducted (except where the failure to so
hold would not have a Material Adverse Effect on the Company), including without
limitation the development, manufacture, use, sale and marketing of its existing
and proposed products and services; and all such certificates, licenses,
permits, authorizations and rights have been lawfully and validly issued and are
in full force and effect.
5.25 Interested Party Transactions. Except as disclosed on Schedule
----------------------------- --------
5.25 hereto, no officer, director or 5% shareholder of the Company or any
- ----
Affiliate or "associate" (as this term is defined in Rule 405 of the Commission
under the Securities Act) of any such Person or the Company has, either directly
or indirectly, (a) a material interest in any Person which (i) furnishes or
sells services or products which are furnished or sold or are proposed to be
furnished or sold by the Company, or (ii) purchases from or sells or furnishes
to the Company any goods or services, or (b) a beneficial interest in any
15
<PAGE>
transaction, contract or agreement to which the Company is a party or by which
it is bound or affected.
5.26 Minute Books. The minute books of the Company provided to Paul,
------------
Hastings, Janofsky & Walker LLP, special counsel for the Investor, contain all
resolutions adopted by directors and shareholders since the incorporation of the
Company and fairly and accurately reflect, in all material respects, all matters
and transactions referred to in such minutes.
5.27 Computer Software.
-----------------
(a) Each of the computer software programs developed by the Company
that are listed on Schedule 5.27(a) hereto (the "Operational Software") is
---------------- --------------------
functional, complete and operational in all material respects in accordance with
its specifications, has been documented in accordance with the Company's
standard practices, and the Company possesses both the source code and object
code versions thereof.
(b) Attached as Schedule 5.27(b) hereto is a true and complete list of
----------------
all computer software games currently in active development by or on behalf of
the Company (the "Developing Software"). Schedule 5.27(b) also sets forth
------------------- ----------------
whether each such game is being internally or externally developed and, if
externally developed, the name of the third party developer.
5.28 Interplay Web Site and Systems.
------------------------------
(a) The Company owns and has the right to communicate and publish its
"Interplay" Internet product offering (the "Web Site") and conduct business on
--------
the World Wide Web at the Internet address "interplay.com" and in connection
therewith to use the registered service mark and trade name "Interplay" and in
so doing is not acting in conflict with any patent, trademark, service mark,
trade name, copyright, trade secret, license or other proprietary right with
respect thereto, except where such conflict would not have a Material Adverse
Effect on the Company.
(b) The Company has not received any communication from any Person
that the Web Site or the conduct of the Company's business is in violation of
any law, rule or regulation or in conflict with any patent, trademark, service
mark, trade name, copyright, trade secret, license or other proprietary right
with respect thereto, except where such violation or conflict would not have a
Material Adverse Effect on the Company.
5.29 Product Returns. Schedule 5.29 hereto sets forth the Company's
--------------- -------------
experience with respect to the return of any of its products sold or leased for
the three (3) year period ended on December 31, 1998.
5.30 Disclosure. To the Company's knowledge, the information
----------
contained in this Agreement, in the Form 10-Q, the Balance Sheet and the Form S-
1, and
16
<PAGE>
in any writing furnished pursuant hereto or in connection herewith, taken as a
whole, is true, complete and correct (except that with respect to the Form 10-Q,
the Balance Sheet and the Form S-1, the information contained therein shall be
true, complete and correct as of the date thereof), and does not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or herein or necessary to make the statements therein or
herein, in light of the circumstances under which they were made, not
misleading.
6. Representations and Warranties of Investor. In order to induce the
------------------------------------------
Company to enter into this Agreement and to issue the Investor Stock, Investor
hereby covenants with, and represents and warrants to, the Company as follows:
6.1 Organization, Standing, etc Investor is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of France, and
has all requisite corporate power and authority to enter into this Agreement,
and to carry out the provisions hereof and thereof.
6.2 Corporate Acts and Proceedings. All corporate acts and
------------------------------
proceedings required for the authorization, execution and delivery of this
Agreement by Investor, and the performance of this Agreement by Investor, have
been lawfully and validly taken or will have been so taken prior to the Closing.
6.3 Compliance with Laws and Other Instruments. The execution,
------------------------------------------
delivery and performance by Investor of this Agreement (a) will not require from
the board of directors or stockholders of Investor any consent or approval that
has not been validly and lawfully obtained, (b) will not require any
authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality of government, except such as shall have
lawfully and validly obtained prior to the Closing, (c) will not cause Investor
to violate or contravene (i) any provision of law, (ii) any rule or regulation
of any agency or government, domestic of foreign, (iii) any order, writ,
judgment, injunction, decree, determination or award binding upon Investor, or
(iv) any provision of the charter documents of Investor, (d) will not violate or
be in conflict with, result in a breach of or constitute (with or without notice
or lapse of time or both) a default under, any indenture, loan or credit
agreement, note agreement, deed of trust, mortgage, security agreement or other
material agreement, lease or instrument, commitment or arrangement to which
Investor is a party or by which Investor or any of its properties, assets or
rights is bound or affected, which in any case would have a Material Adverse
Effect on Investor.
6.4 Binding Obligations. This Agreement constitutes the legal, valid
-------------------
and binding obligations of Investor and is enforceable against Investor in
accordance with its terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally.
6.5 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against the
Company or Investor for any commission, fee or other compensation as a finder or
broker, or in any
17
<PAGE>
similar capacity, except for Concordia Capital Technology Group, Inc., whose
fees will be the responsibility of the Investor.
7. Conditions of Parties' Obligations
----------------------------------
7.1 Conditions of Investor's Obligations at the Closing. The
---------------------------------------------------
obligation of Investor to purchase and pay for the Investor Stock is subject to
the fulfillment prior to or on the Closing Date of the following conditions, any
of which may be waived in whole or in part by Investor:
(a) No Errors, etc. The representations and warranties of the
--------------
Company under this Agreement shall be deemed to have been made again on the
Closing Date and shall then be true and correct in all material respects (except
to the extent already qualified as to materiality, in which case such
representations and warranties shall then be true and correct in all respects).
(b) Compliance with Agreement. The Company shall have
-------------------------
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it on or before the Closing Date.
(c) No Default. There shall not exist on the Closing Date any
----------
Default (as hereinafter defined) or Event of Default (as hereinafter defined) or
any event or condition which, with the giving of notice or lapse of time or
both, would constitute a Default or Event of Default.
(d) Certificate of Company. The Company shall have delivered
----------------------
to Investor a certificate dated the Closing Date, executed by the Chief
Executive Officer and Chief Financial Officer of the Company, certifying the
satisfaction of the conditions specified in subsections (a), (b) and (c) of this
Section 7.1.
(e) Opinion of the Company's Counsel. The Investor shall have
--------------------------------
received from Stradling Yocca Carlson & Rauth, a professional corporation,
counsel for the Company, a favorable opinion dated the Closing Date
substantially in the form of Exhibit A hereto.
---------
(f) Qualification Under State Securities Laws. All
-----------------------------------------
registrations, qualifications, permits and approvals required under applicable
state securities laws shall have been obtained for the lawful execution,
delivery and performance of this Agreement, including without limitation the
offer, sale, issue and delivery of the Investor Stock.
(g) Supporting Documents. Investor shall have received the
--------------------
following:
(1) Copies of resolutions of the Board, certified by the Secretary
of the Company, authorizing and approving the execution, delivery and
performance of this Agreement, and all other documents and instruments to be
delivered
18
<PAGE>
pursuant hereto and thereto, and taking all such other actions as required by
Section 203 of the Delaware General Corporation Law with respect to this
Agreement and the Universal Agreement (as defined below), and the transactions
contemplated hereby and thereby;
(2) A certificate of incumbency executed by the Secretary of the
Company certifying the names, titles and signatures of the officers authorized
to execute the documents referred to in subsection (1) above and further
certifying that the Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws of the Company delivered to the Investors at the
time of the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(3) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Investor or
its special counsel, Paul, Hastings, Janofsky & Walker LLP ("Investor Counsel"),
----------------
may reasonably request.
(h) Proceedings and Documents. All corporate and other
-------------------------
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transactions, shall be satisfactory in
form and substance to Investor and to Investor Counsel.
(i) Universal Agreement. Investor shall have entered into an
-------------------
agreement with Universal Studios, Inc. ("Universal") and the Company with
---------
respect to the granting to Investor of an option (the "Universal Option") to
----------------
purchase 4,658,215 shares of Common Stock (the "Option Stock") held by Universal
------------
substantially in the form of Exhibit B hereto (the "Universal Agreement").
--------- -------------------
(j) Fargo Employment Agreement. Fargo, Universal and the
--------------------------
Company shall have entered into a one-year extension of the employment agreement
among Fargo, Universal and the Company dated as of March 28, 1994.
(k) Lender's Consent. The Company's lender shall have approved
----------------
this Agreement and the transactions contemplated hereby, and shall otherwise
provide such assurances to Investor as Investor may reasonably request with
respect to the use of the proceeds from the sale of the Investor Stock and the
continuing availability and renewal of such lender's current credit facility to
the Company (or the Company shall have provided such assurances to Investor with
respect to a substitute credit facility).
(l) Due Diligence. Investor and Investor Counsel shall have
-------------
completed their legal due diligence investigation of the Company and its
business prospects, and Investor shall be satisfied with the results thereof in
its sole discretion (including without limitation investigation of the Company's
D&O insurance policies).
(m) NASDAQ-NMS Approval. The Company shall have obtained any
-------------------
waiver or approval from NASDAQ-NMS required with respect to this
19
<PAGE>
Agreement and the issuance of the Investor Stock.
(n) Waiver of Existing Rights Agreement. If necessary, the
-----------------------------------
requisite percentage of the Holders (as defined therein) party to the Investors'
Rights Agreement dated as of October 10, 1996, by and among the Company and the
Holders (the "Existing Rights Agreement"), shall have waived the application of
-------------------------
the Existing Rights Agreement (including without limitation Section 1.12
thereof) to the issuance of the Investor Stock and the registration rights
granted hereunder with respect to the Investor Stock.
(o) Government and Other Consents. Any approval, consent or
-----------------------------
waiting period required by any governmental agency or authority, or any other
Person, necessary or material to the consummation of the transactions
contemplated hereby shall have been obtained or expired, as the case may be,
including without limitation any approval from NASDAQ and any applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
(p) Waiver by Fargo. Fargo shall have entered into the
---------------
Waiver substantially in the form of Exhibit C hereto.
---------
(q) Proxies from Fargo and Universal. Each of Fargo and
--------------------------------
Universal shall have granted to Investor an irrevocable proxy substantially in
the form of Exhibit D hereto.
(r) Legal Fees. The Company shall have paid or reimbursed
----------
Investor for $50,000 of the reasonable fees and expenses of Investor Counsel
incurred in connection with the preparation of this Agreement, and all other
documentation necessary to consummate the transactions contemplated hereby, and
all reasonable fees and expenses of Investor Counsel incurred in connection with
its legal due diligence investigation of the Company and its business prospects.
7.2 Conditions of Company's Obligations. The Company's obligation to
-----------------------------------
issue and sell the Investor Stock to Investor on the Closing Date is subject to
the fulfillment prior to or at the Closing Date of the conditions precedent
specified in paragraphs (f) and (o) of Section 7.1 hereof, and to the accuracy
in all material respects of the representations of Investor in Section 4.2 and
Section 6 of this Agreement.
8. Affirmative Covenants of the Company. The Company agrees that unless
------------------------------------
Investor otherwise agrees in writing, from the date hereof through the later of
the Final Valuation Date or the effective date of registration statement with
respect to the Investor Shares (the "Adjustment Period"), unless another period
is expressly provided for in this Section 8, the Company (and each of its
Subsidiaries unless the context otherwise requires) and, to the extent expressly
provided herein, Fargo, will do the following:
8.1 Maintain Corporate Rights and Facilities. Maintain and preserve
----------------------------------------
its corporate existence and all rights, franchises and other authority adequate
for
20
<PAGE>
the conduct of its business; maintain its properties, equipment and facilities
in good order and repair; and conduct its business in an orderly manner without
voluntary interruption.
8.2 Maintain Insurance. Maintain in full force and effect a policy or
------------------
policies of insurance issued by insurers of recognized responsibility, insuring
it and its properties and business against such losses and risks, and in such
amounts, as are customary in the case of corporations of established reputation
engaged in the same or a similar business and similarly situated.
8.3 Pay Taxes and Other Liabilities. Pay and discharge, before the
-------------------------------
same become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental charges upon or against it or any of its
properties, and all its other material liabilities at any time existing, except
to the extent and so long as (i) the same are being contested in good faith and
by appropriate proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of redemption from
any sale thereunder, and (ii) it shall have set aside on its books reserves
(segregated to the extent required by generally accepted accounting principles)
deemed by it adequate with respect thereto.
8.4 Records and Reports. Accurately and fairly maintain its books of
-------------------
account in accordance with generally accepted accounting principles, as approved
from time to time by a majority of the Board and its independent certified
public accountants; permit Investor and its representatives to have access to
and to examine its properties, books and records (and to copy and make extracts
therefrom) at such reasonable times and intervals as Investor may request and to
discuss its affairs, finances and accounts with its officers and auditors, all
to such reasonable extent and at such reasonable times and intervals as Investor
may request; and furnish Investor:
(a) As soon as available, and in any event within thirty (30) days
after the close of each monthly accounting period, but only during the
Restricted Period, financial statements prepared on a consolidated basis
(together with consolidating statements in support thereof) consisting of a
balance sheet of the Company as of the end of such monthly accounting period and
statements of income, shareholders' equity and cash flow for such monthly
accounting period, and for the portion of the Company's fiscal year ending with
the last day of such monthly accounting period, all in reasonable detail,
prepared and certified by the chief executive officer or the chief financial
officer of the Company as fairly presenting the financial condition as of the
balance sheet date and results of operations and cash flows for the period then
ended in accordance with generally accepted accounting principles consistently
applied, subject to normal year end adjustments which in the aggregate shall not
be material;
(b) Promptly upon, and in any event within three (3) business days
following, the learning of the occurrence of a Default or an Event of Default or
a condition or event which with the giving of notice or the lapse of time, or
both, would constitute a Default or an Event of Default, a certificate signed by
the chief executive officer or chief financial officer of the Company describing
such Default, Event of Default or condition or event and stating what steps are
being taken to remedy or cure the same;
21
<PAGE>
(c) During the Restricted Period, promptly upon the receipt
thereof by the Company or the Board, copies of all reports, all management
letters and other detailed information submitted to the Company or the Board by
independent accountants in connection with each annual or interim audit or
review of the accounts or affairs of the Company made by such accountants;
(d) Concurrently with their delivery to the Commission, all
reports, registration statements, proxy statements, and any other document, form
or report submitted to, or filed with, the Commission; and
(e) With reasonable promptness, during the Restricted Period,
such other information relating to the finances, properties, business and
affairs of the Company and each Subsidiary, as Investor reasonably may request
from time to time.
Notwithstanding the foregoing, the Company's obligation to provide any
such information to the Investor under this Section 8.4 shall be subject to the
Company's right to refuse to provide such information if, in the good faith
judgment of the Company, such information has not been provided, directly or
indirectly, to the general public or to any governmental agency (unless and to
the extent filed on a confidential basis), and is confidential and/or
competitively sensitive in nature, unless Investor executes an agreement, in
form reasonably satisfactory to the Company, pursuant to which Investor agrees
(i) to keep such information strictly confidential and not to use it for any
purpose not reasonably related to its interest as a stockholder of the Company,
and (ii) to comply with all of its obligations under the Securities Act and the
Exchange Act with respect to such information.
8.5 Notice of Litigation and Disputes. Promptly notify Investor of
---------------------------------
each legal action, suit, arbitration or other administrative or governmental
investigation or proceeding (whether federal, state, local or foreign)
instituted or threatened against the Company which could materially and
adversely affect its condition (financial or otherwise), properties, assets,
liabilities, business, operations or prospects, or of any occurrence or dispute
which involves a reasonable likelihood of any such action, suit, arbitration,
investigation or proceeding being instituted.
8.6 Directors' Meetings; Election to Board. From and after the
-------------------
Closing until the expiration of the Restricted Period:
(a) Give Investor at least the notice required by Delaware law
and the Company's bylaws to be given to directors (or such longer notice
actually given to the Company's directors), and permit up to two (2) officers or
other representatives of Investor or any Persons designated by Investor (each a
"Designee" and together the "Designees") to attend as observers, all meetings of
- --------- ---------
the Board and all meetings of committees of the Board; furnish Investor and the
Designees with a complete and accurate copy of the minutes and other records of
all meetings and other proceedings of the Board and its committees as well as of
the written consents of members of the Board by which action is taken by the
Board or any committee without a meeting, and
22
<PAGE>
minutes and written consents relating to action taken by the shareholders of the
Company; provided, that, if a meeting of the Board or any committee thereof is
required to be held on shorter notice than required above, waiver of the notice
contained in this Section 8.6 shall not be unreasonably withheld; and also
furnish Investor and the Designees with a complete and accurate copy of the
minutes of the meetings and the written consents with respect to action taken
without a meeting of the board of directors and committees of each Subsidiary
and of the stockholders of each Subsidiary. The Company may exclude the
Designees from portions of any such meeting to the extent necessary (i) for
reasons of attorney-client privilege or (ii) if the subject matter of the
meeting involves discussion of competitively sensitive information.
(b) At any time upon at Investor's notice to the Company, the
Company shall use its best efforts to cause one of the Designees to be elected
to the Board. In such event, Fargo shall vote all shares owned by Fargo in favor
of the election of such Designee to the Board and the Company shall, upon such
election, execute and deliver to such Designee an indemnification agreement in
form identical to that which it has entered into with its other directors.
8.7 Conduct of Business. Conduct its business in accordance with all
-------------------
applicable provisions of federal, state, local and foreign law.
8.8 Compliance with Legal Requirements. Comply promptly with all
----------------------------------
legal requirements that applicable law may impose upon it with respect to the
transactions contemplated by this Agreement, and cooperate promptly with, and
furnish information to, Investor in connection with any such requirements
imposed upon the Company in connection therewith or herewith.
8.9 Replacement of Certificates. Upon receipt of evidence reasonably
---------------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any certificate representing any of the Investor Stock, issue a new certificate
representing such Investor Stock in lieu of such lost, stolen, destroyed, or
mutilated certificate.
8.10 Compliance with Section 7. Use commercially reasonable efforts
-------------------------
to cause the conditions specified in Section 7.1 hereof to be met by the Closing
Date.
8.11 Securities Law Filings. Make all filings necessary to perfect in
----------------------
a timely fashion exemptions from (i) the registration and prospectus delivery
requirements of the Securities Act and (ii) the registration or qualification
requirements of all applicable securities or blue sky laws of any state or other
jurisdiction, for the issuance of the Investor Stock to Investor.
8.12 Compliance With Amended and Restated Certificate of
---------------------------------------------------
Incorporation and Amended and Restated Bylaws. Perform and observe all
- ---------------------------------------------
requirements of the Company's Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws.
23
<PAGE>
8.13 Use of Proceeds. Use the proceeds from the sale of the Investor
---------------
Stock hereunder solely for working capital purposes, including product
development; provided, however, that the Company shall not use such proceeds to
-------- -------
pay more than $250,000 in outstanding Indebtedness for Borrowed Money, except to
the extent that the amounts so paid may immediately be re-borrowed.
Notwithstanding anything herein to the contrary, the proceeds from the sale of
the Investor Stock shall not be used to exercise the Interplay Option (defined
below).
8.14 Exclusivity. The Company will not, between the date hereof and
-----------
the earlier to occur of (i) ninety (90) days from the Closing Date hereof and
(ii) the consummation of a Permitted Transaction or a definitive agreement with
respect to a Permitted Transaction (the "Restricted Period"), directly or
-----------------
indirectly, through any officer, director, employee, agent, 5% stockholder,
partner or otherwise, (a) solicit or initiate, or participate in discussions or
negotiations with, or encourage the submission of bids, offers or proposals by
(or commence negotiations with or provide any information to), any Person with
respect to an acquisition of the Company, its business or assets, or any
interest therein, other than Investor, or (b) provide any non-public information
concerning the Company, its business or assets, to any Person, other than
Investor, except for product developers, distributors, publishers and licensees
under agreements with the Company entered into in the ordinary course of
business consistent with past practices, and except for the Company's lender.
Notwithstanding the foregoing, the Company may entertain a written unsolicited
bid or proposal from, and provide non-public information to, any party who
delivers such a written bid or proposal with respect to an acquisition of the
Company, its business or assets, but only if and so long as the Board determines
in good faith by a majority vote (with the written concurring and concurrent
advice from outside legal counsel) that failing to entertain such written bid or
proposal would constitute a breach of the fiduciary duties of the Board under
applicable law. The Company shall notify Investor in writing promptly upon
receipt of any bids, offers or proposals received, written or oral. The Company
further agrees that it will not engage any broker, financial advisor or other
consultant on a basis which might provide such broker, financial advisor or
consultant with an incentive to initiate or encourage proposals or offers from
other parties with respect to the Company, its business or assets, or any
interest therein. The Company shall not commence any proceeding to merge,
consolidate, liquidate or dissolve the Company or obligate itself to do so.
8.15 Restriction on Transfer of Fargo's Common Stock. During the
-----------------------------------------------
Restricted Period, Fargo shall not sell, assign, pledge, mortgage or otherwise
dispose of or transfer his Common Stock, or any other securities of the Company,
whether now owned or hereafter acquired, or agree to do any of the foregoing,
except to Investor.
8.16 Permitted Transaction. The Company will within one week after
---------------------
the Closing enter into negotiations with Investor concerning, and will use
commercially reasonable efforts thereafter to effect, a transaction approved by
the Board (including Fargo unless he abstains, in which case such abstention
shall be deemed an approval), in which Investor and the Company (or any wholly
owned Subsidiary of the Company) would merge or effect another business
combination involving both Investor and the Company (a "Permitted Transaction").
---------------------
If necessary, Fargo will vote his shares of Common Stock in favor of any
Permitted Transaction, and will waive any rights he has to
24
<PAGE>
purchase such shares of Common Stock in accordance with the Shareholders'
Agreement by and among the Company, Fargo and MCA Inc. dated March 30, 1994.
8.17 Break-Up Fee. In the event that the Permitted Transaction is not
------------
consummated on or prior to the Restricted Period, and the Company enters into a
definitive agreement or letter of intent, or makes a public statement with
respect to, or becomes subject to, any transaction or series of related
transactions (including any tender offer) with any Person other than Investor
and its affiliates which results in, or is intended to result in, a Change of
Control (as defined herein) on or prior to September 30, 1999, then the Company
shall pay to Investor in immediately available funds upon the consummation of
such transaction (whether such transaction is consummated prior to or after
September 30, 1999) a breakup fee in an amount equal to three percent (3%) of
the Enterprise Value of all such transactions. "Enterprise Value" for any
----------------
transaction shall mean the sum of (a) all consideration received or deemed
received by the Company or the selling shareholder or shareholders of the
Company in connection with such transaction, including without limitation all
consideration for covenants not to compete, employment agreements, and
consulting agreements, plus (b) the principal amount of all Indebtedness for
Borrowed Money outstanding as of the closing of such transaction. For purposes
of this Agreement, a "Change in Control" shall mean a sale by the Company of all
-----------------
or substantially all of its assets, or a merger, consolidation, stock sale by
the Company or its stockholders, or any other transaction in which the holders
of the Company's outstanding Common Stock immediately prior to such transaction
or series of related transactions hold less than fifty percent (50%) of the
outstanding Common Stock of the Company (or the common stock of the surviving
entity of parent of such surviving entity) after the consummation of such
transaction or series of related transactions.
