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IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-K IS BEING FILED
IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 0-24363
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Interplay Entertainment Corp.
(Exact name of the registrant as specified in its charter)
Delaware 33-0102707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16815 Von Karman Avenue, Irvine, California 92606
(Address of principal executive offices)
(949) 553-6655
(Registrant's telephone number, including area code)
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Securities registered pursuant of Section 12 (b) of the Act: None
Securities registered pursuant of Section 12 (g) of the Act:
Common Stock, $0.001 par value
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 21, 2000, 30,022,538 shares of Common Stock of the Registrant
were issued and outstanding and the aggregate market value of voting common
stock held by non-affiliates was $34,683,920.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders, to be held in June 2000, are incorporated by
reference into Part III.
THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 17, 2000 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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INTERPLAY ENTERTAINMENT CORP.
INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
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PART I
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 12
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 14
Item 6. Selected Financial Data....................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..... 36
Item 8. Consolidated Financial Statements and Supplementary Data...... 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant............ 38
Item 11. Executive Compensation........................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 38
Item 13. Certain Relationships and Related Transactions................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 39
Signatures.............................................................. 40
Exhibit Index........................................................... 42
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This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 and such forward-looking statements are
subject to the safe harbors created thereby. For this purpose, any statements
contained in this Form 10-K except for historical information may be deemed to
be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" or the negative or other
variations thereof or comparable terminology are intended to identify forward-
looking statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements.
The forward-looking statements included in this Form 10-K are based on
current expectations that involve a number of risks and uncertainties, as well
as certain assumptions. For example, any statements regarding future cash
flow, financing activities, cost reduction measures, compliance with the
Company's line of credit and an extension or replacement of such line are
forward-looking statements involving the aforementioned risks and
uncertainties. There can be no assurance that the Company will generate
positive cash flow in the future or that the Company will be able to obtain
additional or replacement financing on satisfactory terms, if at all; or that
any cost reductions effected by the Company will be sufficient to offset any
negative cash flow from operations; or that the Company will remain in
compliance with its line of credit or be able to renew or replace such line.
Additional risks and uncertainties include possible delays in the completion
of products, the possible lack of consumer appeal and acceptance of products
released by the Company, fluctuations in demand, lost sales because of the
rescheduling of product launches or order deliveries, failure of the Company's
markets to continue to grow, failure of the Company's products to be and
remain accepted within their respective markets, material adverse changes in
competitive conditions within the Company's markets, failure of the Company to
retain key development and management personnel, failure of the Company to
accurately anticipate market demand, and material adverse changes in the
Company's operations or business. Additional factors that may affect future
operating results are discussed in more detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance". Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, the Company's business and
operations are subject to substantial risks that increase the uncertainty
inherent in the forward-looking statements, and the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved. In
addition, risks, uncertainties and assumptions change as events or
circumstances change. The Company disclaims any obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-K with the SEC or otherwise to revise or update any oral or
written forward-looking statement that may be made from time to time by the
Company or on the Company's behalf.
Interplay(R), Interplay Productions(R) and certain of the Company's product
names and publishing labels referred to in this Form 10-K are the Company's
trademarks. This Annual Report on Form 10-K also contains trademarks belonging
to others.
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PART I
ITEM 1. BUSINESS
Overview
Interplay Entertainment Corp., a Delaware corporation, (together with its
subsidiaries, the "Company" or "Interplay") is a leading developer, publisher
and distributor of interactive entertainment software for both core gamers and
the mass market. Interplay was incorporated in the State of California in 1982
and was reincorporated in the State of Delaware in May 1998. The Company,
which commenced operations in 1983, is most widely known for its titles in the
action/arcade, adventure/RPG, and strategy/puzzle categories. The Company has
produced titles for many of the most popular interactive entertainment
software platforms, and currently balances its development efforts by
publishing interactive entertainment software for PCs and current generation
video game consoles, such as the Sony PlayStation and Sega Dreamcast.
The Company seeks to publish interactive entertainment software titles that
are, or have the potential to become, franchise software titles that can be
leveraged across several releases and/or platforms, and has published many
such successful franchise titles to date. In addition, the Company holds
licenses to use popular brands, such as Star Trek and Caesars Palace, for
incorporation into certain of its products. Of the more than 40 titles
currently in development by the Company, more than half are sequels to
successful titles or incorporate licensed intellectual properties.
In February 1999, in connection with the Company's acquisition of a
minority membership interest in the parent entity of Virgin Interactive
Entertainment Limited ("Virgin"), the Company entered into an International
Distribution Agreement with Virgin (the "Virgin Distribution Agreement").
Pursuant to the Virgin Distribution Agreement, Virgin hired the Company's
European sales and marketing personnel and is distributing substantially all
of the Company's titles in Europe, CIS, Africa and the Middle East. See
"Business--Distribution--International" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Distribution Agreement".
The Company completed equity transactions in 1999 and early in 2000 with
Titus Interactive S.A. ("Titus"), which provided for the issuance of
10,795,455 shares of the Company's Common Stock and 719,424 shares of the
Company's Preferred Stock for $55 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Control by Titus".
Products
The Company develops, publishes and distributes interactive entertainment
software titles that provide immersive game experiences by combining advanced
technology with engaging content, vivid graphics and rich sound. The Company
utilizes the experience and judgment of the avid gamers in its product
development group to select and produce the products it publishes. This has
resulted in the publication of a wide variety of games that have received
numerous awards, including the Academy of Interactive Arts & Sciences' Best
Title, Computer Game Review's Gold and Platinum Triads, PC Entertainment's
Editor's Choice Awards, and Computer Gaming World's Game of the Year.
The Company's strategy is to invest in products for those platforms,
whether PC or video game console, that have or will have sufficient installed
bases for the investment to be economically viable. The Company currently
develops and publishes products compatible with multiple variations of the PC
platform, including Windows 98 and 2000, and for currently-available video
game consoles, including the Sony PlayStation and Sega Dreamcast. The Company
anticipates the introduction of the Sony PlayStation 2 in the third quarter of
2000, and new platforms from Nintendo and Microsoft in 2001. In addition, the
Company anticipates substantial growth in installed base for high-speed
Internet access, with the possibility of significantly expanded technical
capabilities for the PC platform.
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The Company assesses the potential acceptance and success of emerging
platforms and the anticipated continued viability of existing platforms based
on many factors, including the number of competing titles, the ratio of
software sales to hardware sales with respect to the platform, the platform's
installed base, the change in the rate of the platform's sales and the cost
and timing of development for the platform. The Company must continually
anticipate and assess the emergence of, and market acceptance of, new
interactive entertainment software platforms well in advance of the time the
platform is introduced to consumers. Because product development cycles are
difficult to predict, the Company is required to make substantial product
development and other investments in a particular platform well in advance of
the platform's introduction. If a platform for which the Company develops
software is not released on a timely basis or does not attain significant
market penetration, the Company's business, operating results and financial
condition could be materially adversely affected. Alternatively, if the
Company fails to develop products for a platform that does achieve significant
market penetration, then the Company's business, operating results and
financial condition could also be materially adversely affected.
The Company has entered into license agreements with Sega, Sony Computer
Entertainment and Nintendo pursuant to which the Company has the right to
develop, sublicense and distribute products for the licensor's respective
platforms in specified territories. The products are manufactured for the
Company by the licensor. The Company pays the licensor a royalty or
manufacturing fee in exchange for such license and manufacturing services.
Such agreements grant the licensor certain approval rights over the products
developed for their platform and the packaging and marketing materials for
such products. There can be no assurance that the Company will be able to
obtain future licenses from platform companies on acceptable terms or that any
existing or future licenses will be renewed by the licensors. The inability of
the Company to obtain such licenses or approvals could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Performance--Dependence on Licenses
from and Manufacturing by Hardware Companies."
Product Development
The Company develops or acquires its products from a variety of sources,
including its three internal development divisions, Shiny and publishing
relationships with leading independent developers.
The Development Process. The Company develops original products both
internally, using its in-house development staff, and externally, using third
party software developers working under contract with the Company. Producers
on the Company's internal staff monitor the work of both inside and third
party development teams through design review, progress evaluation, milestone
review and quality assurance. In particular, each milestone submission is
thoroughly evaluated by the Company's product development staff to ensure
compliance with the product's design specifications and the Company's quality
standards. The Company enters into consulting or development agreements with
third party developers, generally on a flat-fee, work-for-hire basis or on a
royalty basis, whereby the Company pays development fees or royalty advances
based on the achievement of milestones. In royalty arrangements, the Company
ultimately pays continuation royalties to developers once the Company's
advances have been recouped. In addition, in certain cases, the Company will
utilize third party developers to convert products for use with new platforms.
The Company's products typically have short life cycles, and the Company
depends on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously-
released products to additional platforms, to generate revenues to fund
operations and to replace declining revenues from existing products. The
development cycle of new products is difficult to predict, and involves a
number of risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Dependence on New Product Introductions; Risk of Product Delays and Product
Defects."
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During the years ended December 31, 1999 and 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997, the Company spent $20.6
million, $24.5 million, $14.3 million and $21.4 million, respectively, on
product research and development activities. Those amounts represented 20.2%,
19.3%, 16.6% and 25.7%, respectively, of revenue in each of those periods.
Internal Product Development
U.S. Product Development. The Company's U.S. internal product development
group (excluding Shiny's development group) consisted of approximately 210
people at December 31, 1999. Once a design is selected by the Company, a
production team, development schedule and budget are established. The
Company's internal development process includes initial design and concept
layout, computer graphic design, 2D and 3D artwork, programming, prototype
testing, sound engineering and quality control. The development process for an
original, internally developed product typically takes from 12 to 24 months,
and six to 12 months for the porting of a product to a different technology
platform. The Company utilizes a variety of advanced hardware and software
development tools, including animation, sound compression utilities, clay
modeling and video compression for the production and development of its
interactive entertainment software titles. The Company's internal development
organization is divided into three divisions, each dedicated to the production
and development of products for a particular product category. The Company
also undertakes development activities through its subsidiary, Shiny. Within
each division, development teams are assigned to a particular project. These
teams are generally led by a producer or associate producer and include game
designers, software programmers, artists, product managers and sound
technicians. The Company believes that this divisional approach promotes the
creative and entrepreneurial environment necessary to develop innovative and
successful titles. In addition, the Company believes that breaking down the
development function into divisions enables it to improve its software design
capabilities, to better manage its internal and external development processes
and to create and enhance its software development tools and techniques,
thereby enabling the Company to obtain greater efficiency and improved
predictability in the software development process.
Shiny. David Perry, Shiny's President and founder, has produced a number of
highly successful interactive entertainment software titles, including
CoolSpot, Aladdin, Earthworm Jim, Earthworm Jim II and MDK. Shiny currently
has one original title under development. The Company will distribute this
title worldwide under the Shiny label. Shiny's development group presently
consists of approximately 25 people.
International Development. The Company has international development
resources through Interplay Productions Limited ("Interplay Europe"), whose
software producers manage the efforts of local third party developers in
European countries. The Company currently has several original products, under
development through Interplay Europe. Interplay Europe's development group
presently consists of approximately 5 people.
External Product Development
In order to expand its product offerings to include hit titles created by
third party developers, and to leverage its sales and distribution
capabilities, the Company enters into publishing arrangements with third party
developers, including foreign developers and publishers who wish to utilize
the Company's sales and distribution network in North America. In February
1999, the Company entered into a Product Publishing Agreement with Virgin
Interactive Entertainment Limited pursuant to which the Company will publish
substantially all of Virgin's titles in North and South America and Japan. In
the years ended December 31, 1999, December 31, 1998, the eight months ended
December 31, 1997, and the year ended April 30, 1997, approximately 75%, 70%,
50% and 33%, respectively, of new products released by the Company which the
Company believes are or will become franchise titles were developed by third
party developers. The Company expects that the proportion of its new products
which are developed externally may vary significantly from period to period as
different products are released. The Company's focus in obtaining publishing
products is to select titles that combine advanced technologies with creative
game design. The publishing agreements usually provide the Company with the
exclusive right to distribute a product on a worldwide basis (however, in
certain instances the agreement provides for a specified territory). The
Company typically funds external development through the payment of
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advances upon the completion of milestones, which advances are credited
against royalties based on sales of the products. Further, the Company's
publishing arrangements typically provide the Company with ownership of the
trademarks relating to the product as well as exclusive rights to sequels to
the product. The Company manages the production of external development
projects by appointing a producer from one of its internal product development
divisions to oversee the product's development and work with the third party
developer to design, develop and test the game.
The Company believes this strategy of cultivating relationships with
talented third party developers, such as the developers of Baldur's Gate,
Descent and TombRaider, provides an excellent source of quality products, and
a number of the Company's commercially successful products have been developed
under this strategy. However, the Company's reliance on third party software
developers for the development of a significant number of its interactive
software entertainment products involves a number of risks. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Dependence on Third Party Software
Developers."
Sales And Distribution
The Company's sales and distribution efforts are designed to broaden
product distribution and to increase the penetration of the Company's products
in domestic and international markets. The Company supplements its direct
distribution efforts in North America with third party distributors and
"affiliate label" relationships in which the Company serves as distributor for
others. Over the past several years, the Company has increased its sales and
distribution efforts in international markets through the formation of
Interplay Europe, and most recently through the Virgin Distribution Agreement,
and through licensing and third party distribution strategies elsewhere. The
Company also distributes its software products through Interplay OEM in
bundling transactions with computer, peripheral and various other companies
and through on-line services.
North America. In North America, the Company sells its products primarily
to mass merchants, warehouse club stores, large computer and software
specialty retail chains and through catalogs. In addition, the company sells
its products to Internet commerce sites. A majority of the Company's North
American retail sales are to direct accounts, and a lesser percentage are to
third party distributors. The Company's principal direct retail accounts
include CompUSA, Best Buy, Electronics Boutique, Wal-Mart and Software
Acquisitions. The Company's principal distributors in North America include GT
Interactive, Navarre, and Merisel. The Company also distributes product
catalogs and related promotional material to end-users who can order products
by direct mail, by using a toll-free number, or by accessing the Company's web
site. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Future Performance--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."
The Company sells to retailers and distributors through its North American
sales organization. The Company's North American sales force is largely
responsible for generating retail demand for the Company's products by
presenting new products to the Company's retail customers in advance of the
products' scheduled release dates, by providing technical advice with respect
to the Company's products and by working closely with retailers and
distributors to sell the Company's products. The Company typically ships its
products within a short period of time after acceptance of purchase orders
from distributors and other customers. Accordingly, the Company typically does
not have a material backlog of unfilled orders, and net sales in any quarter
are substantially dependent on orders recorded in that quarter. Any
significant weakening in customer demand would therefore have a material
adverse impact on the Company's operating results and on the Company's ability
to maintain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Fluctuations in Operating Results; Uncertainty of Future Results;
Seasonality."
The Company seeks to extend the life cycle and financial return of many of
its products by marketing those products differently along the product's sales
life. Although the product life cycle for each title varies
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based on a number of factors, including the quality of the title, the number
and quality of competing titles, and in certain instances seasonality, the
Company typically considers a title to be "back catalog" once it incurs its
first price drop after its initial release. The Company utilizes marketing
programs appropriate for each particular title, which generally include
progressive price reductions over time to increase the product's longevity in
the retail channel as the Company shifts its advertising support to newer
releases.
The Company has acquired the right to distribute certain products on an
affiliate label basis whereby it distributes products that are produced and
published by a third party and are marketed under the third party's name with
the package bearing a notation that the product is being distributed by the
Company. The Company's focus in obtaining affiliate label products is to
select titles that complement the Company's product families. Products that
are distributed through the Company's affiliate label program are generally
purchased directly from the third party and sold based on a distribution mark-
up.
The Company provides terms of sale comparable to competitors in its
industry. In addition, the Company provides technical support in North America
for its products through its customer support department and a 90-day limited
warranty to end-users that its products will be free from manufacturing
defects. While to date the Company has not experienced any material warranty
claims, there can be no assurance that the Company will not experience
material warranty claims in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Distribution Channels; Risk of Customer
Business Failures; Product Returns."
International. Prior to February 1999, the Company distributed its titles
in Europe through Interplay Europe, and employed approximately 21 persons
dedicated to sales and marketing in the European market. Interplay Europe had
an agreement with Infogrames U.K. and Virgin to pool resources in order to
distribute PC and video game console software to independent software
retailers in the United Kingdom, and had distribution agreements with Acclaim
Entertainment pursuant to which Acclaim Entertainment distributes certain of
the Company's titles in selected European countries. Net revenues from such
distribution agreements with Acclaim Entertainment represented 3.4% 9.6%, 7.4%
and 14.9% of the Company's net revenues in the years ended December 31, 1999,
December 31, 1998, the eight months ended December 31, 1997 and the year ended
April 30, 1997, respectively. In February 1999, the Company completed an
agreement to acquire a 43.9% membership interest in VIE Acquisition Group LLC,
the parent entity of Virgin. In connection with such acquisition, the Company
entered into the Virgin Distribution Agreement, pursuant to which Virgin hired
Interplay Europe's sales and marketing personnel and is distributing
substantially all of the Company's titles in Europe, CIS, Africa and the
Middle East for a seven year period. Under such agreement, the Company will
pay Virgin a distribution fee for its marketing and distribution of the
Company's products, as well as certain direct costs and expenses, and a fixed
overhead fee that is subject to reduction in certain events. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Distribution Agreement."
The Company has built a distribution capability in certain of the developed
markets in Asia and the Americas utilizing third party distribution
arrangements for specified products and platforms. In 1995 the Company
established operations in Japan in order to expand its Japanese sales. In July
1997, the Company initiated a licensing strategy in Japan and terminated its
operations there. The Company has also licensed a number of its titles to Sony
Computer Entertainment to publish in Japan on the PlayStation. In Australia
and New Zealand, the Company has entered into an agreement with Roadshow
Entertainment Pty. Ltd., pursuant to which Roadshow Entertainment Pty. Ltd.
has the exclusive right to market and distribute the Company's ongoing PC and
video game console products.
OEM. Interplay OEM employs approximately 22 people, including 7 in Europe,
focused on the distribution of interactive entertainment software in bundling
transactions to the computer hardware industry. Under these arrangements, one
or more software titles, which are either limited-feature versions or the
retail version of a game, are bundled with computer or peripheral devices and
are sold by an original equipment manufacturer so that the purchaser of the
hardware device obtains the software as part of the hardware purchase. In
addition,
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Interplay OEM has established a development capability to create modified
versions of titles which support its customers' technologies. Although it is
customary for OEM customers to pay a lower per unit price on sales through OEM
bundling contracts, such arrangements involve a high unit volume commitment.
Interplay OEM net revenues generally are incremental net revenues and do not
have significant additional product development or sales and marketing costs.
There can be no assurance that OEM sales will continue to generate consistent
profits for the Company, and a decrease in OEM sales or margins could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition to distributing the Company's titles,
Interplay OEM serves as an exclusive OEM distributor for a number of
interactive entertainment software publishers, including LucasArts
Entertainment Company, Take Two Interactive, Fox Interactive, Westwood
Studios, Virgin, Gathering of Developers, EMME Interactive and Titus.
Interplay OEM's hardware customers include many of the industry's largest
computer and peripheral manufacturers including IBM, Compaq, 3Dfx, Diamond
Multimedia, Packard Bell/NEC, Creative Labs, Pioneer Electronic, Canon, Dell
and Logitech. OEM devotes five employees to modifying existing products into
suitable OEM products. Interplay OEM has expanded its business model to
include licensing of the represented software as a premium to the non-
Information Technology marketplace, as well as continuing its licensing and
merchandising activities on behalf of Interplay and Shiny including television
animation, novelizations, strategy guides and other merchandise tied to
Interplay's entertainment properties.
The Company's North American and international distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retail channels such as warehouse chains, mass merchants,
computer superstores and Internet commerce sites. The Company is exposed to
the risk of product returns and markdown allowances with respect to its
distributors and retailers. The Company allows distributors and retailers to
return defective, shelf-worn and damaged products in accordance with
negotiated terms. The Company considers return requests on a case-by-case
basis, taking into consideration factors such as the products involved, the
customer's historical sales volume and the customer's credit status. The
Company also offers a 90-day limited warranty to its end users that its
products will be free from manufacturing defects. In addition, the Company
provides markdown allowances, which consist of credits given to customers to
induce them to lower the retail sales price of certain products in an effort
to increase sales to consumers and to help manage its customers' inventory
levels in the distribution channel. Although the Company maintains a reserve
for returns and markdown allowances, and although the Company manages its
returns and markdown allowances through its authorization procedure, the
Company could be forced to accept substantial product returns and provide
markdown allowances to maintain its relationships with retailers and its
access to distribution channels. The Company's reserve for estimated returns,
exchanges, markdowns, price concessions, and warranty costs was $9.2 and $18.4
million at December 31, 1999 and 1998, respectively. Product returns and
markdown allowances that exceed the Company's reserves could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Future Performance--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."
Marketing
The Company's marketing department is organized into product groups aligned
with its three internal development divisions and Shiny to promote a focused
marketing strategy and brand image for each division. Integrated into these
product groups are public relations for each division. In addition, the
marketing department has four functional groups (web department, event
coordination, creative services and advertising) that support these four
product groups.
The Company's marketing department develops and implements marketing
programs and campaigns for each of the Company's titles and product groups.
The Company's marketing activities in preparation for a product launch include
print advertising, game reviews in consumer and trade publications, retail in-
store promotions, attendance at trade shows and public relations. The Company
sends direct and electronic mail promotional materials to its large database
of gamers. The Company has also selectively used radio and
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television advertisements in connection with the introduction of certain of
its products. The Company budgets a portion of each product's sales for
cooperative advertising and market development funds with retailers. Every
title and brand is launched with a multi-tiered marketing campaign that is
developed on an individual basis to promote product awareness and customer
pre-orders. The Company anticipates that over time, as the market for its
products matures and competition becomes more intense, it will become
necessary to devote more overall resources to marketing its products but
marketing costs for its products should remain proportional to revenues.
The Company maximizes on-line marketing through web advertising and the
maintenance of several web sites. These sites provide news and information of
interest to its customers through free demonstration versions, contests,
games, tournaments and promotions. Also, to generate interest in new product
introductions, the Company provides free demonstration versions of upcoming
titles both through magazines and through game samples that consumers can
download from the Company's web site. In addition, marketing hosts on-line
events and maintains a vast collection of message boards to keep customers
informed on shipped and upcoming titles.
Competition
The interactive entertainment software industry is intensely competitive
and is characterized by the frequent introduction of new hardware systems and
software products. The Company's competitors vary in size from small companies
to very large corporations with significantly greater financial, marketing and
product development resources than those of the Company. Due to these greater
resources, certain of the Company's competitors are able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, pay
higher fees to licensors of desirable motion picture, television, sports and
character properties and pay more to third party software developers than the
Company. The Company believes that the principal competitive factors in the
interactive entertainment software industry include product features, brand
name recognition, access to distribution channels, quality, ease of use,
price, marketing support and quality of customer service.
The Company competes primarily with other publishers of PC and video game
console interactive entertainment software. Significant competitors include
Electronic Arts Inc., GT Interactive Software Corp., Take Two Interactive
Software Inc, THQ Inc., The 3DO Compay, Eidos PLC, Infogrames Entertainment,
Mattel, Inc., Activision, Inc., Microsoft Corporation, LucasArts Entertainment
Company, Midway Games Inc., Acclaim Entertainment, Inc., Havas Interactive and
Hasbro, Inc. In addition, integrated video game console hardware/software
companies such as Sony Computer Entertainment, Nintendo and Sega compete
directly with the Company in the development of software titles for their
respective platforms. Large diversified entertainment companies, such as The
Walt Disney Company, many of which own substantial libraries of available
content and have substantially greater financial resources than the Company,
may decide to compete directly with the Company or to enter into exclusive
relationships with competitors of the Company. The Company also believes that
the overall growth in the use of the Internet and on-line services by
consumers may pose a competitive threat if customers and potential customers
spend less of their available time using interactive entertainment software
and more time on the Internet and on-line services.
Retailers of the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense competition among
consumer software producers, and in particular interactive entertainment
software products, for high quality retail shelf space and promotional support
from retailers. To the extent that the number of consumer software products
and computer platforms increases, competition for shelf space may intensify
and may require the Company to increase its marketing expenditures. Due to
increased competition for limited shelf space, retailers and distributors are
in an increasingly better position to negotiate favorable terms of sale,
including price discounts, price protection, marketing and display fees and
product return policies. The Company's products constitute a relatively small
percentage of any retailer's sales volume, and there can be no assurance that
retailers will continue to purchase the Company's products or to provide the
Company's products with adequate levels of shelf space and promotional
support, and a prolonged failure in this regard may have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Performance--Industry Competition;
Competition for Shelf Space."
