<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, for Use of the
[_] Preliminary Proxy Statement Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
INTERPLAY ENTERTAINMENT CORP.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
INTERPLAY ENTERTAINMENT CORP.
16815 Von Karman Avenue
Irvine, California 92606
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
August 24, 1999
----------------
To the Stockholders of Interplay Entertainment Corp.:
A Special Meeting of Stockholders of Interplay Entertainment Corp., a
Delaware corporation (the "Company"), will be held at the Long Beach Marriott,
4700 Airport Plaza Drive, Long Beach, California, on Tuesday, August 24, 1999
at 5:00 p.m. Pacific Standard Time, to consider and vote on the following
matters described in the attached Proxy Statement:
(1) The election of five (5) directors to serve until the next Annual
Meeting of Stockholders or until their successors are elected and duly
qualified (Proposal 1);
(2) The approval (recommended by the Board of Directors) of the issuance to
Titus Interactive SA, a French corporation ("Titus") of an aggregate of up to
5,000,000 shares of the Company's Common Stock pursuant to the terms and
conditions of a Stock Purchase Agreement dated March 18, 1999, by and among
the Company, Titus and Brian Fargo (Proposal 2);
(3) The approval (recommended by the Board of Directors) of the sale and
issuance to Titus of 6,250,000 shares of the Company's Common Stock for
aggregate consideration of $25,000,000, pursuant to the terms and conditions
of a Stock Purchase Agreement dated July 20, 1999 by and among the Company,
Titus and Brian Fargo (Proposal 3);
(4) The ratification (recommended by the Board of Directors) of the
appointment of Arthur Andersen LLP as independent auditors of the Company for
the year ending December 31, 1999 (Proposal 4); and
(5) Such other business as may properly come before the meeting or any
adjournment thereof.
The Board of Directors has fixed the close of business on July 9, 1999, as
the record date for the determination of stockholders entitled to notice of
and to vote at the meeting or any postponement and adjournment thereof. The
Company's stock transfer books will not be closed on such date.
The Board of Directors welcomes the personal attendance of stockholders at
the meeting. However, please sign and return the enclosed proxy, which you may
revoke at any time prior to its use, whether or not you expect to attend the
meeting. A self-addressed, postage prepaid envelope is enclosed for your
convenience. Your proxy will not be used if you attend the meeting and choose
to vote in person.
By Order of the Board of Directors
/s/ Brian Fargo
Brian Fargo
Chairman of the Board of Directors
and Chief Executive Officer
Irvine, California
July 27, 1999
<PAGE>
INTERPLAY ENTERTAINMENT CORP.
16815 Von Karman Avenue
Irvine, California 92606
---------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
To Be Held August 24, 1999
5:00 p.m.
---------------
Solicitation and Revocation of Proxies
The accompanying proxy is solicited by and on behalf of the Board of
Directors of Interplay Entertainment Corp., a Delaware corporation (the
"Company"), and the Company will bear the cost of such solicitation.
Solicitation of proxies will be primarily by mail, although some of the
officers, directors and employees of the Company may solicit proxies
personally or by telephone. The Company will reimburse brokerage houses and
other custodians, nominees or fiduciaries for their expenses in sending proxy
materials to their principals.
The persons named as proxies were designated by the Board of Directors and
are directors of the Company. All properly executed proxies will be voted
(except to the extent that authority to vote has been withheld) and where a
choice has been specified by the stockholder as provided in the proxy, it will
be voted in accordance with the specification so made. Proxies submitted
without specification will be voted FOR the election as directors of the
nominees proposed by the Board of Directors, FOR the approval of the issuance
of up to 5,000,000 shares of the Company's Common Stock to Titus Interactive
SA ("Titus") pursuant to the terms of the Stock Purchase Agreement dated March
18, 1999 among the Company, Titus and Brian Fargo, FOR the approval of the
sale and issuance of 6,250,000 shares of the Company's Common Stock to Titus
for aggregate consideration of $25,000,000; and FOR the ratification of Arthur
Andersen LLP as the Company's independent auditors.
Any stockholder may revoke a proxy at any time before it is voted at the
meeting by a proxy bearing a later date. A proxy may also be revoked by any
stockholder by delivering written notice of revocation to the Secretary of the
Company or by voting in person at the meeting.
This Proxy Statement and proxy are being mailed to stockholders of the
Company on or about July 27, 1999. The mailing address of the executive
offices of the Company is 16815 Von Karman Avenue, Irvine, California 92606.
Voting at the Meeting
Only record holders of Common Stock of the Company at the close of business
on July 9, 1999, will be entitled to notice of, and to vote at, the meeting.
As of the record date, there were 22,770,712 shares of the Company's Common
Stock outstanding. Each share is entitled to one vote at the meeting. Except
with respect to the election of directors, the affirmative vote of at least a
majority of the shares of the Company's Common Stock outstanding on the record
date is required for a proposal to be adopted. Shares that are voted "FOR,"
"AGAINST" or "ABSTAIN" from a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as being
entitled to vote on the subject matter (the "Votes Cast") with respect to such
matter.
While abstentions will be counted for purposes of determining both the
presence or absence of a quorum for the transaction of business and the total
number of Votes Cast with respect to a particular matter, broker non-votes
with respect to proposals set forth in this Proxy Statement will not be
considered Votes Cast and, accordingly, will not affect the determination as
to whether the requisite majority of Votes Cast has been obtained with respect
to a particular matter.
The Company's stockholders have cumulative voting rights with respect to
their shares of the Company's Common Stock when voting on the election of
members of the Company's Board of Directors. Cumulative
<PAGE>
voting rights entitle each stockholder to the number of votes he or she would
otherwise have in the absence of cumulative voting rights, multiplied by the
number of directors to be elected. Each stockholder may cast all of the
resulting votes for a single director, or may distribute them among the
directors to be elected as the stockholder sees fit. In order to determine how
may votes a stockholder is entitled to cast as a consequence of cumulative
voting rights, the stockholder multiplies the total number of shares of the
Company's Common Stock which they own by the number of directors being
elected, in this case five (5). The total which results is the number of votes
the stockholder may cast in connection with the election of directors. The
five (5) nominees receiving the most votes will be elected. The proxies
solicited by the Board of Directors confer discretionary authority on the
proxy holders to cumulate votes to elect the nominees listed in this Proxy
Statement.
PROPOSAL ONE
ELECTION OF DIRECTORS
The persons named in the enclosed proxy will vote to elect the five (5)
proposed nominees named below unless contrary instructions are given in the
proxy. The election of directors shall be by the affirmative vote of the
holders of a plurality of the shares voting in person or by proxy at the
meeting. Each director is to hold office until the next annual meeting and
until his successor is elected and qualified.
The names and certain information concerning the persons nominated by the
Board of Directors to become directors at the meeting are set forth below.
Kenneth J. Kay and Mark Pinkerton, who are employees of Universal or its
subsidiaries and who were nominated as directors by Universal, resigned from
the Board in June 1999 in anticipation of the purchase by Titus of the shares
of the Company's Common Stock held by Universal. The Board of Directors has
nominated Herve Caen and Eric Caen, each of whom is an officer and director of
Titus, to fill the resulting vacancies. If elected to serve as directors of
the Company, Messrs. Herve and Eric Caen will only serve as directors if
Proposal 3 of this Proxy Statement is approved by the Company's Stockholders.
In the event the Company's Stockholders approve Proposal 3, Messrs. Caen would
begin to serve as Directors of the Company only upon the consummation of the
transactions contemplated by Proposal 3. The Company's Board of Directors
recommends that you vote FOR the election of each of the nominees named below.
Shares represented by the proxies will be voted FOR the election to the Board
of Directors of the persons named below, with cumulative votes cast as the
proxies deem necessary to elect such persons, unless authority to vote for
nominees has been withheld in the proxy. Although each of the persons named
below has consented to serve as a director if elected, except as stated above
with respect to Herve Caen and Eric Caen and the Board of Directors has no
reason to believe that any of the nominees named below will be unable to serve
as a director, if any nominee withdraws or otherwise becomes unavailable to
serve, the persons named as proxies will vote for any substitute nominee
designated by the Board of Directors. The following information regarding the
nominees is relevant to your consideration of the slate proposed by the Board
of Directors:
Nominees for Director
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
---- --- -------------------- --------
<C> <C> <S> <C>
Brian Fargo............ 36 Chairman and Chief Executive Officer 1983
Richard S.F. Lehrberg.. 51 Executive Vice President 1989
Charles S. Paul(1)..... 49 Chairman and Chief Executive Officer, 1994
SEGA GameWorks LLC
Herve Caen............. 37 President and Chief Executive (2)
Officer, Titus Interactive, SA
Executive Vice President, Titus
Eric Caen.............. 34 Interactive, SA (2)
</TABLE>
- --------
(1) Member of the Compensation Committee of the Board of Directors.
(2) If elected to serve as directors of the Company, Herve Caen and Eric Caen
will only serve in such capacity if Proposal 3 of this Proxy Statement is
approved by the Company's Stockholders.
2
<PAGE>
Brian Fargo, Chairman of the Company's Board of Directors, founded the
Company in 1983 and has served as the Company's Chief Executive Officer since
that time. Prior to June 1995, Mr. Fargo also served as President of the
Company. Mr. Fargo also currently serves as a member of the Board of Directors
of the Interactive Digital Software Association.
Richard S.F. Lehrberg joined the Company as Vice President in November 1991
and has served as Executive Vice President of the Company since October 1994.
Mr. Lehrberg has served as a director of the Company since April 1989. Prior
to joining the Company, from December 1988 to November 1991, Mr. Lehrberg
served as President of Lehrberg Associates, an international licensing
company. From August 1982 to November 1988, Mr. Lehrberg was employed by
Activision, Inc., an interactive entertainment software publisher, in various
positions, including Vice President and General Manager of the Entertainment
Division.
Charles S. Paul has served as a director of the Company since October 1994.
Since March 1995, Mr. Paul has been employed by Sega GameWorks, a location-
based entertainment company, and has served as the Chairman of the Board of
Sega GameWorks L.L.C., a location-based entertainment company, since March
1996. Mr. Paul previously served as Executive Vice President of Universal
Studios, Inc. ("Universal") from December 1986 to March 1995. Mr. Paul is a
director of National Golf Properties, Inc. and Entertainment Properties Trust,
both real estate investment trusts.
Herve Caen has served as Chairman of the Board of Directors and Chief
Executive Officer of Titus Interactive SA, an interactive entertainment
software company, since 1991. Mr. Caen also serves as Managing Director of
Titus Interactive Studio, Titus SARL and Digital Integration Services, which
positions he has held since 1985, 1991 and 1998, respectively. Mr. Caen also
serves as Chief Executive Officer of Titus Software Corporation, Chairman of
Titus Software UK Limited and Representative Director of Titus Japan KK, which
positions he has held since 1988, 1991 and 1998, respectively.
Eric Caen has served as a Director and as President of Titus Interactive SA
since 1991. Mr. Caen also serves as Vice President of Titus Software
Corporation, Secretary and Director of Titus Software UK Limited and Director
of Titus Japan KK and Digital Integration Limited, which positions he has held
since 1988, 1991, 1998 and 1998, respectively. Mr. Caen has also served as
Managing Director of Total Fun 2, a French record production company, since
1998. Mr. Caen served as Managing Director of Titus SARL from 1988 to 1991.
Board Committees
The Company has two standing committees of the Board of Directors: an Audit
Committee and a Compensation Committee. The Audit Committee reviews the
functions of the Company's management and independent auditors pertaining to
the Company's financial statements and performs such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors. The Compensation Committee determines officer and director
compensation and administers the Company's benefit plans. The Audit Committee
did not meet during fiscal 1998. The Compensation Committee met 4 times during
fiscal 1998.