8.18 Key Man Life Insurance. The Company shall within thirty (30)
----------------------
days after Closing obtain, at the Company's expense, a $2,000,000 life insurance
policy on the life of Fargo, for the benefit of Investor, and thereafter so long
as Investor holds any Investor Stock, the Company shall pay from general
corporate funds all trustee fees and remaining insurance premiums.
8.19 HSR Filing. From the date hereof through the end of the Option
----------
Period (as defined in the Universal Agreement), to the extent that Investor is
required in connection with the transactions contemplated hereby, or the
transactions contemplated by the Universal Agreement, to file a notification and
report form in compliance with the Hart-Scott- Rodino Antitrust Improvements Act
of 1976, as amended, or the rules and regulations promulgated thereunder
(collectively, the "HSR Act"), the Company shall agree to fully cooperate with
-------
Investor to enable Investor to promptly make such filing and to respond to any
requests for additional information in connection therewith.
9. Negative Covenants of the Company. The Company agrees that unless
---------------------------------
Investor otherwise agrees in writing, during the Adjustment Period the Company
(and each of its Subsidiaries unless the context otherwise requires) will not do
any of the following:
25
<PAGE>
9.1 Senior Securities. Issue, assume or suffer to exist (a) any
-----------------
security that is senior to the Investor Stock, or (b) any Indebtedness for
Borrowed Money that is an Equity Security or is issued with an Equity Security.
9.2 Changes in Type of Business. Make any substantial change in the
---------------------------
character of its business.
9.3 Loans; Guarantees. Make any loan or advance to any Person,
-----------------
including, without limitation any employee or director of the Company or any
Subsidiary, except advances for travel and entertainment expenses and similar
expenditures in the ordinary course of business or under the terms of an
employee stock option plan or stock purchase agreement approved by the Board,
and except for de minimis loans to employees consistent with past practice; or
----------
guarantee, directly or indirectly, any Indebtedness for Borrowed Money except
for trade accounts of the Company or any Subsidiary arising in the ordinary
course of business.
9.4 Restrictive Agreements. Enter into or become a party to any
----------------------
agreement or instrument which by its terms would violate or be in conflict with,
or restrict the Company's performance of, its obligations under this Agreement.
10. Affirmative Covenants of Investor. Investor agrees that, unless the
---------------------------------
Company otherwise agrees in writing, during the Restricted Period Investor will
do the following:
10.1 Permitted Transaction. Investor will within one week after the
---------------------
Closing enter into negotiations with the Company concerning, and will use
commercially reasonable efforts thereafter to effect, a Permitted Transaction.
10.2 Compliance with Legal Requirements. Comply promptly with all
----------------------------------
legal requirements that applicable law may impose upon it with respect to the
transactions contemplated by this Agreement, and cooperate promptly with, and
furnish information to, the Company in connection with any such requirements
imposed upon Investor in connection therewith or herewith.
10.3 Interplay Option. In the event that Investor exercises the
----------------
Universal Option, but Investor and the Company do not consummate a Permitted
Transaction within the 180 days from the date hereof (the "Option Period"), then
-------------
the Company shall have the right and option (the "Company Option") to purchase
--------------
up to fifty percent (50%) of the Option Stock from Investor at a price per share
equal to the price per share paid by Investor pursuant to the Universal
Agreement (the "Company Option Price"). The Company Option shall be exercisable
--------------------
by the Company providing written notice to Investor within fifteen (15) days
following the earlier to occur of (i) the end of the Option Period, or (ii) if
Investor shall have then exercised the Universal Option, notice by Investor to
the Company that Investor intends to dispose of the Option Stock. Upon the
exercise of the Company Option, the Company shall become obligated to purchase
from Investor, and Investor shall become obligated to sell to the Company, the
number of shares of the Option Stock set forth in the Company's notice for cash
equal to
26
<PAGE>
the Company Option Price. Notwithstanding anything herein to the contrary, the
Company Option is personal to the Company and may not be assigned or transferred
or encumbered by the Company to any other Person. Investor agrees not to sell
more than fifty percent (50%) of the Option Stock without first complying with
this Section and, in furtherance thereof, consents to the placement of a stop
transfer order on the Stock transfer books of the Company with respect to the
Option Stock.
11. Registration of Registrable Stock.
---------------------------------
11.1 Required Registration. On June 21, 1999, the Company shall
---------------------
prepare and file a registration statement under the Securities Act, on a form
selected by the Company, covering all Investor Stock (including the Initial
Shares and the maximum number of Final Additional Shares) and all Option Stock
(together with the Investor Stock, the "Registrable Stock") and shall use its
-----------------
best efforts to cause such registration statement to become effective as
expeditiously as possible and to remain effective until the earlier to occur of
the date (a) the Registrable Stock covered thereby has been sold, or (b) by
which all Registrable Stock covered thereby may be sold under Rule 144(k).
Notwithstanding the foregoing, if (i) prior to June 21, 1999, the Company shall
become ineligible to use Form S-3 or (ii) prior to such date the Company enters
into an agreement to cause a sale or other disposition of all or substantially
all of the assets or outstanding Common Stock of the Company and the Investor
would be materially prejudiced in such transaction by holding unregistered
Common Stock, then in either of such cases the Company shall promptly prepare
and file such registration statement on Form S-1. Without limiting the
generality of clause (ii) in the preceding sentence, the parties agree that
Investor would be materially prejudiced in such transaction in the event that it
is unable to dispose of the shares of Registrable Stock immediately upon the
consummation of such transaction.
11.2 Registration Procedures. When the Company effects the
-----------------------
registration of the Registrable Stock under the Securities Act pursuant to
Section 11.1 hereof, the Company will, at its expense, as expeditiously as
possible:
(a) In accordance with the Securities Act and the rules and
regulations of the Commission, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period described herein, and prepare and file with the Commission such
amendments to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration statement
effective for such period and such registration statement and prospectus
accurate and complete for such period; the plan of distribution set forth in
such registration statement or in any amendment or supplement shall be subject
to the approval of Investor;
(b) Furnish to Investor such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as Investor may reasonably request in order to facilitate the public
offering of such securities;
27
<PAGE>
(c) Use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as Investor may reasonably request within twenty (20)
days following the original filing of such registration statement, except that
the Company shall not for any purpose be required to execute a general consent
to service of process or to qualify to do business as a foreign corporation in
any jurisdiction where it is not so qualified;
(d) Notify Investor, promptly after it shall receive notice
thereof, of the date and time when such registration statement and each post-
effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(e) Notify Investor promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus or
for additional information;
(f) Prepare and file with the Commission, promptly upon the
request of Investor, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for Investor, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Registrable Stock by Investor;
(g) Prepare and promptly file with the Commission, and promptly
notify Investor of the filing of, such amendments or supplements to such
registration statement or prospectus as may be necessary (i) to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) to revise or amend the plan of
distribution of the Registrable Stock, as requested by Investor;
(h) In case Investor is required to deliver a prospectus at a
time when the prospectus then in circulation is not in compliance with the
Securities Act or the rules and regulations of the Commission, prepare promptly
upon request such amendments or supplements to such registration statement and
such prospectus as may be necessary in order for such prospectus to comply with
the requirements of the Securities Act and such rules and regulations; and
(i) Advise Investor, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
11.3 Expenses. With respect to any registration effected pursuant to
--------
Section 11.1 hereof, the Company agrees to bear all fees, costs and expenses of
and
28
<PAGE>
incidental to such registration and the public offering in connection therewith;
provided, however, that Investor shall bear its pro rata share of any
underwriting discounts or commissions. The fees, costs and expenses of
registration to be borne as provided in this Section 11.3 shall include, without
limitation, all registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and disbursements
of counsel for the underwriter or underwriters of such securities (if the
Company and/or selling security holders are otherwise required to bear such fees
and disbursements), all legal fees and disbursements and other expenses of
complying with state securities or blue sky laws of any jurisdictions in which
the securities to be offered are to be registered or qualified, reasonable fees
and disbursements of one firm of counsel for the Investor (not to exceed
$15,000), and the premiums and other costs of policies of insurance against
liability of directors and officers arising out of such public offering.
11.4 Indemnification
---------------
(a) The Company will indemnify and hold harmless Investor and any
underwriter (as defined in the Securities Act) for Investor, and any Person who
controls Investor or such underwriter within the meaning of the Securities Act,
and any officer, director, employee, agent, partner or affiliate of Investor,
from and against, and will reimburse Investor and each such underwriter,
controlling person, officer, director, employee, agent, partner and affiliate
with respect to, any and all claims, actions, demands, losses, damages,
liabilities, costs and expenses to which Investor or any such underwriter or
controlling Person or any such officer, director, employee, agent, partner or
affiliate may become subject under the Securities Act or otherwise, insofar as
such claims, actions, demands, losses, damages, liabilities, costs or expenses
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any such
case to the extent that any such claim, action, demand, loss, damage, liability,
cost or expense is caused by an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity in all material respects with
information furnished to the Company by Investor, such underwriter or such
controlling person or such officer, director, employee, agent, partner or
affiliate in writing specifically for use in the preparation thereof.
(b) Investor will indemnify and hold harmless the Company, and
any Person who controls the Company within the meaning of the Securities Act,
from and against, and will reimburse the Company and such controlling Persons
with respect to, any and all losses, damages, liabilities, costs or expenses to
which the Company or such controlling Person may become subject under the
Securities Act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or are caused by the omission or the
alleged omission to state therein a material
29
<PAGE>
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was so made in reliance
upon and in conformity in all material respects with written information
furnished by Investor to the Company in writing specifically for use in the
preparation thereof. Notwithstanding the foregoing, the liability of Investor
pursuant to this subsection (b) shall be limited to an amount equal to the per
share sale price (less any brokerage or underwriting discount and commissions)
multiplied by the number of shares of Registrable Stock sold by Investor
pursuant to the registration statement which gives rise to such obligation to
indemnify (less the aggregate amount of any damages which Investor has otherwise
been required to pay in respect of such losses, damages, liabilities, costs or
expenses or any substantially similar losses, damages, liabilities, costs or
expenses arising from the sale of such Registrable Stock).
(c) Promptly after receipt by a party indemnified pursuant to the
provisions of paragraph (a) or (b) of this Section 11.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of paragraph (a)
or (b), notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 11.4 and shall not relieve the indemnifying party from liability under
this Section 11.4 except to the extent that such indemnifying party is
materially prejudiced by such omission. In case such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall have the right to participate in, and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provisions of such paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall be liable to an indemnified party for any settlement of any action or
claim without the consent of the indemnifying party. No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a complete and unconditional release from all
liability in respect to such claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b)
of this Section 11.4 is held by a court of competent jurisdiction to be
unavailable to a party to be indemnified with respect to any claims, actions,
demands, losses, damages, liabilities, costs or expenses referred to therein,
then each indemnifying party under any such subsection, in lieu of indemnifying
such indemnified party thereunder, hereby agrees to contribute to the amount
paid or payable by such indemnified party as a result of such claims, actions,
demands, losses, damages, liabilities, costs or expenses in such
30
<PAGE>
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions which resulted in such claims, actions,
demands, losses, damages, liabilities, costs or expenses, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding the foregoing, the amount
Investor shall be obligated to contribute pursuant to this subsection (d) shall
be limited to an amount equal to the per share sale price (less any brokerage or
underwriting discount and commissions) multiplied by the number of shares of
Registrable Stock sold by Investor pursuant to the registration statement which
gives rise to such obligation to contribute (less the aggregate amount of any
damages which Investor has otherwise been required to pay in respect of such
claim, action, demand, loss, damage, liability, cost or expense or any
substantially similar claim, action, demand, loss, damage, liability, cost or
expense arising from the sale of such Registrable Stock). No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution hereunder from any person who
was not guilty of such fraudulent misrepresentation.
11.5 Reporting Requirements Under the Exchange Act. The Company shall
---------------------------------------------
timely file such information, documents and reports as the Commission may
require or prescribe under Section 13 or 15(d) of the Exchange Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 11.5 are (a) to enable Investor to comply with the current public
information requirement contained in paragraph (c) of Rule 144 should Investor
ever wish to dispose of any of the Registrable Stock without registration under
the Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision) and (b) to qualify the Company for the use of registration statements
on Form S-3.
11.6 Investor Information. The Company may require Investor to
--------------------
furnish the Company such information with respect to Investor and the
distribution of the Registrable Stock as the Company may from time to time
reasonably request in writing as shall be required by law or by the Commission
in connection therewith.
11.7 Transferability of Registration Rights. Notwithstanding anything
--------------------------------------
to the contrary in this Section 11, the rights of the Investor under this
Section 11 shall automatically transfer to any transferee of at least ten
percent (10%) of the Registrable Stock in accordance with Section 15.5 hereof.
It is understood and agreed that the registration of the Option Stock in
accordance with this Section 11 shall not be deemed to inure to the benefit of
Universal.
12. Enforcement
-----------
12.1 Survival of Representations and Warranties. The
------------------------------------------
31
<PAGE>
representations, warranties, covenants and agreements of the parties hereto
contained in this Agreement or in any writing delivered pursuant to the
provisions of this Agreement or at the Closing shall survive any examination by
or on behalf of any party hereto and shall survive the Closing and the
consummation of the transactions contemplated hereby.
12.2 Indemnification
---------------
(a) Subject to Section 12.2(e), the Company hereby covenants and
agrees to defend, indemnify and save and hold harmless Investor, together with
its officers, directors, shareholders, employees, attorneys and representatives
and each Person who controls Investor within the meaning of the Securities Act,
from and against any loss, cost, expense, liability, claim or legal damages
(including, without limitation, reasonable fees and disbursements of counsel and
accountants and other costs and expenses incident to any actual or threatened
claim, suit, action or proceeding (each, an "Action") and all costs of
------
investigation) (collectively, the "Damages") arising out of or resulting from
-------
(i) any Default, or any inaccuracy in or breach of, or failure to perform or
observe, any representation, warranty, covenant or agreement made by the Company
or Fargo in this Agreement or in any writing delivered pursuant to this
Agreement or at the Closing, or (ii) any claims of third parties claiming
compensation, commissions or expenses for services as a broker or finder based
upon obligations incurred by the Company.
(b) In the event that any indemnified party is made a defendant
in or party to any action, suit, proceeding or claim, judicial or
administrative, instituted by any third party for Damages or other relief (any
such third party action, suit, proceeding or claim being referred to as a
"Claim"), the indemnified party (referred to in this clause (b) as the
-----
"notifying party") shall give notice thereof (a "Notice of Claim") as soon as
- ---------------- ---------------
practicable and in any event within thirty (30) days after the notifying party
receives notice thereof. The failure to give such notice shall not affect
whether an indemnifying party is liable for reimbursement unless such failure
has resulted in the loss of substantive rights with respect to the indemnifying
party's ability to defend such Claim, and then only to the extent of such loss.
Notice of the intention so to contest and defend shall be given by the
indemnifying party to the notifying party within twenty (20) business days after
the notifying party's notice of such Claim (but, in all events, at least ten
(10) business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the indemnifying party and approved by the indemnified party (which
approval will not be unreasonably withheld). The indemnifying party shall have
the sole right to control the contest and defense of such Claim. The notifying
party shall be entitled, at its own cost and expense (which expense shall not
constitute Damages unless the notifying party reasonably determines that the
indemnifying party because of a conflict of interest, may not adequately
represent, the interests of the indemnified parties, and has provided the
indemnifying party with notice of such determination, and only to the extent
that such expenses are reasonable), to participate in such contest and defense
and to be represented by attorneys of its or their own choosing. The notifying
party will cooperate with the indemnifying party in the conduct of such defense.
Neither the notifying party nor the indemnifying party may concede, settle or
compromise any Claim without the consent of
32
<PAGE>
the other party, which consent will not be unreasonably withheld or delayed in
light of all factors of importance to such party; provided, however, that if the
indemnified party shall fail to consent to the settlement of any Claim where (i)
such settlement includes an unconditional release of all claims against the
indemnified party and requires no payment on the part of the indemnified party
to the claimant or any other party, (ii) such settlement does not require any
action on the part of the indemnified party and does not impose terms
restricting or adversely affecting the indemnified party's activity, and (iii)
the claimant has affirmatively indicated that it will accept such settlement,
then the indemnifying party shall no liability with respect to any payment to be
made in respect of such claim in excess of the proposed settlement amount.
(c) In the event any indemnified party shall have a claim against
any indemnifying party that does not involve a Claim, the indemnified party
shall deliver a notice of such claim with reasonable promptness to the
indemnifying party. The failure to give such notice shall not affect whether an
indemnifying party is liable for reimbursement unless such failure has resulted
in the loss of substantive rights with respect to the indemnifying party's
ability to defend such claim, and then only to the extent of such loss. If the
indemnifying party notifies the indemnified party that it does not dispute the
claim described in such notice or fails to notify the indemnified party within
thirty (30) days after delivery of such notice by the indemnified party whether
the indemnifying party disputes the claim described in such notice, the Damages
in the amount specified in the indemnified party's notice will be conclusively
deemed a liability of the indemnifying party and the indemnifying party shall
pay the amount of such Damages to the indemnified party on demand.
(d) Any claim for indemnity under this Section 12.2 shall be
delivered in writing to the indemnifying party and set forth with reasonable
specificity as to the amount claimed and the underlying facts supporting such
claim. The indemnifying party shall have thirty (30) days to accept or dispute
such claim by written notice to the indemnified party (a "Contest Notice");
--------------
provided, however, that if, at the time a Notice of Claim is submitted to the
indemnifying party the amount of the Claim in respect thereof has not yet been
determined, such thirty (30) day period shall not commence until a further
written notice (a "Notice of Liability") has been sent or delivered by the
-------------------
indemnified party to the indemnifying party setting forth the amount of the
Claim incurred by the indemnified party that was the subject of the earlier
Notice of Claim. Such Contest Notice shall specify the reasons or bases for the
objection of the Indemnifying Party to the claim, and if the objection relates
to the amount of the Claim asserted, the amount, if any, which the indemnifying
party believes is due the indemnified party. If no such Contest Notice is given
with such 30-day period, the obligation of the indemnifying party to pay to the
indemnified party the amount of the Claim set forth in the Notice of Claim, or
subsequent Notice of Liability, shall be deemed established and accepted by the
indemnifying party. If, on the other hand, the indemnifying party contests a
Notice of Claim or Notice of Liability (as the case may be) within such 30-day
period, the indemnified party and the indemnifying party shall thereafter
attempt in good faith to resolve their dispute by agreement. If the parties are
unable to so resolve their dispute within the immediately succeeding thirty (30)
days, such dispute shall be resolved by binding arbitration in Los Angeles,
California, as
33
<PAGE>
provided in Section 15.13 below. The award of the arbitrator shall be final and
binding on the parties and may be enforced in any court of competent
jurisdiction. Upon final determination of the amount of the Claim that is the
subject of an indemnification claim (whether such determination is the result of
the indemnifying party's acceptance of, or failure to contest, a Notice of Claim
or Notice of Liability, or of a resolution of any dispute with respect thereto
by agreement of the parties or binding arbitration), such amount shall be
payable, in cash by the indemnifying party to the indemnified parties who have
been determined to be entitled thereto within fifteen (15) days of such final
determination of the amount of the Claim due by the indemnifying party. Any
amount that becomes due hereunder and is not paid when due shall bear interest
at the maximum legal rate per annum from the date due until paid.
(e) Anything to the contrary notwithstanding, (i) the Investor
shall not be indemnified and held harmless in respect of any Damages unless and
until the aggregate amount of such Damages exceeds $100,000, in which event the
Investor shall be indemnified and held harmless in respect of all Damages
without regard to the foregoing $100,000 limit, and (ii) the liability of the
Company to the Investor shall be limited to an amount equal to the Purchase
Payment.
(f) Investor hereby covenants and agrees to defend, indemnify and
save and hold harmless the Company, together with officers, directors,
shareholders, employees, attorneys and representatives and each Person who
controls the Company within the meaning of the Securities Act from and against
any Damages arising out of or resulting from (i) any inaccuracy in breach of, or
failure to perform or observe, any representation, warranty, covenant or
agreement made by Investor in this Agreement or in any writing or other
agreement delivered pursuant hereto, or (ii) any claims of third parties
claiming compensation, commissions or expenses for services as a broker or
finder based upon obligations incurred by Investor.
(g) Except as provided in Section 12.3, the provisions of this
Section 12.2 shall be the exclusive remedy or exclusive means to obtain relief,
as the case may be, of any party in the event of any breach of any
representation, warranty, covenant or agreement contained herein (or in any
certificate or other document delivered pursuant hereto) by another party, or
with respect to any Action or Claim; provided, however, that this subsection (g)
-------- -------
shall not limit any statutory claim, or any claim in tort, which any party may
have against the other party.
12.3 Injunctive Relief. (a) Any party may bring a claim seeking
-----------------
specific performance by way of injunctive relief before a court of competent
jurisdiction to enforce the provisions of this Agreement, (b) any party seeking
to enforce a claim for indemnification may bring any claim of indemnification
which is not resolved within the thirty day period provided in Section 12.2(b)
before a court of competent jurisdiction, and (c) in the event of any breach by
either party of Section 15.9, the other party may seek injunctive relief from a
court of competent jurisdiction to restrain any such breach.
12.4 No Implied Waiver. Except as expressly provided in this
----------------
Agreement, no course of dealing between the Company and Investor and no delay
in
34
<PAGE>
exercising any such right, power or remedy conferred hereby or now or hereafter
existing at law in equity, by statute or otherwise, shall operate as a waiver
of, or otherwise prejudice, any such right, power or remedy.
13. Rights of First Refusal.
-----------------------
13.1 Subsequent Offerings. Investor shall have the right of first
--------------------
refusal to purchase all (or any part of all) Equity Securities that the Company
may, from time to time, propose to sell and issue during the Restricted Period,
other than the Equity Securities excluded by Section 13.4 hereof.
13.2 Exercise of Rights. If and each time the Company proposes to
------------------
issue any Equity Securities, it shall give Investor written notice of its
intention, describing the Equity Securities, the price, and the general terms
and conditions upon which the Company proposes to issue the same. Investor shall
have ten (10) days from the giving of such notice to agree to purchase Equity
Securities for the price and upon the terms and conditions specified in the
notice by giving written notice to the Company.
13.3 Issuance of Equity Securities to Other Persons. If Investor
----------------------------------------------
fails to exercise in full the rights of first refusal within such ten (10) day
period by giving the agreement referred to in Section 13.2, the Company shall
have ninety (90) days thereafter to complete the sale of the Equity Securities
in respect of which Investor's rights were not exercised, at a price and upon
general terms and conditions no more favorable to the purchasers thereof than
specified in the Company's notice to the Investors pursuant to Section 13.2
hereof. If the Company has not sold all of such Equity Securities within such
ninety (90) days, the Company shall not thereafter issue or sell any of such
Equity Securities, without first offering such securities to Investor in the
manner provided above.