10
<PAGE>
Manufacturing
The Company's PC-based products consist primarily of CD-ROMs and DVDs, user
manuals and packaging. Substantially all of the Company's CD-ROM and DVDs
duplication is performed by unaffiliated third parties. Printing of the user
manual and packaging, manufacturing of related materials and assembly of
completed packages are performed to the Company's specifications by
unaffiliated third parties. To date, the Company has not experienced any
material difficulties or delays in the manufacture and assembly of its CD-ROM
or DVD based products, and has not experienced significant returns due to
manufacturing defects.
Sony Computer Entertainment, Sega and Nintendo manufacture the Company's
products that are compatible with their respective video game consoles, as
well as the manuals and packaging for such products, and ship finished
products to the Company for distribution. PlayStation and Dreamcast products
consist of CD-ROMs and are typically delivered by Sony Computer Entertainment
and Sega, respectively within a relatively short lead-time. Manufacturers of
Nintendo and other video game cartridges typically deliver software to the
Company within 45 to 60 days after receipt of a purchase order. If the Company
experiences unanticipated delays in the delivery of manufactured software
products, its net sales and operating results could be materially adversely
affected. Furthermore, the long manufacturing cycle associated with video game
cartridges requires that the Company forecast retailer and consumer demands
for its manufactured titles further in advance of shipment than for PC-based
products, PlayStation or Dreamcast CD-ROMs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Licenses from and Manufacturing by Hardware
Companies."
Intellectual Property And Proprietary Rights
The Company holds copyrights on its products, product literature and
advertising and other materials, and holds trademark rights in the Company's
name, the Interplay logo, its "By Gamers. For Gamers.(TM)" slogan and certain
of its product names and publishing labels. The Company also holds rights
under a patent application related to the software engine for one of its
products. The Company has licensed certain products to third parties for
distribution in particular geographic markets or for particular platforms, and
receives royalties on such licenses. The Company also outsources some of its
product development to third party developers, contractually retaining all
intellectual property rights related to such projects. The Company also
licenses certain products developed by third parties and pays royalties on
such products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Product Development."
The Company regards its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee
and third party nondisclosure agreements and other methods to protect its
proprietary rights. The Company owns or licenses various copyrights and
trademarks. While the Company provides "shrinkwrap" license agreements or
limitations on use with its software, the enforceability of such agreements or
limitations is uncertain. The Company is aware that unauthorized copying
occurs within the computer software industry, and if a significantly greater
amount of unauthorized copying of the Company's interactive entertainment
software products were to occur, the Company's operating results could be
materially adversely affected. The Company uses copy protection on selected
products and it does not provide source code to third parties unless they have
signed nondisclosure agreements.
The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such countries, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-
line services, the ability of the Company to protect its intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. In addition, the intellectual property laws are less
clear with
11
<PAGE>
respect to such emerging technologies. There can be no assurance that existing
intellectual property laws will provide adequate protection to the Company's
products in connection with such emerging technologies.
As the number of software products in the interactive entertainment
software industry increases and the features and content of these products
further overlap, interactive entertainment software developers may
increasingly become subject to infringement claims. Although the Company makes
reasonable efforts to ensure that its products do not violate the intellectual
property rights of others, there can be no assurance that claims of
infringement will not be made. Any such claims, with or without merit, can be
time consuming and expensive to defend. From time to time, the Company has
received communication from third parties asserting that features or content
of certain of its products may infringe upon the intellectual property rights
of such parties. There can be no assurance that existing or future
infringement claims against the Company will not result in costly litigation
or require the Company to license the intellectual property rights of third
parties, either of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Protection of Proprietary Rights."
Employees
As of December 31, 1999, the Company had 417 full time employees, including
210 in product development, 85 in sales and marketing and 65 in finance,
general and administrative. This includes 28 full time employees of Shiny, 22
full time employees of Interplay OEM and 7 full time employees of Interplay
Europe. The Company also retains independent contractors to provide certain
services, primarily in connection with its product development activities. The
Company and its full time employees are not subject to any collective
bargaining agreements and the Company believes that its relations with its
employees are good.
From time to time the Company has retained actors and/or "voice over"
talent to perform in certain of the Company's products, and the Company
expects to continue this practice in the future. These performers are
typically members of the Screen Actors Guild ("SAG") or other performers'
guilds, which guilds have established collective bargaining agreements
governing their members' participation in interactive media projects. The
Company or an affiliated entity may be required to become subject to the
jurisdiction of SAG's collective bargaining agreement, or some other
applicable performers' guild, with respect to the Company's development
projects in the future in order to engage the services of performers in the
development of the Company's products.
ITEM 2. PROPERTIES
The Company's headquarters are located in Irvine, California, where the
Company leases approximately 81,000 square feet of office space. This lease
expires in June 2006 and provides the Company with one five year option to
extend the term of the lease and expansion rights, on an "as available basis,"
to approximately double the size of the office space. Interplay Europe leases
approximately 10,000 square feet of space in Buckinghamshire, England. This
lease expires in October 2014 and, Interplay Europe has the option for early
termination of the lease in November 2000 or in November 2005. In addition,
Interplay Europe subleases approximately 1,700 square feet of office space in
Central London, England from Virgin. This lease expires in July 2000. Shiny
leases approximately 4,100 square feet of space in Laguna Beach, California,
which lease expires in October 2000 and which provides Shiny with an option to
extend the term for an additional five years. The Company believes that its
facilities are adequate for its current needs and that suitable additional or
substitute space will be available in the future to accommodate expansion of
the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is occasionally involved in various legal proceedings, claims
and litigation arising in the ordinary course of business, including disputes
arising over the ownership of intellectual property rights and collection
matters. In the opinion of management, the outcome of such routine claims will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
12
<PAGE>
The Company and the former owner of Shiny have a dispute over additional
cash payments upon the delivery and acceptance of interactive entertainment
software titles that Shiny was committed to deliver over time. The Company
believes that no amounts are due as of December 31, 1999 under the applicable
agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on The NASDAQ Stock Market National Market
System under the symbol "IPLY". As of December 31, 1999, there were
approximately 2,000 holders of the Common Stock.
The following table sets forth the range of high and low sales prices for
the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
For the Year ended December 31, 1998 High Low
------------------------------------ ----- -----
<S> <C> <C>
Second Quarter.................................................. $6.19 $5.75
Third Quarter................................................... 7.50 3.19
Fourth Quarter.................................................. 3.00 1.50
<CAPTION>
For the Year ended December 31, 1999 High Low
------------------------------------ ----- -----
<S> <C> <C>
First Quarter................................................... $3.00 $1.69
Second Quarter.................................................. 2.63 1.88
Third Quarter................................................... 2.94 2.00
Fourth Quarter.................................................. 4.44 1.56
</TABLE>
Dividend Policy
The Company anticipates that all future earnings will be retained to
finance future operations, and the Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The Company's current
credit agreement restricts the Company from paying cash dividends without the
prior written consent of the lender. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors Affecting Future
Performance--Liquidity; Future Capital Requirements".
The following is a summary of transactions by the Company during the year
ended December 31, 1999 involving sales of the Company's securities that were
not registered under the Securities Act:
During the year ended December 31, 1999, the Company issued an aggregate of
2,208,028 nonqualified stock options to purchase Common Stock pursuant to the
Company's 1997 Stock Incentive Plan (the "1997 Plan") to officers, directors
and employees of the Company at a weighted average exercise price of $2.14.
Such options were issued but not sold, in the view of the Company, and,
therefore, registration thereof was not required. During the period referred
to above, options to issue 287,958 shares or the Company's Common Stock
pursuant to the 1997 Plan were exercised.
As a result of the two equity transactions with Titus in 1999, the Company
issued and sold 10,795,455 shares of the Company's Common Stock for $35
million. Subsequent to December 31, 1999, the Company also issued 719,424
shares of Preferred Stock to Titus for $20 million in a transaction that
included warrants to Titus for up to 500,000 shares of Common Stock at $3.79
per share. The Company issued 484,848 shares of the Company's Common Stock to
RuneCraft Limited. An employee of the Company was issued 56,208 shares of the
Company's Common Stock. Such shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for the years ended
December 31, 1999 and 1998, the eight months ended December 31, 1997 and the
year ended April 30, 1997, and the selected consolidated balance sheets data
as of December 31, 1999 and 1998 are derived from the Company's audited
consolidated financial statements included elsewhere in this Form 10-K. The
selected consolidated statements of operations
14
<PAGE>
data for the years ended April 30, 1996 and 1995, and the selected
consolidated balance sheets data as of December 31, 1997, April 30, 1997, 1996
and 1995 are derived from the Company's audited consolidated financial
statements not included in this Form 10-K. The Company's historical results
are not necessarily indicative of the results that may be achieved for any
other period. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
Eight Months
Years Ended Ended
December 31, December 31, Years Ended April 30,
------------------ ------------ --------------------------
1999 1998 1997 1997 1996 1995
-------- -------- ------------ -------- ------- -------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data(1):
Net revenues............ $101,930 $126,862 $85,961 $ 83,262 $96,952 $79,546
Cost of goods sold...... 61,103 71,928 44,864 62,480 49,939 45,491
-------- -------- ------- -------- ------- -------
Gross profit............ 40,827 54,934 41,097 20,782 47,013 34,055
Operating expenses:
Marketing and sales.... 32,432 39,471 20,603 24,627 23,285 14,280
General and
administrative........ 15,247 12,841 8,989 9,408 9,025 5,528
Product development.... 20,629 24,472 14,291 21,431 15,120 8,200
Other.................. 5,323 -- -- -- -- --
-------- -------- ------- -------- ------- -------
Total operating
expenses.............. 73,631 76,784 43,883 55,466 47,430 28,008
-------- -------- ------- -------- ------- -------
Operating income
(loss)................. (32,804) (21,850) (2,786) (34,684) (417) 6,047
Other income (expense).. (3,471) (4,933) (2,273) (1,600) (807) 1,046
-------- -------- ------- -------- ------- -------
Income (loss) before
income taxes........... (36,275) (26,783) (5,059) (36,284) (1,224) 7,093
Provision (benefit) for
income taxes........... 5,410 1,437 -- (9,065) (480) 2,844
Net income (loss)....... $(41,685) $(28,220) $(5,059) $(27,219) $ (744) $ 4,249
======== ======== ======= ======== ======= =======
Net income (loss) per
share (2):
Basic.................. $ (1.86) $ (1.91) $ (0.45) $ (2.46) $ (0.07) $ 0.40
Diluted................ $ (1.86) $ (1.91) $ (0.45) $ (2.46) $ (0.07) $ 0.35
======== ======== ======= ======== ======= =======
Selected Operating Data:
Net revenues by
geographic region:
North America.......... $ 49,443 $ 73,865 $51,833 $ 38,606 $54,702 $51,892
International.......... 30,310 35,793 24,642 32,006 24,579 13,829
OEM, royalty and
licensing............. 22,177 17,204 9,486 12,650 17,671 13,825
Net revenues by
platform:
Personal computer...... $ 65,397 $ 67,406 $42,520 $ 45,192 $60,254 $36,804
Video game console..... 14,356 42,252 33,955 25,420 19,027 28,917
OEM, royalty and
licensing............. 22,177 17,204 9,486 12,650 17,671 13,825
<CAPTION>
December 31, April 30,
-------------------------------- --------------------------
1999 1998 1997 1997 1996 1995
-------- -------- ------------ -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheets Data:
Working capital........ $ (7,622) $ (3,135) $13,616 $ 7,890 $18,485 $25,227
Total assets........... 56,936 74,944 77,821 69,005 68,511 44,226
Total debt............. 19,630 24,651 38,154 14,970 108 262
Stockholders' equity
(deficit)............. (2,071) 4,193 (1,267) 3,401 30,195 30,069
</TABLE>
- --------
(1) Effective May 1, 1997, the Company changed its year end from April 30 to
December 31.
(2) See Note 9 of Notes to Consolidated Financial Statements for an
explanation of the number of shares used in computing net income (loss)
per share.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto and other information
included or incorporated by reference herein.
General
The Company derives net revenues primarily from direct sales of interactive
entertainment software for PCs and video game consoles to retailers and mass
merchants, from indirect sales to software distributors in North America and
internationally, from the distribution by the Company on an affiliate label
basis of titles published by third parties, and from direct sales to end-users
through the Company's catalogs and the Internet. The Company also derives
royalty-based revenues from licensing arrangements, from the sale of products
by third party distributors in North America and international markets, and
from OEM bundling transactions.
Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". For those agreements that provide the customers the right to
create and sell multiple copies of a product in exchange for guaranteed
amounts, revenue is recognized at the delivery of the product master or the
first copy. Per copy royalties on sales that exceed the guarantee are
recognized as copies are duplicated. The Company is generally not
contractually obligated to accept returns, except for defective, shelf-worn
and damaged products in accordance with negotiated terms. However, the Company
permits customers to return or exchange product and may provide price
protection on products unsold by a customer. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when
Right of Return Exists", revenue is recorded net of an allowance for estimated
returns, exchanges, markdowns, price concessions, and warranty costs. Such
reserves are based upon management's evaluation of historical experience,
current industry trends and estimated costs. The amount of reserves ultimately
required could differ materially in the near term from the amounts included in
the accompanying consolidated financial statements. Customer support provided
by the Company is limited to telephone and Internet support. These costs are
not material and are charged to expenses as incurred.
In order to expand the Company's distribution channels and engage in
software development in overseas markets, in 1995 the Company established
operations in the United Kingdom and in Japan. In July 1997, the Company
initiated a licensing strategy in Japan and terminated its operations there.
In February 1999, the Company undertook a restructuring of its operations in
the United Kingdom that included its investment in VIE Acquisition Group LLC
("VIE"). In connection with the Company's investment in VIE, the Company
entered into an exclusive distribution agreement with Virgin Entertainment
Interactive Limited ("Virgin") which is controlled by VIE and integrated its
distribution operations with Virgin which substantially reduced its sale and
marketing personnel in Europe. The Company still maintains its European OEM
and product development operations. International net revenues accounted for
approximately 29.7%, 28.2%, 28.7% and 38.4% of the Company's net revenues
during the years ended December 31, 1999 and 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997, respectively.
In January 1997, the Company formed a wholly owned subsidiary, Interplay
OEM, Inc. ("Interplay OEM"), which had previously operated as a division of
the Company. Interplay OEM distributes the Company's interactive entertainment
software titles, as well as those of other software publishers, to computer
and peripheral device manufacturers for use in bundling arrangements. The
Company also derives net revenues from the licensing of certain of its
intellectual properties and certain of its products to third parties for
distribution in markets and through channels that are outside the Company's
primary focus. OEM, royalty and licensing net revenues accounted for 21.8%,
13.6%, 11.0% and 15.2% of the Company's total net revenues for the years ended
December 31, 1999 and 1998, the eight months ended December 31, 1997 and the
fiscal year ended April 30, 1997, respectively. OEM, royalty and licensing net
revenues generally are incremental net revenues and do not have significant
additional product development or sales and marketing costs, Cost of goods
sold related to PC and video game console net revenues represents the
manufacturing and related costs of interactive entertainment
16
<PAGE>
software products, including costs of media, manuals, duplication, packaging
materials, assembly, freight and royalties paid to developers, licensors and
hardware manufacturers. Cost of goods sold related to royalty-based net
revenues primarily represents third party licensing fees and royalties paid by
the Company. Typically, cost of goods sold as a percentage of net revenues for
video game console products and affiliate label products are higher than cost
of goods sold as a percentage of net revenues for PC based products due to the
relatively higher manufacturing and royalty costs associated with these
products. Also included in the cost of goods sold is the amortization of
prepaid royalty and license fees paid to third party software developers.
Prepaid royalties are expensed over a period of six months commencing with the
initial shipment of the title at a rate based upon the numbers of units
shipped. The Company evaluates the likelihood of future realization of prepaid
royalties quarterly, on a product-by-product basis, and charges cost of goods
sold for any amounts that it deems unlikely to be realized through future
product sales.
For the year ended December 31, 1999, the Company's net loss was $41.7
million. The Company's results from operations were adversely affected by
several factors. The Company was unable to ship two major titles and a third
major title was shipped later than expected which adversely affected sales
volume. The Company experienced higher product returns and markdown allowances
than expected during the year ended December 31, 1999 due to certain title
releases that did not gain broad market acceptance. In addition, the Company
expensed a $6.9 million provision for bad debt and $5.3 million for asset
valuation, severance charges and provision to cover certain minimum operating
charges payable to Virgin associated with the restructured operations of the
Company. The Company has taken certain actions with the objective of improving
its operating results in the future, including the reduction of its sell-in
unit quantities to limit potential price protection and product return
exposure.
Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31. Accordingly, the discussion of financial results set forth
below compares the year ended December 31, 1999 to the comparable 1998 period,
the year ended December 31, 1998 to the previous year ended April 30, 1997 and
compares the eight months ending December 31, 1997 to the comparable 1996
period.
The Company's operating results have fluctuated significantly in the past
and will likely fluctuate significantly in the future, both on a quarterly and
an annual basis. A number of factors may cause or contribute to such
fluctuations, and many of such factors are beyond the Company's control. There
can be no assurance that the Company will be profitable in any particular
period. It is likely that the Company's operating results in one or more
future periods will fail to meet or exceed the expectations of securities
analysts or investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality.
17
<PAGE>
Results of Operations
The following table sets forth certain consolidated statements of
operations data and segment and platform data for the periods indicated
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Year Ended Eight Months Ended
December 31, December 31, Year Ended
--------------- ------------------------ April 30,
1999 1998 1997 1996 1997
------ ------ --------- ------------ ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 59.9 56.7 52.2 70.9 75.0
------ ------ --------- --------- -----
Gross margin............ 40.1 43.3 47.8 29.1 25.0
Operating expenses:
Marketing and sales... 31.8 31.1 24.0 31.3 29.6
General and
administrative....... 15.0 10.1 10.5 17.3 11.3
Product development... 20.2 19.3 16.6 24.8 25.7
Other................. 5.2 -- -- -- --
------ ------ --------- --------- -----
Total operating
expenses........... 72.2 60.5 51.1 73.4 66.6
------ ------ --------- --------- -----
Operating income
(loss)................. (32.1) (17.2) (3.3) (44.3) (41.6)
Other income (expense).. (3.4) (3.9) (2.6) (2.2) (1.9)
------ ------ --------- --------- -----
Loss before income
taxes.................. (35.5) (21.1) (5.9) (46.5) (43.5)
Provision (benefit) for
income taxes........... 5.3 1.1 -- (11.8) (10.9)
------ ------ --------- --------- -----
Net loss................ (40.8)% (22.2)% (5.9)% (34.7)% (32.6)%
====== ====== ========= ========= =====
Selected Operating Data:
Net revenues by segment:
North America......... 48.5% 58.2% 60.3% 55.1% 46.4%
International......... 29.7 28.2 28.7 27.7 38.4
OEM, royalty and
licensing............ 21.8 13.6 11.0 17.2 15.2
------ ------ --------- --------- -----
100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ========= ========= =====
Net revenues by
platform:
Personal computer..... 64.1% 53.1% 49.5% 50.9% 54.3%
Video game console.... 14.1 33.3 39.5 31.9 30.5
OEM, royalty and
licensing............ 21.8 13.6 11.0 17.2 15.2
------ ------ --------- --------- -----
100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ========= ========= =====
</TABLE>
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
North American, International and OEM, Royalty and Licensing Net Revenues
Net revenues for the year ended December 31, 1999 decreased compared to the
same period in 1998. The decrease in North American net revenues for the year
ended December 31, 1999 was primarily due to less major title releases across
multiple platforms and resulting decreases in unit sales volume in the 1999
period, in addition the Company experienced a high level of product returns
and markdowns due to certain titles that did not gain broad market acceptance.
The decrease in international net revenues was due primarily to decreased net
revenues in Europe due to less major title releases across multiple platforms
and resulting decreases in unit sales volume in the 1999 period. OEM, royalty
and licensing net revenues increased in the year ended December 31, 1999
compared to the same period in 1998 due to increased net revenues in the OEM
business and increased net revenues in licensing. The Company expects that
OEM, royalty and licensing net revenues in 2000 will be generally consistent
with 1999.
18
<PAGE>
Platform Net Revenues
PC net revenues remained relatively even in the year ended December 31,
1999 compared to the same period in 1998 due to the continued sales of
Baldur's Gate and new major title releases such as Baldur's Gate: Tales of the
Sword Coast, Descent 3, Freespace 2, Kingpin, Starfleet Command and Torment
offset by a lower number of titles released overall. The Company expects its
PC net revenues to increase in 2000. Video game console net revenues decreased
in the year ended December 31, 1999 compared to the same period in 1998 due to
fewer major title releases. Major console title releases in the 1999 period
included Baseball 2000 (PlayStation), Caesar's Palace II (Game Boy Color) and
Incoming (Dreamcast). Even though video game console sales are not expected to
grow in 2000 for this segment of the industry, the Company expects its video
game console net revenues to increase in 2000 as a result of the added
penetration into this segment and the expected release of more titles.
Cost of Goods Sold; Gross Margin
Cost of goods sold decreased in the year ended December 31, 1999 compared
to the same period in 1998 due to lower net revenues and a higher percentage
of PC titles as compared to video game console titles, offset by write-offs of
prepaid royalties relating to titles which had been canceled due to the
Company discontinuing its licensed sports product line. The Company expects
its cost of goods sold to increase in 2000 due to its expected higher net
revenues base. The decrease in gross margin was primarily due to a high level
of product returns and markdowns due to certain titles that did not gain broad
market acceptance. The Company expects its gross margin to increase in 2000
due to a significantly improved inventory in channel position and continued
concentration on a sell-through product distribution strategy to improve
inventory management and reduce returns and allowances.
Marketing and Sales
Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services, monthly overhead and distribution fees payable to Virgin and
other related operating expenses. Marketing and sales expenses decreased in
the year ended December 31, 1999 compared to the same period in 1998. The
decrease is primarily attributable to decreased advertising, specifically
television advertising, and other marketing costs associated with fewer major
titles released during the 1999 period. In addition, the Company reduced
personnel and commission expense in connection with the restructuring of
European operations, including the distribution agreement entered into in
February 1999 between the Company and Virgin. The Company expects its
marketing and sales expenses to continue to decrease in 2000.
General and Administrative
General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses
increased in the year ended December 31, 1999 compared to the same period in
1998. The increase is primarily attributable to a provision for bad debt
expense of $6.9 million in 1999 in response to, among other things, the
deteriorating financial condition of certain customers, which placed serious
doubts on their ability and intent to pay. General and administrative expenses
other than bad debt expense decreased in the 1999 period. This decrease is
primarily due to the reorganization of the Company's European operations and
successful efforts to reduce North American operating expenses. The Company
expects its general and administrative expenses to decrease in 2000.
Product Development
Product development expenses, which primarily consist of personnel and
support costs, are charged to operations in the period incurred. Product
development expenses decreased in the year ended December 31,
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1999 compared to the same period in 1998. The decrease is primarily due to
cost efficiencies achieved as a result of the reorganization of the
development process. Because of product development efforts in anticipation of
new video game console platforms, the Company expects its product development
expenses to increase in 2000.
Other Operating Expense
Other operating expenses are primarily non-recurring or unusual expenses
associated with the operations of the Company in 1999. Other operating
expenses of $5.3 million for the year ended December 31,1999 included $2.4
million for restructuring, asset valuations and severance charges. These
charges were incurred primarily in connection with restructuring the European
operations, including establishing the new distribution arrangements in Europe
whereby Virgin replaced the third party distribution arrangements and the
Company recorded provisions for the costs of reductions in work force and
facilities move, including asset valuation, severance expenses and estimated
facility lease termination charges. In addition, the Company recorded a
$2.9 million provision to cover certain minimum operating charges payable to
Virgin. The Company does not expect to incur any further restructuring or
asset valuation charges in connection with its distribution arrangement in
Europe.
Other Income (Expense)
Other income (expense) primarily consists of interest expense on the
Company's line of credit. Such other expense decreased in the year ended
December 31, 1999 compared to the same period in 1998. This decrease was
primarily due to decreased interest expense due to decreased borrowings under
the Company's line of credit and the repayment of the Subordinated Secured
Promissory Notes in June 1998. These borrowings were repaid with the proceeds
of the Company's IPO in June 1998 and the equity investments by Titus
Interactive, S.A. ("Titus") in 1999.