Attendance at Meetings
During the fiscal year ended December 31, 1998, the Board of Directors held
a total of 9 meetings. No member of the Board of Directors attended fewer than
75% of the meetings of the Board and of the committees of which he was a
member.
Director Compensation
The Company's directors currently do not receive cash compensation for
attendance at Board of Directors or committee meetings. However, in the
future, non-employee directors may receive compensation for attendance and may
be reimbursed for certain expenses in connection with attendance at board and
committee meetings. In September 1998, Charles S. Paul, who currently serves
on the Company's Board of Directors and is a nominee for election, and David
R. Dukes, who resigned from the Board in September 1998, were each granted
options to purchase 25,000 shares of the Company's Common Stock at an exercise
price of $8.00 per share, which options vest over a period of five years
following the date of the grant. Mr. Dukes' options expired on October 24,
1998.
3
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who own
more than ten percent of a registered class of the Company's equity securities
to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and ten-percent
Stockholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. To the Company's knowledge, based
solely on the review of copies of such reports furnished to the Company and
written representations that no other reports were required, during the fiscal
year ended December 31, 1998 all of the Company's officers, directors and ten-
percent stockholders complied with all applicable Section 16(a) filing
requirements.
Security Ownership of Certain Beneficial Owners and Management
The following sets forth certain information concerning the beneficial
ownership of the Company's outstanding Common Stock as of June 30, 1999 for
(i) each person (or group of affiliated persons) who is known by the Company
to own beneficially five percent or more of the Company's Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers, and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Name and Address of Beneficial Owner Owned(1) Shares Owned
- ------------------------------------ ------------ -------------
<S> <C> <C>
Brian Fargo ................................... 6,022,378(2) 26.0%
16815 Von Karman Avenue
Irvine, CA 92606
Universal Studios, Inc. ....................... 4,658,216 20.5
100 Universal City Plaza
Universal City, CA 91608
Titus Interactive SA........................... 8,341,787(3) 30.4
Herve Caen(4)
Eric Caen(4)
20432 Corisco Street
Chatsworth, CA 91311
Alliance Capital Management, L.P. ............. 1,664,300(5) 7.3
1290 Avenue of the Americas
New York, NY 10104
Christopher J. Kilpatrick(6)................... 282,602 1.2
Richard S.F. Lehrberg.......................... 590,979(7) 2.5
James C. Wilson(8)............................. 10,000(9) *
Charles S. Paul................................ 0 *
All Directors and Executive Officers as a Group
(7 persons)................................... 6,623,357(10) 27.9%
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options currently
exercisable, or exercisable within 60 days of June 30, 1999 are deemed
outstanding for computing the percentage of the person holding such
options but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Includes 430,000 shares subject to warrants and options exercisable within
60 days of June 30, 1999.
4
<PAGE>
(3) Includes 4,658,216 shares subject to an option granted to Titus by
Universal, which option may, under certain circumstances, be exercisable
within 60 days of June 30, 1999.
(4) Messrs. Herve Caen and Eric Caen, who are officers and directors of Titus,
disclaim beneficial ownership of the shares held by Titus.
(5) The Equitable Companies Incorporated, AXA and the Mutuelles AXA, as direct
or indirect majority owners of Alliance Capital Management L.P. may be
deemed to be beneficial owners of these shares pursuant to the Exchange
Act, however, such entities disclaim beneficial ownership of such shares.
(6) Mr. Kilpatrick's employment with the Company terminated in May 1999.
(7) Includes 510,374 shares subject to options exercisable within 60 days of
June 30, 1999.
(8) Manuel Marrero replaced James Wilson as the Company's Chief Financial
Officer in April 1999.
(9) Includes 10,000 shares subject to options exercisable within 60 days of
June 30, 1999.
(10) Includes 950,374 shares subject to warrants and options exercisable
within 60 days of June 30, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Summary Information Concerning Executive Officers Who Are Not Director
Nominees and Certain Significant Employees
The following table sets forth certain information regarding the Company's
executive officers who are not also nominees for the Board of Directors and
certain significant employees, and their ages as of June 30, 1999:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Manuel Marrero...... 41 Chief Financial Officer(1) and Chief Operating Officer
James C. Wilson..... 48 Vice President of Finance(1)
Phillip G. Adam..... 45 Vice President of Business Development
Kim Motika.......... 39 Vice President of Strategic Development
Patricia J. Wright.. 38 Vice President of Development
Cal Morrell......... 44 Vice President of Marketing
Peter A. Bilotta.... 44 President of Interplay Productions Limited
Jill S. Goldworn.... 35 President of Interplay OEM, Inc.
David Perry......... 32 President of Shiny Entertainment, Inc.
</TABLE>
- --------
(1) Manuel Marrero replaced James Wilson as the Company's Chief Financial
Officer in April 1999.
Background Information Concerning Executive Officers who are not Director
Nominees and Certain Significant Employees
Manuel Marrero joined the Company in April 1999 as its Chief Financial
Officer and Chief Operating Officer. Prior to joining the Company, Mr. Marrero
served as Chief Financial Officer, Senior Vice President and Corporate
Secretary of Precision Specialty Metals, Inc., a leading high precision
conversion mill for stainless steel and high performance alloys, from July
1996. From October 1993 through July 1996 Mr. Marrero served as the Senior
Vice President, Chief Financial Officer and Corporate Secretary for Autologic
Information International, Inc., a manufacturer of computerized image setting
and publications systems equipment and software for the publishing industry.
James C. Wilson joined the Company as Chief Financial Officer in August 1997
and has served as Vice President of Finance of the Company since April 1999.
Prior to joining the Company, from January 1996 to August 1997, Mr. Wilson
served as Chief Financial Officer, Treasurer and Vice President of
Administration of Cloud 9 Interactive Inc., a publisher and developer of
educational and entertainment multi-media products. Between October 1993 and
December 1995, Mr. Wilson served as Vice President--Finance and Chief
Financial
5
<PAGE>
Officer of Applause Enterprises Inc., a worldwide distributor of gifts and
toys. Between February 1992 and October 1993, Mr. Wilson served as a Finance
Executive for Sega of America, a video game system manufacturer.
Phillip G. Adam joined the Company as Vice President of Sales and Marketing
in December 1990 and has served as Vice President of Business Development of
the Company since October 1994. Prior to joining the Company, from January
1984 to December 1990, Mr. Adam served as President of Spectrum Holobyte, an
interactive entertainment software publisher, where he was a co-founder. From
May 1990 to May 1996, Mr. Adam served as the Chairman or a member of the Board
of Directors of the Software Publishers Association and, during part of such
period, as President of the Software Publishers Association. From March 1997
to March 1998 Mr. Adam served as the Chairman of the Public Policy Committee
of the Interactive Digital Software Association.
Kim Motika joined the Company as National Sales Manager in November 1991,
and was promoted to Vice President of Sales of the Company in October 1994. In
November 1998, she was promoted to Vice President of Strategic Development.
Prior to joining the Company, from May 1989 to October 1991, Ms. Motika served
as a Sales Manager for Ashton-Tate, a software publisher, and served as
Western Regional Vice President of Ingram Micro, a worldwide distributor of
information technology products, from 1983 to 1988.
Patricia J. Wright joined the Company as Vice President of Marketing in
October 1995 and has served as Vice President of Development since June 1997.
Prior to joining the Company, from April 1993 to October 1995, Ms. Wright
served as Vice President of Marketing for Activision, Inc. and as Director of
Marketing for the Barbie Products division of Mattel, Inc., a toy
manufacturer, from January 1990 to April 1993.
Cal Morrell joined the Company as Vice President of Marketing in September
1998. Prior to joining the Company, from March 1997 to August 1998, Mr.
Morrell served as Senior Vice President of Games On-Line, Inc dba Engage, and
prior to that served as Vice President of Marketing & Internet for Legacy
Software from June 1996 to February 1997, as well as Director of Worldwide
Consumer Software of IBM UK from January 1995 to June 1996. From June 1993 to
December 1994, Mr. Morrell served as Brand Manager at IBM Consumer Division.
Peter A. Bilotta has served as President of Interplay Productions Limited,
the Company's U.K. subsidiary, since August 1994. Prior to joining the
Company, from January 1992 to July 1994, Mr. Bilotta served as Managing
Director--Distributed Territories of Acclaim Entertainment Ltd., an
entertainment software publisher. Mr. Bilotta also served as Managing Director
and Chief Executive Officer of Arena Entertainment Inc., an interactive
entertainment software publisher, from March 1991 to December 1991. Mr.
Bilotta serves as a director of Interactive Media, Ltd., a privately-held
interactive entertainment software developer, and Bizarre Love Triangle, a
privately-held interactive entertainment software distributor.
Jill S. Goldworn has served as President of Interplay OEM, Inc., the
Company's OEM subsidiary, since December 1996. Prior to that, Ms. Goldworn
served as Vice President, OEM and Merchandising of the Company since June
1995. Prior to that, Ms. Goldworn served as Director of the OEM division of
the Company from September 1992 to June 1995. Prior to joining the Company,
from November 1991 to August 1992, Ms. Goldworn served as Director of Contract
Sales of PC Globe, Inc., a publisher of desktop geography software.
David Perry has served as President of Shiny Entertainment, Inc. since
October 1993. Mr. Perry founded Shiny, developer of Earthworm Jim, in October
1993. Prior to founding Shiny, from January 1991 to September 1993, Mr. Perry
served as a consulting engineer for Virgin Interactive Entertainment Inc., an
interactive entertainment software publisher.
6
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned during the last two fiscal years ended December 31, 1998 by the
Company's Chief Executive Officer and each of the three other most highly
compensated executive officers of the Company whose total salary and bonus
during such year exceeded $100,000 (collectively, the "Named Executive
Officers"). In April 1999, Manuel Marrero replaced Mr. Wilson as the Company's
Chief Financial Officer. Mr. Kilpatrick's employment with the Company
terminated in May 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------- ------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Other(1) Options(#)
- --------------------------- ---- -------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
Brian Fargo.................... 1998 $210,417 -- -- 150,000
Chief Executive Officer 1997 237,500 -- -- --
Christopher J. Kilpatrick...... 1998 234,722 $75,000 $5,065 20,000
President 1997 200,000 -- 4,750 20,000
Richard S. F. Lehrberg......... 1998 178,805 15,000 4,792 --
Executive Vice President 1997 200,000 -- 4,792 --
James C. Wilson................ 1998 131,686 -- -- --
Chief Financial Officer 1997 50,625(2) -- -- 50,000
</TABLE>
- --------
(1) Consists of matching payments made under the Company's 401(k) plan. See
"--Employee Benefit Plans--401(k) Plan."
(2) Mr. Wilson joined the Company in August 1997 at an annual base salary of
$135,000.
Stock Option Grants During Year Ended December 31, 1998
The following table sets forth certain information concerning stock options
granted to the Named Executive Officers during the year ended December 31,
1998.
<TABLE>
<CAPTION>
Percent of Potential Realizable Value
Number of Total at Assumed Annual
Securities Options Rates of Stock Price
Underlying Granted to Exercise Appreciation for
Options Employees In Price Expiration Option Term ($)(4)
Name Granted(1) Fiscal Year ($/Sh)(2) Date(3) 5% 10%
---- ---------- ------------ --------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Brian Fargo............. 150,000 33.3% $8.00 2/23/08 $ 754,674 $ 1,912,491
Christopher J.