13.4 Excluded Securities. The rights of first refusal established by
-------------------
this Section 13 shall have no application to (a) any shares of Common Stock
issued in accordance with the stock option plans and warrants currently reserved
for issuance to employees, directors and advisors, as described in Sections 5.3
and 5.6, and Schedule 5.6, (b) shares of Common Stock issued as consideration to
------------
third parties for product development services or publishing or distribution
rights, not to exceed 500,000 shares, (c) shares of Common Stock issued in
connection with any stock split, stock dividend or reverse stock split, and (d)
shares of Common Stock issued in connection with acquisitions of other entities
by way of merger, share exchange, sale of assets or otherwise.
14. Definitions. Unless the context otherwise requires, the terms defined
-----------
in this Section 14 shall have the meanings herein specified for all purposes of
this Agreement, applicable to both the singular and plural forms of any of the
terms herein defined. All accounting terms defined in this Section 14 and those
accounting terms used in this Agreement not defined in this Section 14 shall,
except as otherwise provided for herein, be construed in accordance with those
generally accepted accounting principles that the Company is required to employ
by the terms of this Agreement. If and so long as
35
<PAGE>
the Company has any Subsidiary, the accounting terms defined in this Section 14
and those accounting terms appearing in this Agreement but not defined in this
Section 14 shall be determined on a consolidated basis for the Company and its
Subsidiaries, and the financial statements and other financial information to be
furnished by the Company pursuant to this Agreement shall be consolidated and
presented with consolidating financial statements of the Company and its
Subsidiaries.
"Action" shall have the meaning assigned to it in Section 12.2(a).
------
"Affiliate" shall mean any Person which directly or indirectly
---------
controls, is controlled by, or is under common control with, the indicated
Person.
"Agreement" shall mean this Agreement.
---------
"Balance Sheet" and "Balance Sheet Date" shall have the meanings
------------- ------------------
assigned to these terms in Section 5.12 hereof.
"Board" shall mean the Board of Directors of the Company.
-----
"Claim" shall have the meaning assigned to it in Section 12.2(b).
-----
"Closing" and "Closing Date" shall have the meanings assigned to
------- ------------
these terms in Section 3.1.
"Common Stock" shall have the meaning assigned to it in Section 1
------------
hereof.
"Commission" shall mean the Securities and Exchange Commission.
----------
"Damages" shall have the meaning assigned to it in Section 12.2(a).
-------
"Default" shall mean a default or failure in the due observance or
-------
performance of any covenant, condition or agreement on the part of the Company
or any of its Subsidiaries to be observed or performed under the terms of this
Agreement, if such default or failure in performance shall remain unremedied for
ten (10) days.
"Designated Key Employees" shall have the meaning assigned to it in
------------------------
Section 5.15.
"Designee" shall have the meaning assigned to it in Section 7.6(a).
--------
"Developing Software" shall have the meaning assigned to it in
-------------------
Section 5.27(b).
"Equity Security" shall mean any stock or similar security of the
---------------
Company or any security (whether stock or Indebtedness for Borrowed Money)
convertible or exchangeable, with or without consideration, into or for any
stock or
36
<PAGE>
similar security, or any security (whether stock or Indebtedness for Borrowed
Money) carrying any warrant or right to subscribe to or purchase any stock or
similar security, or any such warrant or right.
"Event of Default" shall mean (a) the failure of either the Company
----------------
or any Subsidiary to pay any Indebtedness for Borrowed Money, or any interest or
premium thereon, within ten (10) days after the same shall become due, whether
such Indebtedness shall become due by scheduled maturity, by required
prepayment, by acceleration, by demand or otherwise, (b) an event of default
under any agreement or instrument evidencing or securing or relating to any such
Indebtedness, or (c) the failure of either the Company or any Subsidiary to
perform or observe any material term, covenant, agreement or condition on its
part to be performed or observed under any agreement or instrument evidencing or
securing or relating to any such Indebtedness when such term, covenant or
agreement is required to be performed or observed.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Existing Rights Agreement" shall have the meaning assigned to it in
-------------------------
Section 7.1(p).
"Form 10-Q" shall have the meaning assigned to it in Section 5.12.
---------
"Form S-1" shall have the meaning assigned to it in Section 5.12.
--------
"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 be deemed to be
Indebtedness even though such obligation is not assumed by the Company or
Subsidiary.
"Indebtedness for Borrowed Money" shall mean (a) all Indebtedness in
-------------------------------
respect of money borrowed including, without limitation, Indebtedness which
represents the unpaid amount of the purchase price of any property and is
incurred in lieu of borrowing money or using available funds to pay such amounts
and not constituting an account payable or expense accrual incurred or assumed
in the ordinary course of business of the Company or any Subsidiary, (b) all
Indebtedness evidenced by a promissory note, bond or similar written obligation
to pay money, or (c) all such Indebtedness guaranteed by the Company or any
Subsidiary or for which the Company or any Subsidiary is otherwise contingently
liable.
"Investor Counsel" shall have the meaning assigned to it in Section
----------------
7.1(g)(3).
"Investor Stock" shall have the meaning assigned to it in Section 1.
--------------
37
<PAGE>
"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.
"Material Adverse Effect" on a Person means a material adverse effect,
-----------------------
or any condition, situation or set of circumstances that could reasonably be
expected to have an adverse effect, on such Person and its Subsidiaries, taken
as a whole.
"Operational Software" shall have the meaning assigned to it in
--------------------
Section 5.27(a).
"Permitted Liens" shall mean (a) Liens for taxes and assessments or
---------------
governmental charges or levies not at the time due or in respect of which the
validity thereof shall currently be contested in good faith by appropriate
proceedings; (b) Liens in respect of pledges or deposits under workers'
compensation laws or similar legislation, carriers', warehousemen's, mechanics',
laborers' and materialmen's and similar Liens, if the obligations secured by
such Liens are not then delinquent or are being contested in good faith by
appropriate proceedings; and (c) Liens incidental to the conduct of the business
of the Company or any Subsidiary which were not incurred in connection with the
borrowing of money or the obtaining of advances or credits and which do not in
the aggregate materially detract from the value of its property or materially
impair the use thereof in the operation of its business.
"Permitted Transaction" shall have the meaning assigned to it in
---------------------
Section 8.16.
"Person" shall include any natural person, corporation, trust,
------
association, company, partnership, limited liability company, joint venture and
other entity and any government, governmental agency, instrumentality or
political subdivision.
"Purchase Payment" shall have the meaning assigned to it in Section
----------------
2.
"Restricted Period" shall have the meaning assigned to it in Section
-----------------
8.14.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Subsidiary" shall mean any corporation, association or other
----------
business entity at least fifty percent (50%) of the outstanding voting stock of
which is at the time owned or controlled directly or indirectly by the Company
or by one or more of such subsidiary entities or both, where "voting stock"
means any shares of stock having general voting power in electing the board of
directors (irrespective of whether or not at the time stock of any other class
or classes has or might have voting power by reason of any contingency).
38
<PAGE>
"Universal" shall have the meaning assigned to it in Section 7.1(j).
---------
"Universal Agreement" shall have the meaning assigned to it in
-------------------
Section 7.1(j).
"Web Site" shall have the meaning assigned to it in Section 5.28(a).
--------
15. Miscellaneous
-------------
15.1 Waivers and Amendments. With the written consent of Investor,
----------------------
the obligations of the Company and the rights of Investor under this Agreement
may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board, may enter into a supplementary agreement for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of any supplemental agreement or
modifying in any manner the rights and obligations hereunder of Investor and the
Company. Neither this Agreement, nor any provision hereof, may be amended,
waived, discharged or terminated orally or by course of dealing, but only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, as provided in this Section
15.1. Specifically, but without limiting the generality of the foregoing, the
failure of Investor at any time or times to require performance of any provision
hereof by the Company shall in no manner affect the right of Investor at a later
time to enforce the same. No waiver by any party of the breach of any term or
provision contained in this Agreement, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such
breach, or a waiver of the breach of any other term or covenant contained in the
Agreement.
15.2 Rights of Investor. Investor shall have the absolute right to
------------------
exercise or refrain from exercising any right or rights which Investor may have
by reason of this Agreement or any Investor Stock, including, without
limitation, the right to consent to the waiver of any obligation of the Company
under this Agreement and to enter into an agreement with the Company for the
purpose of modifying this Agreement or any agreement effecting any such
modification, and Investor shall not incur any liability to any other
shareholder of the Company with respect to exercising or refraining from
exercising any such right or rights.
15.3 Notices. All notices, requests, consents and other
-------
communications required or permitted hereunder shall be in writing (including
telecopy or similar writing) and shall be given,
if to the Company to:
Interplay Entertainment Corp.
16815 Von Karman Avenue
39
<PAGE>
Irvine, California 92606
Attention: Mr. Brian Fargo, Chairman and
Chief Executive Officer
Telecopier: (949) 252-0667
with a copy to:
K.C. Schaaf, Esq.
Stradling Yocca Carlson & Rauth, a professional corporation
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Telecopier: (949) 725-4100
if to Investor to:
Titus Interactive SA
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, California 91311
Attention: Mr. Herve Caen, Chairman and
Chief Executive Officer
Telecopier: (818) 709-6537
with a copy to:
Robert A. Miller, Jr., Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street - 23rd Floor
Los Angeles, California 90071
Telecopier: (213) 627-0705
40
<PAGE>
if to Fargo to:
Mr. Brian Fargo
c/o Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Telecopier: (949) 252-0667
or to such other address or telecopier number as such party may specify for the
purpose by notice to the other party or parties to this Agreement, as the case
may be. Any notice, request, consent or other communication hereunder shall be
deemed to have been given and received on the day on which it is delivered (by
any means including personal delivery, overnight air courier, United States
mail) or telecopied (or, if such day is not a business day or if the notice,
request, consent or communication is not telecopied during business hours of the
intended recipient, at the place of receipt, on the next following business
day).
15.4 Severability. Should any one or more of the provisions of this
------------
Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement,
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.
15.5 Assignment; Parties in Interest. Neither this Agreement nor any
-------------------------------
interest herein may be assigned by either party hereto without the written
consent of the other parties hereto, except that Investor may assign all of its
rights hereunder to any Subsidiary of Investor. Subject to the foregoing, all
the terms and provisions of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, whether so expressed or not. Subject to the immediately
preceding sentence, this Agreement shall not run to the benefit of or be
enforceable by any Person other than a party to this Agreement and its
successors and assigns.
15.6 Headings. The headings of the Sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
15.7 Choice of Law. The internal substantive laws, and not the laws
-------------
of conflicts, of the State of California shall govern the enforceability and
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties.
15.8 Expenses. The Company agrees, whether or not the transactions
--------
contemplated hereby are consummated, to pay (a) $50,000 of the fees and expenses
of the Investor Counsel arising in connection with the negotiation and execution
41
<PAGE>
of this Agreement and consummation of the transactions contemplated hereby, some
or all of which Investor, in its discretion, may deduct from the Purchase
Payment, (b) the fees and expenses incurred in connection with any requested
waiver of the right of Investor or the consent of Investor to contemplated acts
of the Company not otherwise permissible by the terms of this Agreement, (c)
stamp and other taxes, excluding income taxes, which may be payable with respect
to the execution and delivery of this Agreement or the issuance, delivery or
acquisition of the Investor Stock, and (d) all costs of the Company's
performance of and compliance with this Agreement.
15.9 Publicity. Without the prior consent of the other parties, no
---------
party shall, and each party shall cause its directors, officers, employees,
representatives and agents not to, make any public statement or press release
with respect to the transactions contemplated by this Agreement or otherwise
disclose to any Person the existence, terms, content or effect of this
Agreement; provided, however, that if a disclosure is required by law, the party
--------
required to make such disclosure shall be permitted to make such disclosure but
shall use best efforts to consult with the other parties hereto before making
the required disclosure.
15.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts (including by facsimile) and by different parties hereto in
separate counterparts, with the same effect as if all parties had signed the
same document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument.
15.11 Entire Agreement. This Agreement, and the Exhibits, Schedules,
----------------
certificates, and documents referred to herein constitute the entire agreement
of the parties hereto with respect to the subject matter hereof, and supersede
all prior understandings with respect to the subject matter hereof, and no
representation or warranty not included herein has been relied upon by any party
hereto.
15.12 Attorneys' Fees. In the event of any dispute, controversy, or
---------------
proceeding between the parties concerning this Agreement or the transactions
contemplated hereby, the prevailing party shall be entitled to receive from the
non-prevailing party its costs and expenses, including attorneys' fees.
15.13 Arbitration. Except for actions to obtain injunctions or other
-----------
equitable remedies, all disputes between the parties hereto shall be determined
solely and exclusively by arbitration under, and in accordance with the rules
then in effect of, the American Arbitration Association, or any successors
thereto ("AAA"), in Los Angeles, California, unless the parties otherwise agree
---
in writing. The parties shall, in connection with such arbitration, in addition
to any discovery permitted under AAA rules, be permitted to conduct discovery in
accordance with Section 1283.05 of the California Code of Civil Procedure, the
provisions of which are incorporated herein by this reference. The parties shall
jointly select an arbitrator. In the event the parties fail to agree upon an
arbitrator within ten (10) days, then each party shall select an arbitrator and
such arbitrators shall then select a third arbitrator to serve as the sole
arbitrator; provided, that if either party, in such event, fails to select an
--------
arbitrator within seven (7) days, such
42
<PAGE>
arbitrator shall be selected by the AAA upon application of either party.
Judgment upon the award of the agreed upon arbitrator or the so chosen third
arbitrator, as the case may be, shall be binding and may be entered in any court
of competent jurisdiction.
15.14 Partial and Conditional Termination of Shareholders'
----------------------------------------------------
Agreement. In the event the Investor exercises the Universal Option, the
- ---------
Investor, the Company and Fargo agree that the provisions of Article II of the
Shareholders' Agreement shall terminate and be of no further force or effect.
43
<PAGE>
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective duly authorized officers as of the day and year
first above written.
INTERPLAY ENTERTAINMENT CORP., a
Delaware corporation
By: /s/ Brian Fargo
An Authorized Officer
TITUS INTERACTIVE SA, a French
corporation
By: /s/ Herve Caen
An Authorized Officer
/s/ Brian Fargo
Brian Fargo
<PAGE>
EXHIBIT A
---------
OPINION OF STRADLING YOCCA CARLSON & RAUTH
------------------------------------------
<PAGE>
[LETTERHEAD OF STRADLING YOCCA CALSON & RAUTH]
March 18, 1999
Titus Interactive SA
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, California 91311
Ladies and Gentlemen:
We have acted as counsel to Interplay Entertainment Corp., a Delaware
corporation (the "Company"), in connection with the execution and delivery by
the Company of that certain Stock Purchase Agreement dated as of March 18, 1999
(the "Agreement") among the Company, Brian Fargo and Titus Interactive SA (the
"Investor"). This opinion is being delivered pursuant to Section 7.1(e) of the
Agreement. Unless specifically defined herein or the context requires
otherwise, capitalized terms used herein shall have the meanings ascribed to
them in the Agreement.
In connection with the preparation of this opinion, we have examined the
Agreement and such other documents and considered such questions of law as we
have deemed necessary or appropriate. We have assumed that, except for the
Agreement and the documents required or contemplated thereby, there are no other
documents or agreements between the Company and the Investor which would expand
or otherwise modify the respective rights and obligations of the Company and the
Investor as set forth in the Agreement and the documents required or
contemplated thereby.
We have assumed the authenticity of all documents submitted to us as
originals, the conformity with originals of all documents submitted to us as
copies and the genuineness of all signatures. We have also assumed the legal
capacity of all natural persons and that, with respect to all parties to
agreements or instruments relevant hereto other than the Company, such parties
had the requisite power and authority to execute, deliver and perform such
agreements or instruments, that such agreements or instruments have been duly
authorized by all requisite action, executed and delivered by such parties and
that such agreements or instruments are the valid, binding and enforceable
obligations of such parties.
As to questions of fact material to our opinions, we have relied upon the
representations of each party made in the Agreement and the other documents and
certificates delivered in connection
<PAGE>
Titus Interactive SA
March 18, 1999
Page Two
therewith, certificates of officers of the Company and certificates and advices
of public officials and we have made no independent investigation of such
matters.
Whenever a statement herein is qualified by "known to us," "to our current
actual knowledge," or similar phrase, it is intended to indicate that, during
the course of our representation of the Company, no information that would give
us current actual knowledge of the inaccuracy of such statement has come to the
attention of those attorneys in this firm who have rendered legal services in
connection with the transaction described in the introductory paragraph hereof.
However, except as otherwise expressly indicated, we have not undertaken any
independent investigation to determine the accuracy of such statement, and any
limited inquiry undertaken by us during the preparation of this opinion letter
should not be regarded as such an investigation; no inference as to our
knowledge of any matters bearing on the accuracy of any such statement should be
drawn from the fact of our representation of the Company.
Based upon the foregoing, and subject to the assumptions, exceptions,
qualifications and limitations set forth herein, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own its properties and assets, to carry on its
business as presently conducted, and to enter into the Agreement and perform its
obligations thereunder, including without limitation the sale and issuance of
the Investor Stock.
2. Except as disclosed in the schedules to the Agreement, the Company is
duly qualified to do business as a foreign corporation and is in good standing
in each other state in which the nature of its activities or of its properties
owned or leased makes such qualification necessary, except to the extent that
failure to so qualify would not have a material adverse effect on the Company.
3. The Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company.
4. The Agreement is a legal, valid and binding obligation of the Company
enforceable against it in accordance with its terms, except as the
enforceability thereof may be subject to or limited by (a) bankruptcy,
insolvency, reorganization, arrangement, moratorium, or other similar laws
relating to or affecting rights of creditors and (b) general equitable
principles, regardless of whether the issue of enforceability is considered in a
proceeding in equity or at law.
5. The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, $.001 par value (the "Common Stock") and 5,000,000
shares of Preferred Stock, $.001 par value (the "Preferred Stock"), of which
18,308,861 shares of Common Stock and no shares of Preferred Stock are issued
and outstanding. All presently outstanding shares of the Company's capital
stock have been duly authorized and validly issued, and are fully paid and
<PAGE>
Titus Interactive SA
March 18, 1999
Page Three
nonassessable. Except as disclosed in or contemplated by the Agreement or the
exhibits and schedules delivered in connection therewith, there are, to our
current actual knowledge, (a) no outstanding subscriptions, warrants, options,
calls, claims, commitments, convertible securities or other agreements or
arrangements under which the Company is or may be obligated to issue shares of
its capital stock, and (b) no preemptive or similar rights to subscribe for or
to purchase capital stock of the Company.
6. The shares of Investor Stock to be issued to the Investor pursuant to
the Agreement have been duly authorized and, when issued and paid for in
accordance with the terms of the Agreement, will be validly issued, fully paid
and nonassessable.
7. Based in part upon the representations of the Investor contained in
the Agreement, the offer, sale, issuance and delivery of the Investor Stock
under the circumstances contemplated by the Agreement are exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the qualification requirements of the California
Corporate Securities Law of 1968, as amended.
8. Except as disclosed in the schedules to the Agreement, the execution
and delivery of the Agreement and the performance by the Company of its terms
(a) will not breach or result in a violation of the Company's Amended and
Restated Certificate of Incorporation or Amended and Restated Bylaws, or any
judgment, order or decree of any court or arbitrator, known to us, to which the
Company is a party or is subject, (b) is neither prohibited by, nor subjects the
Company to, a fine, penalty or similar sanction under, nor will result in the
creation of any lien, charge or encumbrance upon any of the assets of the
Company pursuant to, any statute or regulation of the type which are typically
applicable to transactions similar to those transactions contemplated by the
Agreement, (c) will not constitute a material breach of the terms, conditions or
provisions of, or constitute a default under, or result in the creation of any
lien, charge or encumbrance upon any of the assets of the Company pursuant to,
any contract, undertaking, indenture or other agreement or instrument identified
in Schedule 5.14 to the Agreement or filed as an exhibit to any of the Company's
filings under the Securities Act or the Securities Exchange Act of 1934, as
amended.
9. No consent, approval or authorization of, or designation, declaration
or filing with, any governmental authority is required in connection with the
valid execution, delivery and performance by the Company of the Agreement, other
than such consents, approvals, authorizations, designations, declarations or
filings as have been made or obtained on or before the date hereof or which are
not required to be made or obtained until after the date hereof.
10. Except as disclosed in the Agreement or the exhibits and schedules
delivered in connection therewith, there is, to our current actual knowledge, no
action, suit or proceeding pending against the Company or its properties in any
court or before any governmental authority or agency, or arbitration board or
tribunal (a) which seeks to restrain, enjoin, prevent the consummation of, or
otherwise challenge the Agreement or any of the transactions contemplated
thereby, or (b) which, if
<PAGE>
Titus Interactive SA
March 18, 1999
Page Four
adversely determined, could have a material adverse effect on the Company or its
business or properties.
11. The provisions of Section 203 of the Delaware General Corporation Law
will not apply to either (a) the purchase of the Option Stock by the Investor
pursuant to the exercise of the Universal Option or (b) the consummation of any
Permitted Transaction.
The foregoing opinions are subject to the following:
A. We expressly do not comment upon or render any opinion with respect to
any documents referenced in the Agreement.
B. We express no opinion with respect to the enforceability of Section
11.4 of the Agreement regarding indemnification.
C. The effect of California Civil Code Section 1671 which provides in
part that a contractual provision liquidating the damages for breach of contract
in a commercial transaction will be invalid if it is established that the
provision was "unreasonable" under the circumstances existing at the time the
contract was made.
D. The effect of Section 1698 of the California Civil Code which provides
in part that provisions of any instrument or agreement may only be waived in
writing will not be enforced to the extent that an oral agreement has been
executed modifying provisions of such instrument or agreement.
E. We express no opinion regarding the enforceability of the choice of
law provisions of Section 15.7 of the Agreement.
F. Our opinion in paragraph 5 is made in reliance upon representations of
the Company, and we have made no independent investigation as to the accuracy
thereof.
G. Limitations imposed by Chapter 5 of the California Corporations Code
and the Delaware General Corporation Law relating to the repurchase by a
corporation of its capital stock or the making of distributions with respect
thereto.
We are members of the Bar of the State of California and, accordingly, do
not purport to be experts on or to be qualified to express any opinion herein
concerning, nor do we express any opinion herein concerning, any laws other than
the laws of the State of California, the General Corporation Law of the State of
Delaware and federal law.
<PAGE>
Titus Interactive SA
March 18, 1999
Page Five
The foregoing opinions are being furnished to you solely for your benefit
and may not be relied upon by any other person without our prior written
consent.
Very truly yours,
STRADLING YOCCA CARLSON & RAUTH
<PAGE>
EXHIBIT B
---------
UNIVERSAL OPTION
----------------
<PAGE>
TITUS INTERACTIVE SA
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, California 91311
March 18, 1999
Universal Studios, Inc.
100 Universal City Plaza
Universal City, California 91608
Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Ladies and Gentlemen:
This letter agreement (this "Agreement") sets forth the terms of a
---------
prospective transaction (the "Option Transaction") between Universal Studios,
------------------
Inc. ("Universal") and the undersigned ("Titus") with respect to the purchase by
--------- -----
Titus or its nominee from Universal of all of the common stock, par value $.001
per share (the "Common Stock") of Interplay Entertainment Corp. ("Interplay")
------------ ---------
held by Universal, comprised of 4,658,216 shares of Common Stock (the "Option
------
Stock"). Titus has entered into a Stock Purchase Agreement with Interplay dated
- -----
March 18, 1999 (the "Stock Purchase Agreement"), whereby Titus has agreed to
------------------------
purchase up to 5,000,000 shares of Common Stock (the "New Shares") from
----------
Interplay. As a condition to the closing of the transactions contemplated by
the Stock Purchase Agreement (the "Interplay Closing"), Titus requires that
-----------------
Universal and Interplay countersign this Agreement where indicated below
evidencing the mutual agreement of Universal and Titus regarding the Option
Transaction, and certain waivers by Interplay.