Provision (Benefit) for Income Taxes
The Company recorded a tax provision of $5.4 million in the year ended
December 31, 1999, as compared with a tax provision of $1.4 million in the
comparable 1998 period. The tax provision recorded during both periods
represents an increase of the valuation allowance on the deferred tax asset
due to the uncertainty of realization of the deferred tax asset in future
periods. The Company has a deferred tax asset of approximately $35 million
that has been fully reserved at December 31, 1999. This tax asset would reduce
future provisions for income taxes and related tax liabilities when realized.
Year Ended December 31, 1998 Compared to the Year Ended April 30, 1997
North American, International and OEM, Royalty and Licensing Net Revenues
Net revenues for the twelve months ended December 31, 1998 increased
compared to the twelve months ended April 30, 1997. The increase in North
American net revenues for the twelve months ended December 31, 1998 was
primarily due to increased title releases across multiple platforms and
resulting increases in unit sales volume in the 1998 period. A high level of
product returns and markdowns due to certain title releases that did not gain
broad market acceptance adversely affected both periods. The increase in
international net revenues was primarily attributable to increased net
revenues in Europe due to an increase in the number of titles that achieved
broad market acceptance. OEM, royalty and licensing net revenues increased in
the twelve months ended December 31, 1998 compared to the twelve months ended
April 30, 1997.
Platform Net Revenues
PC net revenues increased in the twelve months ended December 31, 1998
compared to the twelve months ended April 30, 1997 due to new major title
releases such as Baldur's Gate, Die By The Sword, Descent: Freespace The Great
War, Fallout 2, VR Sports Powerboat Racing, Redneck Deer Huntin' and Redneck
Rides
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Again. Video game console net revenues also increased in the twelve months
ended December 31, 1998 compared to the twelve months ended April 30, 1997 due
to new major PlayStation title releases in the 1998 period such as Caesars
Palace II, Crime Killer, Heart of Darkness, VR Sports Powerboat Racing, VR
Baseball '99 and Wild 9.
Cost of Goods Sold; Gross Margin
Cost of goods sold increased in the twelve months ended December 31, 1998
compared to the twelve months ended April 30, 1997 mainly due to a higher net
revenues base. Both periods were adversely impacted by the effect of write-
offs of prepaid royalties relating to titles or platform versions of titles
that had been canceled or that were expected to achieve lower unit sales than
were originally anticipated. The increase in gross margin in the 1998 period
over the 1997 period was primarily due to lower write-offs of prepaid
royalties related to titles or platform versions of titles that had been
canceled or that were expected to achieve lower unit sales than were
originally anticipated. A high level of product returns and markdowns due to
certain title releases that did not gain broad market acceptance adversely
affected both periods.
Marketing and Sales
Marketing and sales expenses increased in the twelve months ended December
31, 1998 compared to the twelve months ended April 30, 1997. The increase was
primarily due to increases in advertising and other marketing costs associated
with the increase in major titles launched and products sold, including
increased cooperative advertising and marketing development funds, increased
advertising and commissions on product releases in the U.S. and the European
markets during the 1998 period as well as television advertising for Wild 9
and Heart of Darkness, two titles launched during the 1998 period.
General and Administrative
General and administrative expenses increased in the twelve months ended
December 31, 1998 compared to the twelve months ended April 30, 1997. The
increase in the twelve months ended December 31, 1998 was primarily
attributable to higher overhead costs including a $0.8 million provision for
uncollectable amounts owed to the Company by Engage Games Online, which is
majority-owned by the company's Chairman and Chief Executive Officer.
Product Development
Product development expenses increased in the twelve months ended December
31, 1998 compared to the twelve months ended April 30, 1997. The increase was
primarily due to an increase in the number of products under development,
offset in part by cost efficiencies achieved as a result of the reorganization
of the development process late in 1998.
Other Income (Expense)
Other expense increased in the twelve months ended December 31, 1998
compared to the twelve months ended April 30, 1997. The increase in the twelve
months ended December 31, 1998 was primarily due to increased borrowings under
the Company's line of credit to support increased working capital requirements
prior to the completion of the IPO in June 1998 and interest on the
Subordinated Secured Promissory Notes. The Company used the proceeds of the
IPO to repay those Subordinated Secured Promissory Notes that were not
converted into Common Stock and to pay down the bank line of credit, both of
which resulted in lower interest expense in the second half of 1998.
Provision (Benefit) for Income Taxes
The Company recorded a tax provision of $1.4 million in the twelve months
ended December 31, 1998, as compared with a tax benefit of $9.1 million in the
twelve months ended April 30, 1997. The $1.4 million tax
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provision for 1998 consists primarily of an increase in the deferred tax
valuation of $2.0 million, offset by a foreign tax benefit of $0.6 million.
Eight Months Ended December 31, 1997 Compared to the Eight Months Ended
December 31, 1996
North American, International and OEM, Royalty and Licensing Net Revenues
Net revenues for the eight months ended December 31, 1997 increased
compared to the same period in 1996 period. The increase in North American and
international net revenues for the eight months ended December 31, 1997 was
primarily due to increased title releases across multiple platforms in 1997.
In addition, the Company experienced a higher than expected level of product
returns and markdowns due to certain titles that did not gain broad market
acceptance. OEM, royalty and licensing net revenues decreased in the 1997
period compared to the 1996 period.
Platform Net Revenues
PC net revenues increased in the eight months ended December 31, 1997
compared to the same period in 1996 due to new major title releases such as
Fallout and Star Trek: Starfleet Academy. Video game console net revenues
increased in the eight months ended December 31, 1997 compared to the same
period in 1996 due to new major title releases such as Clay Fighter 63 1/3
(Nintendo 64).
Cost of Goods Sold; Gross Margin
Cost of goods sold increased in the eight months ended December 31, 1997
compared to the same period in 1996. Gross margin as a percentage of net
revenue increased in the 1997 period compared to the 1996 period. The increase
in gross margin was primarily due to reductions in sales by the Company on
affiliate label titles published by third parties, reductions in OEM royalty
expenses as a percentage of net revenues, and changes in the product mix of
externally developed products released during the periods, offset in part by
greater manufacturing costs attributable to an increased number of video game
console products released during the 1997 period. The 1996 period also
included the effects of additional write-offs of prepaid royalties relating to
titles or platform versions of titles which had been canceled or which were
expected to achieve lower unit sales than were originally forecast.
Marketing and Sales
Marketing and sales expenses increased in the eight months ended December
31, 1997 compared to the same period in 1996. The increase in absolute dollars
was primarily due to advertising and other marketing costs associated with the
increase in products launched during the period. The decrease as a percentage
of net revenues was primarily attributable to operating efficiencies gained as
a result of an increased net revenues base.
General and Administrative
General and administrative expenses increased in the eight months ended
December 31, 1997 compared to the same period in 1996. The increase in
absolute dollars was primarily attributable to increased personnel and
operations and facilities costs both in North America and Europe in support of
increased net revenues. The decrease as a percentage of net revenues was
primarily attributable to operating efficiencies gained as a result of an
increased net revenues base.
Product Development
Product development expenses increased in the eight months ended December
31, 1997 compared to the same period in 1996. The increase in absolute dollars
was primarily due to the addition of personnel in the Company's product
development group, an increase in the number of products under development and
the initiation of European and OEM product development in the 1997 period. The
decrease as a percentage of net revenues primarily reflected operating
efficiencies gained as a result of increased net revenues.
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Other Income (Expense)
Other expense increased in the eight months ended December 31, 1997
compared to the same period in 1996. This increase was primarily due to
increased borrowings under the Company's line of credit to support increased
working capital requirements in the 1997 period and interest on the
Subordinated Secured Promissory Notes, which were issued from October 1996
through February 1997 and were outstanding throughout the 1997 period.
Provision (Benefit) for Income Taxes
The Company recorded no tax provision in the eight months ended December
31, 1997, compared to a tax benefit of $5.9 million in the comparable 1996
period. No tax benefit was recorded in the 1997 period due to the uncertainty
of realization in future periods.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through the use of
lines of credit and equipment leases, through cash generated by the private
sale of securities, from the proceeds from the initial public offering and
from operations.
As of December 31, 1999 the Company's principal sources of liquidity
included cash of $399,000 and the Company's line of credit bearing interest at
the London Interbank Offered Rate plus 4.87 percent (11.35 percent as of
December 31, 1999). Under the terms of the line of credit, the Company has
maximum availability for borrowings and letters of credit up to $25 million
based in part upon qualifying receivables and inventory. Within the overall
credit limit, the line of credit also provides that the Company may borrow up
to $7 million in excess of its borrowing base. Under the line of credit the
Company is required to maintain a cash collateral deposit of $2.5 million and
a $5 million personal guarantee by the Company's Chairman and Chief Executive
Officer ("Chairman"). As of December 31, 1999, the Company's balance on the
line of credit was $19.2 million with no stand by letters of credit
outstanding. The amount available for borrowing under the line of credit was
$1.9 million as of December 31, 1999. Subsequent to December 31, 1999, The
Company extended its line of credit through April 2001 generally under the
same terms, except that Titus provided a $20 million corporate guarantee and
the financial institution agreed to release to the Company the $2.5 million of
cash held as collateral. In connection with the $20 million corporate
guarantee provided by Titus on the extension of the Company's line of credit,
if the Company defaults in accordance with the line of credit agreement, and
Titus is forced to pay on its corporate guarantee, Titus may have the right to
receive additional shares of the Company's Common Stock upon conversion of
their Preferred Stock. In addition, the Company secured a $5 million
supplemental line of credit with Titus through April 2001.
Based upon certain assumptions, including without limitation, the Company's
ability to achieve anticipated operating results, the Company believes that it
will be able to renew its line of credit or obtain alternate financing on
reasonable terms. However, there can be no assurance that the assumptions
relied on by the Company will prove correct or that the Company will be able
to renew or replace its line of credit or obtain alternate financing on
reasonable terms, if at all.
The Company's primary capital needs have historically been to fund working
capital requirements necessitated by its net losses, its sales growth, the
development and introduction of products and related technologies and the
acquisition or lease of equipment and other assets used in the product
development process. The Company's operating activities used cash of $26.4
million during the year ended December 31, 1999, primarily attributable to a
decrease in accounts payable and accrued liabilities and the net loss for the
year, offset in part by a decrease in trade receivables, the write off of the
deferred tax asset and depreciation and amortization. Cash provided by
financing activities of $27.8 million for the year ended December 31, 1999
consisted primarily of the proceeds from the equity investments by Titus,
offset partially by the paydown of borrowings on the Company's line of credit.
Cash used in investing activities of $1.6 million for the year ended December
31, 1999 consisted of capital expenditures, primarily for office and computer
equipment used in Company operations. The Company does not currently have any
material commitments with respect to any capital expenditures.
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In February 1999, the Company acquired a 43.9% membership interest in VIE,
the parent entity of Virgin. Under the terms of an International Distribution
Agreement entered into between the Company and Virgin in connection with the
acquisition of that interest, the Company must pay overhead fees and expenses,
subject to reduction in certain events, and distribution fees for the
marketing and distribution of the Company's products based on net sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Distribution Agreement".
To reduce the Company's working capital needs, the Company has implemented
various measures including a reduction of personnel, a reduction of fixed
overhead commitments and has scaled back certain product development and
marketing programs. In addition, the Company believes that its International
Distribution Agreement with Virgin will reduce its international costs and
expenses in future periods. The Company is pursuing various alternatives,
including further expense reductions, in an effort to continue to reduce
operating expenses as much as possible without an adverse impact on its
ability to generate successful future business activities. There can be no
assurance that the Company will be able to undertake such measures, or that
such measures would not materially and adversely affect the Company's ability
to publish commercially viable titles, or that such measures would be
sufficient to generate operating profits. In addition, the Company's long term
liquidity will be materially dependent on its ability to develop and market
successful titles for the hardware platforms that dominate the interactive
entertainment market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Liquidity; Future Capital Requirements".
To provide working capital to support the Company's future operations, the
Company took several actions during 1999, and in early 2000, the Company
extended the expiration of its line of credit to April 2001, as discussed
above. In addition, the Company completed a transaction with Titus under a
Stock Purchase Agreement dated April 14, 2000 and issued 719,424 shares of
newly designated Series A Preferred Stock ("Preferred Stock") which has
preferences under certain events, as defined. The Preferred Stock is
convertible by Titus, redeemable by the Company, and accrues a 6 percent
dividend per annum. The Company may redeem the Preferred Stock at any time at
the original issue price. Titus may convert the Preferred Stock shares into
shares of Common Stock at any time after May 2001. The conversion rate is the
lesser of $2.78 or 85 percent of the market price per share at the time of
conversion, as defined. The Preferred Stock is entitled to the same voting
rights as if it had been converted to Common Stock. Conversion rights are
limited to 5,504,507 shares of Common Stock unless the Company's stockholders
have approved the issuance of the Preferred Stock at which time the Preferred
Stock shares would be convertible to 7,194,240 shares of Common Stock at
closing. In the event that the Company defaults on its line of credit and
Titus is forced to pay on its corporate guarantee of such line, the Series A
Preferred Stock conversion rights will be adjusted so as to make such shares
convertible into up to approximately 42.8 million shares of Common Stock. In
the event that the Company is able to repay to Titus the amounts paid under
the guarantee within six months, the conversion rate shall be returned to the
level at which it existed prior to such adjustment. In the event that the
Company is unable to repay such amounts within six months, the conversion rate
shall be readjusted at the end of such six month period based on the average
closing price of the Company's Common Stock for the last 20 trading days
during such period. If such average price is $10.00 per share, the shares
would be convertible into 7,194,240 shares of Common Stock, and, if less than
$10.00, the shares would be convertible into approximately an additional
5,000,000 shares for each dollar the average price is below $10.00, up to a
maximum of approximately 42.8 million shares. In connection with this
transaction, Titus received a warrant for 350,000 shares of Common Stock at
$3.79 per share exercisable at any time, and a warrant for 50,000 shares of
the Company's Common Stock at $3.79 per share which would only be exercisable
by Titus if the Company does not meet certain financial operating performance
targets for the year ending December 31, 2000, as defined. Both warrants
expire in April 2010. The Common Stock shares issuable upon conversion of the
Preferred Stock or the exercise of the warrants are subject to certain
registration rights. The Company also obtained a $5 million supplemental
secured line of credit with Titus through April 2001. Amounts drawn on this
line will be subject to interest of up to 12 percent per annum payable
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quarterly. In connection with this line of credit, Titus received a warrant
for up to 100,000 shares of the Company's Common Stock at $3.79 per share that
will expire in April 2010. The warrant will become exercisable if and to the
extent that the Company draws on the line of credit, as defined.
The Company believes that funds available under its line of credit, amounts
to be received from equity financing, amounts to be received under various
product license and distribution agreements and anticipated funds from
operations will be sufficient to satisfy the Company's projected working
capital and capital expenditure needs in the normal course of business at
least through the expiration of its line of credit in April 2001. Based upon
certain assumptions, including without limitation, the Company's ability to
achieve anticipated operating results, the Company believes that it will be
able to renew its line of credit or obtain alternate financing on reasonable
terms. However, there can be no assurance that the assumptions relied on by
the Company will prove correct or that the Company will be able to renew or
replace its line of credit on satisfactory terms, if at all. Further, there
can be no assurance that the Company will not be required to raise additional
working capital through debt or equity financing during such period. If the
Company is required to raise additional working capital, there can be no
assurance that the Company will be able to raise such additional working
capital on acceptable terms, if at all. In the event the Company is unable to
raise additional working capital, further measures would be necessary
including, without limitation, the sale or consolidation of certain
operations, the delay, cancellation or scale back of product development and
marketing programs and other actions. No assurance can be given that such
measures would not materially adversely affect the Company's ability to
develop and publish commercially viable titles, or that such measures would be
sufficient to generate operating profits in 2000 and beyond. Certain of such
measures may require third party consents or approvals, including the
Company's financial institution, and there can be no such assurance that such
consents or approvals can be obtained. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Liquidity; Future Capital Requirements".
Year 2000 Issue
To date, no significant problems related to the Year 2000 issue have been
identified in the Company's internal systems or with its vendors, suppliers,
service providers or customers that would materially impact the Company's
business. Also, no significant Year 2000 issues have been identified with the
internally developed or third party products that the Company distributes.
Although the Company does not expect any significant future Year 2000
related failures or malfunctions, the Company will continue to monitor its
internal systems and work closely with its suppliers, service providers and
customers to seek to avoid any material interruptions in its business.
The Company has spent approximately $300,000 for the cost of upgrading,
replacing, testing and implementing its Year 2000 compliance plan. No further
significant expenditures are currently expected.
FACTORS AFFECTING FUTURE PERFORMANCE
Future operating results of the Company depend upon many factors and are
subject to various risks and uncertainties. Some of the risks and
uncertainties which may cause the Company's operating results to vary from
anticipated results or which may materially and adversely affect its operating
results are as follows:
Liquidity; Future Capital Requirements
We used net cash in operations of $26.4 and 18.8 million during the years
ended December 31, 1999 and 1998, respectively. We cannot assure you that we
will ever generate positive cash flow from operations. Our ability to fund our
capital requirements out of our available cash, line of credit and cash
generated from our operations depends on a number of factors. Some of these
factors include the progress of our product development programs, the rate of
growth of our business, and our products' commercial success. We may have to
seek additional funds through debt or equity financings, product licensing or
distribution transactions or other
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sources of financing in order to provide ourselves with enough working
capital. If we issue additional equity securities, our existing stockholders
could suffer a large amount of dilution in their ownership. In the event we
have to raise additional working capital from other sources, we cannot assure
you that we will be able to raise additional working capital on acceptable
terms, if at all. In the event we cannot raise additional working capital, we
would have to take additional actions to continue to reduce our costs,
including selling or consolidating certain operations, delaying, canceling or
scaling back product development and marketing programs and other actions.
These measures could materially and adversely affect our ability to publish
successful titles, and these measures may not be enough to generate operating
profits. We might have to get the approval of other parties, including our
financial lender, for some of these measures, and we cannot assure you that we
would be able to obtain those approvals.
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality
Our operating results have fluctuated a great deal in the past and will
probably continue to fluctuate significantly in the future, both on a
quarterly and an annual basis. Many factors may cause or contribute to these
fluctuations, and many of these factors are beyond our control. Some of these
factors include the following:
. delays in shipping our products
. demand for our products
. demand for our competitors' products
. the size and rate of growth of the market for interactive entertainment
software
. changes in computing platforms
. the number of new products and product enhancements released by us and
our competitors
. changes in our product mix
. the number of our products which are returned
. the timing of orders placed by our distributors and dealers
. delays in shipping our products
. the timing of our development and marketing expenditures
. price competition
. the level of our international and OEM, royalty and licensing net
revenues.
Many factors make it difficult to accurately predict the quarter in which
we will ship our products. Some of these factors include:
. the uncertainties associated with the interactive entertainment software
development process
. long manufacturing lead times for Nintendo-compatible products
. possible production delays
. the approval process for products compatible with the Sony Computer
Entertainment, Nintendo and Sega video game consoles
. approvals required from other licensors.
Because of the limited number of products we introduce in any particular
quarter, a delay in the introduction of a product may materially and adversely
affect our operating results for that quarter, and may not be recaptured in
later quarters. A significant portion of our operating expenses is relatively
fixed, and planned expenditures are based largely on sales forecasts. If net
revenues do not meet our expectations in any given quarter, operating results
may be materially adversely affected. The interactive entertainment software
industry is highly seasonal,
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with the highest levels of consumer demand occurring during the year-end
holiday buying season, followed by demand during the first calendar quarter.
As a result, our net revenues, gross profits and operating income have
historically been highest during the fourth and the following first calendar
quarters, and have declined from those levels in the following second and
third calendar quarters.
Our failure or inability to introduce products on a timely basis to meet
these seasonal increases in demand may have a material adverse effect on our
business, operating results and financial condition.
We may over time become increasingly affected by the industry's seasonal
patterns. Although we seek to reduce the effect of such seasonal patterns on
our business by distributing our product release dates more evenly throughout
the year, we cannot assure you that these efforts will be successful. We
cannot assure you that we will be profitable in any particular period given
the uncertainties associated with software development, manufacturing,
distribution and the impact of the industry's seasonal patterns on our net
revenues.
As a result of the foregoing factors it is likely that our operating
results in one or more future periods will fail to meet or exceed the
expectations of securities analysts or investors. In that event, the trading
price of our Common Stock would likely be materially adversely affected.
Significant Recent Losses
We have experienced significant net losses in recent periods, including
losses of $41.7 million and $28.2 million for the years ended December 31,
1999 and 1998, respectively. These losses resulted largely from delays in the
completion of certain products, a higher than expected level of product
returns and markdowns on products released during the year, and the cost of
restructuring our operations, including international distribution
arrangements. These losses also resulted from lower than expected worldwide
sales of certain releases, as well as from operating expense levels that were
high relative to our revenue level. We may experience similar problems in
current or future periods and we may not be able to generate sufficient net
revenues or adequate working capital, or bring our costs into line with
revenues, so as to attain or sustain profitability in the future.
Dependence on New Product Introductions; Risk of Product Delays and Product
Defects
Our products typically have short life cycles, and we depend on the timely
introduction of successful new products to generate net revenues, to fund
operations and to replace declining net revenues from older products. These
new products include enhancements of or sequels to our existing products and
conversions of previously released products to additional platforms. If in the
future, for any reason, net revenues from new products fail to replace
declining net revenues from existing products, our business, operating results
and financial condition could be materially adversely affected. The timing and
success of new interactive entertainment software product releases remains
unpredictable due to the complexity of product development, including the
uncertainty associated with new technology. The development cycle of new
products is difficult to predict but typically ranges from 12 to 24 months
with six to 12 months for adapting a product to a different technology
platform. In the past, we have frequently experienced significant delays in
the introduction of new products, including certain products currently under
development. Because net revenues associated with the initial shipments of a
new product generally constitute a high percentage of the total net revenues
associated with a product, any delay in the introduction of, or the presence
of a defect in, one or more new products expected in a period could have a
material adverse effect on the ultimate success of these products and on our
business, operating results and financial condition. The cost of developing
and marketing new interactive entertainment software has increased in recent
years due to such factors as the increasing complexity and content of
interactive entertainment software, the increasing sophistication of hardware
technology and consumer tastes and the increasing costs of obtaining licenses
for intellectual properties. We expect this trend to continue. We cannot
assure you that our new products will be introduced on schedule, if at all, or
that, if introduced, these products will achieve significant market acceptance
or generate significant net revenues for us. In addition, software products as
complex as the ones we offer may contain undetected errors when first
introduced or when new versions are released. We cannot assure you that,
despite testing prior to release, errors will not be found in new products or
releases after shipment,
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resulting in loss of or delay in market acceptance. This loss or delay could
have a material adverse effect on our business, operating results and
financial condition.
Uncertainty of Market Acceptance; Dependence on Hit Titles
Consumer preferences for interactive entertainment software are always
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved continued market acceptance.
Instead, a limited number of releases have become "hits" and have accounted
for a substantial portion of revenues in our industry. Further, publishers
with a history of producing hit titles have enjoyed a significant marketing
advantage because of their heightened brand recognition and consumer loyalty.
We expect the importance of introducing hit titles to increase in the future.
We cannot assure you that our new products will achieve significant market
acceptance, or that we will be able to sustain this acceptance for a
significant length of time if we achieve it. We also cannot assure you that
product life cycles will be sufficient to permit us to recover product
development and other associated costs. Most of our products have a relatively
short life cycle and sell for a limited period of time after their initial
release, usually less than one year. We believe that these trends will
continue in our industry and that our future revenue will continue to be
dependent on the successful production of hit titles on a continuous basis.
Because we introduce a relatively limited number of new products in a given
period, the failure of one or more of these products to achieve market
acceptance could have a material adverse effect on our business, operating
results and financial condition. Further, if we do not achieve market
acceptance, we could be forced to accept substantial product returns or grant
significant markdown allowances to maintain our relationship with retailers
and our access to distribution channels. For example, we had significantly
higher than expected product returns and markdowns during the year ended
December 31, 1999 and we cannot assure you that higher than expected product
returns and markdowns will not continue in the future. In the event that we
are forced to accept significant product returns or grant significant markdown
allowances, our business, operating results and financial condition could be
materially adversely affected.