Kilpatrick............. 20,000 4.4 $8.00 2/23/08 $ 100,623 $ 254,999
</TABLE>
- --------
(1) Represents options granted pursuant to the Company's 1997 Plan. All such
options were granted at an exercise price equal to, or greater than, the
fair market value of the Common Stock on the date of grant. All such
options vest at the rate of 20% per year.
(2) In February 1998, the Compensation Committee repriced all options granted
at an exercise price of greater than $8.00 which were held by current
employees of the Company or its wholly owned subsidiaries, including the
options listed above, to an exercise price of $8.00.
(3) Options granted to such individuals pursuant to the 1997 Plan expire 10
years from the date of grant.
(4) Represents amounts that may be realized upon exercise of the options
immediately prior to expiration of their terms assuming appreciation of 5%
and 10% over the option term. The 5% and 10% numbers are calculated based
on rules required by the SEC and do not reflect the Company's estimate of
future stock price growth. The actual value realized may be greater or
less than the potential realizable value set forth.
7
<PAGE>
Aggregate Option Exercises And 1998 Year-End Option Values
Shown below is information relating to the exercise of stock options during
the year ended December 31, 1998 for each of the Named Executive Officers, and
the year-end value of unexercised options.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised in-the-
Unexercised Options Money Options at
Shares at Year-End Year-End
Acquired Value (Exercisable/ (Exercisable/
Name on Exercise Realized Unexercisable) Unexercisable)(1)
---- ----------- -------- -------------------- -------------------
<S> <C> <C> <C> <C>
Brian Fargo............. -- -- 0/150,000 $0/$0
Richard S.F. Lehrberg... -- -- 572,874/0 $932,066/$0
Christopher J.
Kilpatrick............. -- -- 251,528/20,000 $30,775/$0
James C. Wilson......... -- -- 10,000/40,000 $0/$0
</TABLE>
- --------
(1) Represents an amount equal to difference between the closing sale price
for the Company's Common Stock on the Nasdaq National Market on December
31, 1998 and the option exercise price, multiplied by the number of
unexercised in-the-money options.
Employment Agreements
The Company has entered into an employment agreement with Brian Fargo, as
amended, for a term of six years through March 2000, pursuant to which he
currently serves as Chairman of the Board of Directors and Chief Executive
Officer of the Company. The employment agreement provides for a base salary of
$250,000 per year, with such annual raises as may be approved by the Board of
Directors, plus annual bonuses at the discretion of the Board of Directors. In
the event that Mr. Fargo is terminated without cause or resigns for good
reason as set forth in the agreement, the Company is required to pay Mr. Fargo
150% of his base salary and 75% of his imputed annual bonuses for the
remainder of the term of the agreement, which payments are contingent upon Mr.
Fargo's non-competition with the Company, as defined in the agreement. Mr.
Fargo is also entitled to participate in the incentive compensation and other
employee benefit plans established by the Company from time to time. A
condition to the closing of the purchase of 6,250,000 shares of the Company's
Common Stock by Titus is that such employment agreement be replaced with an
agreement having comparable terms with an initial term of three years from the
closing date of such transaction (see "Proposal Three--Approval of Additional
Sale of Common Stock to Titus Interactive SA," below).
The Company entered into an employment agreement with Christopher J.
Kilpatrick for a term of five years commencing May 1994, pursuant to which he
served as President of the Company until his employment with the Company
terminated in May 1999. The employment agreement provided for a base salary of
$157,200 per year, with annual raises determined by the Board of Directors of
not less than ten percent per year, plus annual bonuses at the discretion of
the Board of Directors. Mr. Kilpatrick was also entitled to participate in the
incentive compensation and other employee benefit plans established by the
Company from time to time. In connection with the termination of Mr.
Kilpatrick's employment with the Company, under the terms of the employment
agreement, the Company is required to pay Mr. Kilpatrick 150% of his base
salary and 75% of his imputed annual bonuses for 12 months following such
termination, which payments are contingent upon Mr. Kilpatrick's non-
competition with the Company, as set forth in the agreement. In addition, in
accordance with the termination of Mr. Kilpatrick's employment with the
Company, under the terms of the employment agreement, all stock options held
by Mr. Kilpatrick vested upon his termination to the extent they would have
vested through the end of the term of the agreement. Such options were
exercised by Mr. Kilpatrick upon such termination, and the shares of Common
Stock received by Mr. Kilpatrick from such exercise are being held by Mr.
Kilpatrick pending sale pursuant to the Kilpatrick Agreement (see "Certain
Relationships and Related Transactions--Transactions with Fargo").
The Company has entered into an employment agreement with Richard S.F.
Lehrberg for a term of five years commencing March 1994, pursuant to which he
currently serves as Executive Vice President of the Company. The employment
agreement provides for a base salary of $200,000 per year, with annual raises
as
8
<PAGE>
approved by the Board of Directors. Mr. Lehrberg is also entitled to an annual
bonus based on the achievement of goals and objectives agreed upon by the
Board of Directors and Mr. Lehrberg, up to a maximum of $134,000 per year. In
the event Mr. Lehrberg is terminated without cause or resigns for good reason
as set forth in the agreement, the Company is required to pay Mr. Lehrberg
150% of his base salary and 75% of his imputed annual bonuses for the
remainder of the term of the agreement, which payments are contingent upon Mr.
Lehrberg's non-competition with the Company, as defined in the agreement. Mr.
Lehrberg is also entitled to participate in the incentive compensation and
other employee plans established by the Company from time to time.
The Company entered into an employment agreement with Manual Marrero for a
term of five years commencing March 15, 1999, pursuant to which he currently
serves as Chief Financial Officer and Chief Operating Officer of the Company.
The employment agreement provides for a base salary of $198,000 per year, with
increases from time to time as may be approved by the Compensation Committee
of the Board of Directors. Mr. Marrero is eligible for vacation and health
benefits and participation in the Company's 401((k) Plan. Further, Mr. Marrero
received a grant of options to purchase 150,000 shares of the Company's Common
pursuant to the employment agreement, which grant was effective May 6, 1999.
Mr. Marrero is also eligible to receive an annual cash bonus of $50,000, based
on the achievement of certain performance objectives. Such bonus amount may be
increased at the discretion of the Board of Directors to reward superior
performance. In the event Mr. Marrero is terminated by the Company without
cause during the first year of the term of the agreement, 50,000 of the
options granted pursuant to the agreement will vest, Mr. Marrero will continue
to receive his regular salary and benefits for one year from the effective
date of termination and Mr. Marrero will be entitled to a cash bonus of
$50,000 at the end of the one year severance period. In the event Mr. Marrero
is terminated by the Company without cause after the first year of the term of
the agreement, all of the options granted pursuant to the agreement will vest,
and Mr. Marrero will continue to receive his regular salary and benefits for
the greater of one year from the effective date of termination or end of the
term of the agreement, as well as a $50,000 cash bonus at the end of the
severance period. In the event the Additional Titus Stock Sale is consummated
(see "Proposal Three--Approval of Additional Sale of Common Stock to Titus
Interactive SA," below), all of the options granted to Mr. Marrero will vest
due to the change in control resulting therefrom.
In the event the Titus Stock Sale is consummated, the Company will enter
into an employment agreement with Herve Caen, a major shareholder of Titus,
pursuant to which Mr. Caen will serve as President of the Company (see
"Proposal Three--Approval of Additional Sale of Common Stock to Titus
Interactive SA," below).
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Mr. Paul. No member of the
Compensation Committee or executive officer of the Company has a relationship
that would constitute an interlocking relationship with executive officers and
directors of another entity. During 1998, decisions regarding executive
compensation were made by the Compensation Committee, which then consisted of
Mr. Paul, David R. Dukes and Paul Rioux. Mr. Paul serves as a director of the
Company and is employed by Sega GameWorks, a location-based entertainment
company. Mr. Dukes served as a director of the Company until his resignation
in September 1998. Mr. Rioux served as a director of the Company until his
resignation in November 1998. During such time, Mr. Rioux was an officer of
Universal Studios New Media, Inc., a subsidiary of Universal, which has
entered into various transactions with the Company. See "Certain Relationships
and Related Transactions--Transactions With Fargo and Universal."
REPORT OF THE COMPENSATION COMMITTEE
The following report is submitted by the Compensation Committee of the Board
of Directors with respect to the executive compensation policies established
by the Compensation Committee and recommended to the Board of Directors and
compensation paid or awarded to executive officers for the fiscal year ended
December 31, 1998.
9
<PAGE>
The Compensation Committee determines the annual salary, bonus and other
benefits, including incentive compensation awards, of the Company's executive
officers and recommends new employee benefit plans and changes to existing
plans to the Company's Board of Directors. The Compensation Committee met four
times during fiscal year 1998.
Compensation Policies and Objectives
The Company's executive compensation policy is designed to attract and
retain exceptional executives by offering compensation for superior
performance that is highly competitive with other well-managed organizations.
The Compensation Committee measures executive performance on an individual and
corporate basis.
There are three components to the Company's executive compensation program,
and each is consistent with the stated philosophy as follows:
Base Salary. Base salaries for executives and other key employees are
determined by individual financial and non-financial performance, position in
salary range and general economic conditions of the Company. For purposes of
administering base pay, all executive positions are evaluated and placed in
appropriate salary grades. Salary range midpoint levels are reviewed on an
annual basis to ensure competitiveness with a peer group of comparable
entertainment software companies. In recommending salaries for executive
officers, the Compensation Committee (i) reviews the historical performance of
the executives, and (ii) formally reviews specific information provided by its
accountants and other consultants, as necessary, with respect to the
competitiveness of salaries paid to the Company's executives.
Annual Bonus. Annual bonuses for executives and other key employees are tied
directly to the Company's financial performance as well as individual
performance. The purpose of annual cash bonuses are to reward executives for
achievements of corporate, financial and operational goals. Annual cash
bonuses are intended to reward the achievement of outstanding performance. If
certain objective and subjective performance goals are not met, annual bonuses
are reduced or not paid.
Long-Term Incentives. The purpose of these plans is to create an opportunity
for executives and other key employees to share in the enhancement of
stockholder value through stock options. The overall goal of this component of
pay is to create a strong link between the management of the Company and its
Stockholders through management stock ownership and the achievement of
specific corporate financial measures that result in the appreciation of
Company share price. Stock options are awarded in order to tie the executive
officers' interests to the Company's performance and align those interests
closely with those of the Company's Stockholders. The Compensation Committee
generally has followed the practice of granting options on terms which provide
that the options become exercisable in cumulative installments over a three to
five year period. The Compensation Committee believes that this feature not
only provides an employee retention factor but also makes longer term growth
in share prices important for those receiving options.
Chief Executive Officer Compensation
The salary, annual raises and annual bonus of Brian Fargo, the Company's
Chief Executive Officer, are determined in accordance with Mr. Fargo's
Employment Agreement with the Company. Mr. Fargo's Employment Agreement
provides for a base salary of $250,000 per year, with annual raises and
bonuses as may be approved at the discretion of the Company's Board of
Directors. (see "Employment Agreements," above). The amounts of any annual
raises or bonuses are determined in accordance with the policies and
objectives set forth above. In February 1998, Mr. Fargo was granted an option
to purchase 150,000 shares of the Company's Common Stock. The Compensation
Committee believes it is crucial to the Company's long-term success to
continue to tie the Chief Executive Officer's incentive to the Company's
performance and to align individual financial interests with those of the
Company's Stockholders.