1. Grant of Option.
---------------
(a) Upon the Interplay Closing and for a period of one hundred
eighty (180) days after the Interplay Closing (the "Option Period"), Titus shall
-------------
have the unconditional right and option (the "Option") to purchase all of the
------
Option Stock. The
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 2
exercise price per share of the Option Stock (the "Option Price")
------------
shall be equal to the higher of (i) the average of the closing price of the
Common Stock as reported on the NASDAQ-NMS for the ten (10) trading days
preceding the date of the first public announcement of the Interplay Closing or
(ii) if during the Option Period, Titus or an affiliate of Titus initiates a
tender offer for the Common Stock or otherwise executes an agreement for the
merger, consolidation or acquisition of all or substantially all of the issued
and outstanding shares of Common Stock, or all or substantially all of the
assets of Interplay ("Merger Agreement"), the price paid to the Company's public
----------------
shareholders pursuant to such tender offer or Merger Agreement. If the Option
Closing takes place at the price set forth in clause (i) above and a tender
offer or Merger Agreement is subsequently made or executed during the Option
Period, the difference between the price paid pursuant to clause (i) above and
the price paid pursuant to the tender offer or Merger Agreement, if higher,
shall be promptly paid by Titus to Universal.
(b) In consideration of Universal's grant of the Option, Titus
hereby agrees to pay Universal $500,000 (the "Option Payment"), payable the date
--------------
of the Interplay Closing, by wire transfer to an account specified by Universal.
The Option Payment shall be credited against the Option Price in the event Titus
exercises the Option. In the event Titus does not exercise the Option, the
Option Payment shall be retained by Universal.
2. Exercise of Option.
------------------
(a) Option Closing. The Option shall be exercisable at any time
--------------
during the Option Period. The Option shall be exercised by Titus' giving
written notice (the "Option Exercise Notice") signed by an officer of Titus to
----------------------
Universal. Upon delivery of the Option Exercise Notice, upon the terms and
subject to the conditions contained herein (including without limitation Section
4 hereof), Titus shall become obligated to purchase from Universal, and
Universal shall become obligated to sell to Titus, the Option Stock for cash at
the Option Price at the Option Closing. The Option Price (net of the Option
Payment) shall be paid by wire transfer to an account specified in writing by
Universal, at a closing (the "Option Closing") on the date (the "Option Closing
-------------- --------------
Date") specified in the Option Exercise Notice (which date shall be within the
- ----
Option Period and no later than five (5) days after the date of the Option
Exercise Notice), or
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 3
such later date as may be required to comply with the HSR Act (as defined
below), but in no event shall the Option Closing occur after December 31, 1999.
In the event that the Option has been exercised, but the Option Closing has not
occurred on or before the Option Period because the condition set forth in
Section 2(c) hereof has not been satisfied then, upon the expiration of the
Option Period, Titus shall deposit with an escrow agent the Option Price (net of
the Option Payment) to be held in an escrow account until the earlier of (i) the
satisfaction of the condition set forth in Section 2(c) hereof and (ii) December
31, 1999, pursuant to written escrow instructions mutually agreed upon by Titus
and Universal.
(b) Limited Waiver of Section 2.4. Universal hereby agrees that,
-----------------------------
notwithstanding the other provisions of Section 2.4 of the Shareholders'
Agreement (defined below), upon its receipt of the Option Exercise Notice, it
shall be obligated to sell to Titus the Option Stock at any time after Titus'
exercise of the Option. Interplay and Universal hereby waive any notice
provisions in the Shareholders' Agreement which would otherwise preclude the
immediate exercise by Titus of the Option at any time during the Option Period.
(c) Hart-Scott-Rodino Compliance. As a condition to the exercise
----------------------------
of the Option, any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have
-------
expired or been terminated. To the extent either Universal or Titus is required
in connection with the transactions contemplated hereby to file a notification
and report form in compliance with the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, or the rules and regulations promulgated thereunder,
each party agrees to fully cooperate with such other party to enable such other
party to promptly make such filing and to respond to any requests for additional
information in connection therewith.
(d) Additional Consideration. In the event that, on or before
------------------------
December 31, 1999, Titus sells all of the New Shares it acquires at the
Interplay Closing and all the Option Stock it then holds (collectively, the
"Block") in a single transaction or series of related transactions to a
-----
purchaser (or purchasers who are affiliated with one another) who is
unaffiliated with Titus (a "Block Sale"), whether or not in connection with a
----------
sale of Interplay, then, within five business days of the closing of such
transaction,
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 4
Titus will remit to Universal, for each share of Option Stock included in the
Block, as additional purchase price for the Option Stock, an amount equal to
twenty-five percent (25%) of the excess, if any, of the price per share received
by Titus in the Block Sale over the Option Price. Such additional payment to
Universal shall only be due, if at all, for a Block Sale, and shall not apply to
any other disposition of the Option Stock, including ordinary public sales or
private re-sales to multiple unaffiliated purchasers.
3. Restrictions on Transfer During Option Period. During the Option
---------------------------------------------
Period, Universal covenants and agrees that it shall not sell, assign, pledge,
mortgage or otherwise dispose of or transfer any shares of the Option Stock, or
any other securities of Interplay, whether now owned or hereafter acquired, or
agree to do any of the foregoing, except to Titus.
4. Concurrent Transactions. Prior to the execution of this
-----------------------
Agreement:
(a) The Board of Directors of Interplay shall have approved this
Agreement and the Stock Purchase Agreement and the transactions contemplated
hereby and thereby.
(b) Brian Fargo shall have waived in writing his right of first
refusal and other rights under Section 2.4 of the Shareholders Agreement with
respect to this Agreement, and the transactions contemplated hereby.
5. Representations and Warranties of Universal. Universal represents
-------------------------------------------
and warrants to, and covenants and agrees with, Titus as follows:
(a) Universal has all requisite power and authority to execute,
deliver and perform this Agreement, and all corporate acts and proceedings
required for the authorization, execution and delivery of this Agreement and the
performance of this Agreement have been lawfully and validly taken or will have
been so taken prior to the Option Closing.
(b) This Agreement constitutes the legal, valid and binding
obligation of Universal and is enforceable against Universal in accordance with
its terms,
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 5
except as such enforcement is limited by bankruptcy, insolvency and other
similar laws affecting the enforcement of creditors' rights generally.
(c) Universal has good and marketable title to all of the Option
Stock, free and clear of any lien or restriction on transfer (except for the
Option), and upon the payment by Titus to Universal of the Option Price as
contemplated hereby, Titus will acquire good and marketable title to the Option
Stock, free and clear of all liens and encumbrances.
(d) Universal has been advised that, to the extent the Option is
exercised by Titus, Titus has granted to Interplay an option to acquire from
Titus up to one-half (1/2) of the Option Stock for a price per share equal to
the Option Price.
(e) Universal acknowledges and agrees that upon the consummation
of the Option Closing, all of its rights under the Shareholders' Agreement shall
be terminated except as provided in Section 6.2 of the Shareholders' Agreement
with respect to indemnification by Interplay of directors and officers of
Interplay.
6. Representations and Warranties of Titus. Titus represents and
---------------------------------------
warrants to, and covenants and agrees with, Universal as follows:
(a) Titus has all requisite power and authority to execute,
deliver and perform this Agreement, and all corporate acts and proceedings
required for the authorization, execution and delivery of this Agreement and the
performance of this Agreement have been lawfully and validly taken or will have
been so taken prior to the Option Closing.
(b) This Agreement constitutes the legal, valid and binding
obligation of Titus and is enforceable against Titus in accordance with its
terms, except as such enforcement is limited by bankruptcy, insolvency and other
similar laws affecting the enforcement of creditors' rights generally.
(c) Titus acknowledges that it has conducted and is continuing to
conduct an independent due diligence investigation of Interplay, including but
not
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 6
limited to an investigation and verification of the financial condition,
results of operation, assets, liabilities, properties, prospects or projected
operations of Interplay. Titus further acknowledges that, in making its
determination to acquire, or exercise, the Option contemplated by this
Agreement, Universal shall not have been deemed to have made to Titus any
representation or warranty other than as expressly made by Universal in Section
5 hereof. Without limiting the generality of the foregoing, Universal makes no
representation or warranty to Titus with respect to the financial condition,
results of operation, assets, liabilities, properties, prospects and projected
operations of Interplay or any other information or documents (financial or
otherwise) made available to Titus or its counsel, accountants or advisers with
respect to Interplay.
(d) (i) Titus is acquiring the Option and the Option Stock for
investment purposes only, for its own account, and not as nominee or agent for
any other person or entity, and not with the view to, or for resale in
connection with, any distribution thereof within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and (ii) Titus is an "accredited
--------------
investor" within the meaning of Regulation D of the Securities and Exchange
Commission under the Securities Act.
7. Miscellaneous.
-------------
(a) Waivers and Amendments. 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 by the written consent of Universal and Titus. Any amendment or
waiver effected in accordance with this Section 7(a) shall be binding
upon Universal, Titus and their respective successors and assigns. No
waiver by any party of the breach of any term or provision contained in
this Agreement, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in the
Agreement.
(b) Binding Agreement; Assignment of Rights. No party hereto
---------------------------------------
may assign this Agreement or any of its rights hereunder to any third party,
except for transfers to an affiliate of the assigning party. Subject to the
foregoing, this Agreement and the rights and obligations of the parties
hereunder shall inure to the
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 7
benefit of, and be binding upon, their respective successors, assigns, estates,
heirs and legal representatives.
(c) Notices. All notices, requests, consents and other
-------
communications required or permitted hereunder shall be in writing (including
telecopy or similar writing) and shall be given,
if to Universal to:
Universal Studios, Inc.
100 Universal City Plaza
Universal City, California 91608
Attention: General Counsel
Telecopier: (818) 866-3444
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
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 S. Flower Street, 23rd Floor
Los Angeles, California 90071-2371
Attention: Robert A. Miller, Jr., Esq.
Telecopier: (213) 627-0705
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 8
or to such other address or telecopier number as such party may specify for the
purpose by notice to the other party or parties to this Agreement, as the case
may be. Any notice, request, consent or other communication hereunder shall be
deemed to have been given and received on the day on which it is delivered (by
any means including personal delivery, overnight air courier, United States
mail) or telecopied (or, if such day is not a business day or if the notice,
request, consent or communication is not telecopied during business hours of the
intended recipient, at the place of receipt, on the next following business
day).
(d) Choice of Law. It is the intention of the parties that the
-------------
internal substantive laws, and not the laws of conflicts, of California should
govern the enforceability and validity of this Agreement, the construction of
its terms and the interpretation of the rights and duties of the parties.
(e) Counterparts. This Agreement may be executed in any number
-----------
of counterparts and by different parties hereto in separate counterparts, with
the same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
(f) Entire Agreement. This Agreement and any agreement, or
----------------
document instrument referred to herein or therein, constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof, and supersede all other prior agreements or undertakings with respect
thereto, both written and oral.
<PAGE>
Universal Studios, Inc.
Interplay Entertainment Corp.
March 18, 1999
Page 9
If the foregoing is acceptable to you, please indicate your acceptance
and approval by signing, or by causing to be signed on your behalf, the enclosed
copy of this Agreement and returning it to the undersigned.
Very truly yours,
TITUS INTERACTIVE SA, a French
corporation
By:
------------------------------
Herve Caen, Chairman and Chief
Executive Officer
ACCEPTED AND AGREED:
UNIVERSAL STUDIOS, INC.
By:
--------------------------
Name:
Title:
INTERPLAY ENTERTAINMENT CORP.,
a Delaware corporation
By:
--------------------------
Name:
Title:
<PAGE>
EXHIBIT C
---------
FARGO WAIVER
------------
<PAGE>
WAIVER OF RIGHT OF FIRST REFUSAL
A. Universal Studios, Inc., a Delaware corporation ("Universal") desires
to grant an option (the "Option") to purchase all of the Common Stock of
Interplay Entertainment Corp., a Delaware corporation ("Interplay") held by
Universal (the "Universal Shares") to Titus Interactive SA, a French corporation
("Titus"), in exchange for consideration of $500,000, all as set forth in a
letter agreement dated the date hereof among Universal, Interplay and Titus (the
"Option Agreement");
B. Brian Fargo holds a right of first refusal (the "Right of First
Refusal") with respect to the sale or transfer of the Universal Shares pursuant
to Section 2.4 of that certain Shareholders' Agreement dated March 30, 1994
among Interplay, Universal and Fargo;
C. In order for Titus to exercise the Option without the Universal Shares
being first offered to Fargo for purchase pursuant to the Right of First
Refusal, Fargo must waive the Right of First Refusal.
ACCORDINGLY, the undersigned hereby agrees as follows:
1. Brian Fargo hereby waives the Right of First Refusal with respect to
the Universal Shares only in connection with their purchase by Titus
under the terms and conditions of the Option as set forth in the
Option Agreement.
2. This Waiver shall not be construed as a waiver of compliance with
respect to any additional terms or conditions in the Shareholders'
Agreement or with respect to any other offers to purchase or purchases
of the Universal Shares, except as expressly stated hereinabove.
IN WITNESS WHEREOF, the undersigned has executed this Waiver of Right of
First Refusal as of the __ day of March, 1999.
--------------------------------------------
Brian Fargo
<PAGE>
EXHIBIT D
---------
IRREVOCABLE PROXY
-----------------
<PAGE>
EXHIBIT 1026D
IRREVOCABLE PROXY
The undersigned, , as record owner of shares (the
---------------- ---------
"Shares") of the Common Stock of INTERPLAY ENTERTAINMENT CORP., a Delaware
corporation (the "Company"), hereby revokes all previous proxies and irrevocably
designates TITUS INTERACTIVE SA ("Titus") as proxy of the undersigned (the
"Proxy"), to (a) attend and vote at any and all meetings of the stockholders of
the Company, (b) execute any and all written consents of stockholders of the
Company and (c) otherwise act for the undersigned with respect to the Shares in
the same manner and with the same effect as if the undersigned were personally
present at any such meeting and voting the Shares, or personally acting on any
such matters submitted to stockholders for approval or consent, in favor of the
issuance of up to 5,000,000 shares of the Company's Common Stock to Titus
pursuant to that certain Stock Purchase Agreement dated as of March 18, 1999
(the "Purchase Agreement") among the Company, Titus and Brian Fargo.
The undersigned authorizes the Proxy to substitute any other person to act
hereunder (provided that such substitution is in connection with the Merger of
the Proxy with another entity or the sale of all or substantially all of the
Proxy's assets to another entity), and to file this irrevocable proxy and any
such substitute with the Secretary of the Company.
This proxy is irrevocable until and is coupled with an interest, and is
-------
given in consideration of the making of an equity investment in the Company by
Titus pursuant to the terms and conditions of the Purchase Agreement.
Dated: March __, 1999
-----------------------------------------
_____________________
<PAGE>
EXHIBIT 10.25
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the "Second Amendment")
is made and entered into as of the 18/th/ day of March, 1999, by and among
INTERPLAY ENTERTAINMENT CORP., a Delaware corporation, which is the successor-
in-interest to Interplay Productions, a California corporation (the "Company"),
BRIAN FARGO, an individual (the "Executive") and UNIVERSAL STUDIOS, INC., a
Delaware corporation, which is the successor-in-interest to MCA, Inc.
("Universal").
WHEREAS, the Executive is presently employed by the Company pursuant
to a written Employment Agreement dated as of March 28, 1994 (the "Employment
Agreement"), under the terms and conditions of which, among other things, the
Executive is employed by the Company for a five-year period from March 30, 1994;
WHEREAS, the Company desires to enter into a Stock Purchase Agreement
with Titus Interactive SA ("Titus") and the Executive (the "Purchase
Agreement");
WHEREAS, as a condition to entering into the Purchase Agreement, Titus
requires that the Employment Agreement be amended to provide a one-year
extension of the term of the Executive's employment with the Company;
WHEREAS, pursuant to Section 10(a) of the Employment Agreement, the
written consent of the Company, the Executive and Universal are required to
amend the Employment Agreement; and
WHEREAS, the Company, the Executive and Universal desire that the
Company should enter into the Purchase Agreement with Titus, and consequently
desire to amend the Employment Agreement as stated herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, and in accordance with Section 10(a) of the Employment
Agreement, the parties hereto hereby agree as follows:
1. Definitions. Unless otherwise defined herein, capitalized terms
-----------
used in this Amendment shall have the same meanings ascribed to them in the
Employment Agreement.
2. Amendment. Section 1 of the Employment Agreement shall be amended
---------
in its entirety to state 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 a period of six years from
the date of March 30, 1994 (the "Employment Period")."
3. Entire Agreement; Amendment. The Employment Agreement, as amended
---------------------------
by the First Amendment to Employment Agreement dated as of March 2, 1998 (the
"First Amendment")
<PAGE>
and this Amendment, constitutes the full and complete agreement and
understanding between the parties hereto regarding the subject matter of the
Employment Agreement and shall supersede all prior communications,
representations, understandings or agreements, if any, whether oral or written,
concerning the subject matter contained in the Employment Agreement, as so
amended, and that no provision of the Employment Agreement, as so amended, may
be modified, amended, waived or discharged, in whole or in part, except in
accordance with its terms.
4. Force and Effect. Except as modified by the First Amendment and
----------------
this Amendment, the terms and provisions of the Employment Agreement are hereby
ratified and confirmed and are and shall remain in full force and effect.
Should any inconsistency arise between this Amendment and the First Amendment or
the Employment Agreement as to the specific matters which are the subject of
this Amendment, the terms and conditions of this Amendment shall control. This
Amendment shall be construed to be part of the Employment Agreement and shall be
deemed incorporated into the Employment Agreement by this reference.
5. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to Employment Agreement effective as of the day and year first above
written.
COMPANY:
INTERPLAY ENTERTAINMENT CORP.
By: /s/ Christopher J. Kilpatrick
-----------------------------
Christopher J. Kilpatrick,
President
EXECUTIVE:
/s/ Brian Fargo
---------------------------------
Brian Fargo
UNIVERSAL STUDIOS, INC.
By: /s/ Brian C. Mulligan
-----------------------------
Its: Executive Vice President
------------------------
2
<PAGE>
EXHIBIT 10.26
CONFIDENTIAL TREATMENT REQUESTED
INTERNATIONAL DISTRIBUTION AGREEMENT
[Interplay's Logo]
This INTERNATIONAL DISTRIBUTION AGREEMENT (this "Agreement") is entered
into effective February 10, 1999 (the "Effective Date") by and between INTERPLAY
--
ENTERTAINMENT CORP., a Delaware corporation whose principal place of business is
at 16815 Von Karman Avenue, Irvine, California 92606 (hereinafter "Interplay"),
and VIRGIN INTERACTIVE ENTERTAINMENT LIMITED, a corporation formed under the
laws of England and Wales whose principal place of business is at 2 Kensington
Square, London, England, W8 5 RB (hereinafter "Virgin"), with respect to the
following recitals:
RECITALS
--------
A. VIE Acquisition Group, LLC, a Delaware limited liability company ("VIE
Acquisition Group") of which VIE Acquisition Holdings, LLC, a Delaware limited
liability company ("Holdings") is the only member, has acquired all of the
capital stock and the underlying business of Virgin pursuant to that certain
Sale and Purchase Agreement dated November 6, 1998 by and between Viacom
International Inc. and Spelling Entertainment Group Inc., on the one hand, and
VIE Acquisition Group, on the other hand (the "Viacom Transaction").
B. Interplay is a developer and publisher of computer game programs
operable on various computer and video game consoles and systems.
C. Virgin has the necessary organization and expertise in the sale and
distribution of computer software programs and video games in the Territory (as
defined below).
D. Interplay desires to appoint Virgin, and Virgin is willing to accept
such appointment, as distributor for the Products (as defined on Exhibit A
---------
hereto) in the Territory and on the terms and conditions set forth in this
Agreement.
E. Contemporaneously herewith, Interplay and Holdings are entering into an
Operating Agreement (the "Operating Agreement") with respect to the operation of
VIE Acquisition Group, Interplay and Virgin are entering into a Product
Publishing Agreement (the "Publishing Agreement") with respect to the publishing
by Interplay of certain of Virgin's products in North America and certain other
territories.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
agreements and promises set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
<PAGE>
1. APPOINTMENT.
-----------
(a) Appointment. Subject to restrictions imposed by third party
-----------
licensors of Interplay, Interplay hereby appoints Virgin and Virgin hereby
accepts appointment, as Interplay's exclusive (even as to Interplay) distributor
with respect to the Products in the Territory during the Term subject to the
rights reserved in Section 1(f) below. Subject to Interplay's election to
perform such manufacturing function on a case-by-case basis, Interplay hereby
grants Virgin a non-exclusive license to manufacture the Products or have the
Products manufactured solely to facilitate Virgin's performance of its duties
and exercise of its rights under Sections 2 and 5 hereof.
(b) Subdistributors. Virgin agrees that it will sell and distribute
---------------
the Products directly to the public and/or outright to wholesalers, dealers,
subdistributors, on-line resellers, direct marketers and/or retailers for resale
and distribution directly to the public on terms that are reasonable and
customary in the interactive entertainment software industry. Virgin will not
sell or distribute any of the Products to hawkers, street vendors, peddlers, or
to any person, firm or other entity intending to use them for publicity purposes
whether as gifts or otherwise, provided that Virgin will be permitted to
distribute a reasonable number of demonstration copies of the Products for
legitimate promotional purposes to the press, retailers and dealers. Should
Virgin desire to undertake distribution and/or sale of any of the Products by
any method or means not hereby authorized, Virgin shall first notify Interplay
in writing of the particulars of such method or means and shall not proceed
therewith unless and until Interplay gives its written consent, which may not be
unreasonably withheld. Virgin shall ensure that its authorized subdistributors
abide by all of the terms and provisions of this Agreement and Virgin shall not
be relieved of any of its obligations to Interplay hereunder with respect to
such subdistributor, including, without limitation, financial, marketing and
reporting obligations. The parties expressly acknowledge that Virgin has and
may hereafter establish or acquire certain wholly owned subsidiaries ("Virgin
Subsidiaries") operating distribution companies in the various countries within
the Territory and the appointment of such Virgin Subsidiaries as subdistributors
is expressly permitted hereunder, provided that the payment to Interplay under
this Agreement shall be based upon the wholesale price charged by such Virgin
Subsidiary to its customers without regard to any inter-company charge or fee
between Virgin and the Virgin Subsidiary, such that Interplay is not adversely
impacted by such appointment of the Virgin Subsidiary as a subdistributor,
whether or not Virgin's percentage ownership in any such Virgin Subsidiary
changes in the future.
(c) Trademarks. Subject to Section 8(c), Interplay hereby grants to
----------
Virgin (a) an exclusive (even as to Interplay, except as hereinafter provided)
license within the Territory to reproduce and use the trademarks and service
marks used in connection with the Products (including, without limitation, the
title and name of the Products), and (b) the non-exclusive license within the
Territory to reproduce and use the Interplay name and logo and other Interplay
publishing brands as designated by Interplay (collectively, the "Interplay
Marks") in Virgin's advertising, marketing and other promotion of the Products
solely in the Territory. Notwithstanding the foregoing, Interplay hereby
reserves the right to reproduce and use the Interplay Marks in the Territory in
connection with Interplay's exercise of the rights reserved in Section 1(f)
below.