Control by Titus
Titus currently owns 12,817,255 shares, or approximately 43 percent, of our
outstanding Common Stock, 718,424 shares of our Series A Preferred Stock which
have certain voting rights and are convertible into at least 7,184,240 shares
of Common Stock at any time after May 2001 if not previously redeemed by the
Company, and warrants for up to 500,000 shares of our Common Stock. In
addition, if we default on our line of credit and Titus is obligated to pay on
the $20 corporate guarantee that they provided on the extension of our line of
credit through April 2001, the Series A Preferred Stock may become convertible
into up to 42.8 million shares of our Common Stock, which would constitute
over 75 percent of our Common Stock as of the date hereof. In connection with
Titus' investment, Herve Caen, Titus' president and chief executive officer,
serves as our president and as a member of our Board of Directors, and Herve's
brother Eric Caen, also serves on our Board of Directors. As a consequence,
Titus holds significant voting power with respect to the election of our Board
of Directors and the approval of significant corporate actions, and Herve and
Eric Caen have substantial authority over our operations. As the Company's
capital structure currently stands, in the event that the Stockholder
Agreement pursuant to which our Board of Directors is currently nominated
terminates, Titus would be able to elect 3 of 7 members of the Board of
Directors. In the event Titus acquires enough additional shares of our common
stock so that it owns more than 50% of our total outstanding common stock,
Titus would be able to elect a majority of our Board of Directors, set our
dividend policy and otherwise exercise substantial control over our
management. This control could prevent or hinder a sale of the Company on
terms that are not acceptable to Titus.
Continued Listing on the NASDAQ National Market
Our Common Stock is currently quoted on the NASDAQ National Market under
the symbol "IPLY." For continued inclusion on the NASDAQ National Market, a
company must meet certain tests, including a minimum bid price of $1.00 and
net tangible assets of at least $4 million. In the event that we fail to
satisfy the listing standards on a continuous basis, our Common Stock may be
removed from listing on the NASDAQ National
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Market. If our Common Stock were delisted from the NASDAQ National Market,
trading of our Common Stock, if any, would be conducted on the NASDAQ Small
Cap Market, in the over-the-counter market on the so-called "pink sheets" or,
if available, the NASD's "Electronic Bulletin Board." In any of those cases,
investors could find it more difficult to dispose of, or to obtain accurate
quotations as to the value of, our Common Stock. The trading price per share
of our Common Stock would most likely be reduced as a result.
Distribution Agreement
In connection with our acquisition of a 43.9 percent membership interest in
Virgin's parent entity in February 1999, we signed an International
Distribution Agreement with Virgin. Under this Agreement, we appointed Virgin
as our exclusive distributor for substantially all of our products in Europe,
the CIS, Africa and the Middle East, subject to certain reserved rights, for a
seven-year period. Because of the exclusive nature of the Agreement, if Virgin
were to experience problems with its business, or were to fail to perform as
expected, our business, operating results and financial condition could be
materially and adversely affected. In connection with this Agreement, Virgin
hired our European sales and marketing personnel, and we pay Virgin a
distribution fee for marketing and distributing our products, as well as
certain direct costs and expenses, and a fixed overhead fee that is subject to
reduction in certain events. In the year ended December 31, 1999, we recorded
a $2.9 million provision to cover certain minimum operating charges in 1999.
In addition, due to the fixed nature of the overhead fee, we will not be able
to reduce our European sales and marketing expenses in response to downturns
in our sales in Europe, which could have a material adverse effect on our
business, operating results and financial condition.
Dependence on Third Party Software Developers
We rely on third party interactive entertainment software developers for
the development of a significant number of our interactive entertainment
software products. As there continues to be high demand for reputable and
competent third party developers, we cannot assure you that third party
software developers that have developed products for us in the past will
continue to be available to develop products for us in the future. Many third
party software developers have limited financial resources, which could expose
us to the risk that such developers may go out of business prior to completing
a project. In addition, due to our limited control over third party software
developers, we cannot assure you that such developers will complete products
for us on a timely basis or within acceptable quality standards, if at all.
Due to increased competition for skilled third party software developers, we
have had to agree to make advance payments on royalties and guaranteed minimum
royalty payments to intellectual property licensors and game developers, and
we expect to continue to enter into these kinds of arrangements. If the
products subject to these arrangements do not have sufficient sales volumes to
recover these royalty advances and guaranteed payments, we would have to
write-off unrecovered portions of these payments, which could have a material
adverse effect on our business, operating results and financial condition.
Further, we cannot assure you that third party developers will not demand
renegotiation of their arrangements with the Company.
Rapidly Changing Technology; Platform Risks
The interactive entertainment software industry is subject to rapid
technological change. New technologies, including operating systems such as
Microsoft Windows 98 and 2000, technologies that support multi-player games,
new media formats such as on-line delivery and digital video disks ("DVDs")
and as yet unreleased video game platforms could render our current products
or products in development obsolete or unmarketable. We must continually
anticipate and assess the emergence of, and market acceptance of, new
interactive entertainment software platforms well in advance of the time the
platform is introduced to consumers. Because product development cycles are
difficult to predict, we must make substantial product development and other
investments in a particular platform well in advance of introduction of the
platform. If the platforms for which we develop software are not released on a
timely basis or do not attain significant market penetration, our business,
operating results and financial condition could be materially adversely
affected. Alternatively, if we fail to develop products for a platform that
does achieve significant market penetration, then our business, operating
results and financial condition could also be materially adversely affected.
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The emergence of new interactive entertainment software platforms and
technologies and the increased popularity of new products and technologies may
materially and adversely affect the demand for products based on older
technologies. The broad range of competing and incompatible emerging
technologies may lead consumers to postpone buying decisions with respect to
products until one or more emerging technologies gain widespread acceptance.
This postponement could have a material adverse effect on our business,
operating results and financial condition. We are currently actively
developing products for the Microsoft Windows 98 and 2000, Sony PlayStation
and PlayStation 2, and Sega Dreamcast platforms. We are also planning to
develop product for new platforms expected to be introducted in 2001 by
Microsoft and Nintendo. Our success will depend in part on our ability to
anticipate technological changes and to adapt our products to emerging game
platforms. We cannot assure you that we will be able to anticipate future
technological changes, to obtain licenses to develop products for those
platforms on favorable terms or to create software for those new platforms.
Any failure to do so could have a material adverse effect on our business,
operating results and financial condition.
Industry Competition; Competition for Shelf Space
The interactive entertainment software industry is intensely competitive
and new interactive entertainment software programs and software platforms are
regularly introduced. Our competitors vary in size from small companies to
very large corporations with significantly greater financial, marketing and
product development resources than ours do. Due to these greater resources,
certain of our competitors can undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to licensors of
desirable motion picture, television, sports and character properties and pay
more to third party software developers than we can. We believe that the main
competitive factors in the interactive entertainment software industry
include:
. product features
. brand name recognition
. access to distribution channels
. quality
. ease of use, price, marketing support and quality of customer service.
We compete primarily with other publishers of PC and video game console
interactive entertainment software. Significant competitors include:
. Electronic Arts Inc.
. GT Interactive Software Corp.
. Mattel, Inc.
. Activision, Inc.
. Infogrames Entertainment
. Microsoft Corporation
. LucasArts Entertainment Company
. Midway Games Inc.
. Acclaim Entertainment, Inc.
. Havas Interactive
. Hasbro, Inc.
. The 3DO Company
. Take Two Interactive Software, Inc.
. Eidos PLC
. THQ Inc.
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In addition, integrated video game console hardware/software companies such
as Sony Computer Entertainment, Nintendo and Sega compete directly with us in
the development of software titles for their respective platforms. Large
diversified entertainment companies, such as The Walt Disney Company, many of
which own substantial libraries of available content and have substantially
greater financial resources, may decide to compete directly with us or to
enter into exclusive relationships with our competitors. We also believe that
the overall growth in the use of the Internet and on-line services by
consumers may pose a competitive threat if customers and potential customers
spend less of their available home PC time using interactive entertainment
software and more using the Internet and on-line services.
Retailers of our products typically have a limited amount of shelf space
and promotional resources, and there is intense competition among consumer
software producers, and in particular interactive entertainment software
products, for high quality retail shelf space and promotional support from
retailers. To the extent that the number of consumer software products and
computer platforms increases, competition for shelf space may intensify and
may require us to increase our marketing expenditures. Due to increased
competition for limited shelf space, retailers and distributors are in an
increasingly better position to negotiate favorable terms of sale, including
price discounts, price protection, marketing and display fees and product
return policies. Our products constitute a relatively small percentage of any
retailer's sale volume, and we cannot assure you that retailers will continue
to purchase our products or to provide our products with adequate levels of
shelf space and promotional support. A prolonged failure in this regard may
have a material adverse effect on our business, operating results and
financial condition.
Dependence on Distribution Channels; Risk of Customer Business Failures;
Product Returns
We currently sell our products directly through our own sales force to mass
merchants, warehouse club stores, large computer and software specialty chains
through catalogs in the U.S. and Canada, as well as to certain distributors.
Outside North America, we generally sell products to third party distributors.
Our sales are made primarily on a purchase order basis, without long-term
agreements. The loss of, or significant reduction in sales to, any of our
principal retail customers or distributors could materially adversely affect
our business, operating results and financial condition.
The distribution channels through which publishers sell consumer software
products evolve continuously through a variety of means, including
consolidation, financial difficulties of certain distributors and retailers,
and the emergence of new distributors and new retailers such as warehouse
chains, mass merchants and computer superstores. As more consumers own PCs,
the distribution channels for interactive entertainment software will likely
continue to change. Mass merchants have become the most important distribution
channels for retail sales of interactive entertainment software. A number of
these mass merchants, including Wal-Mart, have entered into exclusive buying
arrangements with other software developers or distributors, which
arrangements prevent us from selling certain of our products directly to that
mass merchant. If the number of mass merchants entering into exclusive buying
arrangements with our competitors were to increase, our ability to sell to
such merchants would be restricted to selling through the exclusive
distributor. Because sales to distributors typically have a lower gross profit
than sales to retailers, this would have the effect of lowering our gross
profit. This trend could increase the material adverse impact on our business,
operating results and financial condition. In addition, emerging methods of
distribution, such as the Internet and on-line services, may become more
important in the future, and it will be important for us to maintain access to
these channels of distribution. We cannot assure you that we will maintain
access or that our access will allow us to maintain our historical sales
volume levels.
Distributors and retailers in the computer industry have from time to time
experienced significant fluctuations in their businesses, and a number have
failed. The insolvency or business failure of any significant distributor or
retailer of our products could have a material adverse effect on our business,
operating results and financial condition. We typically make sales to
distributors and retailers on unsecured credit, with terms that vary depending
upon the customer and the nature of the product. Although we have insolvency
risk insurance to protect against our customers' bankruptcy, insolvency or
liquidation, this insurance contains a significant deductible and a co-payment
obligation, and the policy does not cover all instances of non-payment. In
addition,
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while we maintain a reserve for uncollectible receivables, the actual reserve
may not be sufficient in every circumstance. As a result, a payment default by
a significant customer could have a material adverse effect on our business,
operating results and financial condition.
We are exposed to the risk of product returns and markdown allowances with
respect to our distributors and retailers. We allow distributors and retailers
to return defective, shelf-worn and damaged products in accordance with
negotiated terms, and also offer a 90-day limited warranty to our end users
that our products will be free from manufacturing defects. In addition, we
provide markdown allowances to our customers to manage our customers'
inventory levels in the distribution channel. Although we maintain a reserve
for returns and markdown allowances, and although our agreements with certain
of our customers place certain limits on product returns and markdown
allowances, we could be forced to accept substantial product returns and
provide markdown allowances to maintain our relationships with retailers and
our access to distribution channels. Product return and markdown allowances
that exceed our reserves could have a material adverse effect on our business,
operating results and financial condition. In this regard, our results of
operations for the year ended December 31, 1999 were adversely affected by a
higher than expected level of product returns and markdown allowances, which
reduced our net revenues. We may continue to experience such high levels of
product returns and markdown allowances in future periods, which could have a
material adverse effect on our business, operating results and financial
condition.
Shares Eligible for Future Sale
In 1999, we entered into two Stock Purchase Agreements with Titus, pursuant
to which Titus purchased 10,795,455 shares of our Common Stock from us for an
aggregate purchase price of $35 million. As part of the agreements, Titus'
chairman and chief executive officer became our president, and our chairman
and chief executive officer exchanged 2 million personal shares of our Common
Stock for an agreed upon number of Titus shares. As a result of these
transactions, Titus currently owns approximately 43 percent of our outstanding
common stock.
In addition, Titus purchased 719,424 shares of Preferred Stock from us in
April 2000. The Preferred Stock is convertible by Titus, redeemable by us, and
accrues a 6 percent dividend per year. Titus may convert the Preferred Stock
at any time after May 2001 and has conversion rights limited to 5,504,507
shares of Common Stock unless our stockholders approve the issuance of the
Preferred Stock at which time the Preferred Stock shares would become
convertible into at least 7,194,240 shares of our Common Stock. Titus also
received warrants to purchase up to 500,000 shares of our Common Stock. If we
default in accordance with the line of credit agreement, and Titus is forced
to pay on their corporate guarantee, the Series A Preferred Stock may become
convertible into up to 42.8 million shares of our Common Stock.
We have agreed to register all of the unregistered shares held by Titus for
resale under the Securities Act of 1933, as amended. This registration could
temporarily impair our ability to raise capital through the sale of our equity
securities, and, if such registered shares are sold, could have a material
adverse effect on the market price of our Common Stock.
Dependence upon Third Party Licenses
Many of our products, such as our Star Trek, Advanced Dungeons and Dragons
and the Caesar's Palace titles, are based on original ideas or intellectual
properties licensed from other parties. We cannot assure you that we will be
able to obtain new licenses, or renew existing licenses, on commercially
reasonable terms, if at all. For example, Paramount has granted the Star Trek
license to another party upon the expiration of our rights. If we are unable
to obtain licenses for the underlying content that we believe offers the
greatest consumer appeal, we would either have to seek alternative,
potentially less appealing licenses, or release the products without the
desired underlying content, either of which could have a material adverse
effect on our business, operating results and financial condition. We cannot
assure you that acquired properties will enhance the market acceptance of
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our products based on those properties. We also cannot assure you that our new
product offerings will generate net revenues in excess of their costs of
development and marketing or minimum royalty obligations, or that net revenues
from new product sales will meet or exceed net revenues from existing product
sales.
Dependence on Licenses from and Manufacturing by Hardware Companies
We are required to obtain a license to develop and distribute software for
each of the video game console platforms for which we develop products,
including a separate license for each of North America, Japan and Europe. We
have obtained licenses to develop software for the PlayStation and are working
towards obtaining similar rights for the upcoming PlayStation 2. We have also
obtained agreements to develop software for the Sega Dreamcast platform, which
was introduced in the United States and Europe in Fall 1999. We cannot assure
you that we will be able to obtain licenses from hardware companies on
acceptable terms or that any existing or future licenses will be renewed by
the licensors. In addition, Sony Computer Entertainment, Nintendo and Sega
each have the right to approve the technical functionality and content of the
Company's products for such platform prior to distribution. Due to the nature
of the approval process, we must make significant product development
expenditures on a particular product prior to the time it seeks those
approvals. Our inability to obtain these approvals could have a material
adverse effect on our business, operating results and financial condition.
Hardware companies such as Sony Computer Entertainment, Nintendo and Sega
may impose upon their licensees a restrictive selection and product approval
process, such that those licensees are restricted in the number of titles that
will be approved for distribution on the particular platform. While we have
prepared our future product release plans taking this competitive approval
process into consideration, if we incorrectly predict its impact and fail to
obtain approvals for all products in our development plans, this failure could
have a material adverse effect on our business, operating results and
financial condition. We depend upon Sony Computer Entertainment, Nintendo and
Sega for the manufacture of our products that are compatible with their
respective video game consoles. As a result, Sony, Nintendo and Sega have the
ability to raise prices for supplying these products at any time and
effectively control the timing of our release of new titles for those
platforms. PlayStation and Dreamcast products consist of CD-ROMs and are
typically delivered by Sony Computer Entertainment and Sega, respectively,
within a relatively short lead time. Manufacturers of Nintendo and other video
game cartridges typically deliver software to us within 45 to 60 days after
receipt of a purchase order. If we experience unanticipated delays in the
delivery of video game console products from Sony Computer Entertainment, Sega
or Nintendo, or if actual retailer and consumer demand for our interactive
entertainment software differs from our forecast, our business, operating
results and financial condition could be materially adversely affected.
Dependence on Key Personnel
Our success depends to a significant extent on the continued service of our
key product design, development, sales, marketing and management personnel,
and in particular on the leadership, strategic vision and industry reputation
of our founder and Chief Executive Officer, Brian Fargo. Our future success
will also depend upon our ability to continue to attract, motivate and retain
highly qualified employees and contractors, particularly key software design
and development personnel. Competition for highly skilled employees is
intense, and we cannot assure you that we will be successful in attracting and
retaining such personnel. Specifically, we may experience increased costs in
order to attract and retain skilled employees. Our failure to retain the
services of Brian Fargo or other key personnel or to attract and retain
additional qualified employees could have a material adverse effect on our
business, operating results and financial condition.
Risks Associated with International Operations; Currency Fluctuations
Our international net revenues accounted for 29.7, 28.2, 28.7 and 38.4
percent of our total net revenues for the years ended December 31, 1999 and
1998, the eight months ended December 31, 1997 and the year ended April 30,
1997, respectively. In February 1999, we entered into an International
Distribution Agreement with
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Virgin for the exclusive distribution of our products in selected
international territories. We intend to continue to expand our direct and
indirect sales, marketing and product localization activities worldwide. This
expansion will require a great deal of management time and attention and
financial resources in order to develop improved international sales and
support channels. We cannot assure you, however, that we will be able to
maintain or increase international market demand for our products. Our
international sales and operations are subject to a number of inherent risks,
including the following:
. the impact of recessions in foreign economies
. the time and financial costs associated with translating and localizing
products for international markets
. longer accounts receivable collection periods
. greater difficulty in accounts receivable collection
. unexpected changes in regulatory requirements
. difficulties and costs of staffing and managing foreign operations
. political and economic instability.
These factors may have a material adverse effect on our future
international net revenues and, consequently, on our business, operating
results and financial condition. We currently do not engage in currency
hedging activities. Although exposure to currency fluctuations to date has
been insignificant, we cannot assure you that fluctuations in currency
exchange rates in the future will not have a material adverse effect on net
revenues from international sales and licensing, and thus on our business,
operating results and financial condition.
Risks Associated with New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and a new European currency, the euro. These eleven countries
adopted the euro as the common legal currency on that date. We make a
significant portion of our sales to these countries. Consequently, we
anticipate that the euro conversion will, among other things, create technical
challenges to adapt information technology and other systems to accommodate
euro-denominated transactions. The euro conversion may also limit our ability
to charge different prices for our products in different markets. While we
anticipate that the conversion will not cause major disruption of our
business, the conversion may have a material effect on our business or
financial condition.
Protection of Proprietary Rights
We regard our software as proprietary and rely on a combination of patent,
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights.
We own or license various copyrights and trademarks, and hold the rights to
one patent application related to the software engine for our Messiah title.
While we provide "shrinkwrap" license agreements or limitations on use with
our software, it is uncertain to what extent these agreements and limitations
are enforceable. We are aware that some unauthorized copying occurs within the
computer software industry, and if a significantly greater amount of
unauthorized copying of our interactive entertainment software products were
to occur, our operating results could be materially adversely affected. While
we use copy protection on some of our products, we do not provide source code
to third parties unless they have signed nondisclosure agreements with respect
to that source code.
We rely on existing copyright laws to prevent unauthorized distribution of
our software. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy can be a
persistent problem, especially in certain international markets. Further, the
laws of certain countries where our products are or may be distributed either
do not protect our products and intellectual property rights to the same
extent as the laws of the U.S. or are weakly enforced. Legal protection of our
rights may be
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ineffective in such countries, and as we leverage our software products using
emerging technologies, such as the Internet and on-line services, our ability
to protect our intellectual property rights and to avoid infringing others'
intellectual property rights becomes more difficult. We cannot assure you that
existing intellectual property laws will provide adequate protection for our
products in connection with these emerging technologies.
As the number of interactive entertainment software products in the
industry increases and the features and content of these products continues to
overlap, software developers may increasingly become subject to infringement
claims. Although we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, we cannot assure you that
claims of infringement will not be made. Any such claims, with or without
merit, can be time consuming and expensive to defend. From time to time, we
receive communications from third parties regarding such claims. We cannot
assure you that existing or future infringement claims against us will not
result in costly litigation or require us to license the intellectual property
rights of third parties, either of which could have a material adverse effect
on our business, operating results and financial condition.
Entertainment Software Rating System; Governmental Restrictions
Legislation is periodically introduced at the state and federal levels in
the U.S. and in foreign countries to establish a system for providing
consumers with information about graphic violence and sexually explicit
material contained in interactive entertainment software products. Such a
system would include procedures for interactive entertainment software
publishers to identify particular products within defined rating categories
and communicate these ratings to consumers through appropriate package
labeling and through advertising and marketing presentations. In addition,
many foreign countries have laws that permit governmental entities to censor
the content of certain works, including interactive entertainment software. In
certain instances, we may be required to modify our products to comply with
the requirements of these governmental entities, which could delay the release
of those products in those countries. Those delays could have a material
adverse effect on our business, operating results and financial condition.
While we currently voluntarily submit our products to industry-created review
boards and publish their ratings on our game packaging, we believe that
mandatory government-run interactive entertainment software products rating
systems eventually will be adopted in many countries which represent
significant markets or potential markets for our products. Due to the
uncertainties inherent in the implementation of such rating systems, confusion
in the marketplace may occur, and we are unable to predict what effect, if
any, such rating systems would have on our business. In addition to such
regulations, certain retailers have in the past declined to stock certain of
our products because they believed that the content of the packaging artwork
or the products would be offensive to the retailer's customer base. While to
date these actions have not had a material adverse effect on our business,
operating results or financial condition, we cannot assure you that similar
actions by our distributors or retailers in the future would not have a
material adverse effect on our business, operating results and financial
condition.
Control by Directors and Officers
Including Titus, our directors and executive officers beneficially own an
aggregate of about 51 percent of our outstanding Common Stock, and could,
under certain circumstances, gain substantial additional ownership. See
"Factors Affecting Future Performance--Control by Titus". These stockholders,
if acting together with Universal Studios, Inc. ("Universal"), would be able
to control substantially all matters requiring our stockholders' approval,
including the election of directors (subject to our stockholders' cumulative
voting rights) and the approval of mergers or other business combination
transactions. This concentration of ownership could discourage or prevent a
change in control.
Development of Internet/On-Line Services or Products
We seek to establish an on-line presence by creating and supporting sites
on the Internet. Our future plans envision conducting and supporting on-line
product offerings through these sites or others. Our ability to successfully
establish an on-line presence and to offer online products will depend on
several factors outside our control. These factors include the emergence of a
robust online industry and infrastructure and the development and
implementation of technological advancements to the Internet to increase
bandwidth and speed to the point
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that will allow us to conduct and support online product offerings. Because
global commerce and the exchange of information on the Internet and other
similar open, wide area networks are relatively new and evolving, we cannot
assure you that a viable commercial marketplace on the Internet will emerge
from the developing industry infrastructure or that the appropriate
complementary products for providing and carrying Internet traffic and
commerce will be developed. We also cannot assure you that we will be able to
create or develop a sustainable or profitable on-line presence or that we will
be able to generate any significant revenue from on-line product offerings in
the near future, it at all. If the Internet does not become a viable
commercial marketplace, or if this development occurs but is insufficient to
meet our needs or if such development is delayed beyond the point where we
plan to have established an on-line service, our business, operating results
and financial condition could be materially adversely affected.
Risks Associated with Acquisitions
As part of our strategy to enhance distribution and product development
capabilities, we intend to review potential acquisitions of complementary
businesses, products and technologies. Some of these acquisitions could be
material in size and scope. While we will continue to search for appropriate
acquisition opportunities, we cannot assure you that the Company will be
successful in identifying suitable acquisition opportunities. If we do
identify any potential acquisition opportunity, we cannot assure you that we
will consummate the acquisition, and if the acquisition does occur, we cannot
assure you that it will be successful in enhancing our business or will
increase our earnings. As the interactive entertainment software industry
continues to consolidate, we may face increased competition for acquisition
opportunities, which may inhibit our ability to complete suitable transactions
or increase their cost. Future acquisitions could also divert substantial
management time, result in short term reductions in earnings or special
transactions or other charges and may be difficult to integrate with existing
operations or assets.
We may, in the future, issue additional shares of Common Stock in
connection with one or more acquisitions, which may dilute our stockholders.
Additionally, with respect to future acquisitions, our stockholders may not
have an opportunity to review the financial statements of the entity being
acquired or to vote on these acquisitions.
Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions
Our Certificate of Incorporation and Bylaws, as well as Delaware corporate
law, contain certain provisions that could delay, defer or prevent a change in
control and could materially adversely affect the prevailing market price of
our common stock. Certain of these provisions impose various procedural and
other requirements that could make it more difficult for stockholders to take
certain corporate actions.