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<PAGE>
Deductibility of Executive Compensation
The Company is required to disclose its policy regarding qualifying
executive compensation deductibility under Section 162(m) of the Internal
Revenue Code of 1986, as amended, which provides that, for purposes of the
regular income tax and the alternative minimum tax, the otherwise allowable
deduction for compensation paid or accrued with respect to a covered employee
of a public corporation is limited to no more than $1 million per year. It is
not expected that the compensation to be paid to the Company's executive
officers for fiscal 1998 will exceed the $1 million limit per officer. The
Company's Executive Stock Option Plan, 1994 Stock Option Plan and 1996 Stock
Incentive Plan are structured so that any compensation deemed paid to an
executive officer when he exercises an outstanding option under the plan, with
an exercise price equal to the fair market value of the option shares on the
grant date, will qualify as performance-based compensation that will not be
subject to the $1 million limitation.
The Compensation Committee of the
Board of Directors
Charles S. Paul, Chairman
Notwithstanding anything to the contrary set forth in the Company's previous
filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the foregoing Report and
the performance graph on page 11 shall not be incorporated by reference into
any such filings.
11
<PAGE>
Common Stock Price Performance
Set forth below is a line graph comparing the cumulative stockholder return
on the Company's Common Stock with the cumulative total return of the MG
Industry Group 820 (Multimedia/Graphics Software) and the Nasdaq Market Index
for the period that commenced June 19, 1998, the date on which the Company's
Common Stock was first registered under the Exchange Act, and ended on December
31, 1998. The graph assumes $100 invested June 19, 1998 in the Company's Common
Stock, the MG Industry Group 820 (Multimedia/Graphics Software) and the Nasdaq
Market Index, with the reinvestment of all dividends. The Performance Graph is
not necessarily an indicator of future price performance.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
MG Industry Group 820
Interplay (Multimedia/ Graphics
Measurement Date Entertainment Corp. Software) Nasdaq Market Index
---------------- ------------------- --------------------- -------------------
<S> <C> <C> <C>
06/19/98 100.00 100.00 100.00
06/30/98 95.83 100.00 100.00
09/30/98 53.13 69.97 90.13
12/31/98 29.69 91.60 117.16
</TABLE>
Certain Relationships and Related Transactions
Transactions With Fargo
In connection with the amendment of the Company's line of credit agreement in
November 1998, Brian Fargo, the Company's Chairman and Chief Executive Officer,
provided a personal guarantee of the Company's obligations under such agreement
in the amount of $5.0 million which was effective through May 31, 1999, and
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. In March 1999,
Mr. Fargo extended such guarantee through January 1, 2000. As consideration for
such extension, the Company agreed to assume the obligations of Mr. Fargo under
an agreement entered into between Mr. Fargo and Christopher J. Kilpatrick (the
"Kilpatrick Agreement"). Under the terms of the Kilpatrick Agreement as assumed
by the Company, the Company guarantees that Mr. Kilpatrick will receive an
aggregate of $1,000,000 in pre-tax proceeds from the periodic sale of the
shares of the Company's Common Stock issued
12
<PAGE>
to him upon exercise of his options to purchase 271,528 shares of the
Company's Common Stock (the "Guaranteed Shares"). The amount of the Company's
obligation under the Kilpatrick Agreement will vary based on the market price
of the Company's Common Stock at each date of sale of the Guaranteed Shares.
Based on the closing sale price of the Common Stock on June 30, 1999, the
amount of such obligation would be approximately $295,656, of which $200,000
has been paid as of June 30, 1999.
Transactions With Fargo and Universal
The Company, Mr. Fargo and Universal entered into a Stock Purchase
Agreement, dated January 25, 1994, for the purchase of Common Stock. On March
30, 1994, pursuant to the Stock Purchase Agreement, Universal purchased
1,824,897 shares of Common Stock from the Company for a purchase price of $15
million and 1,216,598 shares of Common Stock from Mr. Fargo for a purchase
price of $10 million. Pursuant to the Stock Purchase Agreement, the Company,
Mr. Fargo and Universal entered into an Option Agreement, dated March 30,
1994, pursuant to which Mr. Fargo granted Universal an option to purchase
additional shares of Common Stock held by Mr. Fargo. Pursuant to such
Agreement, Universal purchased 1,216,598 additional shares of Common Stock
from Mr. Fargo at a price of $9.10 per share on April 25, 1995 and 1,150,123
additional shares of Common Stock at a price of $14.62 per share on April 26,
1996, such that Universal became a 35% owner of the Company as of April 25,
1995 and a 45% owner of the Company as of April 26, 1996. In order to acquire
sufficient shares of Common Stock for sale to Universal on each of the three
sale dates, Mr. Fargo acquired such number of shares as was required for sale
to Universal from existing shareholders of the Company in simultaneous
transactions. Pursuant to the Stock Purchase Agreement, the Company, Mr. Fargo
and Universal entered into a Shareholders' Agreement dated March 30, 1994, as
amended October 8, 1996 and in March 1998, which contains certain restrictions
on transfer of shares, rights of first refusal, voting provisions,
registration rights and certain restrictions on corporate actions. Only the
mutual rights of first refusal as between Universal and Mr. Fargo and the
registration rights of Universal and Mr. Fargo survived the closing of the
IPO. For his services in connection with such transaction, Mr. Fargo was
awarded a bonus of $1.0 million by the Board of Directors on March 28, 1994.
Mr. Fargo has agreed to defer the payment of such bonus to a future date.
The Company has entered into three Merchandising License Agreements with
MCA/Universal Merchandising Inc., a subsidiary of Universal. Pursuant to an
agreement dated May 23, 1994, the Company had the exclusive right to use the
theme and characters of the Waterworld motion picture in software products for
specified platforms. Such right expired July 31, 1998. Pursuant to an
agreement dated May 23, 1994, the Company has the non-exclusive right to use
the theme and characters of the Casper motion picture in software products for
specified platforms for a period of three years following the release of such
motion picture. Pursuant to an agreement dated April 16, 1996, the Company has
the exclusive right to the theme and characters of the Flipper motion picture
for an interactive story book product on specified platforms until June 1,
2001. Each of the agreements provide for the Company to pay specified advances
against royalties and for specified royalty guarantees. To date, the Company
has paid a total of $0.5 million, $0.3 million and $30,000, respectively, in
advances and royalty payments under such agreements. In addition, pursuant to
a letter agreement dated September 27, 1996, with Universal Interactive
Studios, a subsidiary of Universal ("UIS"), the Company has the exclusive
distribution rights in North America for PlayStation versions of Disruptor
(the "Disruptor Agreement"), plus the exclusive rights to manufacture, publish
and distribute Disruptor on any video game platform outside of North America.
On August 16, 1995, the Company and UIS entered into an exclusive distribution
agreement pursuant to which UIS agreed to distribute the Company's interactive
software products in Europe through UIS's affiliate, MCA Home Video, Inc.,
which in turn distributes through Cinema International Corporation ("CIC").
The distribution agreement was subsequently terminated. In March 1998, the
Company entered into an agreement with UIS whereby the Company agreed to pay
to UIS all remaining amounts owed to UIS. Such amounts totaled $1.4 million
and were paid in June 1998.
Transactions with Engage and Fargo
In June 1995, the Company formed a subsidiary to divest Games On-Line, Inc.,
dba Engage Games Online ("Engage"), which formerly operated as a division of
the Company. Pursuant to a Stock Purchase Agreement
13
<PAGE>
dated June 30, 1995, the Company sold 10,000,000 shares of common stock of
Engage to Mr. Fargo for $237,000. In connection with such sale, the Company
and Mr. Fargo entered into an Option Agreement dated June 30, 1995, granting
the Company an option to repurchase all of such shares at an aggregate
exercise price of $337,000 at any time prior to June 30, 2005 (the
"Termination Date"). In conjunction with a financing agreement between Engage
and Mr. Fargo, the Option Agreement was amended in March 1998 to reduce the
shares subject to such option to 19% of the shares held by Mr. Fargo and to
reduce the exercise price to $250,000. In the event the Company elects not to
exercise its option to repurchase the shares, upon certain events Universal
has an option to purchase the shares at the same exercise price. If Universal
exercises its option to purchase the shares, the Company has an option to
purchase such shares from Universal at the $250,000 exercise price until the
Termination Date.
Prior to March 1996, the Company loaned Engage approximately $1.8 million to
fund the operations of Engage, which debt was evidenced by a convertible
demand promissory note dated March 29, 1996, bearing interest at the prime
rate plus two percent per annum. Approximately, $0.8 million of the principal
amount was repaid to the Company in a number of installments during 1996 and
1997. In connection with a secured debt financing in August 1997, the
remaining outstanding principal of approximately $1.0 million was converted
into a secured convertible promissory note bearing interest at a rate of eight
percent per annum. As part of the August 1997 transaction, the Company loaned
an additional $100,000 to Engage on the same terms.
In March 1996, the Company entered into an agreement with Engage which,
among other things, provides that the Company will provide certain
administrative services to Engage, and grants Engage the exclusive right to
use certain of the Company's products in Internet-based on-line services.
Engage currently owes the Company approximately $900,000 in connection with
such agreement.
The Company is co-lessee with Engage under a lease with General Electric
Capital Corporation ("GECC") for equipment utilized by Engage. The Company has
possession of substantially all of the equipment covered by such lease. As of
June 30, 1999, the Company's obligations to GECC through the term of the lease
are approximately $115,000.
Transactions with Titus and Fargo
In March 1999, the Company entered into a Stock Purchase Agreement with
Titus Interactive SA and Brian Fargo. Under the terms of the Stock Purchase
Agreement, the Company issued Two Million Five Hundred Thousand (2,500,000)
shares of its common stock to Titus in exchange for consideration of Ten
Million Dollars ($10,000,000). Pursuant to the terms of the Stock Purchase
Agreement, the purchase price was recalculated based on the average closing
price per share of the Company's Common Stock as reported by Nasdaq during the
ten trading days ended June 30, 1999, and the purchase price will be
recalculated again based on the average closing price per share of the
Company's Common Stock as reported by Nasdaq during the ten trading days
ending August 20, 1999. Pursuant to the June 30, 1999 adjustment, the Company
issued to Titus 1,161,771 additional shares of Common Stock without additional
consideration, for a total of 3,661,771 shares, and issued to Titus a
promissory note in the principal amount of $1,051,548, bearing interest at the
rate of 10% per annum and due January 1, 2000. If the Company's stockholders
approve the sale of such shares to Titus, such note shall be exchanged for
430,301 shares of the Company's Common Stock. If the average price per share
of the Company's Common Stock as calculated during the ten trading days ending
August 20, 1999 is below $2.73, the Company will be required under the terms
of the Stock Purchase Agreement to issue additional shares to Titus so that
the total number of shares issued to Titus equals $10,000,000 divided by the
stock price as so recalculated up to a maximum of 2,500,000 additional shares,
or 5,000,000 shares in the aggregate. However, in no event will the Company be
obligated to issue Titus more than 3,661,771 shares in the aggregate without
the approval of the Company's stockholders. In such event, if the purchase
price as so recalculated is less than $2.73, the Company would be obligated to
issue a revised promissory note to Titus. In the event the stock price
determined during the ten trading days ending August 20, 1999 is greater than
$2.73, Titus would be required to return shares to the Company accordingly
(see "Proposal Two--Approval of Issuance of Common Stock to Titus Interactive
SA," below).