(d) Territory. For purposes of this Agreement, "Territory" shall
---------
mean Europe (including Scandinavia), CIS (former U.S.S.R), Africa and the Middle
East. Interplay shall not distribute or publish any computer software programs
or video games (whether or not constituting a
2
<PAGE>
"Product" hereunder) in the Territory except (i) through Virgin pursuant to this
Agreement, (ii) as required by the provisions of those agreements entered into
by Interplay prior to the date of this Agreement that are listed on Exhibit C
hereto (but only until the current expiration dates of such agreements), and
(iii) in connection with the electronic transmission of Products, OEM
Transactions with respect to Products, sub-budget rights with respect to
Products, merchandising of Products, and Licensed Derivative Works (as defined
in paragraph (g) below), in each case only as permitted by Section 1(f).
(e) Localized Versions. Virgin may request that Interplay localize
------------------
one or more Products into one or more of German, French, Spanish or Italian.
Interplay shall use its diligent efforts to comply with such request, at its
expense, if such localization would be commercially viable, except that
Interplay shall only be obligated to localize Products into Italian or Spanish
if it deems appropriate in its sole discretion. Such localized version of a
Product shall be added to the definition of "Products" hereunder.
(f) Reserved Rights. Only those rights with respect to the right to
---------------
distribute the Products in the Territory expressly granted in this Section 1 are
licensed by Interplay to Virgin. All other rights, including, without
limitation, all rights outside the Territory, all rights to translate and
localize the Products, any electronic transmission rights, (including, without
limitation, cable, the internet and any on-line services, but excluding
electronic downloading of full versions of the Products in or to the Territory
and/or acceptance or fulfillment of orders from within the Territory for
shipments of Products to the Territory), any rights with respect to OEM
Transactions (as hereafter defined), all "sub-budget" rights (which shall mean
products which were initially released in the Territory at least [*] prior to
such date and which are sold through non-traditional retail channels [including
without limitation drug stores and food chains, etc.] at an expected retail
price of less than [*] per unit), any and all other merchandising rights of any
kind whatsoever, and rights with respect to Licensed Derivative Works, are
specifically excluded from this Agreement and are retained and reserved by
Interplay exclusively and worldwide. As a matter of clarity, Virgin may not
fulfill direct online orders for Products to be shipped outside the Territory,
but Virgin may forward such orders to Interplay to fulfill. Any distribution or
use by Interplay of such reserved rights, including, without limitation, the use
or authorization of others to use or exploit any of the Products, Interplay
Marks (as defined below) and/or any portion of the copyrighted audiovisual works
of or concerning the Products in any manner in connection with any articles of
merchandise and product consistent with Interplay's reserved rights shall not be
deemed unfair competition, interference or infringement of any of Virgin's
rights hereunder.
(g) Licensed Derivative Works. [*]
-------------------------
3
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
(h) Performance Under Certain Distribution Agreements. Interplay
-------------------------------------------------
hereby engages Virgin to perform on Interplay's behalf, and Virgin agrees to
perform, Interplay's distribution and product supply obligations, to the extent
arising after the date of this Agreement under those distribution agreements
listed on Exhibit C-1 hereto (true and correct copies of which have previously
been provided to counsel for Virgin) (the "Assumed Agreements"), to the extent
pertaining to the distribution of computer software programs or video games in
the Territory from and after the date hereof. As consideration for such
performance by Virgin, Interplay shall pay Virgin a fee equal to the fee that
would be payable to Virgin if the products actually distributed under the
Assumed Agreements were instead Products distributed by Virgin pursuant to this
Agreement. For purposes of clarity, Virgin shall not be entitled to receive any
payments under guaranteed minimums that do not result from actual sales of
products. In addition, Virgin shall, at Interplay's election, perform the
manufacturing services set forth in Section 5(k) hereof with respect to the
products provided under such agreements, and Interplay shall reimburse Virgin
for the costs of such manufacturing services as set forth in Section 4(d) hereof
and shall perform its obligations under Section 5(k) hereof with respect to such
manufacturing services and otherwise assist Virgin as reasonably necessary to
permit Virgin to timely perform such manufacturing services. In the absence of
such an election, Interplay shall continue to manufacture and ship products to
Virgin so as to permit Virgin to timely perform Interplay's obligations under
the Assumed Agreements. This Agreement shall not constitute an agreement to
subcontract Interplay's obligations under such agreements if such an agreement
without the consent required or necessary of a third party would constitute a
breach or violation thereof. If such a consent of a third party which is
required in order to enter into such a subcontract is not obtained prior to the
date hereof, Interplay and Virgin shall cooperate in any lawful arrangement to
effectuate the intent of this Section.
2. ORDERING.
--------
(a) Orders. Virgin may order Products described on Exhibit A by means
------
of a written purchase order. With respect to new Product releases, the parties
shall mutually agree upon the initial ship-in orders for all Products based upon
expected demand for the particular Product and Virgin shall place a written
purchase order in sufficient time to facilitate the release of such Product. In
order to facilitate expected demand on an ongoing basis, Virgin shall provide to
Interplay from time to time upon Interplay's written request non-binding
forecasts of expected customer orders or customer demand for each of the
Products available for the ensuing three month period.
(b) Interplay Acceptance. All orders for Products by Virgin shall be
--------------------
subject to acceptance by Interplay and shall not be binding on Interplay until
the earlier of confirmation or shipment, and, in the case of acceptance by
shipment, only as to the portion of the order actually shipped; provided,
however, that Interplay agrees not to unreasonably withhold its acceptance of
any order. In the event Virgin receives no rejection of an order within ten
(10) business days after submitting an order, such order shall be deemed
accepted by Interplay.
(c) Manufacturing. Once Interplay accepts an order from Virgin
-------------
hereunder, Interplay shall, at its discretion, (i) manufacture such Products
itself and ship such Products to
4
<PAGE>
Virgin, or (ii) place a manufacturing order with Virgin to manufacture the
Products (or have the Products manufactured) on behalf of Interplay in
accordance with Section 5(k) below, or (iii) any combination of the foregoing,
to the extent necessary to satisfy such Virgin order.
(d) Pricing. The price to be paid by Virgin to Interplay for the
-------
Products shall be a percentage of the Net Sales as specified on Exhibit B.
---------
Interplay shall provide Virgin with suggested wholesale prices for the Products.
(e) Controlling Terms. The terms and conditions of this Agreement
-----------------
shall apply to each order for Products hereunder. Any terms or conditions
appearing on the face or reverse side of any purchase order, acknowledgment, or
confirmation that are different from or in addition to those required hereunder
shall not be binding on the parties, even if signed and returned, unless both
parties hereto expressly agree in a separate writing to be bound by such
separate or additional terms and conditions.
(f) Title and Risk of Loss. Title to the Products shall remain with
----------------------
Interplay until such units are shipped to Virgin's warehouse(s) located in the
Territory and title shall pass to Virgin upon delivery to Virgin's warehouse.
It is anticipated that Interplay, or a third party duplicator, will ship the
Products to Virgin's warehouse(s) located in the Territory where the Products
will be held pending resale to Virgin's customers in the Territory. Interplay
shall bear the risk of loss on shipments of the Products until delivery to the
Virgin warehouse and Virgin shall bear the risk of loss thereafter.
(g) Interplay Cancellation. Interplay reserves the right to cancel or
----------------------
suspend any orders placed by Virgin and accepted by Interplay, or refuse or
delay shipment thereof, (i) if Virgin fails to make payment as provided herein
or in any invoice, or to comply with the terms and conditions of this Agreement
and fails to cure such nonpayment or noncompliance within any applicable cure
periods provided herein, or (ii) if Interplay no longer has the right to
distribute the Product in the Territory.
(h) Delivery Schedule. Except as otherwise provided in Section 2(g)
-----------------
herein, to the extent Interplay is responsible for shipping such order and
subject to any longer period of time required by the manufacturer of the
Product. With respect to personal computer products, Interplay shall ship an
order within [*] of receipt of the order. With respect to products for use with
video game console systems, Interplay shall cause the orders to be shipped to
Virgin within the time frame specified by the first party licensor doing the
manufacturing. Upon Virgin's request for a commercially reasonable delivery
schedule, Interplay shall use diligent efforts to meet Virgin's requested
delivery schedule. Interplay may make partial shipments of Virgin's orders to be
separately invoiced and paid for when due.
3. PAYMENTS.
--------
(a) Payments. Payments for Products shall be made by Virgin to
--------
Interplay as specified in Exhibit B hereto for each of the Products sold or
---------
licensed by Virgin under this Agreement, subject to adjustment as set forth on
Exhibit B. Interplay shall also pay to Virgin when due all fees and other
- ---------
moneys required to be paid by Interplay to Virgin pursuant to the provisions of
Exhibit B attached hereto.
- ---------
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
5
<PAGE>
(b) Payment Terms. Virgin and/or its authorized agent shall make
-------------
payments hereunder with respect to any given order for the Products in the
manner described in Exhibit B hereto. All payments required to be made by
---------
Virgin hereunder shall be made in British Pounds unless otherwise agreed to by
Interplay and Virgin during the term of this Agreement. All such payments shall
be made via bank wire transfer to Interplay's bank or via bank check to
Interplay. In the event Virgin pays via bank wire transfer, Virgin will provide
Interplay with a copy, via telefax, (confirmed in writing), of the bank wire
transfer receipt within two (2) days of processing the transfer of funds. The
banking instructions may be changed by Interplay by providing Virgin with
written notice thereof. Interplay may charge interest on any past due amount at
the rate of [*] per month compounded and calculated from the time the amount
became past due until paid, or, if lower, the maximum rate permitted by law.
4. INTERPLAY'S OBLIGATIONS.
-----------------------
(a) Support and Training. Interplay shall, at the reasonable request
--------------------
of Virgin and at no cost to Virgin, provide reasonable technical support to
Virgin regarding any questions that Virgin has with respect to the Products.
(b) Grey Market Prevention. Until this Agreement is terminated,
----------------------
Interplay shall not exploit, sell, license or distribute the Products in
contravention of the sole and exclusive distribution rights set forth in Section
1 to any customer or licensee located in the Territory or to any customer or
licensee who it has reason to believe will exploit, sell, license or distribute
the Products in the Territory, commonly referred to as "grey market" activity.
In the event grey market sales activity is deemed by Virgin to be a problem,
Interplay agrees to use its best commercial efforts to eliminate such grey
market sales.
(c) Shipping To Virgin. Interplay shall be responsible for all
------------------
packaging, freight and transportation charges to Virgin's warehouse(s) for the
Products.
(d) Expense Reimbursements. Interplay shall pay for the approved
----------------------
marketing expenditures incurred by Virgin on Interplay's behalf in accordance
with the Marketing Plan described in Section 5(c) below, and the direct costs of
manufacturing the Products or having the Products manufactured and shipped to
Virgin's warehouse under Section 5, in each case such payment to be made by way
of deduction of amounts owed to Interplay in accordance with Exhibit B.
---------
Interplay shall not have any obligation to pay any other fee, expense or other
amount to Virgin or Virgin's vendors for the services to be provided by Virgin
under Section 5 or otherwise, except as expressly provided in Exhibit B.
---------
(e) Demo Version. Interplay shall use its reasonable efforts to
------------
provide Virgin with a demonstration version of each Product at least ninety (90)
days prior to the scheduled completion of such Product (or as soon thereafter as
possible), unless the parties agree otherwise. Interplay shall have the right
to determine the content and features to be included in such demonstration
versions.
(f) Marketing Spend. With respect to each Product which is initially
---------------
released by Interplay under this Agreement, Interplay agrees to spend in the
Territory at least [*] of its projected Net Sales (less the Return Reserve) for
such Product in the European market
6
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
on marketing and advertising for such Product (the "Minimum Marketing Spend").
All marketing and advertising costs incurred in favor of third parties by or on
behalf of Interplay in the Territory shall be applied toward meeting Interplay's
obligation hereunder, including, without limitation, print, television, radio
and other advertising, special marketing events to promote the Products and coop
and MDF funds. Any portion of the Minimum Marketing Spend not spent by Interplay
during any calendar year during the term of this Agreement shall be added to the
Minimum Marketing Spend for the succeeding calendar year. For purposes of the
preceding sentence, expenditures shall be deemed to have occurred as and to the
extent that the marketing activity for which the expenditure is payable is
undertaken, not when the cost thereof is actually paid.
(g) OEM Transaction Restriction. Interplay hereby agrees not to ship
---------------------------
any versions of the Products for any platform in OEM Transactions within
[*] of the initial release of such Product on such platform in the
Territory without the approval of Virgin (which approval may be withheld by
Virgin in the exercise of its sole discretion), except for "Limited Versions"
(as hereinafter defined). For the purposes of this Agreement, (a) "OEM
Transactions" shall be defined as the sale, license or other distribution of one
or more Products, either directly or through software aggregators, to ultimately
be sold only with or in conjunction with one or more hardware products without
separate charge if (as applicable) (i) during the first [*] following the
initial release of such Product on such platform in the Territory, the combined
hardware and software products have an expected retail price of at least $[*] or
(ii) thereafter, the combined hardware and software products have an expected
retail price of at least [*]% of the suggested retail price of the Product, and
(b) "Limited Versions" shall be defined as versions of a Product having less
than approximately [*] of the total game play experience of the full retail
version of such Product (e.g., levels, missions, game play features).
(h) Release Schedule and Beta Versions. Interplay will deliver to
----------------------------------
Virgin alpha and beta versions of each Product as it becomes available and a
projected Product release schedule as such schedule may be updated from time to
time to allow Virgin to prepare for and manage the release of the Products in
the Territory. "Alpha" and "beta" shall be defined as such terms are
----- ----
customarily defined in the interactive entertainment software industry. Virgin
acknowledges and agrees that the Product release schedule is confidential
information of Interplay and may not be disclosed to third parties, provided
that Virgin may make such disclosures as are consistent with the implementation
of the Marketing Plan for each such Product.
5. VIRGIN'S RIGHTS AND OBLIGATIONS.
-------------------------------
Virgin shall have the following rights, duties and obligations:
(a) Distribution. Virgin shall -use commercially diligent efforts to
------------
sell and distribute the Products in the Territory. Nothing herein shall be
deemed to preclude Virgin from marketing or distributing competing products in
the Territory.
(b) Marketing and Sales Force. Virgin shall maintain and manage a
-------------------------
marketing, distribution and sales force to actively promote the distribution of
the Products throughout the Territory, such sales force to have sufficient size,
skill, training, experience and resources to service the entire Territory in a
professional manner consistent with the commercially recognized industry
7
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
standards. The foregoing shall not obligate Virgin to maintain a sales office or
sales personnel in any given country other than the United Kingdom, Germany,
France and Spain.
(c) Marketing. Virgin shall provide marketing of the Products in the
---------
Territory on behalf of Interplay and at Interplay's direction in accordance with
a marketing plan to be approved by Interplay for each Product. Virgin shall
provide to Interplay a twelve (12) month general marketing plan for Interplay's
reasonable approval, such general marketing plan to be delivered to Interplay
within thirty (30) days of the Effective Date and to be updated on a quarterly
basis for Interplay's reasonable approval. The general marketing plan will
include, without limitation, all projected sales, promotional activities,
including, among others, advertising, public relations, trade shows and direct
mailings, for all Products under this Agreement. In addition to the foregoing
general marketing plan, Virgin will provide a product specific marketing plan
for each Product for Interplay's approval prior to release of such Product. Each
marketing plan prepared and approved in accordance with this Section 5(c) shall
be referred to as a "Marketing Plan." All third party costs and charges
associated with implementation of Marketing Plans for the Products shall be paid
by Interplay pursuant to the provisions of Section 4(f) of this Agreement.
Virgin shall implement and execute each Marketing Plan to maximize the
commercial success of each such Product in the Territory. Notwithstanding
anything to the contrary in this Agreement, in the event of any failure by
Virgin to comply with the provisions of this Section 5(c) that is caused by any
action of or inaction by [*] or [*] while such person is employed by Interplay
which is not due to instructions of Virgin, such failure shall not be deemed a
breach of this Agreement.
(d) Advertising and Promotion. On behalf of Interplay and at its
-------------------------
direction, Virgin shall promote the sale of Products throughout the Territory in
accordance with the applicable Marketing Plans and Interplay's directions. All
costs of such advertising shall be paid by Interplay pursuant to the provisions
of Section 4(d) of this Agreement, which costs shall be counted for purposes of
Interplay's obligations under Section 4(f).
(e) Reserve. Virgin shall have the right to retain from the payments
-------
due to Interplay herein, as a reserve against charges, markdown allowances,
returns of "faulties" or defective units, credits or returns (collectively,
"Returns"), such portion of the Net Sales (as defined on Exhibit B) of each
Product it sells or licenses as shall be reasonable in Virgin's best business
judgment. Reserves shall be set at [*] of Net Sales for the first six months of
the Term and shall therefore be adjusted to be equivalent to the actual Returns
as a percentage of the total Net Sales of Products over the six-month period
preceding the calendar quarter in which the payment is made (the "Return
Reserve"). The Return Reserve so established shall be liquidated and paid to
Interplay, to the extent it is not reduced for actual or potential Returns, in
connection with the monthly report for the third month following the date such
reserve was taken; and, to the extent the Return Reserve is less than actual
Returns for the period covered by such monthly report, any deficiency in the
Return Reserve shall be credited against any payments thereafter due to
Interplay under this Agreement if during the term of this Agreement, and paid by
Interplay to Virgin upon demand if such deficiency exists at or after
termination of this Agreement.
(f) Returns and Markdowns. Interplay shall be responsible for any
---------------------
returns and markdown allowances-in excess of the Return Reserve, provided that
Virgin may not grant any markdown allowance, price protection or other credit
for Products without the prior written consent of Interplay, not to be
unreasonably withheld or delayed. In the event Virgin receives no written
8
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
rejection of any request for approval of any markdown allowance, price
protection or other credit within ten (10) business days after submitting a
request therefor, such request shall be deemed approved. Any unauthorized
markdown allowance, price protection or other credit granted by Virgin shall be
Virgin's financial responsibility and no deduction shall be made from amounts
payable to Interplay for such unauthorized amounts.
(g) Care of Inventory. Virgin shall use commercially reasonable
-----------------
efforts (no less than that used from Virgin's products) to guard the Products
from damage during the period that the Products are warehoused or otherwise
stored by Virgin pending sale to a third party. Virgin agrees to maintain
adequate insurance against the loss of or damage to such inventory.
(h) Quality Assurance. Virgin shall provide final and Territory-
-----------------
specific quality assurance and compatibility testing on the Products on behalf
of, and at the direction of, Interplay, as Interplay may request. Virgin agrees
to maintain a quality assurance infrastructure of a size and quality consistent
with industry standards.
(i) Customer Service. Virgin shall provide customer service and
----------------
support for the Products in the Territory on behalf of Interplay. Virgin agrees
to maintain and manage a customer service and support infrastructure of a size
and quality consistent with industry standards throughout the Territory.
Interplay shall be under no obligation to provide technical support of any kind
to end-users in the Territory.
(j) Public Relations. Virgin shall provide public relations for the
----------------
Products in the Territory on behalf of Interplay in accordance with the
Marketing Plan. Virgin agrees to maintain and manage a public relations
infrastructure of a size and quality consistent with industry standards
throughout the Territory. All costs of such public relations shall be paid by
Interplay pursuant to the provisions of Section 4(f) of this Agreement.
(k) Manufacturing. Virgin shall cause the manufacturing of all
-------------
Products hereunder in accordance with the following:
(A) With respect to personal computer Products, Interplay will
timely provide golden or glass masters, films, and other usual materials to
allow Virgin to carry out manufacturing of the Products hereunder.
(B) With respect to personal computer Products, except as
may be directed by Interplay with respect to a particular Product or order,
Virgin will be fully responsible for all phases of manufacturing hereunder and
in all such cases Virgin will obtain the same or better pricing than Virgin
receives for manufacturing of comparable quantities of its own products on
comparable build schedules. As a matter of clarity, Interplay shall have the
right to provide finished goods to Virgin and to manage the manufacturing
function in its discretion by providing notice to Virgin.
(C) With respect to Products on video game console systems
(e.g., PlayStation, N64, Dreamcast), Interplay shall be responsible for ordering
the Products from the system licensor and the payment of the cost of goods and
royalties to such system licensors. Virgin agrees that Interplay may, subject to
Virgin's approval (which shall not be unreasonably withheld), utilize Virgin's
line of credit with any of the system licensors to facilitate ordering Products
for
9
<PAGE>
distribution hereunder, to the extent there is availability under such line of
credit(s) at the time Interplay is seeking to place such orders and such credit
availability is not reasonably anticipated to be required by Virgin during the
succeeding [*] period. In the event that Interplay utilizes such credit
availability, such amounts, together with any interest or other costs payable to
the system licensor, shall be paid by Interplay on or before the earlier to
occur of (i) such date as Virgin has to pay down such line of credit for the
particular order or requires access to the portion of the facility used by
Interplay for Virgin's own orders, provided that Interplay is given at least [*]
prior written notice of such date, and (ii) [*] following such utilization by
Interplay.
(D) The parties will consult with and agree in advance in
writing on a manufacturing and inventory schedule for each Product to be
included hereunder. Such schedule will specify, among other things: (i) the
number of units of each Product to be manufactured for the initial launch of
such Product, (ii) the appropriate level of inventory to be maintained for such
Product thereafter, and (iii) the appropriate timing and size of reorders of
such Product.
(E) Virgin will designate one of its employees to act as the
primary liaison between Virgin and Interplay with respect to all sales,
marketing, financial, logistical and other matters relating to this Agreement
and the activities contemplated hereunder.
(F) Virgin will use its commercially reasonable efforts to
advise Interplay as soon as Virgin becomes aware of any potential conflict
between the planned release of one of the Products and the release of any other
products distributed by Virgin.
(G) In the event of an overage, duplicate or unauthorized
production of units of a Product, the cost of which is to be charged to
Interplay hereunder, Virgin must give Interplay notice within ten (10) business
days of the receipt of such shipment. Virgin shall use its diligent efforts to
cause the manufacturer of such units of the Product to issue a credit for the
incorrect portion of the order, such credit being for the benefit of Interplay.
In the event Virgin is unable to obtain such credit for the benefit of
Interplay, Virgin shall not pay the manufacturer for the incorrect portion of
the order without the prior written consent of Interplay, which consent shall
not be unreasonably withheld, and shall be deemed given unless Interplay
provides written notice that such consent will be withheld within ten (10)
business days following receipt by Interplay of a request for such consent.
6. RECORDS AND AUDIT.
-----------------
(a) Reports. Along with the payments made to Interplay pursuant to
-------
Exhibit B, Virgin shall provide Interplay with monthly reports within ten (10)
- ---------
business days after the end of each month that contain the units manufactured,
units shipped, returns (detailing defective and non-defective units) and
markdowns and other credits issued (detailing the value of any credits raised
and the value of any commissions to be deducted), the units in inventory
(detailing opening inventory, inventory activity, shrinkage and closing
inventory), demonstration or promotional units shipped, and the expenses
incurred under the Marketing Plans, together with supporting documentation
therefor, in each case on a Product by Product basis and on a country by country
basis and on both a unit and dollar basis. Notwithstanding the foregoing,
during the first year of the
10
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
term of this Agreement, such reports shall be provided as soon as practicable
but in any event within forty-five (45) days after the end of each month.