Stock Price Volatility
The trading price of our Common Stock has been and could continue to be
subject to wide fluctuations in response certain factors, including:
. quarter to quarter variations in results of operations
. our announcements of new products
. our competitors' announcements of new products
. our product development or release schedule
. general conditions in the computer, software, entertainment, media or
electronics industries
. changes in earnings estimates or buy/sell recommendations by analysts
. investor perceptions and expectations regarding our products, plans and
strategic position and those of our competitors and customers
. other events or factors
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In addition, the public stock markets experience extreme price and trading
volume volatility, particularly in high technology sectors of the market. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons often unrelated to the operating performance
of the specific companies. These broad market fluctuations may adversely
affect the market price of our Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments as of December 31,
1999. However, we are exposed to certain market risks arising from
transactions in the normal course of business, principally the risk associated
with interest rate fluctuations on our revolving line of credit agreement, and
the risk associated with foreign currency fluctuations. We do not hedge our
interest rate risk, or our risk associated with foreign currency fluctuations.
Interest Rate Risk
Our interest rate risk is immaterial due to the short maturity of the line
of credit agreement. We have no fixed rate debt.
Foreign Currency Risk
Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our investment in a foreign company that is accounted
for under the equity method. Our risk associated with foreign exchange
fluctuations has been immaterial to date.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements begin on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is omitted from this report, as
the Company will file a definitive proxy statement (the "Proxy Statement")
within 120 days after the end of its fiscal year pursuant to Regulation 14A of
the Securities Exchange Act of 1934 for its Annual Meeting of Shareholders to
be held in June 2000 and the information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Compensation of Executive Officers" in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management
Directors and Nominees" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and the
Company or its Subsidiaries" in the Proxy Statement and is incorporated herein
by reference.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The list of financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the Report of
Independent Auditors is herein incorporated by reference.
(2) Financial Statement Schedules
The list of financial statement schedules contained in the
accompanying Index to Consolidated Financial Statements covered by the
Report of Independent Auditors is herein incorporated by reference.
All other schedules are omitted because they are not applicable or
the required information is included in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits
The list of exhibits on the accompanying Exhibit Index is herein
incorporated by reference.
(b) Reports on Form 8-K.
(1) The Company filed a Report on Form 8-K on January 2, 1999, which
reported that the Company announced its acceptance of the resignation of
David Dukes as a Director of the Company. The Report also stated that Mr.
Dukes' resignation was not due to any disagreement with the Company on any
matter relating to the Company's operations, policies or practices.
(2) The Company filed a Report on Form 8-K on June 3, 1999, which
reported that the Company had signed a letter of intent with Titus
Interactive S.A. ("Titus") relating to the purchase and sale of 6.25
million shares of the Company's Common Stock for $25 million.
(3) The Company filed a Report on Form 8-K on July 29, 1999, which
reported that the Company had entered into an agreement with Titus relating
to the previously reported transaction.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized, at Irvine,
California this 14th day of April 2000.
Interplay Entertainment Corp.
/s/ Brian Fargo
By:
__________________________________
Brian Fargo
Its:Chairman of the Board and Chief
Executive
Officer (Principal Executive
Officer)
POWER OF ATTORNEY
The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Brian Fargo and Manny Marrero, or either of
them, with full power of substitution and resubstitution, as their true and
lawful attorneys and agents, to do any and all acts and things in our name and
behalf in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorney and agent, may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto, and we do hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report and Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Brian Fargo Chairman of the Board of April 14, 2000
______________________________________ Directors and Chief
Brian Fargo Executive Officer
(Principal Executive
Officer)
/s/ Herve Caen President and Director April 14, 2000
______________________________________
Herve Caen
/s/ Manuel Marrero Chief Financial and Chief April 14, 2000
______________________________________ Operating Officer
Manuel Marrero (Principal Financial and
Accounting Officer)
/s/ Eric Caen Director April 14, 2000
______________________________________
Eric Caen
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James Barnett Director April 14, 2000
______________________________________
James Barnett
/s/ Charles S. Paul Director April 14, 2000
______________________________________
Charles S. Paul
</TABLE>
41
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization and Merger, dated May 29, 1998,
between the Company and Interplay Productions. (incorporated herein by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-1, No. 333-48473 (the "Form S-1"))
3.1 Amended and Restated Certificate of Incorporation of the Company.
(incorporated herein by reference to Exhibit 3.1 to the Form S-1)
3.2 Amended and Restated Bylaws of the Company. (incorporated herein by
reference to Exhibit 3.2 to the Form S-1)
4.1 Specimen form of stock certificate for Common Stock. (incorporated
herein by reference to Exhibit 4.1 to the Form S-1)
4.2 Shareholders' Agreement among MCA Inc., the Company, and Brian Fargo,
dated March 30, 1994, as amended. (incorporated herein by reference to
Exhibit 4.2 to the Form S-1)
4.3 Investors' Rights Agreement dated October 10, 1996, as amended, among
the Company and holders of its Subordinated Secured Promissory Notes
and Warrants to purchase Common Stock. (incorporated herein by
reference to Exhibit 4.3 to the Form S-1)
10.1 Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan").
(incorporated herein by reference to Exhibit 10.1 to the Form S-1)
10.2 Form of Stock Option Agreement pertaining to the 1997 Plan.
(incorporated herein by reference to Exhibit 10.2 to the Form S-1)
10.3 Form of Restricted Stock Purchase Agreement pertaining to the 1997
Plan. (incorporated herein by reference to Exhibit 10.3 to the Form S-
1)
10.4 Incentive Stock Option and Nonqualified Stock Option Plan--1994, as
amended (the "1994 Plan"). (incorporated herein by reference to
Exhibit 10.4 to the Form S-1)
10.5 Form of Nonqualified Stock Option Agreement pertaining to the 1994
Plan. (incorporated herein by reference to Exhibit 10.5 to the Form S-
1)
10.6 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan--1991, as amended (the "1991 Plan"). (incorporated
herein by reference to Exhibit 10.6 to the Form S-1)
10.7 Form of Incentive Stock Option Agreement pertaining to the 1991 Plan.
(incorporated herein by reference to Exhibit 10.7 to the Form S-1)
10.8 Form of Nonqualified Stock Option Agreement pertaining to the 1991
Plan. (incorporated herein by reference to Exhibit 10.8 to the Form S-
1)
10.9 Employee Stock Purchase Plan. (incorporated herein by reference to
Exhibit 10.10 to the Form S-1)
10.10 Form of Indemnification Agreement for Officers and Directors of the
Company. (incorporated herein by reference to Exhibit 10.11 to the
Form S-1)
10.11 Von Karman Corporate Center Office Building Lease between the Company
and Aetna Life Insurance Company of Illinois, dated September 8, 1995,
together with amendments thereto. (incorporated herein by reference to
Exhibit 10.14 to the Form S-1)
10.12 Loan and Security Agreement among Greyrock Business Credit, a Division
of NationsCredit Commercial Corporation ("Greyrock"), the Company, and
Interplay OEM, Inc. ("Interplay OEM"), dated June 16, 1997, as
amended, with Schedules. (incorporated herein by reference to Exhibit
10.15 to the Form S-1)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.13 Letter of Credit Agreement among Greyrock, the Company and Interplay
OEM, dated September 10, 1997. (incorporated herein by reference to
Exhibit 10.18 to the Form S-1)
10.14 Letter of Credit Agreement among Greyrock, the Company and Interplay
OEM, dated September 24, 1997. (incorporated herein by reference to
Exhibit 10.19 to the Form S-1)
10.15 Master Equipment Lease between Brentwood Credit Corporation and the
Company, dated March 28, 1996, with Schedules. (incorporated herein by
reference to Exhibit 10.20 to the Form S-1)
10.16 Master Equipment Lease Agreement between General Electric Capital
Computer Leasing Corporation and the Company, dated December 14, 1994,
as amended, with Schedules. (incorporated herein by reference to
Exhibit 10.22 to the Form S-1)
10.17 Confidential License Agreement for Nintendo 64 Video Game System,
between the Company and Nintendo of America, Inc., dated October 7,
1997. (Portions omitted pursuant to a request for confidential
treatment.) (incorporated herein by reference to Exhibit 10.23 to the
Form S-1)
10.18 PlayStation License Agreement, between Sony Computer Entertainment of
America and the Company, dated February 16, 1995. (Portions omitted
pursuant to a request for confidential treatment.) (incorporated
herein by reference to Exhibit 10.24 to the Form S-1)
10.19 Master Merchandising License Agreement between Paramount Pictures
Corporation and the Company, dated as of June 16, 1992. (Portions
omitted pursuant to a request for confidential treatment.)
(incorporated herein by reference to Exhibit 10.25 to the Form S-1)
10.20 Heads of Agreement concerning Sales and Distribution between the
Company and Activision, Inc., dated November 19, 1998, as amended
(incorporated herein by reference to Exhibit 10.23 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.)
(Portions omitted pursuant to a request for confidential treatment.)
10.21 Stock Purchase Agreement between the Company and Titus Interactive SA,
dated March 18, 1999 (incorporated herein by reference to Exhibit
10.24 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.)
10.22 International Distribution Agreement between the Company and Virgin
Interactive Entertainment Limited, dated February 10, 1999
(incorporated herein by reference to Exhibit 10.26 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.)
(Portions omitted pursuant to a request for confidential treatment.)
10.23 Termination Agreement among the Company, Virgin Interactive
Entertainment Limited, VIE Acquisition Group, LLC and VIE Acquisition
Holdings, LLC, dated February 10, 1999 (incorporated herein by
reference to Exhibit 10.27 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.) (Portions omitted pursuant to a
request for confidential treatment.)
10.24 Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
Greyrock, dated March 18, 1999 (incorporated herein by reference to
Exhibit 10.28 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.)
10.25 Fifth Amendment to Lease for Von Karman Corporate Center Office
Building between the Company and Arden Realty Finance IV, L.L.C.,
dated December 4, 1998 (incorporated herein by reference to Exhibit
10.29 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.)
10.26 Stock Purchase Agreement dated July 20, 1999, by and among the
Company, Titus Interactive S.A., and Brian Fargo (incorporated herein
by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.)
10.27 Exchange Agreement dated July 20, 1999, by and among Titus Interactive
S.A., Brian Fargo, Herve Caen and Eric Caen (incorporated herein by
reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1999.)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.28 Employment Agreement between the Company and Herve Caen dated November
9, 1999 (incorporated herein by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.)
10.29 Employment Agreement between the Company and Brian Fargo dated
November 9, 1999 (incorporated herein by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.)
10.30 Stockholder Agreement among the Company, Titus Interactive S.A. and
Brian Fargo dated November 9, 1999 (incorporated herein by reference
to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.)
10.31 Stock Purchase Agreement between the Company and Titus Interactive
S.A, dated April 14, 2000.
10.32 Certificate of Designation, dated April 14, 2000.
10.33 Warrant (350,000 shares) for Common Stock between the Company and
Titus Interactive S.A, dated April 14, 2000.
10.34 Warrant (50,000 shares) for Common Stock between the Company and Titus
Interactive S.A, dated April 14, 2000.
10.35 Warrant (100,000 shares) for Common Stock between the Company and
Titus Interactive S.A, dated April 14, 2000.
10.36 Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
Greyrock, dated April 14, 2000.
10.37 Revolving Note between the Company and Titus Interactive S.A., dated
April 14, 2000.
10.38 Reimbursement and Security Agreement between the Company and Titus
Interactive S.A., dated April 14, 2000.
10.39 Amendment Number 1 to International Distribution Agreement between the
Company and Virgin Interactive Entertainment Limited, dated July 1,
1999.
21.1 Subsidiaries of the Company. (incorporated herein by reference to
Exhibit 21.1. to the Form S-1)
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included as page 37 to this Form 10-K).
27.1 Financial Data Schedule.
</TABLE>
44
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-3
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998, the eight months ended December 31, 1997 and the year
ended April 30, 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1999 and 1998, the eight months ended December 31,
1997 and the year ended April 30, 1997.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998, the eight months ended December 31, 1997 and the year
ended April 30, 1997.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Interplay Entertainment Corp.:
We have audited the accompanying consolidated balance sheets of INTERPLAY
ENTERTAINMENT CORP. (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1999 and 1998, the eight months ended December 31, 1997, and the year ended
April 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interplay Entertainment
Corp. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 1999
and 1998, the eight months ended December 31, 1997, and the year ended April
30, 1997, in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Orange County, California
April 14, 2000
F-2
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash...................................................... $ 399 $ 614
Restricted Cash........................................... 2,597 --
Trade receivables, net
of allowances of $9,161 and $18,431, respectively........ 22,209 36,407
Inventories............................................... 6,057 6,303
Prepaid licenses and royalties............................ 19,249 18,128
Deferred income taxes..................................... -- 5,336
Other..................................................... 874 685
-------- -------
Total current assets.................................... 51,385 67,473
Property and Equipment, net................................. 4,225 5,679
Other Assets................................................ 1,326 1,792
-------- -------
$ 56,936 $74,944
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Current debt.............................................. $ 19,630 $24,651
Accounts payable.......................................... 21,462 23,403
Accrued liabilities....................................... 17,915 22,554
-------- -------
Total current liabilities............................... 59,007 70,608
Minority Interest in Subsidiary............................. -- 143
Commitments and Contingencies
Stockholders' Equity (Deficit):
Series A Preferred stock, $.001 par value, authorized
5,000,000 shares;
issued and outstanding, none.............................. -- --
Common stock, $.001 par value, authorized 50,000,000
shares;
issued and outstanding 29,989,125 shares in 1999 and
18,292,431 shares in 1998................................ 30 18
Paid-in capital........................................... 87,390 51,918
Accumulated deficit....................................... (89,782) (48,097)
Accumulated other comprehensive income.................... 291 354
-------- -------
Total stockholders' equity (deficit).................... (2,071) 4,193
-------- -------
$ 56,936 $74,944
======== =======
</TABLE>
The accompanying notes are an intergral part of these consolidated financial
statements.
F-3
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Eight Months
Years Ended December 31, Ended Year Ended
-------------------------- December 31, April 30,
1999 1998 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenues............ $ 101,930 $ 126,862 $ 85,961 $ 83,262
Cost of goods sold...... 61,103 71,928 44,864 62,480
------------ ------------ ----------- -----------
Gross profit............ 40,827 54,934 41,097 20,782
------------ ------------ ----------- -----------
Operating expenses:
Marketing and sales... 32,432 39,471 20,603 24,627
General and
administrative....... 15,247 12,841 8,989 9,408
Product development... 20,629 24,472 14,291 21,431
Other................. 5,323 -- -- --
------------ ------------ ----------- -----------
Total operating
expenses........... 73,631 76,784 43,883 55,466
------------ ------------ ----------- -----------
Operating loss.......... (32,804) (21,850) (2,786) (34,684)
Other income (expense):
Interest expense...... (3,640) (4,620) (3,009) (1,907)
Other................. 169 (313) 736 307
------------ ------------ ----------- -----------
Total other
expense............ (3,471) (4,933) (2,273) (1,600)
Loss before provision
(benefit) for income
taxes.................. (36,275) (26,783) (5,059) (36,284)
Provision (benefit) for
income taxes........... 5,410 1,437 -- (9,065)
Net loss................ $ (41,685) $ (28,220) $ (5,059) $ (27,219)
============ ============ =========== ===========
Net loss per share:
Basic/Diluted......... $ (1.86) $ (1.91) $ (0.45) $ (2.46)
============ ============ =========== ===========
Weighted average number
of common shares
outstanding:
Basic/Diluted......... 22,418,463 14,762,644 11,123,327 11,085,632
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other
------------------ Paid-in Earnings Comprehensive Comprehensive
Shares Amount Capital (Deficit) Income (Loss) Loss
---------- ------ ------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 30,
1996................... 10,829,781 $ 11 $17,783 $ 12,401 --
Exercise of stock
options............... 313,403 -- 58 -- --
Repurchase of common
stock................. (29,124) -- (275) -- --
Proceeds from
warrants.............. -- -- 148 -- --
Compensation for stock
options granted....... -- -- 306 -- --
Net loss............... -- -- -- (27,219) -- $(27,219)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- 188
--------
Other comprehensive
income................ -- -- -- -- $188 188
--------
Comprehensive loss..... -- -- -- -- -- $(27,031)
---------- ---- ------- -------- ---- ========
Balance, April 30,
1997................... 11,114,060 11 18,020 (14,818) 188
Issuance of common
stock................. 16,362 -- 184 -- --
Repurchase of common
stock................. (178,594) -- -- -- --
Compensation for stock
options granted....... -- -- 204 -- --
Net loss............... -- -- -- (5,059) -- $ (5,059)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- 3
Other comprehensive
income................ -- -- -- -- 3 3
--------
Comprehensive loss..... -- -- -- -- -- $ (5,056)
---------- ---- ------- -------- ---- ========
Balance, December 31,
1997................... 10,951,828 11 18,408 (19,877) 191
Issuance of common
stock, net of issuance
costs................. 5,056,102 5 24,390 -- --
Issuance of warrants... -- -- 316 -- --
Exercise of warrants... 2,272,417 2 8,599 -- --
Exercise of stock
options............... 12,084 -- 15 -- --
Compensation for stock
options granted....... -- -- 190 -- --
Net loss............... -- -- -- (28,220) -- $(28,220)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- 163
--------
Other comprehensive
income................ -- -- -- -- 163 163
--------
Comprehensive loss..... -- -- -- -- -- $(28,057)
---------- ---- ------- -------- ---- ========
Balance, December 31,
1998................... 18,292,431 18 51,918 (48,097) 354
Issuance of common
stock, net of issuance
costs................. 11,408,736 12 34,838 -- --
Exercise of stock
options............... 287,958 -- 608 -- --
Compensation for stock
options granted....... -- -- 26 -- --
Net loss............... -- -- -- (41,685) -- $(41,685)
Other comprehensive
income, net of income
taxes:
Foreign currency
translation
adjustment............ -- -- -- -- -- (63)
--------
Other comprehensive
loss.................. -- -- -- -- (63) (63)
--------
Comprehensive loss..... -- -- -- -- -- $(41,748)
---------- ---- ------- -------- ---- ========
Balance, December 31,
1999................... 29,989,125 $ 30 $87,390 $(89,782) $291
========== ==== ======= ======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended Eight Months
December 31, Ended Year Ended
------------------ December 31, April 30,
1999 1998 1997 1997
-------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(41,685) $(28,220) $(5,059) $(27,219)
Adjustments to reconcile net loss
to the cash used in operating
activities--
Depreciation and amortization.... 3,023 3,415 2,138 3,172
Noncash expense for stock
options......................... 26 190 204 306
Noncash interest expense......... 300 68 184 --
Write-off of other assets........ 82 -- -- 250
Loss on asset valuation,
restructuring................... 410
Deferred income taxes............ 5,336 2,022 128 (6,649)
Minority interest in earnings
(loss) of subsidiary............ (143) (117) (66) 28
Changes in assets and liabilities:
Trade receivables, net........... 14,198 693 (12,338) 3,926
Inventories...................... 246 35 1,066 (1,508)
Income taxes receivable.......... -- 1,427 174 (176)
Other current assets............. (489) 1,657 (1,864) 5,732
Other assets..................... -- (3) 543 5,610
Prepaid licenses and royalties... (1,121) (5,501) (1,714) (4,102)
Accounts payable................. (1,941) 6,282 146 (1,999)
Accrued liabilities.............. (4,653) (166) 1,449 5,618
Income taxes payable............. 14 (607) (310) --
-------- -------- ------- --------
Net cash used in operating
activities..................... (26,397) (18,825) (15,319) (17,011)
Cash flows used in investing
activities:
Purchase of property and
equipment........................ (1,595) (1,684) (792) (3,451)
-------- -------- ------- --------
Net cash used in investing
activities..................... (1,595) (1,684) (792) (3,451)
Cash flows provided by financing
activities:
Net borrowings (payments) on line
of credit........................ (5,257) 1,229 12,296 5,900
Issuances (payments) of
subordinated secured promissory
notes and warrants............... -- (6,054) -- 14,803
Repayments on notes payable....... -- (76) (62) (75)
Net proceeds from issuance of
common stock..................... 35,450 24,310 -- --
Proceeds from exercise of stock
options.......................... 8 15 -- 58
Additions to restricted cash...... (2,597) -- -- --
Other financing activities........ 236 -- -- --
-------- -------- ------- --------
Net cash provided by financing
activities..................... 27,840 19,424 12,234 20,686
-------- -------- ------- --------
Effect of exchange rate changes on
cash.............................. (63) 163 3 263
-------- -------- ------- --------
Net increase (decrease) in cash.... (215) (922) (3,874) 487
Cash, beginning of year............ 614 1,536 5,410 4,923
-------- -------- ------- --------
Cash, end of year.................. $ 399 $ 614 $ 1,536 $ 5,410
======== ======== ======= ========
Supplemental cash flow information:
Cash paid during the year for
Interest......................... $ 3,608 $ 4,671 $ 2,936 $ 1,638
Supplemental disclosure of non-cash
financing activity:
Common Stock issued under Multi-
Product Agreement................ $ 1,000 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Line of Business; Risk Factors
Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(collectively with Interplay Productions, a California corporation, the
"Company"), develop, publish, and distribute interactive entertainment
software. In addition, the Company distributes certain titles to computer or
peripheral device manufacturers for use in bundling arrangements. The
Company's software is developed for use on various interactive entertainment
software platforms, including personal computers and current generation video
game consoles, such as the Sony PlayStation and Sega Dreamcast.
For the year ended December 31, 1999 the Company incurred a net loss of
$41.7 million and used cash in operating activities of $26.4 million.
Partially because of these losses, the Company's liquidity deteriorated during
1999. At December 31, 1999, the Company had negative working capital of $7.6
million, although the Company did have borrowing availability under its line
of credit (See Note 5).
To provide working capital to support the Company's operations, in 1999 the
Company took several actions during the year, including extending the
expiration of its line of credit, in connection with which the Company's
Chairman and Chief Executive Officer ("Chairman") personally guaranteed $5
million of the Company's obligations under such line of credit. Further, the
Company completed two equity transactions with Titus Interactive S.A.
("Titus") which provided for the issuance of 10,795,455 shares of the
Company's Common Stock for $35 million (See Notes 5 and 8).
Subsequent to December 31, 1999, the Company extended its line of credit
through April 2001, in connection with which Titus provided a $20 million
corporate guarantee, and the Company also completed a transaction with Titus,
which provided for the issuance of convertible, redeemable Preferred Stock for
$20 million. In addition, Titus may be entitled to receive additional shares
of Common Stock upon conversion of their Preferred Stock if we default on our
line of credit and Titus is obligated to pay on the $20 corporate guarantee
that they provided on the extension of our line of credit through April 2001.
In addition, the Company secured a $5 million supplemental line of credit with
Titus through April 2001 (See Note 14).
The Company believes that funds available under its line of credit, funds
to be received from the sale of equity securities and anticipated funds from
operations, if any, should be sufficient to satisfy the Company's projected
working capital and capital expenditure needs in the normal course of business
at least through the end of 2000 (See Notes 5 and 14). However, there can be
no assurance that the Company will be able to raise sufficient funds to
satisfy its projected working capital and capital expenditure needs beyond
2000.
In addition to the continuing risks related to the Company's future
liquidity, the Company also faces numerous other risks associated with its
industry. These risks include dependence on new product introductions, product
delays, rapidly changing technology, intense competition, dependence on
distribution channels and risk of customer returns. Certain additional risks
are discussed on pages 25-36 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern. Accordingly, the consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities or any other adjustments that might result should the Company be
unable to continue as a going concern.
A valuation allowance is provided for the deferred tax asset when it is
estimated to be more likely than not that a portion of the deferred tax asset
will not be realized in the short-term. Primarily as a result of the factors
discussed above, during the year ended December 31, 1999, the Company took a
charge of $5.4 million to fully reserve its deferred tax asset (See Note 6).
F-7
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions Pty Ltd
(Australia), Interplay Co., Ltd., (Japan) and its 91 percent-owned subsidiary
Shiny Entertainment, Inc. All significant intercompany accounts and
transactions have been eliminated.
Change of Fiscal Year End
Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31.
Reincorporation
On March 2, 1998, the Board of Directors of Interplay Productions approved
a reincorporation plan. Under the reincorporation plan Interplay Productions
formed a new entity in Delaware into which Interplay Productions was merged on
May 29, 1998. The new entity was named Interplay Entertainment Corp.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior period's financial
statements to conform to classifications used in the current period.