14
<PAGE>
Under the terms of the Stock Purchase Agreement, the Company is obligated to
register all of the shares of the Company's Common Stock purchased by Titus
pursuant to the terms and conditions of the Stock Purchase Agreement, as well
as any shares purchased by Titus by exercise of an option it holds to purchase
the 4,658,216 shares of the Company's Common Stock currently held by Universal
(the "Universal Option"). Also, in connection with the Stock Purchase
Agreement, Mr. Fargo agreed to not sell, assign, pledge, mortgage or otherwise
dispose of or transfer any shares of the Company's Common Stock without the
prior written consent of Titus. In addition, in connection with such
transaction Mr. Fargo granted to Titus an irrevocable proxy to vote all of his
shares of Common Stock in favor of the issuance of Common Stock to Titus
pursuant to the Stock Purchase Agreement.
In May 1999 the Company signed a letter of intent with Titus pursuant to
which Titus loaned the Company $5,000,000 and the Company and Titus agreed to
negotiate certain additional transactions. Pursuant thereto, on July 20, 1999
the Company and Titus entered into a Stock Purchase Agreement (the "Additional
Stock Purchase Agreement") providing for the sale and issuance of Six Million
Two Hundred Fifty Thousand (6,250,000) shares of Company's Common Stock to
Titus in exchange for total consideration of $25,000,000, including the
$5,000,000 previously loaned to the Company by Titus (see "Proposal Three--
Approval of Additional Sale of Common Stock to Titus Interactive SA," below).
Upon the closing of the transactions contemplated by the Additional Stock
Purchase Agreement (the "Closing"), the Company, Titus and Fargo would enter
into a Stockholder Agreement, pursuant to which (a) Titus and Fargo would
enter into certain voting agreements with respect to the shares of Common
Stock held by them, (b) Titus and Fargo would each grant to the other certain
rights of first refusal and tag-along rights with respect to the shares of
Common Stock held by them, (c) the Company would grant to Titus a right of
first refusal with respect to the issuance of certain equity securities by the
Company, and (d) the Company would agree not to take certain actions without
the prior approval of Titus and Fargo. In addition, at the Closing the Company
would enter into Employment Agreements with each of Brain Fargo and Herve
Caen, pursuant to which Messrs. Fargo and Caen will be employed as Chief
Executive Officer and President, respectively, of the Company, which
agreements shall each have an initial term of three years. Titus and Fargo
have also entered into an Exchange Agreement, which will be consummated
concurrent with the Stock Purchase Agreement, pursuant to which Fargo will
exchange 2,000,000 shares of the Company's Common Stock for 96,666 shares of
Titus common stock. Should the transactions contemplated by the Additional
Stock Purchase Agreement not be consummated, the loan must be repaid by the
Company, or, at the option of Titus, may be converted into shares of the
Company's Common Stock.
Financing Transactions
In October 1996, the Company sold an aggregate of $2,400,000 in Subordinated
Secured Promissory Notes and Common Stock Warrants to Brian Fargo
($2,000,000), Richard S.F. Lehrberg ($300,000) and Christopher J. Kilpatrick
($100,000). The Secured Subordinated Promissory Notes provided for interest at
a rate of 12% per annum. Messrs. Fargo, Lehrberg and Kilpatrick elected to
receive 11,688, 1,683 and 100 shares of Common Stock, respectively, in lieu of
the May 1997 interest payment due under the Secured Subordinated Promissory
Notes, at a price of $11.25 per share. In February 1998, the terms of such
Notes and Warrants were amended to permit the exercise of the Warrants or the
repayment of the Notes upon the closing of the Company's IPO whether or not
the IPO constituted a Qualified Event (as defined in the Notes and Warrants).
Messrs. Fargo, Lehrberg and Kilpatrick elected to exercise such Warrants for
519,481, 77,922 and 25,974 shares of Common Stock, respectively, by canceling
such Notes effective upon the closing of the IPO at an exercise price of $3.85
per share (based upon the IPO price of $5.50 per share).
Other Transactions
The Company has entered into Indemnification Agreements with all of its
directors and executive officers providing for indemnification of such persons
by the Company in certain circumstances.
In May 1999, in connection with the termination of Mr. Kilpatrick's
employment with the Company, the Company assumed certain guaranty obligations
of Brian Fargo to Mr. Kilpatrick relating to the value of Mr. Kilpatrick's
options to purchase shares of the Company's Common Stock (see "Transactions
with Fargo," above).
The Company has entered into employment agreements with each of its
executive officers (see "Executive Compensation--Employment Agreements"
above).
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<PAGE>
PROPOSAL TWO
APPROVAL OF ISSUANCE OF COMMON STOCK TO TITUS INTERACTIVE SA
Original Issuance of Shares
On March 18, 1999, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Titus Interactive SA, a French corporation
("Titus"), and Brian Fargo, under the terms of which the Company issued
2,500,000 Shares of its Common Stock to Titus in exchange for consideration of
$10,000,000. The Stock Purchase Agreement provides for the recalculation of
the purchase price for such Shares, and an adjustment of the number of Shares
issued to Titus, based on the price per share of the Company's Common Stock as
of certain future dates, as more particularly set forth below, provided that,
due to certain limitations imposed by the rules of the Nasdaq Stock Market
(discussed below), Titus will not be issued a total number of shares of the
Company's Common Stock equal to or exceeding 3,661,772 shares, which is
twenty percent (20%) of the Company's outstanding Common Stock as of the date
of the Stock Purchase Agreement, without the prior approval of the Company's
Stockholders (the "Issuance Limitation"). The Board of Directors unanimously
approved the terms of the Stock Purchase Agreement and the transactions
contemplated thereby on March 17, 1999. The net proceeds from the sale of
Common Stock to Titus provided the Company with additional working capital to
finance its operations.
Adjustments to Shares Issued
Pursuant to the terms of the Stock Purchase Agreement, the purchase price
was recalculated on June 30, 1999 based on the average closing price per share
of the Company's Common Stock as reported by Nasdaq for the ten trading days
ended on that date, which was $2.44375. Pursuant to this recalculation, the
Company was obligated to issue to Titus 1,592,072 additional shares without
additional consideration. However, because of the Issuance Limitation and the
fact that the approval by the Company's stockholders of such transaction (the
"Required Approval") had not been obtained prior to June 30, 1999, the Company
issued 1,161,771 additional shares (the "Additional Shares") to Titus and
issued Titus a promissory note (the "Initial Note") for an amount equal to
$1,051,548. Such promissory note accrues interest at a rate of ten percent
(10%) per annum from March 18, 1999 until the date paid, and is due on January
1, 2000.
Pursuant to the terms of the Stock Purchase Agreement, the purchase price
will be recalculated again on August 20, 1999 based on the average closing
price per share of the Company's Common Stock as reported by Nasdaq for the
ten trading days ended on that date. If the average closing price per share of
the Company's Common Stock during such period is below $2.73, the Company
would be required, subject to the Issuance Limitation, to issue additional
shares to Titus so that the total number of shares issued to Titus equals
$10,000,000 divided by the stock price as so recalculated up to a maximum of
2,500,000 additional shares, or 5,000,000 shares in the aggregate. In such
event, if the Required Approval has not been obtained prior to August 20,
1999, the Company will exchange the Initial Note for a promissory note in an
amount equal to $10,000,000 less the product of 3,661,771 shares multiplied by
the purchase price as so recalculated (the "Final Note"). In the event the
stock price determined pursuant to the second recalculation is greater than
$2.73 per share, Titus would be required to surrender the Initial Note to the
Company and return Additional Shares to the Company accordingly.
If the Required Approval is obtained prior to January 1, 2000, then, in lieu
of payment of the Initial Note or the Final Note, as applicable, the Company
would issue additional shares of Common Stock to Titus so that the total
number of shares issued to Titus pursuant to the Stock Purchase Agreement
equals $10,000,000 divided by the stock price as recalculated on August 20,
1999.
Nasdaq Requirements
Applicable law does not require the Company's stockholders to approve the
terms of the Stock Purchase Agreement, or the issuance of Common Stock to
Titus thereunder. However, Nasdaq rules require a listed
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<PAGE>
company to obtain stockholder approval prior to any issuance of its common
stock which equals or exceeds twenty percent of its outstanding common stock
(or twenty percent or more of the Company's outstanding voting power), for
consideration less than the greater of book or market value of the shares.
Prior to the issuance of any of its shares to Titus, the Company had
18,308,861 shares of common stock issued and outstanding. Consequently, under
Nasdaq Stock Market Rules, the Company may not issue Titus an aggregate of
3,661,772 or more shares, or twenty percent (20%) of the Company's outstanding
Common Stock prior to the Titus transaction, unless it first obtains
stockholder approval of the issuance. Because the Company may be required to
issue an aggregate of 3,661,772 or more shares to Titus under the terms of the
Stock Purchase Agreement, and because the price of those shares may be below
market value at the time of issuance, the Board of Directors seeks the
approval by the Company's Stockholders of the Share Issuance Proposal.
As a condition to entering into the Stock Purchase Agreement, Titus obtained
irrevocable proxies from Brian Fargo and Universal Studios, Inc., which
beneficially own 6,022,378 shares and 4,658,216 shares, respectively, of the
Company's common stock as of the date of this Proxy Statement. The irrevocable
proxies permit Titus to vote the shares held by Mr. Fargo and Universal in
favor of the Share Issuance Proposal.
Vote Required; Board of Directors' Recommendation
The affirmative vote of a majority of the outstanding shares of Common Stock
of the Company is required to authorize the issuance to Titus of an aggregate
number of shares of the Company's Common Stock which equals or exceeds
3,661,772 shares. The Board of Directors recommends that you vote FOR the
approval of the Share Issuance Proposal. Shares represented by the proxies
will be voted FOR the proposal unless a vote against the proposal or an
abstention is specifically indicated on the proxy card.
PROPOSAL THREE
APPROVAL OF ADDITIONAL SALE OF COMMON STOCK TO TITUS INTERACTIVE SA
Terms of Transaction
On May 12, 1999, the Company, Titus and Brian Fargo signed a letter of
intent (the "Letter of Intent"), pursuant to which Titus loaned the Company
$5,000,000 and the Company, Titus and Brian Fargo agreed to negotiate certain
transactions, including the purchase and sale of additional shares of the
Company's Common Stock. Subsequently, the Company, Titus and Fargo entered
into a Stock Purchase Agreement dated July 20, 1999 (the "Additional Stock
Purchase Agreement"), pursuant to which the Company agreed, subject to certain
conditions including the approval of the Company's stockholders, to sell (the
"Additional Titus Stock Sale") to Titus Six Million Two Hundred Fifty Thousand
(6,250,000) shares of the Company's Common Stock (the "Additional Shares") at
a price of $4.00 per share, for an aggregate purchase price of $25,000,000
(the "Purchase Payment"). The Company will use the net proceeds from the
Additional Titus Stock Sale for repayment of debt and for working capital.
When added to the shares of the Company's Common Stock acquired or to be
acquired by Titus pursuant to the original Titus Stock Sale and the exercise
of the Universal Option, the sale and issuance of the Additional Shares to
Titus would result in Titus owning an aggregate of approximately 51% of the
outstanding Common Stock of the Company. The Company's Board of Directors has
unanimously approved the Additional Stock Purchase Agreement and the
transactions contemplated thereby, and believes that they are in the best
interests of the Company's stockholders.