(b) Records. In conjunction with this Agreement, Virgin agrees to
-------
keep and maintain full and accurate books and records related to the sale and
distribution of the Products and all associated manufacturing and marketing
expenses during the term of this Agreement and for two (2) years thereafter.
These records shall include, but not necessarily be limited to, the number of
copies of each of the Products sold, distributed, marketed or otherwise
transferred, the amounts withheld for the Return Reserve and the number of
copies returned as defective and returned for credit, the amounts withheld for
the MDF and the uses thereof, the amounts of and the identities of the parties
receiving markdown allowances, and the wholesale selling prices and net sales
amounts for the Product in the Territory. Such documentation shall be in
sufficient detail to enable Interplay to verify the accuracy of the payments
made by Virgin hereunder.
(c) Examination of Records. A certified public accountant (or the
----------------------
European equivalent thereof) appointed by Interplay may, at Interplay's expense,
examine Virgin's books and records solely for the purpose of verifying the
accuracy of the reports described in Section 6(a) and payments thereunder, to
Interplay's satisfaction. Interplay agrees that such certified public
accountant shall be required to sign an agreement with Virgin protecting the
confidential information of Virgin and shall be authorized by Virgin to report
to Interplay only the amounts due and payable with respect of the books and
records examined. Such examination shall take place at a mutually agreed upon
time and place, but in any event only during Virgin's normal business hours and
upon at least ten (10) business days' advance written request. The books and
records relating to any particular payment may only be so examined once. Virgin
agrees to pay for the reasonable fees, costs and expenses charged by any
certified public accountant engaged by Interplay for such review if the amounts
paid pursuant to the books and records examined are understated by more than
[*] of the amounts actually due. Interplay shall have no other rights to examine
Virgin's books and records hereunder.
7. OWNERSHIP.
---------
(a) The Products. All rights, title and interests in and to the
------------
Products, including all copyrights, patents and trade secrets therein, shall be
the exclusive property of Interplay. The Products shall be licensed and not
sold by Interplay to Virgin and by Virgin to its customers. Virgin shall take
all actions and execute all documents, at Interplay's expense and as Interplay
may reasonably request, to effectuate the acknowledgment of ownership contained
herein and to secure, maintain and defend for Interplay's own benefit all rights
therein. Upon Virgin's request, Interplay shall register the copyright of each
Product at Virgin's cost in the countries designated by Virgin where Virgin has
rights to such products, and Interplay shall take such additional action as may
be reasonably necessary to secure, maintain and defend its rights in and to such
products.
(b) Trademarks. Subject to Virgin's license rights hereunder, all
----------
rights, title and interest in and to the Interplay Marks shall be the exclusive
property of Interplay or its licensors. Virgin (i) shall not create a unitary
composite mark involving any Interplay Mark without the prior written approval
of Interplay and (ii) shall display symbols and notices clearly and sufficiently
indicating the trademark status and ownership of the Interplay Marks by
Interplay in accordance with applicable trademark law and practice.
Virgin acknowledges and agrees that its utilization of
11
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
Interplay's Marks will not create in it, nor will it represent it has, any
right, title or interest in or to such Interplay Marks other than the license
expressly granted herein. Virgin agrees not to do anything contesting or
impairing the trademark rights of Interplay. Each party agrees that all use of
the Interplay Marks in connection with this Agreement shall inure to the
benefit, and be on behalf, of Interplay.
8. NOTICE AND LABELING.
-------------------
(a) Copyright Notice. Virgin agrees that it will use its diligent
----------------
efforts to cause to be affixed, conspicuously and legibly on the Products sold
or distributed by it under this Agreement, appropriate copyright notices in the
name of Interplay, as reasonably requested by Interplay. Interplay shall have
the right to review and approve the affixation of the appropriate copyright
notices. In the event that Virgin receives no objection within ten (10)
business days after a written request for approval, the incorporation of such
Interplay Mark shall be deemed to have been approved, subject to any longer
period required by Interplay's third party licensors. An isolated failure or
failures to comply with this Section in any instance will not be a breach of
this Agreement if Virgin cures by correcting the notice in the next
manufacturing run of the Products, provided that if Interplay's third party
license agreement requires further actions to cure such breach and such third
party demands such actions, Virgin shall use its commercially reasonable efforts
to effect such cure within the time periods proscribed in such third party
agreement. Virgin shall not have any responsibility or obligation under this
paragraph with respect to products and packaging designed by Interplay and
purchased by Virgin from Interplay.
(b) Labeling. The Products shall be distributed in the Territory
--------
under Interplay's name and label but Virgin shall be entitled to assert
attribution to itself as the distributor of the Products. Interplay shall, if
requested by Virgin, place Virgin's logo, copyright and trademark notices and
any legally required text on the packaging for the Products, on the screen
displays of the Products, and on all marketing and advertising materials
reasonably related to the Products in accordance with such reasonable written
instructions as Virgin may from time to time provide to Interplay, subject to
any restrictions imposed by system licensors or other third-party licensors. A
failure to comply with this Section in any instance will not be a breach of this
Agreement if Interplay cures by correcting the labeling in the next
manufacturing run of the Products or marketing and advertising materials,
provided that if Interplay's third party license agreement requires further
actions to cure such breach and such third party demands such actions, Virgin
shall use its commercially reasonable efforts to effect such cure within the
time periods proscribed in such third party agreement.
(c) Trademark Usage. Subject to any restrictions imposed by system
---------------
licensors, if Virgin incorporates an Interplay Mark on any advertisements,
packaging or merchandise, Virgin will only incorporate such Interplay Mark after
the receipt of written approval of Interplay as to the use and style of such
Interplay Mark. In the event that Virgin receives no objection within ten (10)
business days after a written request for approval, the incorporation of such
Interplay Mark shall be deemed to have been approved, subject to any longer
period required by Interplay's third party licensors.
9. CONFIDENTIALITY. Each party acknowledges and agrees that the
---------------
information which it receives from the other party shall be subject to the terms
of that certain Confidentiality
12
<PAGE>
Agreement (the "Confidentiality Agreement") of even date herewith between
Interplay and Virgin, the provisions of which are incorporated herein by this
reference.
10. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Interplay's Representations and Warranties. Interplay represents
------------------------------------------
and warrants to Virgin as follows:
(i) Power and Authority. Interplay possesses (A) all rights
-------------------
necessary to enter into this Agreement, without liability to any third party,
(B) full power and authority to carry out its obligations hereunder; and
Interplay has not heretofore granted any right to the Products to any other
person, party or company which remains in effect and which would violate the
rights granted to Virgin herein; and this Agreement constitutes a valid and
binding obligation of Interplay enforceable in accordance with its terms; and
this Agreement has been duly authorized, executed and delivered by Interplay.
(ii) No Conflict. The rights granted herein will not violate
-----------
the rights of any other person or entity or breach, require payments from
Virgin to a third party for the exploitation of the rights granted by Interplay
to Virgin herein, or cause a default under Interplay's organizational documents
or any agreements entered into by Interplay.
(iii) Year 2000 Compliance. To the best of Interplay's
--------------------
knowledge, unless otherwise stated in a written notice delivered by Interplay to
Virgin at least sixty (60) days prior to the scheduled release of a Product,
each Product is year 2000 compliant and will handle and manipulate dates which
refer to the year 1999, the year 2000 and beyond or any leap year without
compromising the functionality and performance of such Product, and such Product
will not be materially adversely affected by or cease to operate correctly in
any way as a result of such date being used by or input into the Product.
(iv) No Infringement. To the best of Interplay's knowledge,
---------------
the Products do not and shall not violate or infringe any patent, trademark,
trade secret, copyright, or similar law or right in the Territory. To the best
of Interplay's knowledge, the Products do not contain any defamatory or libelous
material.
(v) No Breach. During the Term, the performance of
---------
Interplay's duties hereunder will not breach any separate agreement by which
Interplay is bound, or violate or infringe any rights of any third party. So
long as this Agreement remains in effect, Interplay shall not commit any act or
enter into any agreement or understanding with any third party which is
inconsistent or in conflict with the terms of this Agreement.
(b) Virgin's Representations and Warranties. Virgin represents and
---------------------------------------
warrants to Interplay as follows:
(i) Power and Authority. Virgin possesses (A) all rights
-------------------
necessary to enter into this Agreement, without liability to any third party,
(B) full power and authority to carry out its obligations hereunder; and this
Agreement constitutes a valid and binding obligation of Virgin enforceable in
accordance with its terms; and this Agreement has been duly authorized, executed
and delivered by Virgin.
13
<PAGE>
(ii) No Breach. During the Term, the performance of Virgin's duties
---------
hereunder will not breach any separate agreement by which Virgin is bound, or
violate or infringe any rights of any third party. So long as this Agreement
remains in effect, Virgin shall not commit any act or enter into any agreement
or understanding with any third party which is inconsistent or in conflict with
the terms of this Agreement.
11. INDEMNIFICATION.
---------------
(a) Interplay's Indemnification. Interplay agrees to indemnify,
---------------------------
defend and hold Virgin and its customers harmless from and against any and all
claims, losses, liabilities, damages, expenses and costs (including reasonable
attorneys' and expert witnesses' fees) (collectively "Claims") which result from
any breach by Interplay of any covenant, representation or warranty contained in
this Agreement, including Claims incurred in the settlement or avoidance as a
result of any of the foregoing; provided, however that Virgin shall give prompt
written notice to Interplay of the assertion of any such Claim; and provided
further, that Interplay shall have the right to select counsel and control the
defense and settlement thereof, subject to the right of Virgin to participate in
any such action or to proceed at its own expense with counsel of its own
choosing.
(b) Virgin's Indemnification. Virgin shall indemnify, defend and hold
------------------------
Interplay harmless from and against any and all Claims incurred by Interplay as
a result of any breach by Virgin of any covenant, representation or warranty
made by Virgin hereunder, including Claims incurred in the settlement or
avoidance as a result of any of the foregoing; provided, however that Interplay
shall give prompt written notice to Virgin of the assertion of any such Claim;
and provided further, that Virgin shall have the right to select counsel and
control the defense and settlement thereof, subject to the right of Interplay to
participate in any such action or to proceed at its own expense with counsel of
its own choosing.
(c) Limitations. THE WARRANTIES STATED IN SECTION 10 ARE INTERPLAY'S
-----------
SOLE AND EXCLUSIVE WARRANTIES PERTAINING TO THE PRODUCTS, AND INTERPLAY HEREBY
DISCLAIMS ANY OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-
INFRINGEMENT.
NEITHER PARTY WILL UNDER ANY CIRCUMSTANCES BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL LOSS OR DAMAGES ARISING OUT OF THIS
AGREEMENT, THE TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH
ITS TERMS OR WITH RESPECT TO THE INSTALLATION, USE, OPERATION OR SUPPORT OF THE
PRODUCT, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING. THE
FOREGOING SHALL NOT BE DEEMED TO IN ANY WAY LIMIT INTERPLAY'S OBLIGATION, IF
ANY, TO PAY THE AMOUNTS, IF ANY, SET FORTH ON EXHIBIT B TO THIS AGREEMENT.
NOTWITHSTANDING THE FOREGOING, IN THE EVENT INTERPLAY BREACHES ITS
OBLIGATION TO DISTRIBUTE ALL OF ITS PRODUCTS THROUGH VIRGIN IN THE TERRITORY,
AND INTERPLAY ENTERS INTO AN AGREEMENT WITH, LICENSES TO, OR OTHERWISE DIRECTLY
SELLS PRODUCTS COVERED BY THIS AGREEMENT TO ANY THIRD PARTY, THEN VIRGIN SHALL
BE ENTITLED TO RECEIVE, AS A MEASURE OF
14
<PAGE>
CONSEQUENTIAL DAMAGES, [*] OF THE NET SALES RECEIVED BY INTERPLAY FOR THE NUMBER
OF UNITS ACTUALLY DISTRIBUTED IN THE TERRITORY IN VIOLATION OF THIS AGREEMENT,
IN ADDITION TO ANY OTHER REMEDIES VIRGIN MAY HAVE AT LAW (EXCEPT FOR SPECIAL,
INCIDENTAL OR OTHER CONSEQUENTIAL DAMAGES, WHICH ARE SPECIFICALLY EXCLUDED) OR
IN EQUITY.
12. NOTICES.
-------
Any notice, consent, approval, request, waiver or statement to be
given, made or provided for under this Agreement shall be in writing and deemed
to have been duly given (i) by its delivery personally; (ii) by its being sent
via facsimile (confirmed in writing); or (iii) five (5) days after delivery by
courier requiring receipt upon delivery, or mail, return receipt requested,
addressed as follows:
TO INTERPLAY: INTERPLAY ENTERTAINMENT CORP.
16815 Von Karman Avenue
Irvine, CA 92606
Attn: Chief Executive Officer
With a Copy To: INTERPLAY PRODUCTIONS LIMITED
Harleyford Manor, Harleyford
Henley Road, Marlow
Buckinghamshire SL7 2DX
England
Attn: Peter A. Bilotta
And To: K.C. Schaaf, Esq.
STRADLING YOCCA CARLSON & RAUTH
660 Newport Center Drive, Suite 1600
NEWPORT BEACH, CALIFORNIA 92660
TO VIRGIN : VIRGIN INTERACTIVE ENTERTAINMENT LIMITED
2 Kensington Square
London, England W8 5RB
ATTN: Chief Executive Officer and
Chief Financial Officer
WITH A COPY TO: Murray Markiles, Esq.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
2049 Century Park East, 24th Floor
Los Angeles, CA 90067-3010
or such other address as either party may designate by notice given as
aforesaid.
For purposes of this Agreement, if at any time while Peter Bilotta is
employed or acting as a consultant or representative of Interplay or any of its
subsidiaries, Virgin is required by any provision of this Agreement to
communicate any information to, or obtain any approval from, or
15
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
provide any reports to Interplay such provision shall be deemed satisfied if
such information is communicated to, such approval is obtained from, or such
report is provided to, Peter Bilotta.
13. TERM AND TERMINATION.
--------------------
(a) Term. This Agreement shall become effective on the date hereof
----
and, unless sooner terminated pursuant to the terms of this Agreement, shall
continue in full force and effect for seven (7) years.
(b) Event of Default. A party shall be in default (an "Event of
----------------
Default") under this Agreement if: (A) it is the subject to a Dissolution Event
or an Insolvency Event (as such terms are defined below) or (B) if it is in
default in the performance of any material obligation, agreement or undertaking
of such party under this Agreement which default has not been cured within sixty
(60) days of notice given by the other party, or, in the case of a default which
cannot be cured within such sixty (60) day period, if such party has failed to
commence efforts to cure such default within sixty (60) days and thereafter
fails to pursue diligently efforts to cure such default. For purposes of this
Agreement, the terms "Dissolution Event" and "Insolvency Event" shall have the
meanings ascribed to such terms in the Operating Agreement.
(c) Remedies Upon Event of Default. Upon the occurrence of an Event
------------------------------
of Default by a party, the non-defaulting party may, in addition to the other
remedies provided by law, terminate this Agreement, provided that if the Event
of Default applies to one or more particular Products, then the non-defaulting
party's right to terminate shall only apply to those Products that are directly
related to the Event of Default and this Agreement shall remain in full force
and effect for all of the other Products. Notwithstanding any of the foregoing,
the party that is not in default thereunder (the "Non-Defaulting Party") shall
not have the right to exercise any of the remedies provided for above during any
period in which the party in default hereunder (the "Defaulting Party") disputes
in good faith the occurrence of the Event of Default. Further, if the
Defaulting Party disputes the occurrence of any Event of Default and such is
resolved, either as a result of agreement or the entry of a final order by a
court of competent jurisdiction or any arbitrator empowered by the parties to
finally resolve such dispute, in favor of the Non-Defaulting Party, then the
Defaulting party shall have an additional 30-day period following such
resolution in order to cure such Event of Default and following such cure shall
be fully reinstated of all rights hereunder without prejudice.
(d) Effect of Termination. In the event of expiration or termination
---------------------
of this Agreement, Virgin may distribute any of its then existing inventory of
the Products for a period of [*] after the date of expiration or termination
subject to the continued payments due under this Agreement, provided that this
sell-off period shall not apply if Interplay terminates this Agreement, in part
or in whole, due to an Event of Default of Virgin.
(e) Survival. The provisions of Sections 2(d), 3(a), 3(b), 4(d),
--------
5(e), 6, 7, 9, 11, 13 and 14 shall survive the termination or expiration of this
Agreement.
(f) Bankruptcy. In the event Interplay is subject to a voluntary or
----------
involuntary filing for protection under Federal bankruptcy laws, Interplay
agrees not to attempt to or actually reject, rescind or terminate this Agreement
or its obligations hereunder. The parties acknowledge
16
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
and agree that this Agreement is intended to and shall be subject to the terms
and conditions of Section 365(n) of the United States Bankruptcy Code and Virgin
shall be afforded all of the protections of a "licensee" under such Section.
14. GENERAL PROVISIONS.
------------------
(a) Assignment. Neither this Agreement, nor the parties' rights and
----------
obligations hereunder, may be transferred, assigned or sublicensed to a third
party, without the prior written consent of the other party provided, however,
that either party may transfer or assign its rights and/or obligations hereunder
to any person acquiring such party by merger or acquiring all or substantially
all of such party's assets, including substantially all of the Products (and, in
the case of an assignment by Virgin, where such party agrees in writing to
assume Virgin's obligations under the Publishing Agreement), without requiring
the consent of the other party.
(b) Entire Agreement. This Agreement and the exhibits hereto
----------------
constitute the complete and exclusive agreement between the parties with respect
to the subject matter hereof, superseding and replacing any and all prior or
contemporaneous agreements, communications, and understandings (whether written
or oral) regarding such subject matter. This Agreement may only be modified, or
any rights under it waived, by a written document executed by both parties.
(c) Governing Law; Arbitration. This Agreement is governed by
--------------------------
California law, without regard to its choice of law rules. The parties
expressly waive the application of the United Nations Convention on Contracts
for the International Sale of Goods to the terms of this Agreement. Any
controversy or dispute arising out of or in connection with this Agreement
(including the interpretation of any of the provisions hereof), other than
requests for immediate equitable relief (each, a "Disputed Matter"), shall be
settled by arbitration in accordance with the provisions of Attachment 17.20 to
the Operating Agreement, the provisions of which are incorporated herein by this
reference, except that references to the "Agreement" therein shall be deemed to
be references to this Agreement for purposes hereof.
(d) Waiver. The failure of either party to exercise or enforce any of
------
its rights under this Agreement will not act as a waiver, or continuing waiver,
of such rights.
(e) Independent Contractor. Each party shall be and remain an
----------------------
independent contractor and nothing herein shall be deemed to constitute the
parties as partners. Further, except as expressly provided herein, neither
party shall have any authority to act, or attempt to act, or represent itself,
directly or by implication, as an agent of the other or in any manner assume or
create, or attempt to assume or create, any obligation on behalf of or in the
name of the other, nor shall either be deemed the agent or employee of the
other.
(f) Force Majeure. Neither party shall be responsible for any failure
-------------
to perform due to causes beyond its reasonable control (each a "Force Majeure"),
including, but not limited to, acts of God, war, riot, embargoes, acts of civil
or military authorities, denial of or delays in processing of export license
applications, fire, floods, earthquakes, accidents, breakdown of machinery,
shortages of materials, inability to obtain labor, strikes or fuel crises,
provided that such party gives prompt written notice thereof to the other. The
time for performance will be extended for a period equal to the duration of the
Force Majeure, but in no event longer than sixty (60) days.
17
<PAGE>
(g) Counterparts. This Agreement may be signed by telecopy and in
------------
counterparts by Virgin and Interplay, each of which counterpart shall be deemed
an original and all of which counterparts when taken together, shall constitute
but one and the same instrument.
(h) Severability. If any provision of this Agreement is, becomes, or
------------
is deemed invalid or unenforceable in any jurisdiction, such provision will be
enforced to the maximum extent permissible in such jurisdiction so as to effect
the intent of the parties, and the validity, legality and enforceability of such
provision shall not in any way be affected or impaired thereby in any other
jurisdiction. If such provision cannot be so amended without materially
altering the intention of the parties, it shall be stricken in the jurisdiction
so deeming, and the remainder of this Agreement shall remain in full force and
effect.
(i) Language. This Agreement has been written in the English
--------
language, and it may be translated, for convenience, into other languages.
However, in the case of error or disagreement, the executed English language
version shall prevail.
18
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by respective duly authorized representatives as set forth below.
VIRGIN:
VIRGIN INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Mark Dyne
----------------------------
Name:---------------------------
Title: Authorized Agent
--------------------------
INTERPLAY:
INTERPLAY ENTERTAINMENT CORP.
By: /s/ Brian Fargo
---------------------------
Name: Brian Fargo
-------------------------
Title: CEO
------------------------
[SIGNATURE PAGE TO INTERNATIONAL DISTRIBUTION AGREEMENT]
19
<PAGE>
EXHIBIT A
PRODUCTS
--------
1. Products. The Products shall be defined as all computer software programs
--------
and video games that (a) Interplay develops or has developed and to which
Interplay has rights in the Territory as of the Effective Date of this Agreement
or acquires such rights thereafter, or (b) Interplay has the right or acquires
the right to distribute in the Territory, in each case during the term of this
Agreement. Products includes, by way of example, derivatives of such computer
software programs and video games (including, without limitation, add-on levels,
conversions and sequels) on any computer system or video game console or system,
whether now known or hereafter devised, on all formats, platforms and media of
delivery.
2. General. For purposes of this definition of Products, products developed
-------
by or for, and products acquired by, any subsidiary or affiliate of Interplay
shall be included within the scope of this Agreement to the extent that such
Interplay subsidiary or affiliate has any of the rights covered by the scope of
rights granted in Section 1. If Interplay has rights that are narrower than the
full rights granted herein, or other contractual limitations, or if such product
cannot be covered by this Agreement without known conflict with the rights of
others or breach of the provisions of Section 10 of this Agreement, Interplay
shall provide to Virgin at least [*] prior to Virgin's scheduled release of such
Product, a written summary of such rights and contractual limitations to permit
Virgin to comply with such limitations and/or a description of the reasons why
rights to such product cannot be provided to Interplay without conflict with the
rights of others or breach of the provisions of Section 10 of this Agreement.
With respect to any such Product, the rights granted herein and the terms of
this Agreement are subject to any such limitations that are expressly provided
to Virgin in writing. In the event the rights to any Product is to expire during
the term of this Agreement, Interplay shall provide written notice of such
expiration date at least [*] in advance to allow Virgin to properly manage the
sell-off and discontinuance of its marketing and sales of the Product.
A-1
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT B
PAYMENTS
--------
1. Payment. Virgin shall pay to Interplay [*] of the Net Sales (as defined
-------
below) for Products sold under this Agreement. All such payments shall be paid
to Interplay within [*] after the month in which the Products are shipped or
invoiced by Virgin to its customers, whichever is earlier. As a matter of
clarity, Virgin shall take the risk of bad debt of its customers.
"Net Sales" shall mean [*]:
[*]
2. Deductions. Virgin may deduct from the payments due Interplay under
----------
Section 1 of this Exhibit B the following amounts:
---------
(a) Marketing expenditures payable and paid by Virgin under Section 5(c)
during the month subject to the report.