Restricted Cash
Restricted cash represents cash collateral deposits made in accordance with
the Company's amended Loan and Security Agreement (see Note 5). Restricted
cash earns interest at the bank's prime rate (8.5 percent at December 31,
1999) less three percent, or 5.5 percent at December 31, 1999.
Inventories
Inventories consist of CD-ROMs or DVDs, video game console cartridges
(cartridges), manuals, packaging materials, supplies and packaged software
ready for shipment and are valued at the lower of cost (first-in, first-out)
or market.
Prepaid Licenses and Royalties
Prepaid licenses and royalties consist of payments for intellectual
property rights and advanced royalty payments to outside developers. In
addition such costs include certain other outside production costs generally
consisting of film cost and amounts paid for digitized motion data with
alternative future uses. Payments to developers represent contractual advanced
payments made for future royalties. These payments are contingent upon the
successful completion of milestones, which generally represent specific
deliverables. Royalty advances are recoupable against future sales based upon
the contractual royalty rate. The Company amortizes the cost of licenses,
prepaid royalties and other outside production costs to cost of sales over six
months commencing with
F-8
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the initial shipment of the related title at a rate based upon the number of
units shipped. Management evaluates the future realization of such costs
quarterly and charges to cost of goods sold any amounts that management deems
unlikely to be fully realized through future sales. Such costs are classified
as current and noncurrent assets based upon estimated net product sales.
Property and Equipment
Property and equipment are stated at cost. Depreciation of computers,
equipment and furniture and fixtures is provided using the straight-line
method over a five year period. Leasehold improvements are amortized on a
straight line basis over the lesser of the estimated useful life or the
remaining lease term.
Other Non-current Assets
Other non-current assets consist primarily of goodwill which the Company is
amortizing on a straight-line basis over seven years (see Note 3). Accumulated
amortization as of December 31, 1999 and 1998 was $1.7 and $1.3 million
respectively.
Long-lived Assets
As prescribed by Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of", the Company assesses the recoverability of its
long-lived assets (including goodwill) by determining whether the asset
balance can be recovered over the remaining depreciation or amortization
period through projected undiscounted future cash flows. Cash flow
projections, although subject to a degree of uncertainty, are based on trends
of historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic
conditions.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable and notes
payable approximates the fair value. In addition, the carrying value of all
borrowings approximate fair value based on interest rates currently available
to the Company.
Revenue Recognition
Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". For those agreements that provide the customers the right to
multiple copies in exchange for guaranteed amounts, revenue is recognized at
the delivery of the product master or the first copy. Per copy royalties on
sales that exceed the guarantee are recognized as earned. The Company is
generally not contractually obligated to accept returns, except for defective,
shelf-worn and damaged products in accordance with negotiated terms. However,
the Company permits customers to return or exchange product and may provide
price protection on products unsold by a customer. In accordance with SFAS No.
48, "Revenue Recognition when Right of Return Exists", revenue is recorded net
of an allowance for estimated returns, exchanges, markdowns, price
concessions, and warranty costs. Such reserves are based upon management's
evaluation of historical experience, current industry trends and estimated
costs. The amount of reserves ultimately required could differ materially in
the near term from the amounts included in the accompanying consolidated
financial statements. Customer support provided by the Company is limited to
telephone and Internet support. These costs are not material and are charged
to expenses as incurred.
F-9
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Product Development
Product development expenses are charged to operations in the period
incurred and consist primarily of payroll and payroll related costs.
Advertising Costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and
charged to expense at the first run of the ad. Cooperative advertising with
distributors and retailers is accrued when revenue is recognized. Cooperative
advertising credits are reimbursed when qualifying claims are submitted.
Income Taxes
The Company accounts for income taxes using the liability method as
prescribed by the SFAS No. 109, "Accounting for Income Taxes." The statement
requires an asset and liability approach for financial accounting and
reporting of income taxes. Deferred income taxes are provided for temporary
differences in the recognition of certain income and expense items for
financial reporting and tax purposes given the provisions of the enacted tax
laws.
Foreign Currency
The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at
the weighted average exchange rate prevailing during the period. Gains or
losses arising from the translation of the foreign subsidiaries' financial
statements are included in the accompanying consolidated balance sheets as a
separate component of stockholders' equity (deficit). (Losses) gains resulting
from foreign currency transactions amounted to ($125,000), ($288,000),
$246,000, and $364,000 during the years ended December 31, 1999 and 1998, the
eight months ended December 31, 1997 and the year ended April 30, 1997,
respectively, and are included in other income (expense) in the consolidated
statements of operations.
Net Loss Per Share
The Company accounts for net loss per share in accordance with SFAS No. 128
"Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." Basic net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding plus the effect of any dilutive stock options and common
stock warrants.
For years ended December 31, 1999 and 1998, the eight months ended December
31, 1997 and the year ended April 30, 1997, all options and warrants to
purchase common stock were excluded from the diluted loss per share
calculation as the effect of such inclusion would be antidilutive.
Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". Comprehensive income
(loss) of the Company includes net income (loss) adjusted for the change in
foreign currency translation adjustments. The net effect of income taxes on
comprehensive income (loss) is immaterial. The disclosures required by SFAS
No. 130 have been included in the Statements of Stockholders' Equity
(Deficit).
F-10
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for employee stock options in accordance with the
Accounting Principles Board Opinion No. 25 and makes the necessary pro forma
disclosures mandated by SFAS No. 123 (see Note 10).
Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 became effective for fiscal
years beginning after December 15, 1998. The adoption of this standard did not
have a material impact on the Company's results of operations.
The AICPA issued SOP 98-4, "Deferral of the Effective Date of SOP 97-2,
Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition", which effectively modified and delayed the
application of certain provisions of SOP 97-2 until fiscal years beginning
after March 15, 1999. The Company does not believe that adoption of these
standards will have a material impact on the Company's results of operations.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued and, as amended by SFAS No. 137, will become
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The adoption of this standard did not have a material impact on the
Company's results of operations.
In December 1999, the Securities Exchange Commission ("SEC") staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as amended
by SAB No. 101A, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 explains the SEC
staff's general framework for revenue recognition, stating that certain
criteria be met in order to recognize revenue. SAB No. 101 also addresses the
question of gross vs. net revenue presentation and financial statement and
Management's Discussion and Analysis disclosures related to revenue
recognition. The Company will adopt SAB No. 101 in the first quarter of 2000.
3. Acquisition
In 1995, the Company acquired a 91 percent interest in Shiny Entertainment,
Inc. ("Shiny") for $3.6 million in cash and stock. The acquisition was
accounted for using the purchase method. The allocation of purchase price
included $3 million of goodwill. The purchase agreement requires the Company
to pay the former owner of Shiny additional cash payments of up to $5.6
million upon the delivery and acceptance of five future Shiny interactive
entertainment software titles, as defined. As of December 31, 1999, the
Company had not been required to make any additional payments in accordance
with the purchase agreement. (See Note 7)
4. Detail of Selected Balance Sheet Accounts
Inventories
Inventories are stated at the lower of cost or market. Inventories consist
of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(Dollars in
thousands)
<S> <C> <C>
Packaged software......................................... $4,394 $4,070
CD-ROMs, DVDs, cartridges, manuals, packaging and
supplies................................................. 1,663 2,233
------ ------
$6,057 $6,303
====== ======
</TABLE>
F-11
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(Dollars in
thousands)
<S> <C> <C>
Prepaid expenses............................................ $ 764 $ 639
Deposits.................................................... 110 46
------ ------
$ 874 $ 685
====== ======
</TABLE>
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
(Dollars in
thousands)
<S> <C> <C>
Computers and equipment............................... $ 14,651 $13,944
Furniture and fixtures................................ 849 588
Leasehold improvements................................ 1,348 1,135
-------- -------
16,848 15,667
Less: accumulated depreciation and amortization....... (12,623) (9,988)
-------- -------
$ 4,225 $ 5,679
======== =======
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(Dollars in
thousands)
<S> <C> <C>
Royalties payable........................................ $ 7,950 $ 6,758
Accrued payroll.......................................... 2,337 2,552
Payable to distributor................................... 2,908 216
Accrued bundle and affiliate............................. 1,563 1,409
Deferred income.......................................... 2,039 9,786
Other.................................................... 1,118 1,833
------- -------
$17,915 $22,554
======= =======
</TABLE>
Included in deferred income for the year ended December 31, 1998 is $9.0
million related to distribution and other advances on future products.
F-12
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Current Debt
Current debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(Dollars in
thousands)
<S> <C> <C>
Loan Agreement............................................ $19,218 $24,475
Other..................................................... 412 176
------- -------
$19,630 $24,651
======= =======
</TABLE>
Loan Agreement
Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (6.48 percent at December 31, 1999 and 5.62 percent at
December 31, 1998) plus 4.87 percent (11.35 percent at December 31, 1999 and
10.49 percent at December 31, 1998). At various times during 1999, the Company
amended its line of credit under the Loan Agreement with a financial
institution to extend its current line of credit through April 2000 and
thereafter, based on qualifying receivables and inventory. Under the terms of
the Amendment the maximum credit line is $25 million. Within the total credit
limit, the Company may borrow up to $7 million in excess of its borrowing
base. At December 31, 1999, the Company had availability of $1.9 million on
its line of credit. Under the amended line of credit the Company has been
required to place a cash collateral deposit from time to time, which was $2.5
million at December 31, 1999. In addition, the Company is required to maintain
the $5 million personal guarantee by the Company's Chairman. Subsequent to
year end, the Company further amended its line of credit which, among other
things, extended the expiration through April 2001 (See Note 14). The Company
is currently in compliance with the terms of the Loan Agreement.
6. Income Taxes
Loss before provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended Eight Months
December 31, Ended Year Ended
------------------ December 31, April 30,
1999 1998 1997 1997
-------- -------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Domestic....................... $(32,294) $(25,038) $(2,784) $(32,888)
Foreign........................ (3,981) (1,745) (2,275) (3,396)
-------- -------- ------- --------
Total.......................... $(36,275) $(26,783) $(5,059) $(36,284)
======== ======== ======= ========
</TABLE>
F-13
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year
Years Ended Eight Ended
December 31, Months Ended April
------------- December 31, 30,
1999 1998 1997 1997
------ ------ ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current:
Federal............................. $ -- $ -- $(179) $(1,689)
State............................... 8 8 -- --
Foreign............................. 66 (571) 51 153
------ ------ ----- -------
74 (563) (128) (1,536)
Deferred:
Federal............................. 4,536 2,000 128 (7,303)
State............................... 800 -- -- (226)
------ ------ ----- -------
5,336 2,000 128 (7,529)
------ ------ ----- -------
$5,410 $1,437 $ -- $(9,065)
====== ====== ===== =======
</TABLE>
The Company files a consolidated U.S. Federal income tax return which
includes substantially all of its domestic operations. The Company files
separate tax returns for each of its foreign subsidiaries in the countries in
which they reside. The Company's available net operating loss (NOL)
carryforward for federal tax reporting purposes approximates $97.1 million and
may be subject to certain limitations as defined under Section 382 of the
Internal Revenue Code. The federal NOL carryforwards expire through the year
2019. The Company's NOL's for state tax reporting purposes approximate $48.7
million and expire through the year 2004.
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax loss is as follows:
<TABLE>
<CAPTION>
Years Ended Eight Year
December 31, Months Ended Ended
--------------- December 31, April 30,
1999 1998 1997 1997
------ ------ ------------ ---------
<S> <C> <C> <C> <C>
Statutory income tax rate......... (34.0)% (34.0)% (34.0)% (34.0)%
State and local income taxes, net
of federal income tax benefit.... (3.0) (3.0) (3.0) (3.0)
Valuation allowance............... 51.9 39.8 39.7 8.0
Other............................. -- 2.6 (2.7) 4.0
------ ------ ----- -----
14.9 % 5.4 % -- % (25.0)%
====== ====== ===== =====
</TABLE>
F-14
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's net deferred income tax asset (liability)
are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(Dollars in
thousands)
<S> <C> <C>
Current deferred tax asset (liability):
Prepaid royalties..................................... $ (7,652) $ (5,621)
Nondeductible reserves................................ 4,184 5,013
Accrued expenses...................................... 1,007 853
Foreign loss and credit carryforward.................. 454 1,962
Federal and state net operating losses................ 35,952 17,796
Research and development credit carryforward.......... 831 831
Other................................................. 314 461
-------- --------
$ 35,090 $ 21,295
======== ========
Non-current deferred tax asset (liability):
Depreciation expense.................................. $ (126) $ (342)
Nondeductible reserves................................ 318 223
Other................................................. (5) (22)
-------- --------
$ 187 $ (141)
======== ========
Total deferred tax asset before valuation allowance..... $ 35,277 $ 21,154
Valuation allowance..................................... (35,277) (15,818)
-------- --------
Net deferred tax asset.................................. $ -- $ 5,336
======== ========
</TABLE>
The valuation allowance relates primarily to net operating loss and tax
credit carryforwards. Due to the uncertainty surrounding the realization of
the favorable tax attributes in the short term, the Company recorded a
valuation allowance against its net deferred tax assets at this time.
7. Commitments and Contingencies
Leases
The Company has various leases for the office space it occupies including
its corporate offices in Irvine, California. The lease for corporate offices
expires in June 2006 with one five-year option to extend the term of the
lease. The Company has also entered into various office equipment operating
leases. Future minimum lease payments under noncancelable operating leases are
as follows:
<TABLE>
<S> <C>
Year ending December 31 (Dollars in thousands):
2000.............................................................. $ 2,131
2001.............................................................. 1,731
2002.............................................................. 1,755
2003.............................................................. 1,770
2004.............................................................. 1,907
Thereafter........................................................ 4,708
-------
$14,002
=======
</TABLE>
Total rent expense was $3.2 million, $2.4 million, $1.3 million and $2.1
million for the years ended December 31, 1999 and 1998, the eight months ended
December 31, 1997, and the year ended April 30, 1997, respectively.
F-15
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pending Internal Revenue Service Examination
The Internal Revenue Service ("the IRS") is currently examining the
Company's consolidated federal income tax returns for the years ended April
30, 1992 through 1997. The IRS has challenged the timing of certain tax
deductions taken by the Company, and has asserted that an additional tax
liability is due. The Company disagrees with the IRS challenge, and is
currently contesting such challenges. The potential losses to the Company as a
result of these challenges are not reasonably estimable. Accordingly, no
reserve has been established in the accompanying financial statements. Any
losses which might be suffered by the Company as a result of this examination
that could not be offset by the Company's Deferred tax asset, could impact the
Company's future profitability.
Litigation
The Company is involved in various legal proceedings, claims and litigation
arising in the ordinary course of business, including disputes arising over
the ownership of intellectual property rights and collection matters. In the
opinion of management, the outcome of known routine claims will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company and the former owner of Shiny have a dispute over additional
cash payments upon the delivery and acceptance of interactive entertainment
software titles that Shiny was committed to deliver over time (See Note 3).
The Company believes that no amounts are due as of December 31, 1999 under the
applicable agreements.
Employment Agreements
The Company has entered into employment agreements with three of its
officers providing for, among other things, salary, bonuses and the right to
participate in certain incentive compensation and other employee benefit plans
established by the Company. Under these agreements, upon termination without
cause or resignation for good reason, as defined, the employees may be
entitled to certain severance benefits, as defined. These agreements expire
between 2002 and 2004.
New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("Participating Countries") established fixed conversion rates between
their existing sovereign currencies and a new European currency, the "euro".
The euro was adopted by the Participating Countries as the common legal
currency on that date. A significant portion of the Company's sales are made
to Participating Countries and consequently, the Company anticipates that the
euro conversion will, among other things, create technical challenges to adapt
information technology and other systems to accommodate euro-denominated
transactions and limit the Company's ability to charge different prices for
its producers in different markets. While the Company believes that the
conversion will not cause material disruption of its business, there can be no
assurance that the conversion will not have a material effect on the Company's
business or financial condition.
8. Stockholders' Equity (Deficit)
Common Stock
In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company issued its Chairman warrants to
purchase 400,000 shares of the Company's Common Stock (the "Warrants") at an
exercise price of $3.00 per share exercisable after May 20, 1999. The Warrants
have a three year term and have no registration rights. The shares issuable
upon exercise of the warrants are
F-16
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subject to the twelve month lockup agreement the employee entered into in
connection with the Company's IPO. In connection with the issuance of the
Warrants, the Company recorded an expense equal to the fair market value of
the Warrants, which is approximately $316,000, with such expense being
amortized as additional debt cost in 1999, which was the term of the
guarantee.
As consideration for the extension of a $5 million personal guarantee by
the Company's Chairman under the Company's Loan Agreement (See Note 5), the
Company agreed to assume the obligation of the Chairman under an agreement
between the Chairman and the Company's former President, pursuant to which the
Chairman granted certain put rights to the former President with respect to
the 271,528 common stock options held by the former President. The Company
recorded compensation expense of approximately $700,000 through December 31,
1998 related to these options and interest expense of $300,000 for the year
ended 1999, in connection with the assumption of the put right. In May 1999,
the Company issued 271,528 shares of Common Stock for the exercise of the
former President's stock options in conjunction with an Agreement and General
Release executed with the former President. The Company guaranteed the former
President a value of $1 million for the stock through periodic sales or
guarantee payments through January 2000. On the due dates of the payments, the
Company has the option to either require that the former President sell shares
on the open market or the Company may purchase the shares from the former
president and retire them. As of December 31, 1999, the Company has not
repurchased any shares under this Agreement.
In April 1999, the Company entered into a multi-product development
agreement with a developer which provides for the delivery of ten titles to
the Company during 1999 and 2000 in exchange for $0.5 million paid in cash
installments and the issuance of 484,848 shares of the Company's Common Stock.
The shares of Common Stock will be restricted as to transfer rights until such
products are delivered and accepted by the Company. The arrangement also
includes certain penalties to the developer in the event of noncompliance and
the terms and conditions are subject to the approval by the Company's
underwriters and lenders, if necessary.
The Company entered into an Agreement and Release with an employee and
former director of the Company. As a result of the Agreement and Release, the
Company issued 56,208 shares of its Common Stock in consideration for payments
of deferred compensation.
During 1999, the Company completed two equity transactions with Titus which
provided for the issuance of 10,795,455 shares of the Company's Common Stock
for $35 million. Subsequent to December 31, 1999, the Company completed a
transaction with Titus which provided for the issuance of convertible,
redeemable Preferred Stock for $20 million, including warrants to purchase
shares of the Company's Common Stock (See Note 14).
Employee Stock Purchase Plan.
Under this plan, eligible employees may purchase shares of the Company's
Common Stock at 85% of fair market value at specific, predetermined dates. Of
the 200,000 shares authorized to be issued under the plan, 72,000 shares
remained available for issuance at December 31, 1999. Employees purchased
72,225 and 56,102 shares in 1999 and 1998 for $127,000 and $85,000,
respectively.
Initial Public Offering
In June 1998, the Company effected a registration with the Securities and
Exchange Commission, whereby the Company registered up to 5,750,000 shares of
its Common Stock. In June 1998, the Company completed its initial public
offering of 5,000,000 shares of Common Stock, at $5.50 per share, which raised
approximately
F-17
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$24.3 million, net of expenses of $3.2 million. In addition, in connection
with the offering, 750,000 shares of Common Stock of the Company were sold by
a selling stockholder at $5.50 per share, for which the Company received no
proceeds.
9. Loss Per Share
Basic loss per share is calculated by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding and
does not include the impact of any potentially dilutive common stock
equivalents. Diluted loss per share is the same as basic because the effect of
outstanding stock options and warrants is anti-dillutive.
There were options and warrants outstanding to purchase 3,740,780 shares of
common stock and there were 484,848 shares of restricted common stock at
December 31, 1999, which were excluded from the loss per share computation. At
December 31, 1998 and 1997 and April 30, 1997 there were options to purchase
2,132,738, 1,838,972 and 1,630,022 shares of common stock, respectively, which
were not included in the loss per share computation. The weighted average
exercise price at December 31, 1999, 1998 and 1997 and April 30, 1997 was
$3.30, $4.73, $5.29 and $4.59, respectively, for the options outstanding.
10. Employee Benefit Plans
Stock Option Plans
The Company has three stock option plans. Under the Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan--1991 (1991
Plan), the Company was authorized to grant options to its employees to
purchase up to 2,250,000 shares of common stock. Under the Incentive Stock
Option and Nonqualified Stock Option Plan--1994 (1994 Plan), the Company was
authorized to grant options to its employees to purchase up to 808,300 shares
of common stock. Under the 1997 Stock Incentive Plan the Company may grant
options to its employees, consultants and directors to purchase up to 700,000
shares of common stock.
Options under all three plans generally vest over five years. Holders of
options under the 1991 Plan and the 1994 Plan shall be deemed 100 percent
vested in the event of a merger in which the Company is not the surviving
entity, a sale of substantially all of the assets of the Company, or a sale of
all shares of common stock of the Company. The Company has treated the
difference, if any, between the exercise price and the estimated fair market
value, as determined by the board of directors on the date of grant, as
compensation expense for financial reporting purposes. Compensation expense
for the vested portion aggregated $26,000, $190,000, $204,000 and $306,000 for
the years ended December 31, 1999 and 1998, the eight months ended December
31, 1997, and the year ended April 30, 1997, respectively.
Effective February 9, 1998, the Company repriced substantially all
outstanding options with exercise prices greater than $8 per share and
subsequently reissued these options with exercise prices equal to $8 per
share, management's estimate of the fair value of the Company's common stock
as of the date of reissuance. These options were accounted for as new grants.
Effective March 2, 1998, the 1991 Plan and the 1994 Plan were terminated for
purposes of future grants. On February 23, 1998, the Company granted 240,100
stock options with an exercise price equal to the estimated fair market value
of $8 per share.
F-18
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of option activity pursuant to the Company's
stock option plans:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------- Eight Months Ended Year Ended
1999 1998 December 31, 1997 April 30, 1997
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 2,132,738 $4.73 1,838,972 $5.29 1,630,022 $ 4.59 1,824,025 $ 3.16
Granted................ 2,208,028 2.14 451,100 6.91 263,750 11.25 136,800 14.08
Exercised.............. (287,958) 0.04 (12,084) 1.27 -- -- (313,403) 0.18
Canceled............... (712,028) 5.29 (139,750) 8.44 (54,800) 12.50 (17,400) 8.50
Rescinded.............. (5,500) 8.00 -- -- -- --
--------- ----- --------- ----- --------- ------ --------- ------
Options outstanding at
end of period.......... 3,340,780 $3.30 2,132,738 $4.73 1,838,972 $ 5.29 1,630,022 $ 4.59
========= ===== ========= ===== ========= ====== ========= ======
Options exercisable..... 1,209,734 1,448,143 1,324,132 1,218,102
========= ========= ========= =========
</TABLE>
The following outlines the significant assumptions used to calculate the
fair value information presented utilizing the Black-Scholes Single Option
approach with ratable amortization:
<TABLE>
<CAPTION>
Years Ended Eight
December 31, Months Ended Year Ended
---------------------- December 31, April 30,
1999 1998 1997 1997
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Risk free rate............... 6.3% 5.1% 6.1% 6.1%
Expected life................ 7.12 years 7.74 years 8.02 years 7.13 years
Expected volatility.......... 0.9 0.7 -- --
Expected dividends........... -- -- -- --
Weighted--average grant-date
fair value of options
granted..................... $ 1.91 $ 2.95 $ 3.61 $ 3.68
</TABLE>
A detail of the options outstanding and exercisable as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted Weighted
Range of Average Weighted Average
Exercise Number Remaining Average Number Exercise
Prices Outstanding Contract Life Price Outstanding Price
-------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15-$ 0.47 572,874 2.24 $0.15 572,874 $0.15
$1.94-$ 4.44 1,929,356 9.19 2.44 175,356 2.64
$4.50-$ 6.66 212,400 7.29 5.02 113,600 5.09
$7.00-$10.00 626,150 6.51 8.25 347,904 8.36
--------- ---- ----- --------- -----
$0.15-$10.00 3,340,780 7.38 $3.30 1,209,734 $3.34
========= ==== ===== ========= =====
</TABLE>
F-19
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows pro forma net loss as if the fair value based
accounting method prescribed by SFAS No. 123 had been used to account for
stock based compensation cost:
<TABLE>
<CAPTION>
Years Ended Eight Year
December 31, Months Ended Ended
------------------ December 31, April 30,
1999 1998 1997 1997
-------- -------- ------------ ---------
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Net loss as reported............ $(41,685) $(28,220) $(5,059) $(27,219)
Pro forma compensation expense.. (1,242) (1,011) (276) (348)
-------- -------- ------- --------
Pro forma net loss.............. $(42,927) $(29,231) $(5,335) $(27,567)
======== ======== ======= ========
Basic and diluted net loss as
reported....................... $ (1.86) $ (1.91) $ (0.45) $ (2.46)
Basic and diluted pro forma net
loss........................... $ (1.91) $ (1.98) $ (0.48) $ (2.49)
======== ======== ======= ========
</TABLE>
Profit Sharing 401(k) Plan
The Company sponsors a 401(k) plan ("the Plan") for most full-time
employees. The Company matches 50 percent of the participant's contributions
up to six percent of the participant's base compensation. The profit sharing
contribution amount is at the sole discretion of the Company's board of
directors. Participants vest at a rate of 20 percent per year after the first
year of service for profit sharing contributions and 20 percent per year after
the first two years of service for matching contributions. Participants become
100 percent vested upon death, permanent disability or termination of the
Plan. Benefit expense for the years ended December 31, 1999 and 1998, for the
eight months ended December 31, 1997 and for the year ended April 30, 1997 was
$257,000, $256,000, $178,000, and $229,000, respectively.