Certain conditions to the parties' obligations under the Additional Stock
Purchase Agreement include (a) that Titus and Fargo have entered into a
Stockholder Agreement (described below) setting forth certain voting and
stockholder rights, (b) that Titus and Fargo have entered into an Exchange
Agreement (described below), pursuant to which Fargo would exchange shares of
the Company's Common Stock held by him for shares of Titus common stock, (c)
that the Company have entered into Employment Agreements (described below)
with each of Brian Fargo and Herve Caen, and (d) that the Company and Titus
have entered into a Distribution Agreement (described below) giving the
Company the right to distribute substantially all of Titus' video game console
products in North America.
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<PAGE>
Stockholder Agreement
The Stockholder Agreement would provide for certain voting agreements by
Titus and Fargo with respect to the shares of the Company's Common Stock held
by them. Specifically, until the earlier of (a) the termination of Fargo's
employment with the Company for "Cause" or his resignation other than for
"Good Reason" (both as defined in the Fargo Employment Agreement), (b) the
termination of Caen's employment with the Company without "Cause" or his
resignation for "Good Reason" (both as defined in the Caen Employment
Agreement), or (c) Fargo ceasing to own at least 2,000,000 shares of the
Company's Common Stock (the "Voting Agreement Termination Date"), Fargo and
Titus shall take all actions within their respective powers as stockholders to
cause the Board of Directors to consist of seven (7) members, two (2) of which
would be designated by Fargo, two (2) of which would be designated by Titus
and three (3) of which would be designated by mutual agreement of Titus and
Fargo.
The Stockholder Agreement would also provide that Titus and Fargo would each
grant to the other certain rights of first refusal and tag-along rights with
respect to the shares of Common Stock held by them. Until the earlier to occur
of (a) Titus ceasing to own a majority of the outstanding Common Stock of the
Company, or (b) the termination of Herve Caen's employment with the Company
without Cause (the "Termination Date"), and for three (3) years following the
Termination Date, if either Fargo or Titus desires to transfer any of the
shares of Common Stock held by them (subject to certain specified exceptions),
they must first give written notice of the proposed transfer to the other
party, setting forth the terms and conditions of the proposed transfer. The
other party would then have ten (10) business days following receipt of such
offer in which to elect, at its option, to either (x) purchase such shares on
the same terms as the proposed transfer, or (y) sell to the proposed
transferee, as part of the proposed sale, a number of shares of Common Stock
determined by multiplying the total number of shares proposed to be
transferred by a fraction, the numerator of which is the number of shares of
the Company's Common Stock then held by such party, and the denominator of
which is the total number of shares of the Company's Common Stock then held by
both parties. Such right of first refusal would inure to the Company, rather
than Fargo, under certain circumstances.
The Stockholder Agreement would also provide that, until the Termination
Date, the Company would not issue any equity securities or any securities
convertible into or exchangeable for equity securities (subject to certain
specified exceptions) ("New Securities") without first offering to sell such
New Securities to Titus on the same terms as the proposed issuance. Following
receipt of such offer, Titus would have ten (10) business days in which to
elect, by written notice to the Company, to purchase its pro rata share of
such New Securities on the same terms and conditions as the proposed issuance.
The foregoing right of first refusal would not apply to (a) issuances of
securities which have been approved by the Board of Directors in accordance
with this Agreement and by the stockholders; (b) securities distributed or set
aside to all holders of Common Stock on a per share equivalent basis; (c)
issuances pursuant to the Stock Purchase Agreements; and (d) issuances of
Common Stock upon the exercise or conversion of (i) options or warrants to
purchase shares of Company Stock or (ii) securities which are convertible into
shares of Company Stock either prior to the date hereof in accordance with the
Stockholder Agreement; provided, however, that in the event of any issuance
described in clauses (a) or (d) above, the Company would be required to give
written notice of such issuance to Titus (an "Excluded Securities Notice"),
and Titus would have an option to purchase from the Company such number of
shares of the Company's Common Stock as necessary to maintain its percentage
ownership of the Company's fully-diluted Common Stock at the same level as
immediately prior to such issuance, at the price and on the other terms and
conditions of the proposed issuance. Such option would be exercisable by
written notice to the Company within thirty (30) days following receipt of the
Excluded Securities Notice, or, in the case of convertible securities, within
thirty (30) days following receipt of notice from the Company of the exercise
or conversion thereof.
The Stockholder Agreement would also provide that, until the Termination
Date, the Company would not take any of the following actions without the
written consent or approval of Titus and Fargo: (a) authorize or issue, or
obligate itself to issue, any other equity security, including any
indebtedness convertible into or exchangeable for shares of equity securities
of the Company or issued with (i) shares of Company Stock or (ii) warrants or
other rights to purchase Company Stock or any other equity security, without
compliance with the provisions of the Additional Stock Purchase Agreement; (b)
effect any recapitalization, or any dissolution,
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<PAGE>
liquidation, or winding up of the Company; (c) permit any subsidiary of the
Company to issue or sell, or obligate itself to issue or sell, except to the
Company or any wholly-owned subsidiary, any stock of such subsidiary, without
first offering Titus the right to purchase such stock on the same terms and
conditions as those offered to the Company by any third party; (d) amend its
Certificate of Incorporation or amend or repeal its By-Laws; (e) increase the
number of members of the Board of Directors; (f) take any action that would
constitute a bankruptcy or insolvency event for the Company or any subsidiary
of the Company; or (g) guarantee or otherwise become contingently obligated
for the payment of Indebtedness of any person (other than a wholly-owned
subsidiary of the Company), where such obligation is not related to the
Company's business.
The Stockholder Agreement would also provide that if, prior to the Voting
Agreement Termination Date, any matter is submitted to a vote of the Company's
stockholders in which Titus or Fargo has a material interest, other than an
interest as a stockholder of the Company that is proportional to the interests
of all other stockholders of the Company, such party would abstain from voting
the shares of Common Stock held by it with respect to such matter. In
addition, Titus would agree that, until the earlier to occur of (a) the Voting
Agreement Termination Date, or (b) the Termination Date, it would not, without
the unanimous consent of the Board of Directors: (i) acquire, offer to
acquire, or agree to acquire, directly or indirectly, by purchase or
otherwise, any voting securities or direct or indirect rights to acquire any
voting securities of the Company or any subsidiary thereof, or any material
amount of the assets of the Company, or any subsidiary or division thereof
outside the ordinary course of business; (ii) make, or in any way participate
in, directly or indirectly, any "solicitation" of "proxies" (as such terms are
used in the rules of the Securities and Exchange Commission) to vote, or seek
to advise or influence any person with respect to the voting of, any voting
securities of the 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 Company or its securities or
assets; provided, however, the foregoing restrictions shall not (x) preclude
Titus from (A) acquiring the shares of Common Stock contemplated by the
Additional Stock Purchase Agreement and the transactions contemplated thereby,
including without limitation the transactions contemplated by the Initial
Purchase Agreement and the Universal Agreement (each as defined in the Stock
Purchase Agreement), (B) filing a Schedule 13D in connection with the
transactions contemplated by the Additional Stock Purchase Agreement, (C)
voting its shares of Common Stock within its discretion on any matter
submitted for a vote or consent of the Company's stockholders, or (D) taking
any other action contemplated by the Additional Stock Purchase Agreement;
provided, further, that such restrictions on Titus shall lapse automatically
to the extent any person other than Titus or an affiliate of Titus takes any
action with respect to the matters described in clauses (ii) and (iii) above,
or (y) preclude Fargo from filing a Schedule 13D in connection with the
transactions contemplated by the Additional Stock Purchase Agreement or the
Exchange Agreement.
Exchange Agreement
The Exchange Agreement provides for the exchange by Brian Fargo of 2,000,000
shares of the Company's Common Stock held by him for 96,666 shares of Titus
common stock (the "Titus Shares"). This exchange ratio is calculated based on
a valuation of the Company's Common Stock of $4.00 per share and a valuation
of the Titus common stock of Eighty Two Dollars and Seventy Six Cents ($82.76)
per share, which represents a 20% discount on the price of such shares due to
certain restrictions on the resale or transfer of such shares by Fargo.
The Titus Shares would not be registered for resale under French securities
laws, and as such would not be fully transferable except as permitted by
various exemptions contained in such laws. Pursuant to French stock exchange
rules, Fargo would not be permitted to sell, transfer or otherwise dispose of,
or pledge, collateralize or hypothecate, 77,333, or 80%, of the Titus Shares
until July 8, 2000 (the "Holding Period"). Fargo would also agree with Titus
that he would not transfer any of the remaining 19,333, or 20%, of the Titus
Shares for a period of 270 days following the closing of such transaction (the
"Lock-Up Period"). Fargo would also grant Titus certain rights of first
refusal with respect to the Titus Shares.
Following the expiration of the Holding Period or the Lock-Up Period, as
applicable, Fargo would have the right, by notice to Titus, to require Titus
to arrange for the sale of all or any portion of the Titus Shares at the
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<PAGE>
then-current trading price for Titus common stock. In the event Titus does not
exercise its right of first refusal with respect to such Titus Shares, and is
unable to arrange the sale of such Titus Shares within sixty (60) days
following such notice, Fargo would have the right to require Titus, at Fargo's
option, to either (a) purchase such Titus Shares from Fargo for cash at a
purchase price per share equal to the average closing price per share of Titus
common stock for the ten (10) trading days immediately preceding the date of
such notice, or (b) exchange such Titus Shares for shares of the Company's
Common Stock at an exchange rate based on the average closing prices per share
of Titus common stock and the Company's Common Stock for the ten (10) trading
days immediately preceding the date of such notice.
Employment Agreements
Fargo Employment Agreement
Upon the closing of the Additional Titus Stock Sale, the Company and Mr.
Fargo would enter into an Employment Agreement (the "Fargo Employment
Agreement"), pursuant to which Mr. Fargo would be employed as the Company's
Chief Executive Officer for an initial term of three years at a base salary of
not less than $250,000 per year, plus bonuses as determined by the Board of
Directors or its Compensation Committee. If Mr. Fargo were terminated without
Cause or resigned his position with Good Reason (as such terms are defined in
the Fargo Employment Agreement), he would be paid his annual base salary for
the remaining term of the Fargo Employment Agreement. Further, pursuant to the
terms of the Fargo Employment Agreement, Mr. Fargo would be granted options to
purchase 500,000 shares of Common Stock under the Company's Amended and
Restated 1997 Stock Option Plan upon entering into the Employment Agreement.
These options would vest over a four-year period, which vesting would
accelerate if (a) Titus ceased to own a majority of the then-issued and
outstanding Common Stock of the Company, or (b) Mr. Fargo were terminated
without Cause or resigned from his position for Good Reason. The Fargo
Employment Agreement provides that, as Chief Executive Officer of the Company,
Mr. Fargo would have primary responsibility and authority within the Company
with respect to product development, marketing, strategic development and
legal affairs. Significant deviations from the operating plan approved by the
Company's Board of Directors would require joint approval by Mr. Fargo and Mr.
Caen.
Caen Employment Agreement
Upon the closing of the Additional Titus Stock Sale, the Company and Mr.
Herve Caen would enter into an Employment Agreement (the "Caen Employment
Agreement"), pursuant to which Mr. Caen would be employed as the Company's
President for an initial term of three years at a base salary of not less than
$250,000 per year, plus bonuses as determined by the Board of Directors or its
Compensation Committee. If Mr. Caen were terminated without Cause or resigned
his position with Good Reason (as such terms are defined in the Caen
Employment Agreement), he would be paid his annual base salary for the
remaining term of the Caen Employment Agreement. The Caen Employment Agreement
provides that, as President of the Company, Mr. Caen would have primary
responsibility and authority within the Company for finance, sales and
distribution, operations and international issues.