(b) An amount equal to Virgin's actual direct cost of manufacturing the
Products in cases where Virgin produces the units of the Products on
behalf of, and with the approval of Interplay, as evidenced by
Interplay written purchase orders for such units or where Virgin has
the Products manufactured Virgin's actual costs of goods (including
all shipping, handling and insurance) with respect to such products,
to the extent such costs are payable and paid by Virgin during the
month subject to the report, provided that direct costs other than
costs paid to unaffiliated third parties shall be subject to
Interplay's prior written approval, which shall not be unreasonably
withheld.
3. The Minimum Monthly Overhead Fee. Interplay shall pay the "Minimum Monthly
--------------------------------
Overhead Fee" (as defined below) to Virgin on the last day of each month during
the term of this Agreement. The "Minimum Monthly Overhead Fee" shall be defined
as an amount equal to [*] British Pounds per month, subject to adjustment as
provided in Section 4 of this Exhibit B below.
4. Adjustment of the Minimum Monthly Overhead Fee. In the event Virgin or one
----------------------------------------------
of its subsidiaries or affiliates enters into an agreement (other than a product
development agreement where development is financed in whole or substantial part
by Virgin) or otherwise secures the rights to distribute the products of a third
party (but excluding those third parties or licensors listed on Exhibit B-1
hereto who are licensors of Virgin prior to execution of this Agreement, unless
Virgin enters into an agreement with such third party which provides for such
third party to offset a portion
B-1
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
of the overhead of Virgin or its affiliates) in any portion of the Territory,
then [*] of the Contribution Margin (as defined below) earned by distributing
the products of such third party, excluding any Contribution Margin attributable
to [*] (or its successors) for [*], shall be applied dollar for dollar on a
month to month basis to reduce the Minimum Monthly Overhead Fee of Interplay.
Notwithstanding the foregoing, the Contribution Margin attributable to rights
with respect to the products of any third party or licensor listed on Exhibit B-
1 hereto who is a supplier or licensor of Virgin prior to execution of this
Agreement shall not be applied to reduce the Minimum Monthly Overhead Fee unless
Virgin enters into an agreement with such third party which provides for the
issuance to such third party of (a) a Membership Interest Percentage (as defined
in the Operating Agreement) of more than [*] of VIE Acquisition Group, and/or
(b) more than [*] of the equity of Virgin or any directly or indirectly
controlled or majority owned subsidiary of Virgin, in which case only the
incremental Contribution Margin earned by distributing the products of such
third party (over the average Contribution Margin earned by distributing the
products of such third party during the preceding two year period) shall be
counted for purposes of this paragraph. "Contribution Margin" shall mean the
gross profit earned by Virgin or its controlled or majority owned subsidiaries
attributable to such third party products less the costs associated with such
gross profit (including the value of any cash, stock or other consideration paid
by Virgin or its subsidiaries or affiliates to such third party solely as
consideration for such distribution rights and which is not reasonably
attributable to consideration for any other property or rights received, with
such difference amortized over the term of the relevant agreement). For purposes
of clarification, the value of any stock or other non-cash consideration paid by
Virgin or its subsidiaries or affiliates to such third party solely as
consideration for such distribution rights shall be determined based upon
reasonable valuation criteria with the value assigned by contract among the
parties not necessarily being determinative.
5. Minimum Distribution Fee. Interplay shall pay to Virgin a minimum
------------------------
distribution fee hereunder equal to [*] per calendar year commencing with
calendar year 1999 (the "Minimum Distribution Fee"). Within thirty (30) days
after the end of each calendar year during the term of this Agreement, Virgin
shall calculate the actual distribution fees paid by Interplay to Virgin
hereunder and deliver to Interplay a copy of such calculation. Interplay shall
review such calculation and either accept such calculation or provide a written
response to any objections or issues in the manner in which such calculation was
made. In the event the parties fail to agree on a calculation, they shall submit
the issue to a third party independent auditor to evaluate and make a
determination. If the actual distribution fees paid to Virgin for such year are
below the Minimum Distribution Fee, then Interplay shall pay to Virgin an amount
equal to the shortfall no later than February 15 of the succeeding year.
B-2
* Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT B-1
EXCLUDED COMPANIES
------------------
[*]
B-1-1
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT C
PRIOR AGREEMENTS
----------------
[*]
C-1
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT C-1
SUBCONTRACTED AGREEMENTS
------------------------
[*]
C-1-1
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
Exhibit 10.27
CONFIDENTIAL TREATMENT REQUESTED
TERMINATION AGREEMENT
[LOGO OF INTERPLAY ENTERTAINMENT CORP. (TM) APPEARS HERE]
This TERMINATION AGREEMENT (this "Agreement") is entered into effective as
of February 10, 1999 (the "Effective Date") by and among INTERPLAY ENTERTAINMENT
--
CORP., a Delaware corporation whose principal place of business is at 16815 Von
Karman Avenue, Irvine, California 92606 (hereinafter "Interplay"), VIRGIN
INTERACTIVE ENTERTAINMENT LIMITED, a corporation formed under the laws of
England and Wales whose principal place of business is at 2 Kensington Square,
London, England, W8 5 RB (hereinafter "Virgin"), VIE ACQUISITION GROUP, LLC, a
Delaware limited liability company ("VIE Acquisition Group") and VIE ACQUISITION
HOLDINGS, LLC, a Delaware limited liability company ("Holdings") with respect to
the following recitals:
RECITALS
--------
A. VIE Acquisition Group, of which Holdings is the only member, has
acquired all of the capital stock and the underlying business of Virgin pursuant
to that certain Sale and Purchase Agreement dated November 6, 1998 by and
between Viacom International Inc. and Spelling Entertainment Group Inc., on the
one hand, and VIE Acquisition Group, on the other hand (the "Viacom
Transaction").
B. Contemporaneously herewith, Interplay and Holdings are entering into an
Operating Agreement (the "Operating Agreement") with respect to the operation of
VIE Acquisition Group, Interplay and Virgin are entering into an International
Distribution Agreement (the "Distribution Agreement") of even date herewith with
respect to the distribution by Virgin of certain of Interplay's products in
Europe and certain other territories and a Product Publishing Agreement (the
"Publishing Agreement") of even date herewith with respect to the publishing by
Interplay of certain of Virgin's products in North America and certain other
territories.
C. Interplay, Virgin and Holdings desires to enter into this Agreement to
set forth their rights with respect to the termination of their relationship
upon the occurrence of certain events.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
agreements and promises set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. CHANGE IN CONTROL.
-----------------
(a) Interplay Right to Withdraw. Notwithstanding anything to the
---------------------------
contrary in the Operating Agreement, the Distribution Agreement or the
Publishing Agreement, in the event of a
-1-
<PAGE>
Change in Control (as defined below) of Interplay, Interplay shall have the
right to withdraw as a Member from VIE Acquisition Group under the terms and
conditions set forth in this Section 1 by written notice to VIE Acquisition
Group (the "Change of Control Termination Notice"). Within ten (10) business
days of receipt of the Change of Control Termination Notice by VIE Acquisition
Group, VIE Acquisition Group shall deliver to Interplay by its good faith
estimate of the Supplemental Fee (the "Supplemental Fee Estimate"). Interplay
shall thereafter have ten (10) business days to revoke its Change of Control
Termination Notice by delivery of written notice to VIE Acquisition Group. If no
such revocation is made by Interplay, the parties shall proceed to determine the
actual Supplemental Fee in accordance with this Section 1. In the event the
actual Supplemental Fee exceeds the Supplemental Fee Estimate by more than
[*], Interplay shall have the right to revoke the Change of Control Termination
Notice by delivery of written notice to VIE Acquisition Group within ten (10)
business days of its receipt of the notice of the actual Supplemental Fee. In
the event Interplay delivers a Change in Control Termination Notice to VIE
Acquisition Group, Interplay shall automatically be deemed to have surrendered
its rights to vote and participate in the management of VIE Acquisition Group
effective upon delivery of the Change of Control Termination Notice and shall
transfer to Holdings its Membership Interest (as defined in the Operating
Agreement) for the sum of [*] effective as of the close of business on the last
day Interplay may deliver notice of revocation of the Change in Control
Termination Notice (a "Revocation Notice") pursuant to this Section unless prior
to such time a Revocation Notice is properly delivered to VIE Acquisition Group,
in which event all of Interplay's rights as a Member of VIE Acquisition Group
shall be reinstated.
(b) Buy-Out Fee. Interplay shall pay to Holdings the amount of [*]
-----------
Dollars (US$[*]) as the buy-out fee (the "Buy-Out Fee") for exercising the right
to withdraw from VIE Acquisition Group granted to Interplay pursuant to Section
1(a) of this Agreement.
(c) Supplemental Fee. In addition to the Buy-Out Fee in paragraph (b)
----------------
above, for exercising the right to withdraw from VIE Acquisition Group granted
to Interplay pursuant to Section 1(a) of this Agreement Interplay shall pay to
VIE Acquisition Group an additional amount (the "Supplemental Fee") equal to
Interplay's Gross Profit Contribution Percentage (as defined below) of the Shut
Down Costs (as defined below) of Virgin, determined in accordance with
subparagraph (h)(F) below.
(d) Interplay Right to Terminate Distribution Agreement. In the event
---------------------------------------------------
Interplay elects to exercise its rights under this Section 1 and withdraws as a
Member from VIE Acquisition Group pursuant to Section 1(a) above, Interplay
shall have the right by delivery of notice of termination of the Distribution
Agreement together with the Change of Control Termination Notice to terminate
the Distribution Agreement without liability to Virgin, such termination to be
effective upon that date which is [*] days following delivery to Virgin of the
Change of Control Termination Notice (the "Change of Control Termination Date"),
unless prior to the close of business on the last day Interplay may deliver a
Revocation Notice Interplay properly delivers a Revocation Notice to Virgin, in
which event all of the parties' rights and obligations under the Distribution
Agreement shall be reinstated.
(e) Virgin Right to Terminate Publishing Agreement. In the event
----------------------------------------------
Interplay elects to terminate the Distribution Agreement pursuant to this
Section 1, Virgin shall have the right to terminate the Publishing Agreement
without liability to Interplay, such termination to be effective upon the Change
in Control Termination Date, unless prior to the close of business on the last
day Interplay
-2-
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
may deliver a Revocation Notice Interplay properly delivers a Revocation Notice
to Virgin, in which event all of the parties' rights and obligations under the
Publishing Agreement shall be reinstated.
(f) Adjustments. Interplay shall have the right to continue to supply
-----------
its back catalogue products for distribution by Virgin and in such case the fair
market value to Virgin of the back catalogue rights provided to Virgin, as
determined (in the same manner as Shut-Down Costs) by the accounting firm
selected under paragraph (h)(F) below, shall be applied dollar for dollar as a
credit towards payment of the Supplemental Fee, and up to $[*] of any remaining
credits shall be applied dollar for dollar as a credit towards payment of the
Buy-Out Fee.
(g) Payment of Fees. The Buy-Out Fee and the Supplemental Fee shall
---------------
be paid to Virgin on the Change of Control Termination Date. Interplay or its
successor may, at their option, pay the Buy-Out Fee and/or the Supplemental Fee
in cash or Marketable Securities (as defined in the Operating Agreement) or any
combination thereof.
(h) Definitions. For purposes of this Agreement the following terms
-----------
shall be defined as:
(A) "Aggregate Gross Profit Contribution" shall mean the sum
of (i) the Interplay Gross Profit Contribution, plus (ii) the aggregate net
distribution fee earned by Virgin on all other third party products distributed
by Virgin, plus (iii) the gross profit (i.e., sales less cost of goods, less
development costs attributable to such sales) of products published by Virgin,
plus (iv) royalties earned by Virgin other than under the Publishing Agreement,
in each case for the LTM Period.
(B) "Change in Control" shall have the meaning ascribed to
such term in the Operating Agreement.
(C) Interplay's "Gross Profit Contribution Percentage" shall
mean the percentage calculated by dividing the Interplay Gross Profit
Contribution by the Aggregate Gross Profit Contribution of Virgin.
(D) "Interplay Gross Profit Contribution" shall mean [*] of
the Net Sales attributable to Interplay Products for the LTM Period.
(E) "LTM Period" shall have the meaning ascribed to such term
in Section 1.9 of the Operating Agreement.
(F) "Shut Down Costs" shall mean the amount by which the fair
market value of the liabilities of Virgin exceeds the fair market value of the
assets (including intangible assets) of Virgin measured as of the date of the
Change of Control Termination Notice and assuming the operations of Virgin were
to be shut down as of such date with all liabilities discharged in full and all
assets liquidated, as determined in accordance with generally accepted
accounting principles by an independent "Big Five" accounting firm that has not
represented either party in the preceding five (5) years, selected by mutual
agreement of the parties. If the parties are unable to agree on such accounting
firm within thirty (30) days following delivery by Interplay of the Change of
Control Termination Notice, each Interplay and VIE Acquisition Group shall each
designate any Big Five accounting firm of
-3-
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
their choosing to determine the Shut Down Costs. Within forty-five (45) days
after appointment, such accounting firm or firms as are appointed shall
determine its initial view as to the Shut Down Costs and, if more than one
accounting firm is appointed, consult with one another with respect thereto.
Within 75 days after the date of delivery of the Change of Control Notice, the
accounting firm, or, if more than one accounting firm is appointed, each
accounting firm, shall have determined its final view as to the Shut Down Costs.
If more than one accounting firm is appointed: (a) If the difference between the
higher of the respective final views of the two accounting firms (the "Higher
Shut Down Costs") and the lower of the respective final views of the two
accounting firms (the "Lower Shut Down Costs") is less than 10% of the Higher
Shut Down Costs, the Shut Down Costs determined shall be the average of those
two views, or (b) otherwise, the two accounting firms shall jointly designate a
third accounting firm (the "Mutually Designated Firm") to determine the final
Shut Down Costs, and within 15 days of such designation, the Mutually Designated
Firm shall determine its final view as to the Shut Down Costs (the "Mutual Shut
Down Costs") and the final determination of the Shut Down Costs shall be the
average of (i) the Mutual Shut Down Costs and (ii) the Higher Shut Down Costs or
the Lower Shut Down Costs, whichever is closer to the Mutual Shut Down Costs.
Virgin shall provide reasonable access to each of the designated accounting
firms to members of management of Virgin and its Subsidiaries and to the books
and records of Virgin and its Subsidiaries so as to allow such accounting firms
to conduct due diligence examinations in scope and duration as are customary in
valuations of this kind. Each of the parties and any permitted assignee (on its
own behalf and on behalf of its respective Affiliates) agrees to cooperate with
each of the accounting firms and to provide such information as may reasonably
be requested. Costs of the determination of the accounting firms shall be borne
equally by Interplay and VIE Acquisition Group.
(i) Liquidated Damages. Each party acknowledges and agrees that (i)
------------------
the withdrawal from VIE Acquisition Group and the termination of the
Distribution Agreement pursuant to this Section 1 by Interplay shall result in
VIE Acquisition Group, Virgin and Holdings incurring certain costs and other
damages in amounts that would be extremely difficult or impractical to
ascertain, and (ii) the provisions and payments described in this Section 1 bear
a reasonable relationship to the damages and losses which Virgin, Interplay and
Holdings estimate may be suffered by Virgin and Holdings. Accordingly, the
provisions and payments described in this Section 1 shall constitute liquidated
damages and shall be the sole and exclusive remedy of Virgin, VIE Acquisition
Group, Holdings or any member or shareholder thereof arising out of any
withdrawal from VIE Acquisition Group and termination of the Distribution
Agreement pursuant to this Section 1.
(j) Inventory Sell-Off Right. In the event of termination of the
------------------------
Distribution Agreement pursuant to Section 1(d) above by Interplay, the [*]
inventory sell-off right under Section 13(e) of the Distribution Agreement shall
not apply.
(k) Defined Terms. All capitalized terms and phrases not defined in
-------------
this Agreement shall have the meaning set forth in the Distribution Agreement.
2. TERMINATION FOR BREACH. In addition to Interplay's rights under
----------------------
Section 1 above, in the event of the termination of the Operating Agreement by
Interplay due to any uncured breach thereof by VIE Acquisition Group, Interplay
may elect, in its sole discretion to terminate the Distribution Agreement
effective immediately.
3. CONSEQUENTIAL DAMAGES EXCLUSION.
-------------------------------
-4-
*Portions omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
<PAGE>
NEITHER PARTY WILL UNDER ANY CIRCUMSTANCES BE LIABLE TO THE OTHER
PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL LOSS OR DAMAGES ARISING OUT
OF THIS AGREEMENT, THE TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE
WITH ITS TERMS OR WITH RESPECT TO THE INSTALLATION, USE, OPERATION OR SUPPORT OF
THE PRODUCT, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING.
4. NOTICES.
-------
Any notice, consent, approval, request, waiver or statement to be
given, made or provided for under this Agreement shall be in writing and deemed
to have been duly given (i) by its delivery personally; (ii) by its being sent
via facsimile (confirmed in writing); or (iii) five (5) days after delivery by
courier requiring receipt upon delivery, or mail, return receipt requested,
addressed as follows:
TO INTERPLAY: INTERPLAY ENTERTAINMENT CORP.
16815 Von Karman Avenue
Irvine, CA 92606
Attn: Chief Executive Officer
With a Copy To: INTERPLAY PRODUCTIONS LIMITED
Harleyford Manor, Harleyford
Henley Road, Marlow
Buckinghamshire SL7 2DX
England
Attn: Peter A. Bilotta
And To: K.C. Schaaf, Esq.
STRADLING YOCCA CARLSON & RAUTH
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
TO VIRGIN : VIRGIN INTERACTIVE ENTERTAINMENT LIMITED
2 Kensington Square
London, England W8 5RB
Attn: Chief Executive Officer And
Chief Financial Officer
-5-
<PAGE>
With a Copy To: Murray Markiles, Esq.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
2049 Century Park East, 24th Floor
Los Angeles, CA 90067-3010
IF TO VIE
ACQUISITION GROUP
OR HOLDINGS: VIE Acquisition Group, LLC
6355 Topanga Canyon Blvd.
Suite 120
Woodland Hills, CA 91367
Attention: Mark Dyne
With a Copy To: Murray Markiles, Esq.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
2049 Century Park East, 24th Floor
Los Angeles, CA 90067-3010
or such other address as either party may designate by notice given as
aforesaid.
5. GENERAL PROVISIONS.
------------------
(a) Assignment. Neither this Agreement, nor the parties' rights and
----------
obligations hereunder, may be transferred, assigned or sublicensed to a third
party, without the prior written consent of the other party; provided, however,
that either party may transfer or assign its rights and/or obligations hereunder
to any person acquiring such party by merger or acquiring all or substantially
all of such party's assets, including substantially all of the Products (and
where such party agrees in writing to assume the assignor's obligations under
the Publishing Agreement and Distribution Agreement), without requiring the
consent of the other party; and provided further, however, that Holdings and /or
VIE Acquisition Group may transfer or assign its rights hereunder to Virgin.
(b) Entire Agreement. This Agreement and the exhibits hereto
----------------
constitute the complete and exclusive agreement between the parties with respect
to the subject matter hereof, superseding and replacing any and all prior or
contemporaneous agreements, communications, and understandings (whether written
or oral) regarding such subject matter. This Agreement may only be modified, or
any rights under it waived, by a written document executed by both parties.
(c) Governing Law; Arbitration. This Agreement is governed by
--------------------------
California law, without regard to its choice of law rules. The parties
expressly waive the application of the United Nations Convention on Contracts
for the International Sale of Goods to the terms of this Agreement. Any
controversy or dispute arising out of or in connection with this Agreement
(including the interpretation of any of the provisions hereof), other than
requests for immediate equitable relief (each, a "Disputed Matter"), shall be
settled by arbitration in accordance with the provisions of Attachment 17.20 to
the Operating Agreement, the provisions of which are incorporated herein by this
reference, except that references to the "Agreement" therein shall be deemed to
be references to this Agreement for purposes hereof.
-6-
<PAGE>
(d) Waiver. The failure of either party to exercise or enforce any of
------
its rights under this Agreement will not act as a waiver, or continuing waiver,
of such rights.
(e) Independent Contractor. Each party shall be and remain an
----------------------
independent contractor and nothing herein shall be deemed to constitute the
parties as partners. Further, except as expressly provided herein, neither
party shall have any authority to act, or attempt to act, or represent itself,
directly or by implication, as an agent of the other or in any manner assume or
create, or attempt to assume or create, any obligation on behalf of or in the
name of the other, nor shall either be deemed the agent or employee of the
other.
(f) Force Majeure. Neither party shall be responsible for any failure
-------------
to perform due to causes beyond its reasonable control (each a "Force Majeure"),
including, but not limited to, acts of God, war, riot, embargoes, acts of civil
or military authorities, denial of or delays in processing of export license
applications, fire, floods, earthquakes, accidents, breakdown of machinery,
shortages of materials, inability to obtain labor, strikes or fuel crises,
provided that such party gives prompt written notice thereof to the other. The
time for performance will be extended for a period equal to the duration of the
Force Majeure, but in no event longer than sixty (60) days.
(g) Counterparts. This Agreement may be signed by telecopy and in
------------
counterparts, each of which counterpart shall be deemed an original and all of
which counterparts when taken together, shall constitute but one and the same
instrument.
(h) Severability. If any provision of this Agreement is, becomes, or
------------
is deemed invalid or unenforceable in any jurisdiction, such provision will be
enforced to the maximum extent permissible in such jurisdiction so as to effect
the intent of the parties, and the validity, legality and enforceability of such
provision shall not in any way be affected or impaired thereby in any other
jurisdiction. If such provision cannot be so amended without materially
altering the intention of the parties, it shall be stricken in the jurisdiction
so deeming, and the remainder of this Agreement shall remain in full force and
effect.
(i) Language: Order of Precedence. This Agreement has been written
------------------------------
in the English language, and it may be translated, for convenience, into other
languages. However, in the case of error or disagreement, the executed English
language version shall prevail. This Agreement amends the Distribution
Agreement, the Publishing Agreement and the Operating Agreement. In the event
of any inconsistency between the terms of this Agreement and the terms of the
Distribution Agreement, the Publishing Agreement or the Operating Agreement, or
any other agreement entered into in connection herewith, the order of precedence
shall be:
(A) This Agreement;
(B) The Distribution Agreement;
(C) The Publishing Agreement; and then
(D) The Operating Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by respective duly authorized representatives as set forth below.
INTERPLAY:
INTERPLAY ENTERTAINMENT CORP.
By: /s/ Brian Fargo
------------------
Name: Brian Fargo
------------------
Title: CEO
------------------
VIRGIN:
VIRGIN INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Mark Dyne
-------------------
Name:
-------------------
Authorized Agent
-------------------
HOLDINGS:
VIE ACQUISITION HOLDINGS, LLC
By: /s/ Mark Dyne
-------------------
Name:
-------------------
Title: Manager
-------------------
VIE ACQUISITION GROUP:
VIE ACQUISITION GROUP, LLC
By: /s/ Mark Dyne
-----------------
Name:
-----------------
Title: Manager
----------------
-8-
<PAGE>
EXHIBIT 10.28
AMENDMENT TO LOAN DOCUMENTS
Borrowers: Interplay Entertainment Corp. (successor by merger to Interplay
Productions, a California corporation)
Interplay OEM, Inc.