11. Related Parties
The Company has amounts due from a business controlled by the Chairman of
the Company. Net amounts due, prior to reserves, at December 31, 1999 and 1998
were $2.5 and $2 million, respectively. Such amounts at December 31, 1999 and
1998 are fully reserved. Through December 1997, the Company rented office
space from the Chairman of the Company. Rent expense paid to the Chairman was
$160,000 and $191,000 for the eight months ended December 31, 1997 and for the
year ended April 30, 1997, respectively.
In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company's Chairman provided a personal
guarantee in the amount of $5 million secured by certain of the Chairman's
personal assets. As consideration for making such guarantee, the Chairman
received warrants to purchase 400,000 shares of the Company's Common Stock at
an exercise price of $3.00 per share exercisable after May 1999 (see Note 8).
The Company amended its line of credit in March 1999 and in conjunction with
the amendment, the personal guarantee was extended. As consideration for
extending the guarantee, the Company assumed an obligation to the Company's
former President by the Chairman (See Note 8). The Company did not repurchase
any shares from the former President under this obligation.
The Company subleases office space from Virgin. Rent expense paid to Virgin
was $50,000 for the year ended December 31, 1999.
Distribution and Publishing Agreements
In February 1999, the Company signed an International Distribution
Agreement with Virgin which provides for the exclusive distribution of
substantially all of the Company's products in Europe, CIS, Africa and the
F-20
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Middle East for a seven-year period, cancelable under certain conditions,
subject to termination penalties and costs. Under the Agreement, the Company
pays Virgin a monthly overhead fee, certain minimum operating charges, a
distribution fee based on net sales, and Virgin provides certain market
preparation, warehousing, sales and fulfillment services on behalf of the
Company. In connection with this arrangement the Company incurred expenses of
$3.4 million in distribution fees, $3.9 million in overhead fees and $2.9
million to cover certain minimum operating charges to Virgin for the year
ended December 31, 1999.
The Company has also executed a Product Publishing Agreement with Virgin
which provides the Company with an exclusive license to publish and distribute
substantially all of Virgin's products within North America, Latin America and
South America for a royalty based on net sales. During the year ended
December 31, 1999, the Company recognized revenue of $276,000 and gross profit
of $41,000 for performing distribution services on behalf of Virgin.
In April 1999, the Company entered into an exclusive North American
distribution agreement with Titus which provides for the distribution of eight
titles on multiple platforms for a two-year period. Under the terms of the
arrangement, the Company will receive a distribution fee for all orders
shipped and will provide certain services including marketing, order
processing, billings and collections. During the year ended December 31, 1999,
the Company recognized revenue of $1.2 million and gross profit of $0.2
million for performing distribution services on behalf of Titus.
During 1999, the Company executed publishing agreements with Titus. As a
result of these agreements, the Company has delivered titles to Titus and
recognized $2.6 million in licensing revenue.
Investment in Affiliate
In connection with the International Distribution Agreement and Product
Publishing Agreement, the Company has also executed an Operating Agreement
with Virgin Acquisition Holdings, LLC, which, among other terms and
conditions, provides the Company with a 43.9 percent equity interest in VIE
Acquisition Group LLC ("VIE"), the parent entity of Virgin. Under the
Operating Agreement the Company was obligated to make a cash payment of
$9,000. However, the Company is not obligated to make any future contributions
to the working capital of Virgin other than the monthly overhead fee discussed
above. In addition, two former members of the management of Interplay
Productions Limited, the Company's United Kingdom subsidiary, have acquired a
6 percent interest in VIE. During 1999, Titus acquired 50.1 percent equity
interest in VIE. The Company and Titus together hold a 94 percent equity
interest in VIE.
The Company accounts for its investment in VIE in accordance with the
equity method of accounting. The Company did not recognize any material income
or loss in connection with its investment in VIE for the year ended December
31, 1999. In addition, the Company does not recognize sales to Virgin until
Virgin reports its sales of the Company's products to unaffiliated third
parties.
12. Concentration of Credit Risk
The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables may be affected by
changes in economic or other industry conditions and could impact the
Company's overall credit risk. Although the Company generally does not require
collateral, the Company performs ongoing credit evaluations of its customers
and reserves for potential credit losses are maintained.
For the year ended December 31, 1999, Virgin accounted for approximately 22
percent of net revenues in connection with the International Distribution
Agreement (See Note 11). One customer accounted for
F-21
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately 15 percent of net revenues for the fiscal year ended April 30,
1997. No single customer accounted for ten percent or more of net revenues in
the year ended December 31, 1998 or the eight months ended December 31, 1997.
13. Segment and Geographical Information
The Company operates in one principal business segment. Information about
the Company's operations in the United States and foreign markets is presented
below:
<TABLE>
<CAPTION>
Year Ended December 31, Eight Months Year Ended
----------------------- Ended December 31, April 30,
1999 1998 1997 1997
----------- ----------- ------------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net revenues:
United States......... $ 92,244 $ 94,727 $65,199 $ 54,469
United Kingdom........ 9,686 32,135 20,689 27,867
Other................. -- -- 73 926
----------- ----------- ------- --------
Consolidated net
revenues........... $ 101,930 $ 126,862 $85,961 $ 83,262
=========== =========== ======= ========
Income (loss) from
operations:
United States......... $ (28,824) $ (20,315) $ 298 $(30,764)
United Kingdom........ (3,980) (1,535) (2,666) (3,871)
Other................. -- -- (418) (49)
----------- ----------- ------- --------
Consolidated loss
from operations.... $ (32,804) $ (21,850) $(2,786) $(34,684)
=========== =========== ======= ========
Expenditures made for
the acquisition of
long-lived assets:
United States......... $ 1,595 $ 1,067 $ 459 $ 2,741
United Kingdom........ -- 422 175 382
Other................. -- 195 158 328
----------- ----------- ------- --------
Total expenditures
for long-lived
assets............. $ 1,595 $ 1,684 $ 792 $ 3,451
=========== =========== ======= ========
</TABLE>
Net revenues were made to geographic regions as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------- Eight Months Ended Year Ended
1999 1998 December 31, 1997 April 30, 1997
---------------- ---------------- -------------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- ---------- --------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America........... $ 49,443 48.5% $ 73,865 58.2% $ 51,833 60.3% $38,606 46.4%
Europe.................. 23,901 23.4 28,777 22.7 19,941 23.2 26,752 32.1
Rest of World........... 6,409 6.3 7,016 5.5 4,701 5.5 5,254 6.3
OEM, royalty and
licensing.............. 22,177 21.8 17,204 13.6 9,486 11.0 12,650 15.2
-------- ----- -------- ----- ---------- -------- ------- -----
$101,930 100.0% $126,862 100.0% $ 85,961 100.0% $83,262 100.0%
======== ===== ======== ===== ========== ======== ======= =====
</TABLE>
F-22
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-lived assets by geographic regions, net:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------- --------------
Amount Percent Amount Percent
------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
North America.................................. $ 5,435 97.9% $6,621 89.6%
Europe......................................... 47 0.9 723 9.8
Rest of World.................................. -- -- -- --
OEM, royalty and licensing..................... 69 1.2 44 0.6
------- ----- ------ -----
$ 5,551 100.0% $7,388 100.0%
======= ===== ====== =====
</TABLE>
14. Subsequent Events
Amendment to Credit Facility
Subsequent to December 31, 1999, the Company extended its line of credit
through April 2001 generally under the same terms (See Note 5), except that
Titus provided a $20 million corporate guarantee and the financial institution
agreed to release to the Company the $2.5 million of cash held as collateral.
Sale of Preferred Stock
Subsequent to December 31, 1999, the Company completed a transaction with
Titus under a Stock Purchase Agreement dated April 13, 2000 and issued 719,424
shares of newly designated Series A Preferred Stock ("Preferred Stock") which
has preferences under certain events, as defined. The Preferred Stock is
convertible by Titus, redeemable by the Company, and pays a 6 percent dividend
per annum. The Company may redeem the Preferred Stock shares at anytime at the
original issue price. Titus may convert the Preferred Stock shares into shares
of Common Stock at any time after May 2001. The conversion rate is the lesser
of $2.78 or 85 percent of the market price per share at the time of
conversion, as defined. The Preferred Stock is entitled to the same voting
rights as if it had been converted to Common Stock shares. Conversion rights
are limited to 6,004,507 shares of Common Stock unless the Company's
stockholders have approved the issuance of the Preferred Stock at which time
the Preferred Stock shares would be convertible to 7,194,240 shares of Common
Stock at closing. In connection with this transaction, Titus received a
warrant for 350,000 shares of the Company's Common Stock at $3.79 per share
exercisable at anytime, and a warrant for 50,000 shares of the Company's
Common Stock at $3.79 per share which would only be exercisable by Titus if
the Company does not meet certain financial operating performance targets for
the year ending December 31, 2000, as defined. Both warrants expire in April
2010. In connection with the $20 million corporate guarantee provided by Titus
on the extension of the Company's line of credit, if the Company defaults in
accordance with the line of credit agreement, and Titus is forced to pay on
its corporate guarantee, Titus may have the right to receive additional shares
of the Company's Common Stock upon conversion of their Preferred Stock. The
Common Stock shares issuable upon conversion of the Preferred Stock or the
exercise of the warrants are subject to certain registration rights.
The Company also secured a $5 million supplemental line of credit with
Titus through April 2001. Amounts drawn on this line will be subject to
interest of up to 12 percent per annum payable quarterly. In connection with
this line of credit, Titus received a warrant for up to 100,000 shares of the
Company's Common Stock at $3.79 per share that will expire in April 2010. The
warrant will vest if and to the extent that the Company draws on the line of
credit, as defined.
F- 23
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Pro-forma Condensed Balance Sheet
The following unaudited pro-forma condensed balance sheet reflects the
estimated impact of the sale of the Series A Preferred stock for $20 million
and the amendment to the credit facility and the related release of
$2.5 million of cash collateral described above as if the transactions would
have taken place at December 31, 1999.
UNAUDITED PRO-FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
Pro-
Actual forma
-------- --------
(Dollars in
thousands)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash..................................................... $ 399 $ 22,996
Restricted cash.......................................... 2,597 --
Trade receivables, net of allowances of $9,161........... 22,209 22,209
Inventories.............................................. 6,057 6,057
Prepaid licenses and royalties........................... 19,249 19,249
Other.................................................... 874 874
-------- --------
Total current assets................................... 51,385 71,385
Property and Equipment, net................................ 4,225 4,225
Other Assets............................................... 1,326 1,326
-------- --------
$ 56,936 $ 76,936
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Current debt............................................. $ 19,630 $ 19,630
Accounts payable......................................... 21,462 21,462
Accrued liabilities...................................... 17,915 17,915
-------- --------
Total current liabilities.............................. 59,007 59,007
Commitments and Contingencies
Stockholders' Equity (Deficit):
Series A Preferred stock, $.001 par value, authorized
5,000,000 shares; issued and outstanding, none and pro
forma 719,424 shares.................................... -- 20,000
Common stock, $.001 par value, authorized 50,000,000
shares; issued and outstanding 29,989,125 shares........ 30 30
Paid-in capital.......................................... 87,390 87,390
Accumulated deficit...................................... (89,782) (89,782)
Accumulated other comprehensive income................... 291 291
-------- --------
Total stockholders' equity (deficit)................... (2,071) 17,929
-------- --------
$ 56,936 $ 76,936
======== ========
</TABLE>
F-24
<PAGE>
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Trade Receivables Allowance
------------------------------------------------------
Balance at Provisions for
Beginning of Returns and Returns and Balance at End
Period Period Discounts Discounts of Period
------ ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
Year ended April 30,
1997................... $ 9,100 $34,424 $(28,630) $14,894
======= ======= ======== =======
Eight months ended
December 31, 1997...... $14,894 $21,915 $(22,348) $14,461
======= ======= ======== =======
Year ended December 31,
1998................... $14,461 $43,596 $(39,626) $18,431
======= ======= ======== =======
Year ended December 31,
1999................... $18,431 $25,187 $(34,457) $ 9,161
======= ======= ======== =======
</TABLE>
F-25
<PAGE>
EXHIBIT 10.31
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of April
---------
14, 2000 by and between INTERPLAY ENTERTAINMENT CORP., a Delaware corporation
(the "Company"), TITUS INTERACTIVE SA, a French corporation ("Titus" or the
------- -----
"Investor"). Capitalized terms not otherwise defined herein shall have the
--------
meanings ascribed thereto in Section 14 hereof.
THE PARTIES hereby agree as follows:
1. Authorization of Investor Stock. The Company has authorized the issue
-------------------------------
and sale of up to seven hundred nineteen thousand four hundred twenty-four
(719,424) shares (the "Shares") of its Series A Preferred Stock, par value $.001
per share ("Series A Preferred Stock"). The Series A Preferred Stock has the
rights preferences, privileges and restrictions set forth in the Certificate of
Designation attached hereto as Exhibit A (the "Certificate of Designation").
---------
2. Sale and Purchase of Investor Stock. Upon the terms and subject to
-----------------------------------
the conditions herein contained, the Company agrees to sell to Investor, and
Investor agrees to purchase from the Company, at the Closing (as hereinafter
defined) on the Closing Date (as hereinafter defined) the Shares at a price in
the aggregate of Twenty Million Dollars ($20,000,000) (the "Purchase Payment").
----------------
3. Closing. The closing of the sale to and purchase by Investor of the
-------
Shares (the "Closing") shall occur at the offices of Paul, Hastings, Janofsky &
-------
Walker LLP, 555 South Flower Street, Twenty-Third Floor, Los Angeles,
California, at the hour of 10:00 A.M., Pacific time, on April 12, 2000 or at
such different time or day as the Investor and the Company shall agree (the
"Closing Date"). At the Closing, the Company shall deliver to Investor a
------------
certificate evidencing the Shares which shall be registered in Investor's name,
against delivery to the Company of payment by check or wire transfer in an
amount equal to $10,000,000 and surrender of those certain promissory notes of
the Company in favor of Investor in the aggregate amount of $10,000,000.
4. Register of Shares; Restrictions on Transfer of Securities; Removal of
----------------------------------------------------------------------
Restrictions on Transfer of Investor Stock.
- ------------------------------------------
4.1 Register of Investor Stock. The Company or its duly appointed
--------------------------
agent shall maintain a register for the Series A Preferred Stock (and the shares
of Common Stock issuable upon conversion thereof), in which it shall register
the issue and sale of all such shares. All transfers of the Series A Preferred
Stock shall be recorded on the register maintained by the Company or its agent,
and the Company shall be entitled to regard the registered holder of the Shares
as the actual holder of the Shares so registered until the Company or its agent
is required to record a transfer of such Shares on its register. Subject to
Section 4.2(c) hereof, the Company or its agent shall be required to record any
such transfer when it receives the shares of Series A Preferred Stock to be
transferred duly and properly endorsed by the registered holder thereof or by
its attorney duly authorized in writing.
1
<PAGE>
4.2 Restrictions on Transfer.
-------------------------
(a) Investor understands and agrees that neither the Shares, nor
the shares of the Company's Common Stock issuable upon the conversion thereof
(collectively, the "Investor Stock") have been registered under the Securities
Act, and that accordingly they will not be fully transferable except as
permitted under various exemptions contained in the Securities Act, or upon
satisfaction of the registration and prospectus delivery requirements of the
Securities Act. Investor acknowledges that it must bear the economic risk of its
investment in the Investor Stock for an indefinite period of time (subject,
however, to the Company's obligation to effect the registration of the Investor
Stock under the Securities Act in accordance with this Agreement) since they
have not been registered under the Securities Act and therefore cannot be sold
unless they are subsequently registered or an exemption from registration is
available.
(b) (i) Investor hereby represents and warrants to the Company
that it is acquiring the Investor Stock for investment purposes only, for its
own account, and not as nominee or agent for any other Person, and not with the
view to, or for resale in connection with, any distribution thereof within the
meaning of the Securities Act, and (ii) it is an "accredited investor" within
the meaning of Regulation D of the Commission under the Securities Act.
(c) Investor hereby agrees with the Company as follows:
(i) Subject to Section 4.3 hereof, the certificates
evidencing the Investor Stock, and each certificate issued in transfer thereof,
will bear the following legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and,
except as stated in an agreement between the holder of this
certificate, or its predecessor in interest, and the issuer
corporation, such securities may not be sold or transferred unless
there is an effective registration statement under such Act covering
such securities or the issuer corporation receives an opinion of
counsel (which may be counsel for the issuer corporation) stating that
such sale or transfer is exempt from the registration and prospectus
delivery requirements of such Act."
(ii) The certificates representing such Investor Stock,
and each certificate issued in transfer thereof, will also bear any legend
required under any applicable state securities law.
(iii) Absent an effective registration statement under the
Securities Act, covering the disposition of the Investor Stock which Investor
acquires, Investor will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of any or all of the Investor Stock without first providing
the Company with an opinion of counsel (which
2
<PAGE>
may be counsel for the Company) to the effect that such sale, transfer,
assignment, pledge, hypothecation or other disposition will be exempt from the
registration and the prospectus delivery requirements of the Securities Act and
the registration or qualification requirements of any applicable state
securities laws, except that no such registration or opinion shall be required
with respect to (A) a transfer not involving a change in beneficial ownership,
or (B) a sale to be effected in accordance with Rule 144 of the Commission under
the Securities Act (or any comparable exemption).
(iv) Investor consents to the Company's making a notation
on its records or giving instructions to any transfer agent of the Investor
Stock in order to implement the restrictions on transfer of the Investor Stock
mentioned in this subsection (c).
4.3 Removal of Transfer Restrictions. Any legend endorsed on a
--------------------------------
certificate evidencing shares of Investor Stock pursuant to Section 4.2(c)(i)
hereof and any stop transfer instructions and record notations with respect to
such Investor Stock shall be removed and the Company shall issue a certificate
without such legend to the holder of such Investor Stock (a) if such Investor
Stock is registered under the Securities Act, or (b) if such Investor Stock may
be sold under Rule 144(k) of the Commission under the Securities Act or (c) if
such holder provides the Company with an opinion of counsel (which may be
counsel for the Company) reasonably acceptable to the Company to the effect that
a public sale or transfer of such Investor Stock may be made without
registration under the Securities Act.
5. Representations and Warranties by the Company. In order to induce
---------------------------------------------
Investor to enter into this Agreement and to purchase the Shares, the Company
hereby covenants with, and represents and warrants to, Investor, as of the date
hereof, except as set forth on the Schedule of Exceptions delivered to Investor
concurrently herewith, as follows (unless the context otherwise requires, the
"Company" shall refer to the Company and its Subsidiaries, collectively):
5.1 Organization, Standing, etc. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite power and authority to carry on its business, to
own and hold its properties and assets, to enter into this Agreement, to issue
the Investor Stock and to carry out the provisions hereof and thereof. The
copies of the Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws of the Company which have been delivered to Investor prior to
the execution of this Agreement are true and complete and have not been amended
or repealed. Subsidiaries of the Company are set forth on Schedule 5.1.
------------
5.2 Qualification. The Company is duly qualified, licensed or
-------------
domesticated as a foreign corporation in good standing in each jurisdiction
wherein the nature of its activities or its properties owned or leased makes
such qualification, licensing or domestication necessary, except where the
failure to be so qualified would not have a Material Adverse Effect on the
Company.
5.3 Capital Stock. The authorized capital stock of the Company
-------------
consists of 50,000,000 shares of Common Stock, and 5,000,000 shares of Preferred
Stock, of which
3
<PAGE>
719,424 shares have been designated as Series A Preferred Stock, and the Company
has no authority to issue any other capital stock. No shares of Preferred Stock
have been issued prior to the Closing; 30,022,538 shares of Common Stock are
issued and outstanding, and such shares are duly authorized, validly issued,
fully paid and nonassessable. Except where the failure to do so would not result
in a Material Adverse Effect on the Company, the offer, issuance and sale of the
shares of Common Stock were (a) registered or qualified under (or were exempt
from the registration and prospectus delivery requirements of) the Securities
Act, (b) registered or qualified (or were exempt from registration or
qualification) under the registration or qualification requirements of all
applicable state securities laws, and (c) accomplished in conformity with all
other federal and applicable state securities laws, rules and regulations. As of
March 31, 2000, the Company has (A) reserved a total of 149,856 shares of Common
Stock for issuance to employees, officers and directors under a 1991 stock
option plan, under which options to purchase a total of 149,856 shares have been
granted, but neither exercised nor forfeited by the holder thereof, (B) reserved
a total of 337,950 shares of Common Stock for issuance to employees, officers
and directors under a 1994 stock option plan, under which options to purchase a
total of 337,950 shares have been granted, but neither exercised nor forfeited
by the holder thereof, and (C) reserved a total of 2,369,025 shares of Common
Stock for issuance to employees, officers and directors under a 1997 stock
incentive plan, under which options to purchase 2,126,100 shares have been
granted, but neither exercised nor forfeited by the holder thereof, (D) reserved
a total of 200,000 shares of Common Stock for issuance to employees and officers
under an Employee Stock Purchase Plan, of which 128,327 shares have been
granted, but neither exercised nor forfeited by the holder thereof, and (E)
reserved a total of 861,156 shares of Common Stock for issuance upon the
exercise of options granted outside the Company's option plans, of which 572,874
shares have been granted, but neither exercised nor forfeited by the holder
thereof. The Company has reserved a total of 400,000 shares for issuance upon
exercise of outstanding warrants issued by the Company. Under the terms thereof,
to the extent that any outstanding award under the 1991 stock option plan or
1994 stock option plan expires or terminates prior to exercise of such award in
full, or if shares issued upon exercise are repurchased by the Company, the
unexercised portion or repurchased shares shall be added to the pool of shares
under the 1997 stock incentive plan and shall thereafter be available for grant
under the terms of such 1997 stock incentive plan. Each of the 1991 stock option
plan and 1994 stock option plan has been terminated with respect to future
grants of shares of Common Stock. Except as expressly provided in this
Agreement, the Company has no outstanding subscription, option, warrant, call,
contract, demand, commitment, convertible security or other instrument,
agreement or arrangement of any character or nature whatsoever under which the
Company is or may be obligated to issue Common Stock, Preferred Stock or other
Equity Security (as hereinafter defined) of any kind. Neither the offer nor the
issuance or sale of the Investor Stock constitutes or will constitute an event,
under any Equity Security or any anti-dilution or similar provision of any
agreement or instrument to which the Company is a party or by which it is bound
or affected, which shall either increase the number of shares or units of Equity
Securities issuable upon conversion of any securities (whether stock or
Indebtedness for Borrowed Money (as hereinafter defined)) or upon exercise of
any warrant or right to subscribe to or purchase any stock or similar security
(including Indebtedness for Borrowed Money), or decrease the consideration per
share or unit of Equity Security to be received by the Company upon such
conversion or exercise.
4
<PAGE>
5.4 Investor Stock. The Shares have been duly authorized and validly
--------------
issued, and upon payment to the Company of the Purchase Payment at the Closing,
will be fully paid and nonassessable. The shares of Common Stock issuable upon
conversion of the Shares have been reserved for issuance upon such conversion,
and when issued in accordance with the Certificate of Designation will be
validly issued, fully paid and nonassessable. The Investor Stock, when issued
in accordance with the terms of this Agreement and the Certificate of
Designation will be free and clear of all Liens and restrictions, other than
Liens that might have been created by Investor and restrictions imposed by (i)
Section 4.2 hereof, (ii) the Stockholder Agreement, (iii) applicable state
securities laws, and (iv) the Securities Act.
5.5 Indebtedness for Borrowed Money. The Company has no Indebtedness
-------------------------------
for Borrowed Money except as disclosed on the Balance Sheet.