Distribution Agreement
Upon or following the closing of the Additional Titus Stock Sale, the
Company and Titus would enter into a Distribution Agreement (the "Distribution
Agreement"). Pursuant to the Distribution Agreement, Interplay would serve as
the exclusive distributor in North America of substantially all of Titus'
products relating to console gaming systems in exchange for a distribution fee
to be negotiated by the parties.
Certain Effects of the Transaction
In the event the Additional Titus Stock Sale is consummated, Titus will own
approximately 57% of the outstanding Common Stock of the Company, and may own
up to approximately 59% of the outstanding Common
20
<PAGE>
Stock of the Company following the August 20, 1999 repricing under the
original Stock Purchase Agreement (see "Proposal Two--Approval of Issuance of
Common Stock to Titus," above). This percentage constitutes voting control of
the Company. In addition, Titus' rights of first refusal with respect to
future issuances of equity securities by the Company will enable Titus to
maintain this percentage ownership of the Company's voting stock.
As a result of its voting control of the Company, Titus will have the power
under Delaware law and the Company's Bylaws to elect at least three (3)
members of the Company's Board of Directors, as presently constituted. While
Titus has agreed with the Company and Brian Fargo pursuant to the Stockholder
Agreement that it will not exercise such power, in the event such obligation
terminates, Titus would be able to exercise a high degree of control over the
affairs and management of the Company.
Titus' voting control of the Company will also permit it to approve or block
most proposals submitted to a vote of the Company's stockholders under
Delaware law and the Company's Bylaws. While Titus has agreed pursuant to the
Stockholder Agreement to abstain from voting on any proposal in which it has a
material interest, other than an interest as a stockholder that is
proportional to the interests of the Company's stockholders generally, in the
event such obligation terminates, Titus would be able to approve or block
almost all proposals submitted to the Company's stockholders, including
proposals pertaining to mergers or recapitalizations involving the Company,
which would adversely affect the ability of other stockholders to influence
the affairs and direction of the Company.
Reasons for the Transaction; Board Recommendation
Prior to entering into the Additional Stock Purchase Agreement, the Board of
Directors carefully considered the terms and conditions of the proposed
Additional Stock Purchase Agreement and the other agreements and transactions
contemplated thereby, and has unanimously determined that such agreements and
transactions are in the best interests of the Company and its stockholders,
and unanimously approved the Additional Stock Purchase Agreement, the
Stockholder Agreement and the Employment Agreements (collectively, the
"Transaction Agreements") and the transactions contemplated thereby. In
reaching such determination, the Board of Directors considered a number of
factors, which taken together supported such determination, including without
limitation (a) its knowledge of the Company's business, operations,
properties, financial condition and operating results, which provided the
background and context for its deliberations and determinations; (b) advice of
the Company's management that the Company is in urgent need of additional
working capital; (c) the presentation by U.S. Bancorp Piper Jaffray Inc.
("U.S. Bancorp Piper Jaffray) and its opinion that the Purchase Payment to be
paid to the Company for the Additional Shares was fair, from a financial point
of view, to the Company (d) the relationship of the purchase price for the
Shares to the historical and current market prices for the Company's Common
Stock; and (e) the terms of the Transaction Agreements, as reviewed by the
Board of Directors.
Opinion of Financial Advisor
U.S. Bancorp Piper Jaffray was engaged to act as the Company's financial
advisor in connection with this transaction pursuant to an engagement letter
dated June 11, 1999 (the "U.S. Bancorp Piper Jaffray Engagement Letter").
Pursuant to the U.S. Bancorp Piper Jaffray Engagement Letter, the Company
engaged U.S. Bancorp Piper Jaffray to provide financial advisory services in
connection with the transaction, and to render an opinion as to the fairness
of the Purchase Payment to be paid to the Company for the Additional Shares,
from a financial point of view, to the Company. The terms of such transaction
were determined by arms-length negotiations between the Company and Titus and
not by U.S. Bancorp Piper Jaffray.
At a meeting of the Board of Directors on July 7, 1999, U.S. Bancorp Piper
Jaffray delivered its oral opinion that, as of such date and based upon and
subject to certain assumptions and other matters described in its written
opinion, the Purchase Payment to be paid to the Company for the Additional
Shares was fair to the Company from a financial point of view. U.S. Bancorp
Piper Jaffray subsequently delivered its written opinion to the Board
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<PAGE>
of Directors dated July 7, 1999 (the "U.S. Bancorp Piper Jaffray Opinion") to
the same effect. The U.S. Bancorp Piper Jaffray Opinion is addressed to the
Board of Directors, relates solely to the Purchase Payment to be paid to the
Company for the Additional Shares in the Additional Titus Stock Sale and does
not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote at the Special Meeting. The U.S. Bancorp Piper
Jaffray Opinion does not address the Company's underlying business decision to
proceed with or effect the Additional Titus Stock Sale, any related
transaction or agreement or alternative transaction or agreement.
In arriving at its opinion, U.S. Bancorp Piper Jaffray reviewed, among other
things:
.the Additional Stock Purchase Agreement
.the Exchange Agreement
.the Stockholder Agreement
.publicly available financial, operating and business information related
to the Company
.publicly available securities and market data related to the Company
.to the extent publicly available, financial terms of selected acquisition
transactions
.financial and securities data of public companies deemed comparable to the
Company
.analyst reports
.publicly available financial, operating and business information related
to Titus
.publicly available securities and market data related to Titus
In addition, U.S. Bancorp Piper Jaffray engaged in discussions with
management of the Company and Titus concerning the financial condition,
current operating results and business outlook of the Company and plans and
business outlook for the Company following the Additional Titus Stock Sale.
In delivering the U.S. Bancorp Piper Jaffray Opinion to the Board of
Directors, U.S. Bancorp Piper Jaffray prepared and delivered certain written
materials containing various analyses material to the opinion. The following
is a summary of these analyses:
Proposed Purchase Payment
Giving effect to the proposed Purchase Payment of $4.00 per share and
outstanding common stock and options of the Company prior to the issuance
of the Additional Shares, U.S. Bancorp Piper Jaffray calculated the implied
aggregate equity value of the Company to be approximately $93.2 million and
the implied aggregate enterprise or company value (equity value plus debt
less cash as of March 31, 1999) to be approximately $113.7 million.
Market Analysis
U.S. Bancorp Piper Jaffray reviewed market and stock trading information
concerning the Company. U.S. Bancorp Piper Jaffray presented the following
stock price data for the Company common stock:
<TABLE>
<S> <C>
Closing stock price as of 7/6/99.............................. $2.69
30 to 180 trading day average as of 7/6/99.................... $2.33--$2.44
Market capitalization (based on 7/6/99 close)................. $62.7 million
Latest 12-month high and low stock price (as of 7/6/99)....... $1.00--$ 8.25
Latest 12-month volume weighted average stock price........... $2.70
</TABLE>
U.S. Bancorp Piper Jaffray also presented a comparison of weekly price
performance of the Company common stock relative to various indices and the
comparable group described below.
Comparable Company Analysis
U.S. Bancorp Piper Jaffray compared financial information relating to the
Company to corresponding data and ratios from a group of nine selected
publicly traded consumer software companies deemed comparable to the
Company. These comparable companies included Acclaim Entertainment,
Activision, Eidos PLC, Electronic Arts, GT Interactive Software, Midway
Games, Take-Two Interactive Software, THQ and 3DO Company.
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U.S. Bancorp Piper Jaffray presented the following implied valuation
multiple data for the Company and the comparable companies:
<TABLE>
<CAPTION>
Comparable Companies
Company Multiple Based On ----------------------------
$4.00 Purchase Payment Price Minimum Mean Median Maximum
---------------------------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Price/LTM earnings...... Neg. Neg. 18.2x 15.6x 33.9x
Price/CY1999
earnings(1)............ Neg. Neg. 18.9x 17.1x 31.0x
Price/CY2000
earnings(1)............ 19.6x Neg. 14.0x 12.2x 25.6x
Company Value/LTM
revenue................ 1.1x 0.8x 1.5x 1.1x 2.7x
Company Value/CY1999
revenue(1)............. 0.8x 0.6x 1.3x 1.0x 2.8x
Company Value/CY2000
revenue(1)............. 0.7x 0.6x 1.0x 0.8x 1.9x
</TABLE>
- --------
(1) Based on publicly available analyst estimates. LTM data is as of March 31,
1999.
Comparable Transaction Analysis
U.S. Bancorp Piper Jaffray reviewed recent merger and acquisition
transactions for which information was publicly available involving
announced consumer software company transactions since January 1, 1997 with
a transaction size of $15 million to $400 million and involving acquisition
of 100% of the target company. This review yielded five transactions for
comparison including: Activision/Expert Software, Hasbro/Microprose, The
Learning Company/Broderbund, The Learning Company/Mindscape and Electronic
Arts/Maxis.
U.S. Bancorp Piper Jaffray calculated the following valuation multiple data
for the comparable transactions group:
<TABLE>
<CAPTION>
Comparable Transaction
Company Multiple Based Multiple
on $4.00 Purchase ----------------------------
Payment Price Minimum Mean Median Maximum
---------------------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Company Value/LTM
revenue................ 1.1x 0.6x 1.2x 1.1x 2.3x
Equity Value/LTM net
income................. Neg. Neg. 21.8x 21.8x 22.4x
</TABLE>
Premiums Paid Analysis
U.S. Bancorp Piper Jaffray analyzed the implied premium or discount paid or
proposed to be paid in acquisitions relative to recent public market pre-
announcement trading prices for two groups of announced transactions:
. 21 pre-packaged software sector acquisitions involving 100% of public and
private companies of $15 million to $150 million in equity value since
January 1, 1996
. 4 consumer software public company transactions involving $15 to $400
million in equity value since January 1, 1997
U.S. Bancorp Piper Jaffray calculated a one-day, one-week and one-month
implied premium based upon the $4.00 per share Purchase Payment price as a
percentage of the Company's closing stock price on the corresponding date
prior to the May 12, 1999 announcement of the Letter of Intent.
<TABLE>
<CAPTION>
Pre-Packaged Software
Comparable Transaction
Implied Premium Group
Based on Implied Premium (Discount)
$4.00 Purchase -----------------------------
Payment Price Minimum Mean Median Maximum
--------------- ------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
1 month prior to
announcement............... 88.0% (14.3%) 55.5% 48.5% 146.7%
1 week prior to
announcement............... 97.0% (14.3%) 40.9% 40.4% 146.9%
1 day prior to
announcement............... 91.0% (14.3%) 33.3% 25.6% 164.9%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Implied Consumer Software Focus
Premium Based Transaction Group Implied
On Premium
$4.00 Purchase ----------------------------
Payment Price Minimum Mean Median Maximum
-------------- ------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
1 month prior to
announcement........... 88.0% 19.0% 28.6% 26.3% 40.6%
1 week prior to
announcement........... 97.0% 2.3% 32.7% 16.4% 79.4%
1 day prior to
announcement........... 91.0% 2.3% 18.3% 21.2% 31.5%
</TABLE>
Discounted Cash Flow Analysis
Using discounted cash flow analysis, U.S. Bancorp Piper Jaffray estimated
the present value of the projected cash flows of the Company using internal
management financial planning data and research analyst estimates. U.S.
Bancorp Piper Jaffray applied a range of terminal value multiples of
projected operating income of 8.0x to 10.0x and a range of discount rates
of 20.0% to 30.0%. This analysis yielded a range of estimated present
values of the Company equity of approximately $65.7 million to $105.7
million, or $2.82 to $4.53 per fully diluted common share, with a midpoint
of $84.0 million in aggregate and $3.60 per share.