Date: March 18, 1999
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Greyrock Capital,
a Division of NationsCredit Commercial Corporation (formerly Greyrock Business
Credit) ("GBC"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles,
CA 90024 and the borrowers named above (jointly and severally, "Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated June 16, 1997 (as heretofore amended, the "Loan Agreement"), as follows,
effective on the date hereof. (This Amendment, the Loan Agreement, the prior
written amendments to said agreements signed by GBC and the Borrower, and all
other written documents and agreements between GBC and the Borrower are referred
to herein collectively as the "Loan Documents." Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
1. Credit Limit. Section 1 of the Schedule is amended to read as follows:
"1. Credit Limit (Section 1.1): An amount not to exceed the lesser of (A)
------------
or (B) below:
"(A) an amount equal to the `Dollar Limit' (as defined below) at any
one time outstanding; or
"(B) an amount equal to
"(1) 65% of the amount of Borrower's Eligible Receivables
(as defined in Section 8 above), plus 65% of the amount of the
Eligible Receivables (as defined in Section 8 above) of Interplay
Productions Limited (U.K.) (the `UK Subsidiary'), which Borrower
represents is a wholly-owned subsidiary of Interplay Entertainment
Corp., a Delaware corporation (the `Parent'),
"Plus
"(2) the lesser of (A) 100% of the Value of Borrower's
Eligible Inventory (as defined in Section 8 above), consisting of
`Interplay Titles' (i.e. software titles as to which Borrower is the
publisher and does marketing and manufacturing) and 20% of the Value
of Borrower's Eligible Inventory (as defined in Section 8 above),
consisting of `Affiliate Titles' (i.e. software titles as to which
Borrower is not the
<PAGE>
publisher and does not do marketing and manufacturing) or (B)
$5,000,000. `Value', as used herein, means the lower of cost or
wholesale market value."
"Plus
"(3) The `Permitted Overadvance Amount' (as defined below).
"As used above, `Dollar Limit' shall mean the following amounts during
the following periods:
<TABLE>
<S> <C>
"Present to November 29, 1999 $37,500,000
"November 30, 1999 to December 30, 1999 $30,000,000
"December 31, 1999 and thereafter $25,000,000
"As used above, `Permitted Overadvance Amount' shall mean the following amounts
during the following periods:
"Present to July 30, 1999 $14,000,000
"July 31, 1999 to September 29, 1999 $10,000,000
"September 30, 1999 to November 29, 1999 $ 7,000,000
"November 30, 1999 and thereafter $ 5,000,000
</TABLE>
"The Loans outstanding from time to time under the Permitted
Overadvance component of the Credit Limit are referred to herein as
the `Overadvance Loans.'
"The UK Subsidiary shall provide a cross-corporate guarantee and
first-priority security interests in its Receivables and other assets
prior to the making of any Loans with respect to the same. In order
to be Eligible Receivables, the UK Subsidiary's Receivables (the `UK
Receivables') shall be billed from and payable to offices in the UK
(even though bills may be sent to, and payments may be remitted from,
other countries). Currencies in which Receivables are denominated
shall be acceptable to GBC in its sole discretion.
"Loans will be made separately to each Borrower based on the
Receivables and Inventory of each Borrower. Loans based on the UK
Receivables will be made to the Parent."
Nothing herein limits the fact that the amount of Loans to be made under the
Loan Agreement are a matter of GBC's good faith business judgment, as provided
in Section 1.1 of the Loan Agreement.
2. Maturity Date. Section 6.1 of the Loan Agreement is amended in
its entirety to read as follows:
-2-
<PAGE>
"6.1 Maturity Date. This Agreement shall continue in effect until January
-------------
1, 2000 (the `Maturity Date'), provided that the Maturity Date shall
automatically be extended, and this Agreement shall automatically and
continuously renew, for successive additional terms of one year each,
unless one party gives written notice to the other, not less than thirty
days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
Section 4 of the Schedule, titled "Maturity Date," has been deleted from the
Schedule.
3. Additional Covenants. A new Section 8 is hereby added to the Schedule which
shall read as follows. (Section 8.1 below replaces Section 5 of the
Amendment to Loan Documents between the parties dated November 19, 1998
relating to cash collateral.)
"8. Additional Covenants.
--------------------
"8.1 Cash Collateral. Borrower shall deposit with GBC cash
---------------
collateral (the `Cash Collateral') in the following amounts on the
following dates, to be held as Collateral in accordance with all of
the provisions of the Loan Agreement:
"February 15, 1999 $1,000,000
"March 15, 1999 $1,000,000
"April 15, 1999 $500,000
"The Cash Collateral shall bear interest at a rate equal to the
`Reference Rate' or the substitute therefor of the Bank of America NT
& SA (or its successor) in effect from time to time minus three
percent per annum, which interest shall be added to, and held as, Cash
Collateral. In the event the Maturity Date has not been extended past
January 1, 2000, the Cash Collateral shall be applied to the
outstanding Obligations on December 31, 1999, whether or not any
default or Event of Default has occurred. In the event the Maturity
Date is extended past January 1, 2000, the Cash Collateral shall
continue to be held as collateral for the Obligations, and, upon
termination of this Agreement and payment and performance in full of
all of the Obligations, the remaining Cash Collateral shall be
released to the Borrower. The Cash Collateral shall constitute
`Collateral' for all purposes of this Agreement.
"8.2 Covenant to Reduce Obligations on Certain Dates.
-----------------------------------------------
Notwithstanding the provisions of this Loan Agreement relating to
Credit Limit or any other provisions of this Loan Agreement to the
contrary, Borrower shall make principal payments to GBC on the
outstanding Loans in an amount sufficient to reduce the total balance
of all outstanding Loans and other monetary Obligations to the
following amounts on the following dates:
"June 30, 1999 $35,000,000
"July 31, 1999 $35,000,000
-3-
<PAGE>
"August 31, 1999 $33,000,000
"September 30, 1999 $34,000,000
"October 31, 1999 $37,000,000
"November 30, 1999 $30,000,000
"December 31, 1999 $25,000,000
"The foregoing shall be computed without regard to any Cash Collateral
or other Collateral held by GBC, whether provided by Borrower, any
Guarantor, or any other person.
"8.3 Guarantees to Continue. Borrower shall cause the Continuing
----------------------
Guarantees of Interplay Productions Limited (U.K.) and Brian Fargo and
all security agreements, pledge agreements and other agreements
executed by them in favor of GBC to continue in full force and effect
until this Loan Agreement has terminated and all Obligations have been
paid and performed in full."
4. Fee. In consideration for GBC entering into this Amendment, Borrower shall
pay GBC a facility fee of $100,000, which shall be payable, in seven equal
monthly installments of $14,286 each, commencing on April 1, 1999 and continuing
on the first day of each month thereafter until paid in full, provided that the
entire unpaid balance of said fee shall be paid in full on the Maturity Date or
on any earlier termination of the Loan Agreement. Said fee may be charged by GBC
to Borrower's loan account, in GBC's discretion. Said fee is fully earned on the
date hereof, is in addition to all interest and other charges and fees and is
non-refundable. Nothing herein modifies any other fees payable by Borrower to
GBC, and all such fees shall continue to be payable as set forth in the written
agreements between Borrower and GBC.
5. Representations True. Borrower represents and warrants to GBC that all
representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct (subject to any exceptions therein set forth).
6. Condition Precedent. This Amendment is conditioned on Borrower receiving
$10,000,000 in cash in consideration for the issuance of its common stock, which
sum shall be received in full on or before March 19, 1999, and Borrower
providing evidence of the same to GBC on or before said date, which evidence
shall be reasonably satisfactory to GBC. If the foregoing conditions are not
satisfied by said date, this Amendment shall be of no force or effect.
7. Consent. GBC hereby consents to Interplay Entertainment Corp. issuing up to
5,000,000 shares of its common stock to Titus Interactive S.A., a French
corporation ("Titus"), pursuant to a Stock Purchase Agreement in substantially
the form the Borrower has provided to GBC. GBC further agrees that a change in
the controlling stock ownership of Interplay Entertainment Corp. to Titus as a
result of the issuance of said shares will not constitute an Event of Default
under Section 7.1(n) of the Loan Agreement or any of the other provisions of the
Loan Documents. This consent does not constitute a waiver of any of the other
terms or provisions of the Loan Agreement, or any other Loan Documents, nor does
it constitute a consent to any other transaction, whether or not
-4-
<PAGE>
similar to the foregoing, and whether or not contemplated by any of the
documents referred to herein.
8. Loan Documents Continue. As herein expressly amended, all of the terms and
provisions of the Loan Agreement and the other Loan Documents shall continue in
full force and effect, and the same are hereby ratified and confirmed.
9. General Provisions. This Amendment, the Loan Agreement, and the other Loan
Documents set forth in full all of the representations and agreements of the
parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. This Amendment shall be governed by the laws
of the State of California.
Borrower: GBC:
INTERPLAY ENTERTAINMENT CORP. GREYROCK CAPITAL,
a Division of NationsCredit Commercial
Corporation
By /s/ James C. Wilson
----------------------------------
Chief Financial Officer
By /s/ Lisa Nagano
------------------------------
By /s/ Lisa A Latham Title Executive Vice President
---------------------------------- ----------------------------
Secretary
Borrower:
INTERPLAY OEM, INC.
By /s/ James C. Wilson
-----------------------------------
Chief Financial Officer
By /s/ Lisa A Latham
-----------------------------------
Assistant Secretary
-5-
<PAGE>
Consent-Guarantors
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the guarantees of the undersigned,
or the security agreements, pledge agreements and other agreements between the
undersigned and GBC, all of which are hereby ratified and affirmed.
Interplay Productions Limited (U.K.)
/s/ Brian Fargo By /s/ Richard S. F. Lehrberg
- ----------------------------------- --------------------------------------
Brian Fargo, individually Title Director and Corporate Secretary
----------------------------------
-6-
<PAGE>
EXHIBIT 10.29
FIFTH AMENDMENT TO LEASE
------------------------
(VON KARMAN CORPORATE CENTER)
THIS FIFTH AMENDMENT TO LEASE ("Fifth Amendment") is made and entered into
as of the 4th day of December, 1998, by and between ARDEN REALTY FINANCE IV,
L.L.C., a Delaware limited liability company ("Landlord") and INTERPLAY
ENTERTAINMENT CORP., a Delaware corporation, as successor-in-interest to
Interplay Productions ("Tenant").
R E C I T A L S :
----------------
A. AETNA LIFE INSURANCE COMPANY OF ILLINOIS, an Illinois corporation
("Original Landlord") and INTERPLAY PRODUCTIONS, a California corporation
("Interplay Productions") entered into that certain Office Building Lease dated
as of September 8, 1995 (the "Original Lease") as amended by that certain First
Amendment to Lease dated as of December 1, 1995 by and between Original Landlord
and Interplay Productions ("First Amendment"), that certain Second Amendment to
Lease dated as of January 5, 1996 by and between Original Landlord and Interplay
Productions ("Second Amendment"), that certain Third Amendment to Lease dated as
of June 30, 1997 by and between THE STANDARD FIRE INSURANCE COMPANY, a
Connecticut corporation, as successor to Original Landlord ("Standard Fire") and
Interplay Productions ("Third Amendment") and that certain Fourth Amendment to
Lease dated as of July 29, 1998 by and between Landlord, as successor to
Standard Fire, and Tenant ("Fourth Amendment"), whereby Landlord leased to
Tenant and Tenant leased from Landlord certain office space located in those
certain buildings located and addressed at 16845 Von Karman Avenue ("Building
Three"), 16815 Von Karman Avenue ("Building Four") and 16795 Von Karman Avenue
("Building Five") in Irvine, California (collectively, the "Buildings"). The
Original Lease, as amended by the First Amendment, the Second Amendment, the
Third Amendment and the Fourth Amendment may be referred to herein as the
"Lease."
B. By this Fifth Amendment, Landlord and Tenant desire to reduce the size
of the space which Tenant is obligated to lease and to otherwise modify the
Lease as provided herein.
C. Unless otherwise defined herein, capitalized terms as used herein shall
have the same meanings as given thereto in the Original Lease.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
A G R E E M E N T :
------------------
1. The Existing Premises. Landlord and Tenant hereby agree that pursuant
---------------------
to the Lease, Landlord currently is obligated to lease to Tenant and Tenant
currently is obligated to lease from Landlord (i) all of Building Four
consisting of 50,379 rentable square feet (the "Building Four Space"), (ii) the
entire second (2nd) floor of Building Five consisting of 27,490 rentable square
feet as shown on Exhibit "A-II" to the Original Lease (the "Building Five
Space"), and (iii) that certain space on the ground floor of Building Five
defined as the "Expansion Space" in Section 3 of the Fourth Amendment. In
addition, pursuant to Section 3 of the Fourth Amendment, until the "Phase 2
Effective Date" (as that term is defined in Section 3 of the Fourth Amendment),
Tenant is obligated to lease certain space on the second (2nd) floor of Building
Three containing approximately 11,479 rentable square feet (i.e., all of the
"Building Three Space" (as that term is defined in Section 1 of the Fourth
Amendment) other than the
<PAGE>
"Phase 1 Surrender Space" (as that term is defined in Section 2 of the Fourth
Amendment)). Finally, pursuant to Section 2 of the Fourth Amendment, Tenant is
obligated to pay Monthly Base Rent and Operating Expense payments for the "Phase
1 Surrender Space" (as that term is defined in Section 2 of the Fourth
Amendment) until December 31, 1998.
2. Reconfiguration of Expansion Space. Notwithstanding Section 3 of the
----------------------------------
Fourth Amendment, Landlord and Tenant have agreed that the "Expansion Space," as
that term is defined in Section 3 of the Fourth Amendment, shall mean and refer
to that certain space on the ground floor of Building Five consisting of 3,209
rentable (2,853 usable) square feet as shown on the floor plan attached hereto
as Exhibit "A" and made a part hereof, and such space is not subject to
modification. All other terms and conditions of Section 3 of the Fourth
Amendment shall apply to Tenant's lease of such Expansion Space. Accordingly,
effective upon the "Phase 2 Effective Date" (as that term is defined in Section
3 of the Fourth Amendment) the space leased by Tenant pursuant to the Lease, as
amended by this Fifth Amendment, shall consist of the Building Four Space, the
Building Five Space, and the Expansion Space for a total of approximately 81,078
rentable square feet (which total space may be collectively referred to herein
as the "New Premises").
3 Monthly Base Rent. As a result of the decrease in the size of the
-----------------
Expansion Space, Section 4.1 of the Fourth Amendment shall be deleted and this
Section 3 shall be substituted: Subject to the last sentence of this Section 3
below, Tenant's obligation to pay Monthly Base Rent shall remain unchanged until
the "Phase 2 Effective Date," as that term is defined in Section 3 of the Fourth
Amendment. However, effective as of the Phase 2 Effective Date, Monthly Base
Rent for the "New Premises" (as that term is defined in Section 2 of this Fifth
Amendment above) shall be as follow:
<TABLE>
<CAPTION>
Monthly Base Rent Per
Period Monthly Base Rent Rentable Square Foot
------ ----------------- --------------------
<S> <C> <C>
Phase 2 Effective Date - 6/14/2001 $105,401.40 $1.30
6/15/2001 - 12/14/2003 $109,455.30 $1.35
12/15/2003 - 6/14/2006 $121,617.00 $1.50
</TABLE>
Notwithstanding the foregoing provisions of this Section 3, Landlord and
Tenant acknowledge that the foregoing chart assumes that the Phase 2 Effective
Date shall occur on January 1, 1999. If, however, (i) the Phase 2 Effective
Date occurs prior to January 1, 1999, then in addition to the Monthly Base Rent
specified in this chart above, during the period from the Phase 2 Effective Date
through and including December 31, 1998, Monthly Base Rent shall be increased by
Fifteen Thousand Five Hundred Seventy and 10/100 Dollars ($15,570.10) per month
(i.e., $1.30 per rentable square foot of the Phase 1 Surrender Space) and (ii)
the Phase 2 Effective Date occurs after January 1, 1999, then Monthly Base Rent
payable by Tenant from January 1, 1999 through and including the day immediately
preceding the Phase 2 Effective Date shall be reduced by Fifteen Thousand Five
Hundred Seventy and 10/100 Dollars ($15,570.10) per month.
4. Additional Monthly Base Rent. In addition to the then Monthly Base
----------------------------
Rent payable by Tenant pursuant to Section 3 above, Monthly Base Rent payable by
Tenant shall be increased as provided in Section 4.2 of the Fourth Amendment.
5. Tenant's Percentage Share and Base Year. Notwithstanding anything to
---------------------------------------
the contrary in the Lease, effective upon the Phase 2 Effective Date, Tenant's
Percentage shall be reduced to seventeen point nine six percent (17.96%). The
Base Year shall remain the calendar year 1996 throughout the Term of Tenant's
Lease (as amended by this Fifth Amendment).
6. Tenant Improvements. Tenant Improvements in the Expansion Space shall
-------------------
be installed and constructed in accordance with the terms of the Tenant Work
Letter attached to the Fourth Amendment as Exhibit "B"; provided, however, that
the "Expansion Space Allowance"
-2-
<PAGE>
(as that term is defined in Section 2.1 of Exhibit "B" to the Fourth Amendment)
shall be reduced to Thirty-Two Thousand Ninety Dollars ($32,090.00).
7. Parking. Effective as of the Phase 2 Effective Date, the number of
-------
unreserved parking passes which Tenant is entitled to use shall be reduced to
three hundred twenty-four (324). Tenant's use of such parking passes shall be
in accordance with, and subject to, all provisions of Section 32 of the Original
Lease and the Rules and Regulations regarding parking contained in Exhibit "H"
to the Original Lease.
8. Expansion Rights. All terms and conditions of Section 8 of the Fourth
----------------
Amendment shall apply to Tenant's potential lease of the "First Offer Space," as
that term is defined in Section 8 of the Fourth Amendment, except that Tenant's
right of first offer shall not apply with respect to that certain space ("Fuscoe
Space") consisting of approximately 13,179 rentable square feet located adjacent
to the Expansion Space described in Section 2 of this Fifth Amendment above,
until and unless Landlord's lease with Fuscoe terminates or expires, For
purposes of the immediately preceding sentence, if Landlord and Fuscoe agree to
renew or extend such lease, whether or not such renewal or extension is pursuant
to an express written provision in such lease, Tenant's right of first offer
shall apply only after the expiration or earlier termination of such lease, as
extended.
9. Effectiveness of this Fifth Amendment. Notwithstanding anything to the
-------------------------------------
contrary contained in this Fifth Amendment, in the event that Landlord and
Fuscoe Engineering, Inc., a California corporation ("Fuscoe") do not fully
execute an amendment to Fuscoe's existing lease in Building Five expanding
Fuscoe's lease to include the Fuscoe Space, Landlord shall have the option, upon
written notice to Tenant, to deem this Fifth Amendment null and void.
10. Signing Authority. Promptly after Tenant's execution of this Fifth
-----------------
Amendment, Tenant shall provide to Landlord a copy of a resolution of the Board
of Directors of Tenant authorizing the execution of this Fifth Amendment on
behalf of such corporation, which copy of resolution shall be duly certified by
the secretary or an assistant secretary of the corporation to be a true copy of
a resolution duly adopted by the Board of Directors of said corporation and
shall be in the form of Exhibit "B" or in some other form reasonably acceptable
to Landlord.
11. No Further Modification. Except as set forth in this Fifth Amendment,
-----------------------
all of the terms and provisions of the Lease shall apply and shall remain
unmodified and in full force and effect and all references to the "Lease" shall
refer to the Lease as amended by this Fifth Amendment.
-3-
<PAGE>
IN WITNESS WHEREOF, this Fifth Amendment has been executed as of the day
and year first above written.
"Landlord":
ARDEN REALTY FINANCE IV, L.L.C.,
a Delaware limited liability company
By: /s/ Victor J. Coleman
--------------------------
Victor J. Coleman
Its: President and COO
By: /s/ Andrew J. Sobel
----------------------
Its: Executive Vice President & Assistant
------------------------------------
Secretary
---------
"Tenant":
INTERPLAY ENTERTAINMENT CORP.,
a Delaware corporation
By: /s/ Christopher J. Kilpatrick
--------------------------------
Print Name: Christopher J. Kilpatrick
--------------------------
Its: President
--------------------------
By: /s/ Steven "Chuck" Camps
--------------------------------
Print Name: Steven "Chuck" Camps
--------------------------
Its: Chief Operating Officer
--------------------------
-4-
<PAGE>
EXHIBIT "A"
-----------
OUTLINE OF EXPANSION SPACE
--------------------------
<PAGE>
EXHIBIT "B"
-----------
CERTIFIED COPY OF
BOARD OF DIRECTORS RESOLUTIONS
OF
INTERPLAY ENTERTAINMENT CORP.
-----------------------------
The undersigned, being the duly elected Corporate Secretary of Interplay
Entertainment Corp., a Delaware corporation ("Corporation"), hereby certifies
that the following is a true, full and correct copy of the resolutions adopted
by the Corporation by unanimous written consent in lieu of a special meeting of
its Board of Directors, and that said resolutions have not been amended or
revoked as of the date hereof.
RESOLVED, that the Corporation, is hereby authorized to execute, deliver
and fully perform that certain document entitled Fifth Amendment to Lease
("Amendment") by and between the Corporation and Arden Realty Finance IV,
L.L.C., a Delaware limited liability company, for the lease of space at Von
Karman Corporate Center, Irvine, California.
RESOLVED FURTHER, that the Corporation is hereby authorized and directed to
make, execute and deliver any and all, consents, certificates, documents,
instruments, amendments, confirmations, guarantees, papers or writings as may be
required in connection with or in furtherance of the Amendment (collectively
with the Amendment, the "Documents") or any transactions described therein, and
to do any and all other acts necessary or desirable to effectuate the foregoing
resolution.
RESOLVED FURTHER, that the following officers acting together:
_______________ as _____________ and ____________ as _______________ are
authorized to execute and deliver the Documents on behalf of the Corporation,
together with any other documents and/or instruments evidencing or ancillary to
the Documents, and in such forms and on such terms as such officer(s) shall
approve, the execution thereof to be conclusive evidence of such approval and to
execute and deliver on behalf of the Corporation all other documents necessary
to effectuate said transaction in conformance with these resolutions.
Date: _____________, 199_ ----------------------------------------
---------------, Corporate Secretary
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Interplay Entertainment Corp.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 29, 1999, included in this Form 10-K into
Interplay Entertainment Corp.'s previously filed Form S-8 Registration Statement
File No. 333-60583.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 614
<SECURITIES> 0
<RECEIVABLES> 33,991
<ALLOWANCES> 18,431
<INVENTORY> 6,303
<CURRENT-ASSETS> 67,614
<PP&E> 15,667
<DEPRECIATION> (9,988)
<TOTAL-ASSETS> 75,085
<CURRENT-LIABILITIES> 70,478
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 3,821
<TOTAL-LIABILITY-AND-EQUITY> 75,085
<SALES> 109,658
<TOTAL-REVENUES> 126,862
<CGS> 71,928
<TOTAL-COSTS> 71,928
<OTHER-EXPENSES> 81,717
<LOSS-PROVISION> 43,596
<INTEREST-EXPENSE> 4,620
<INCOME-PRETAX> (26,783)
<INCOME-TAX> (1,437)
<INCOME-CONTINUING> (28,220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,220)
<EPS-PRIMARY> (1.91)
<EPS-DILUTED> (1.91)
</TABLE>