In reaching its conclusion as to the fairness of the Purchase Payment and in
its presentation to the board, U.S. Bancorp Piper Jaffray did not rely on any
single analysis or factor described above, assign relative weights to the
analyses or factors considered by it, or make any conclusion as to how the
results of any given analysis, taken alone, supported its opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analysis or summary description. U.S. Bancorp Piper
Jaffray believes that its analyses must be considered as a whole and that
selection of portions of its analyses and of the factors considered by it,
without considering all of the factors and analyses, would create a misleading
view of the processes underlying the opinion.
The analyses of U.S. Bancorp Piper Jaffray are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by the analyses. Analyses relating to the value of
companies do not purport to be appraisals or valuations or necessarily reflect
the price at which companies may actually be sold. No company or transaction
used in any analysis for purposes of comparison is identical to the Company or
the Additional Titus Stock Sale. Accordingly, an analysis of the results of
the comparisons is not mathematical; rather, it involves complex
considerations and judgments about differences in the companies to which the
Company was compared and other factors that could affect the public trading
value of the companies.
For purposes of its opinion, U.S. Bancorp Piper Jaffray relied upon and
assumed the accuracy, completeness and fairness of the financial statements
and other information provided to it by the Company or otherwise made
available to U.S. Bancorp Piper Jaffray and did not assume responsibility for
the independent verification of such information. U.S. Bancorp Piper Jaffray
relied upon the assurances of the management of the Company that the
information provided to it by the Company was prepared on a reasonable basis,
the financial planning data and other business outlook information reflects
the best currently available estimates of management, management was not aware
of any information or facts that would make the information provided to U.S.
Bancorp Piper Jaffray incomplete or misleading and there were no material
changes in the Company's assets, financial condition, results of operations,
business or prospects since the date of the last financial statements or
information made available to U.S. Bancorp Piper Jaffray.
In arriving at its opinion, U.S. Bancorp Piper Jaffray did not perform any
appraisals or valuations of any specific assets or liabilities of the Company,
and was not furnished with any such appraisals or valuations. U.S. Bancorp
Piper Jaffray analyzed the Company as a going concern and accordingly
expressed no opinion as to its liquidation value. U.S. Bancorp Piper Jaffray
expressed no opinion as to the price at which shares of the
Company common stock have traded or at which these shares may trade at any
future time. The opinion is based on information available to U.S. Bancorp
Piper Jaffray and the facts and circumstances as they existed and were
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subject to evaluation on the date of the opinion. Events occurring after that
date could materially affect the assumptions used in preparing the opinion.
U.S. Bancorp Piper Jaffray was not engaged to opine, and expressed no
opinion concerning, the sale of Interplay Common Stock to Titus pursuant to
the Stock Purchase Agreement or the consideration paid to the Company for the
shares issued and to be issued in accordance with the Stock Purchase
Agreement. Nor has U.S. Bancorp Piper Jaffray expressed any opinion concerning
any aspect of the Exchange Agreement or the Universal Option. Rather, the U.S.
Bancorp Piper Jaffray Opinion relates solely to the fairness, from a financial
point of view, of the Purchase Payment in the Additional Titus Stock Sale,
viewed as a separate transaction, not as part of an integrated transaction
with any or all of the Original Titus Stock Sale, the Exchange Agreement or
the Universal Option. U.S. Bancorp Piper Jaffray was not engaged or authorized
to solicit, and it did not solicit, any other purchase transaction or
strategic alternative transaction to the Additional Titus Stock Sale.
U.S. Bancorp Piper Jaffray, as a customary part of its investment banking
business, evaluates businesses and their securities in connection with mergers
and acquisitions, underwritings and secondary distributions of securities,
private placements and valuations for estate, corporate and other purposes.
The board selected U.S. Bancorp Piper Jaffray because of its expertise,
reputation and familiarity with the Company and the interactive entertainment
software industry in general. U.S. Bancorp Piper Jaffray has provided
investment banking services to the Company for which it has received customary
fees. In the ordinary course of its business, U.S. Bancorp Piper Jaffray and
its affiliates may actively trade securities of the Company for their own
accounts or the accounts of their customers and, accordingly, may at any time
hold a long or short position in those securities.
Under the terms of the engagement letter dated June 11, 1999, the Company
has agreed to pay $225,000 for financial advisory services rendered in
connection with the Additional Titus Stock Sale. The contingent nature of
these fees may have created a potential conflict of interest in that the
Company would be unlikely to consummate the Additional Titus Stock Sale unless
the board had received the opinion. In addition, the Company has agreed to pay
U.S. Bancorp Piper Jaffray $100,000 for rendering its opinion, which fee is
not contingent on consummation of the Additional Titus Stock Sale, but shall
be credited against the $225,000 payment set forth above. Whether or not the
Additional Titus Stock Sale is consummated, the Company has agreed to pay the
reasonable out-of-pocket expenses of U.S. Bancorp Piper Jaffray and to
indemnify U.S. Bancorp Piper Jaffray against liabilities incurred. These
liabilities include liabilities under the federal securities laws in
connection with the engagement of U.S. Bancorp Piper Jaffray by the Company.
Vote Required; Board of Directors' Recommendation
The affirmative vote of a majority of the outstanding shares of Common Stock
of the Company is required to approve the sale of 6,250,000 shares of the
Company's Common Stock to Titus for aggregate consideration of $25,000,000
pursuant to the terms of the Additional Stock Purchase Agreement. The Board of
Directors recommends that you vote FOR the approval of the Additional Titus
Stock Sale. Shares represented by the proxies will be voted FOR the proposal
unless a vote against the proposal or an abstention is specifically indicated
on the proxy card.
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PROPOSAL FOUR
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Arthur Andersen LLP, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 1999. The Board of Directors recommends that you vote FOR
the ratification of such appointment. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection.
Representatives of Arthur Andersen LLP are expected to be present at the
meeting with the opportunity to make a statement if they desire to do so and
are expected to be available to respond to appropriate questions.
The persons named in the enclosed proxy will vote FOR the appointment of
Arthur Andersen LLP unless contrary instructions are given in the proxy. The
appointment of Arthur Andersen LLP shall be by the affirmative vote of the
holders of a majority of the shares voting on the proposal in person or by
proxy at the meeting.
STOCKHOLDER PROPOSALS
Any stockholder desiring to submit a proposal for action at the 2000 Annual
Meeting of Stockholders and presentation in the Company's proxy statement with
respect to such meeting should arrange for such proposal to be delivered to
the Company's offices, 16815 Von Karman Avenue, Irvine, California 92606,
addressed to the Secretary, no later than March 21, 2000 in order to be
considered for inclusion in the Company's proxy statement relating to the
meeting. Matters relating to such proposals, including the number and length
thereof, eligibility of persons entitled to have such proposals included and
other aspects are regulated by the Securities Exchange Act of 1934, Rules and
Regulations of the Securities and Exchange Commission and other laws and
regulations to which interested persons should refer.
On May 21, 1998 the Securities and Exchange Commission adopted an amendment
to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934,
as amended. The amendment to Rule 14a-4(c)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a stockholder proposal
which is not addressed in the Company's proxy statement. The new amendment
provides that if a proponent of a proposal fails to notify the Company at
least 45 days prior to the month and day of mailing of the prior year's proxy
statement, then the Company will be allowed to use its discretionary voting
authority when the proposal is raised at the meeting, without any discussion
of the matter in the proxy statement.
With respect to the Company's 2000 Annual Meeting of Stockholders, if the
Company is not provided notice of a stockholder proposal, which the
stockholder has not previously sought to include in the Company's proxy
statement, by June 5, 2000, the Company will be allowed to use its voting
authority as described above.
TRANSACTION OF OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors is not aware
of any matters other than those set forth herein and in the Notice of Special
Meeting of Stockholders that will come before the meeting. Should any other
matters arise requiring the vote of Stockholders, it is intended that proxies
will be voted in respect thereto in accordance with the best judgment of the
person or persons voting the proxies.
Please return your proxy as soon as possible. Unless a quorum consisting of
a majority of the outstanding shares entitled to vote is represented at the
meeting, no business can be transacted. Therefore, please be sure to date and
sign your proxy exactly as your name appears on your stock certificate and
return it in the enclosed postage prepaid return envelope. Please act promptly
to ensure that you will be represented at this important meeting.
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THE COMPANY IS, TOGETHER HEREWITH, MAILING TO EACH STOCKHOLDER OF THE
COMPANY, A COPY (WITHOUT EXHIBITS) OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998. ADDITIONAL COPIES CAN BE OBTAINED FROM THE SECRETARY,
INTERPLAY ENTERTAINMENT CORP., 16815 VON KARMAN AVENUE, IRVINE, CALIFORNIA
92606.
By Order of the Board of Directors
/s/ Brian Fargo
Brian Fargo
Chairman of the Board of Directors
and Chief Executive Officer
July 27, 1999
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INTERPLAY ENTERTAINMENT CORP.
PROXY SOLICITED BY BOARD OF DIRECTORS
Brian Fargo and Richard S.F. Lehrberg, and each or either of them, with full
power of substitution, are hereby appointed proxies to vote the stock of the
undersigned in Interplay Entertainment Corp. at the Special Meeting of
Stockholders on August 24, 1999, and at any postponement and adjournment
thereof, to be held at 16815 Von Karman Avenue, Irvine, California, on Tuesday,
August 24, 1999 at 5:00 p.m. Pacific Standard Time.
Management recommends that you vote FOR Proposal 1, FOR Proposal 2, FOR
Proposal 3 and FOR Proposal 4.
1. PROPOSAL 1. ELECTION OF DIRECTORS.
[_] For all Nominees [_] Withhold authority to
listed below (except as vote for all Nominees
indicated to the contrary listed below
below)
Brian Fargo, Richard S. F. Lehrberg, Charles S. Paul, Herve Caen and Eric
Caen.
INSTRUCTION: To withhold authority to vote for any individual Nominee, write
that Nominee's name in the space provided below.
--------------
2. PROPOSAL 2. THE ISSUANCE OF UP TO 5,000,000 SHARES OF THE COMPANY'S COMMON
STOCK TO TITUS INTERACTIVE SA, PURSUANT TO THE TERMS OF THE STOCK PURCHASE
AGREEMENT DATED MARCH 18, 1999.
FOR [_] AGAINST [_] ABSTAIN [_]
3. PROPOSAL 3. THE SALE AND ISSUANCE OF 6,250,000 SHARES OF THE COMPANY'S
COMMON STOCK TO TITUS INTERACTIVE SA, IN EXCHANGE FOR AGGREGATE CONSIDERATION
OF $25,000,000, PURSUANT TO THE TERMS OF THE STOCK PURCHASE AGREEMENT DATED
JULY 20, 1999.
FOR [_] AGAINST [_] ABSTAIN [_]
(Continued on other side)
(Continued from other side)
4. PROPOSAL 4. RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS
INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31,
1999.
FOR [_] AGAINST [_] ABSTAIN [_]
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof,
including procedural and other matters relating to the conduct of the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS OTHERWISE DIRECTED, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF THE FIVE DIRECTOR NOMINEES LISTED ABOVE AND
FOR PROPOSALS 2, 3 AND 4.
Please sign exactly as name appears
hereon.
Dated: ___________________________, 1999
________________________________________
________________________________________
Signature(s)
When shares are held by joint tenants,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Please immediately date, sign and return this card in the enclosed envelope.
Thank you for your prompt attention to this important matter.