5.6 Shareholder List. Schedule 5.6 hereto contains a true and
---------------- ------------
complete list of the names and addresses of all persons or entities known to the
Company, based on Schedules 13D and/or 13G filed by such persons or entities or
otherwise based on the Company's actual knowledge, to be the beneficial holders
of more than five percent (5%) of the outstanding Common Stock and of the
holders of all outstanding options, warrants or other rights to purchase from
the Company more than five percent (5%) of Common Stock. With respect to
holders of more than 5% of Common Stock, Schedule 5.6 contains, to the Company's
------------
knowledge, a true and complete description of the number of shares held by each
such holder. With respect to each option set forth on such Schedule, Schedule
--------
5.6 sets forth the date of grant, the number of shares subject thereto, the
- ---
exercise price, vesting schedule and expiration date. With respect to the
warrants set forth on such Schedule, Schedule 5.6 sets forth the date of issue
------------
of each warrant, the number of shares of Common Stock subject to the warrant,
the exercise price and expiration date. Except as provided on Schedule 5.6, no
------------
holder of Common Stock or any other security of the Company or any other Person
(other than the Investor) is entitled to any preemptive right, right of first
refusal or similar right from the Company or, to the Company's knowledge, any
Person as a result of the issuance of the Investor Stock or otherwise. Except
as provided on Schedule 5.6, there is no voting trust, agreement or arrangement
------------
among any of the beneficial holders of Common Stock of the Company affecting the
exercise of the voting rights of such stock.
5.7 Corporate Acts and Proceedings. All corporate acts and
------------------------------
proceedings required for the valid authorization, execution and delivery of this
Agreement, the offer, issuance and delivery of the Investor Stock and the
performance of this Agreement have been lawfully and validly taken or will have
been so taken prior to the Closing.
5.8 Compliance with Laws and Other Instruments. The business and
------------------------------------------
operations of the Company have been and are being conducted in accordance with
all applicable federal, state and local laws, rules and regulations, except to
the extent that noncompliance with laws, rules and regulations would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The execution, delivery and performance by the Company of this Agreement (a)
will not require from the Board or stockholders of the Company any consent or
approval that has not been validly and lawfully obtained, (b) will
5
<PAGE>
not require any authorization, consent, approval, license, exemption of or
filing or registration with any domestic or, to best of the Company's knowledge,
foreign, court or governmental department, commission, board, bureau, agency or
instrumentality of government, except such as shall have been lawfully and
validly obtained prior to the Closing, (c) will not cause the Company to violate
or contravene (i) any provision of law, (ii) any rule or regulation of any
agency or government, domestic or foreign, (iii) any order, writ, judgment,
injunction, decree, determination or award, or (iv) any provision of the Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws of the
Company, (d) will not violate or be in conflict with, result in a breach of or
constitute (with or without notice or lapse of time or both) a default under,
any indenture, loan or credit agreement, note agreement, deed of trust,
mortgage, security agreement or other agreement, lease or instrument, commitment
or arrangement to which the Company is a party or by which the Company or any of
its properties, assets or rights is bound or affected, which in any such case
would have a Material Adverse Effect on the Company, and (e) will not result in
the creation or imposition of any Lien, other than Liens in favor of the
Investor. The Company is not in violation of, or (with or without notice or
lapse of time or both) in default under, any term or provision of its Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws or of
any indenture, loan or credit agreement (including any agreement evidencing
Indebtedness for Borrowed Money), note agreement, deed of trust, mortgage,
security agreement or other material agreement, lease or other instrument,
commitment or arrangement to which the Company is a party or by which any of the
Company's properties, assets or rights is bound or affected, which in any such
case would have a Material Adverse Effect on the Company. The Company is not
subject to any restriction of any kind or character which prohibits the Company
from entering into this Agreement or would prevent its performance of or
compliance with all or any part of this Agreement or the consummation of the
transactions contemplated hereby or thereby.
5.9 Binding Obligations. This Agreement constitutes the legal, valid
-------------------
and binding obligation of the Company and is enforceable against the Company in
accordance with its terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally.
5.10 Securities Laws. Based in part upon the representations of
---------------
Investor in Section 4.2, the offer, issue and sale of the Investor Stock are and
will be exempt from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
5.11 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against the
Company or the Investor for any commission, fee or other compensation as a
finder or broker, or in any similar capacity based upon obligations incurred by
the Company.
5.12 Financial Statements. Attached hereto as Schedule 5.12 are (a)
-------------------- -------------
the Company's unaudited balance sheet (the "Balance Sheet") as of December 31,
-------------
1999 (the "Balance Sheet Date"), and the unaudited statement of operations for
------------------
the twelve-month
6
<PAGE>
period then ended, and (b) the Company's unaudited balance sheet as of October
31, 1999. Included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 Form 10-K") are the Company's audited balance
sheets as of April 30, 1996 and 1997, and December 31, 1997 and 1998, and the
audited statements of operations, cash flow and shareholders' equity for each of
the periods then ended, together with the related opinion thereon of Arthur
Andersen LLP, independent certified public accountants. The foregoing financial
statements (i) are in accordance with the books and records of the Company, (ii)
present fairly in all material respects, taken as a whole, the financial
condition of the Company at the Balance Sheet Date and other dates therein
specified and the results of its operations and cash flow for the periods
therein specified, and (iii) have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior
accounting periods ("GAAP"). Specifically, but not by way of limitation, the
Balance Sheet discloses all of the material debts, liabilities and obligations
of any nature (whether absolute, accrued, contingent or otherwise and whether
due or to become due) of the Company at the Balance Sheet Date which must be
disclosed on a balance sheet in accordance with GAAP.
5.13 Changes. Since the Balance Sheet Date, except as disclosed on
-------
Schedule 5.13 hereto, the Company has not (a) incurred any material debts,
- -------------
obligations or liabilities, absolute, accrued, contingent or otherwise, whether
due or to become due in excess of $250,000, except current liabilities incurred
in the usual and ordinary course of business, none of which (individually or in
the aggregate) materially and adversely affects the business, finances,
properties or prospects of the Company, (b) discharged or satisfied any Liens
other than those securing, or paid any obligation or liability other than,
current liabilities shown on the Balance Sheet and current liabilities incurred
since the Balance Sheet Date, in each case in the usual and ordinary course of
business, (c) mortgaged, pledged or subjected to Lien any of its assets,
tangible or intangible, (d) sold, transferred or leased any of its assets of
value exceeding $250,000 except in the usual and ordinary course of business,
(e) canceled or compromised any debt or claim, or waived or released any right,
of value exceeding $250,000, (f) suffered any physical damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the properties, business or prospects of the Company, (g) encountered any labor
difficulties or labor union organizing activities, (h) made or granted any wage
or salary increase to any executive officer other than in the ordinary course of
business or entered into any employment agreement, (i) issued or sold any shares
of capital stock or other securities or granted any options with respect
thereto, (j) modified any Equity Security, except to the extent disclosed on
Schedule 5.6 hereto, (k) declared or paid any dividends on or made any other
- ------------
distributions with respect to, or purchased or redeemed, any of its outstanding
Equity Securities, (l) suffered or experienced any change in, or condition
affecting, the condition (financial or otherwise) of the Company as a whole
other than changes, events or conditions in the usual and ordinary course of its
business, none of which (either by itself or in conjunction with all such other
changes, events and conditions) has been or could reasonably be expected to be
materially adverse, (m) made any change in the accounting principles, methods or
practices followed by it or depreciation or amortization policies or rates
theretofore adopted, or (n) entered into any agreement, or otherwise obligated
itself, to do any of the foregoing.
7
<PAGE>
5.14 Material Agreements of the Company. Except as expressly set
----------------------------------
forth in this Agreement, the Balance Sheet, as disclosed in the Index (compiled
pursuant to Item 601 of Regulation S-K of the Commission) to the Company's
filings under the Securities Act and the Exchange Act or as disclosed on
Schedule 5.14 hereto, the Company is not a party to any written or oral
- -------------
agreement, instrument or arrangement not made in the ordinary course of business
that is material to the Company and is either (a) an agreement with any labor
---
union, (b) an agreement for the purchase of fixed assets or for the purchase of
materials, supplies or equipment over $250,000, (c) an agreement for the
employment of any officer on other than an at-will basis, (d) an indenture, loan
or credit agreement, note agreement, deed of trust, mortgage, security
agreement, promissory note or other agreement or instrument relating to or
evidencing Indebtedness for Borrowed Money in excess of $250,000 or subjecting
any asset or property of the Company to any Lien, (e) a guaranty of any
Indebtedness, (f) a lease or agreement under which the Company is lessee of or
holds or operates any property, real or personal, owned by any other Person
under which payments to such Person exceed $250,000 per annum, (g) a lease or
agreement under which the Company is lessor or permits any Person to hold or
operate any property, real or personal, owned or controlled by the Company
having a value over $250,000 other than in the ordinary course of business, (h)
an agreement granting any preemptive right, right of first refusal or similar
right to any Person, (i) a covenant not to compete or other restriction on its
ability to conduct a business or engage in any other activity, or (j) an
agreement to register securities under the Securities Act. To the Company's
knowledge, all parties having material contractual arrangements with the Company
are in substantial compliance therewith, and none is in default in any material
respect thereunder, except for noncompliance or defaults which will not have a
Material Adverse Effect on the Company.
5.15 Employees. Brian Fargo and David Perry (collectively,
---------
"Designated Key Employees") are in the full-time employ of the Company and/or
------------------------
one or more of its Subsidiaries. To the best of the Company's knowledge, no
Designated Key Employee has any plans to terminate his employment with the
Company or a Subsidiary, as the case may be, and the Company has no intention of
terminating the employment of any Designated Key Employee. To the best of the
Company's knowledge, no Designated Key Employee or any other employee of the
Company is a party to or is otherwise bound by any agreement or arrangement
(including, without limitation, any license, covenant, or commitment of any
nature), or subject to any judgment, decree, or order of any court or
administrative agency, (a) that would conflict with such employee's obligation
diligently to promote and further the interests of the Company or (b) that would
conflict with the Company's business as now conducted or as proposed to be
conducted. The Company has complied in all material respects with all laws
relating to the employment of labor, including provisions relating to wages,
hours, equal opportunity, collective bargaining and payment of Social Security
and other taxes, and the Company has encountered no material labor difficulties.
5.16 Tax Returns and Audits. All required federal, state and local
----------------------
tax returns of the Company have been accurately prepared and duly and timely
filed, and all federal, state and local taxes required to be paid with respect
to the periods covered by such returns have been paid. The Company is not
delinquent in the payment of any material tax, assessment or governmental
charge. Except as set forth on Schedule 5.16 hereto, there is not
-------------
8
<PAGE>
currently pending against the Company any tax deficiency proposed or assessed
against it and the Company has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge
for any tax period for which the statute of limitations has not expired. Except
as set forth on Schedule 5.16 hereto, none of the Company's federal income tax
-------------
returns nor any state or foreign income or franchise tax returns has ever been
audited by governmental authorities in any of the last five (5) tax years. The
reserves for taxes, assessments and governmental charges reflected in the
Balance Sheet are and will be sufficient for the payment of all unpaid taxes,
assessments and governmental charges payable by the Company with respect to the
period ended on the Balance Sheet Date.
5.17 Patents and Other Intangible Assets.
------------------------------------
(a) Except as disclosed on Schedule 5.17 hereto, the Company (i)
-------------
owns or has the right to use all patents, trademarks, service marks, trade
names, copyrights, licenses and rights with respect to the foregoing, used in or
necessary for the conduct of its business as now conducted and proposed to be
conducted, (ii) to the Company's knowledge, is not infringing upon or otherwise
acting adversely to the right or claimed right of any Person under or with
respect to any patent, trademark, service mark, trade name, copyright or license
with respect thereto, where such infringement would have a Material Adverse
Effect on the Company.
(b) The Company owns or has the right to use all product rights,
manufacturing rights, trade secrets, including know-how, negative know-how,
formulas, patterns, compilations, programs, devices, methods, techniques,
processes, inventions, designs, technical data, computer software (in both
source code and object code forms and all documentation therefor), including
without limitation the Operational Software (as hereinafter defined) (all of the
foregoing of which are collectively referred to herein as "intellectual
------------
property") required for or incident to the conduct of the Company's business, as
- --------
it is presently conducted, in each case free and clear of any right, Lien or
claim of others, including without limitation former employers of its employees,
except for rights reserved by the licensors of such intellectual property and
rights granted by the Company pursuant to license, publishing and distribution
agreements, and except where such right, lien or claim would not have a Material
Adverse Effect on the Company.
(c) Since its organization, the Company has taken reasonable
security measures to protect the secrecy, confidentiality and value of all
intellectual property and all Inventions (as defined below). Without limiting
the generality of the foregoing, except as set forth on Schedule 5.17, each of
-------------
the Company's present employees has signed an agreement with the Company in the
form provided to Investor, and each of the Company's past employees has signed
an agreement with the Company substantially in the form provided to Investor,
except, in either such case, where the failure to do so would not have a
Material Adverse Effect on the Company. As used herein, "Inventions" means all
----------
inventions, developments and discoveries which during the period of an
employee's or other Person's service to the Company he or she makes or conceives
of, either solely or jointly with others, that relate to any subject matter with
which his or her work for the Company may be concerned, or relate to or are
connected with the business, products, services or projects of
9
<PAGE>
the Company, or relate to the actual or demonstrably anticipated research or
development of the Company or involve the use of the Company's time, material,
facilities or trade secret information.
(d) Except for license, publishing and distribution agreements
with third parties entered into in the ordinary course of business, and except
as disclosed on Schedule 5.17 hereto, the Company has not sold, transferred,
-------------
assigned, licensed or subjected to any Lien, any intellectual property, trade
secret, know-how, invention, design, process, computer software or technical
data, or any interest therein, necessary for the development, manufacture, use,
operation or sale of any product listed on Schedules 5.27(a) and 5.27 (b)
hereto.
(e) No director, officer, employee, agent or shareholder of the
Company owns or has any right in the intellectual property of the Company, or
any patents, trademarks, service marks, trade names, copyrights, licenses or
rights with respect to the foregoing, or any inventions, developments or
discoveries used in or necessary for the conduct of the Company's business as
now conducted and as proposed to be conducted, which could reasonably be
expected to have a Material Adverse Effect on the Company.
(f) The Company has not received any communication alleging or
stating that the Company or any of its employees or other agents has violated or
infringed, or by conducting business as proposed, would violate or infringe, any
patent, trademark, service mark, trade name, copyright, trade secret,
proprietary right, process or other intellectual property of any other Person,
which could reasonably be expected to have a Material Adverse Effect on the
Company.
5.18 Employment Benefit Plans; ERISA. Except for the Interplay
-------------------------------
Productions 401(k) Profit Sharing Plan (the "Plan"), as described in Schedule
---- --------
5.18, the Company does not maintain or make contributions to any pension, profit
- ----
sharing or other employee retirement benefit plan. The Plan has been maintained
in compliance with all applicable laws, ordinances, rules, regulations, permits,
orders, writs, judgments, injunctions, decrees, determinations and awards of any
agency, government, or arbitrator. The Company has no material liability with
respect to the Plan or any other such plan (including, without limitation, any
unfunded liability or any accumulated funding deficiency) or any material
liability to the Pension Benefit Guaranty Corporation or under Title IV of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with
-----
respect to the Plan or any multi-employer pension benefit plan, nor would the
Company have any such liability if the Plan or any multi-employer plan were
terminated or if the Company withdrew, in whole or in part, from the Plan or any
multi-employer plan. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated by this Agreement will
constitute a termination of employment or other event entitling any person to
any additional or other benefits, or that would otherwise modify benefits or the
vesting of benefits, provided under the Plan.
5.19 Title to Property and Encumbrances; Leases. The Company has good
------------------------------------------
and marketable title to all of its properties and assets, including without
limitation the
10
<PAGE>
properties and assets reflected in the Balance Sheet and the properties and
assets used in the conduct of its business, except for properties disposed of in
the ordinary course of business since the Balance Sheet Date and except for
properties held under valid and subsisting leases which are in full force and
effect and which are not in default, subject to no Lien, except those which are
shown and described on the Balance Sheet and except for Permitted Liens (as
hereinafter defined). All material leases under which the Company is lessee of
any real or personal property are valid, enforceable and effective in accordance
with their terms; there is not under any such lease any existing or claimed
default by the Company or event or condition which with notice or lapse of time
or both would constitute a default by the Company. Except as disclosed on
Schedule 5.19 hereto, no material lease under which the Company is lessee of any
- -------------
real property contains any provision which either (i) treats a sale or transfer
of any or all of the outstanding stock of the Company or a merger of the Company
with another Person as an assignment of the Company's leasehold interest, or
(ii) otherwise requires the consent of the lessor in the event of any such sale,
transfer or merger.
5.20 Condition of Properties. All facilities, machinery, equipment,
-----------------------
fixtures, vehicles and other properties owned, leased or used by the Company
with fair market value in excess of $250,000 are in good operating condition and
repair, subject to ordinary wear and tear, and are adequate and sufficient for
the Company's business.
5.21 Insurance Coverage. There is in full force and effect one or
------------------
more policies of insurance issued by insurers of recognized responsibility,
insuring the Company and its properties and business against such losses and
risks, and in such amounts, as are customary in the case of corporations engaged
in the same or similar business and similarly situated. The Company has not
been refused any insurance coverage sought or applied for, and the Company has
no knowledge of any facts that cause it to believe that the Company will be
unable to renew its existing insurance coverage as and when the same shall
expire upon terms at least as favorable as those presently in effect, other than
possible increases in premiums that do not result from any act or omission of
the Company.
5.22 Litigation. Except as disclosed on Schedule 5.22 hereto, there
---------- -------------
is no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding (whether federal, state, local
or foreign) pending or, to the Company's knowledge, threatened against or
affecting (i) the Company or its properties, assets or business (existing or
contemplated), or (ii) any Designated Key Employee, before any court or
governmental department, commission, board, bureau, agency or instrumentality or
any arbitrator, which if adversely determined would have a Material Adverse
Effect on the Company. Except as disclosed on Schedule 5.22 hereto, the Company
-------------
is not aware of any fact which might result in or form the basis for any such
action, suit, arbitration, investigation, inquiry or other proceeding, which if
adversely determined would have a Material Adverse Effect on the Company.
Neither the Company nor, to the best of the Company's knowledge, any of the
Designated Key Employees is in default with respect to any order, writ,
judgment, injunction, decree, determination or award of any court or of any
governmental agency or instrumentality (whether federal, state, local or
foreign).
5.23 Registration Rights. Except as set forth on Schedule 5.23, other
------------------- -------------
than
11
<PAGE>
under this Agreement and other agreements entered into with the Investor, the
Company has not agreed to register under the Securities Act any of its
authorized or outstanding securities.
5.24 Licenses. The Company possesses from the appropriate agency,
--------
commission, board and governmental body and authority, whether state, local or
federal, all licenses, permits, authorizations, approvals, franchises and rights
which are necessary for the Company to engage in the business currently
conducted by it and proposed to be conducted (except where the failure to so
hold would not have a Material Adverse Effect on the Company), including without
limitation the development, manufacture, use, sale and marketing of its existing
and proposed products and services; and all such certificates, licenses,
permits, authorizations and rights have been lawfully and validly issued and are
in full force and effect.
5.25 Interested Party Transactions. Except as disclosed on Schedule
----------------------------- --------
5.25 hereto, no officer, director or 5% shareholder of the Company or any
- ----
Affiliate of any such Person or the Company (other than Investor) has, either
directly or indirectly, (a) a material interest in any Person which (i)
furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company, or (ii) purchases from or sells
or furnishes to the Company any goods or services, or (b) a beneficial interest
in any transaction, contract or agreement to which the Company is a party or by
which it is bound or affected.
5.26 Minute Books. The minute books of the Company made available to
------------
Paul, Hastings, Janofsky & Walker LLP, special counsel for the Investor, contain
all resolutions adopted by directors and stockholders since the incorporation of
the Company and fairly and accurately reflect, in all material respects, all
matters and transactions referred to in such minutes.
5.27 Computer Software.
-----------------
(a) Each of the computer software programs developed by the
Company that are listed on Schedule 5.27(a) hereto (the "Operational Software")
---------------- --------------------
is functional, complete and operational in all material respects in accordance
with its specifications, has been documented in accordance with the Company's
standard practices, and the Company possesses both the source code and object
code versions thereof.
(b) Attached as Schedule 5.27(b) hereto is a true and complete
---------------
list of all computer software games currently in active development by or on
behalf of the Company (the "Developing Software"). Schedule 5.27(b) also sets
------------------- ----------------
forth whether each such game is being internally or externally developed and, if
externally developed, the name of the third party developer.
5.28 Interplay Web Site and Systems.
------------------------------
(a) The Company owns and has the right to communicate and
publish its "Interplay" Internet product offering (the "Web Site") and conduct
--------
business on the World Wide Web at the Internet address "interplay.com" and in
connection therewith to use
12
<PAGE>
the registered service mark and trade name "Interplay" and in so doing is
not acting in conflict with any patent, trademark, service mark, trade name,
copyright, trade secret, license or other proprietary right with respect
thereto, except where such conflict would not have a Material Adverse Effect on
the Company.
(b) The Company has not received any communication from any
Person that the Web Site or the conduct of the Company's business is in
violation of any law, rule or regulation or in conflict with any patent,
trademark, service mark, trade name, copyright, trade secret, license or other
proprietary right with respect thereto, except where such violation or conflict
would not have a Material Adverse Effect on the Company.
5.29 Product Returns. Schedule 5.29 hereto sets forth the Company's
--------------- -------------
experience with respect to the return of any of its products sold or leased for
the three (3) year period ended on December 31, 1999.
5.30 Disclosure. To the Company's knowledge, the information
----------
contained in this Agreement, in the Balance Sheet and the 1998 Form 10-K, and in
any writing furnished pursuant hereto or in connection herewith, taken as a
whole, is true, complete and correct (except that with respect to the Balance
Sheet and the 1998 Form 10-K, the information contained therein shall be true,
complete and correct as of the date thereof), and does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or herein or necessary to make the statements therein or herein,
in light of the circumstances under which they were made, not misleading.
5.31 Secured Creditors. As of the Closing Date, the Company does not
-----------------
have any other creditors holding any security interest in any of the property or
assets of the Company, other than Greyrock.
6. Representations and Warranties of Investor. In order to induce the
------------------------------------------
Company to enter into this Agreement and to issue the Shares, Investor hereby
covenants with, and represents and warrants to, the Company as follows:
6.1 Organization, Standing, etc Investor is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of France, and
has all requisite corporate power and authority to enter into this Agreement,
and to carry out the provisions hereof and thereof.
6.2 Corporate Acts and Proceedings. All corporate acts and
------------------------------
proceedings required for the authorization, execution and delivery of this
Agreement by Investor, and the performance of this Agreement by Investor, have
been lawfully and validly taken or will have been so taken prior to the Closing.
6.3 Compliance with Laws and Other Instruments. The execution,
------------------------------------------
delivery and performance by Investor of this Agreement (a) will not require from
the board of directors or stockholders of Investor any consent or approval that
has not been validly and lawfully obtained, (b) will not require any
authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department,
13
<PAGE>
commission, board, bureau, agency or instrumentality of government, except such
as shall have lawfully and validly obtained prior to the Closing, (c) will not
cause Investor to violate or contravene (i) any provision of law, (ii) any rule
or regulation of any agency or government, domestic of foreign, (iii) any order,
writ, judgment, injunction, decree, determination or award binding upon
Investor, or (iv) any provision of the charter documents of Investor, (d) will
not violate or be in conflict with, result in a breach of or constitute (with or
without notice or lapse of time or both) a default under, any indenture, loan or
credit agreement, note agreement, deed of trust, mortgage, security agreement or
other material agreement, lease or instrument, commitment or arrangement to
which Investor is a party or by which Investor or any of its properties, assets
or rights is bound or affected, which in any case would have a Material Adverse
Effect on Investor.
6.4 Binding Obligations. This Agreement constitutes the legal, valid
-------------------
and binding obligations of Investor and is enforceable against Investor in
accordance with its terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally.
6.5 No Brokers or Finders. No Person has, or as a result of the
---------------------
transactions contemplated herein will have, any right or valid claim against the
Company or Investor for any commission, fee or other compensation as a finder or
broker, or in any similar capacity, except for Concordia Capital Technology
Group, Inc., whose fees will be the responsibility of the Investor.
7. Conditions of Parties' Obligations.
----------------------------------
7.1 Conditions of Investor's Obligations at the Closing. The
---------------------------------------------------
obligation of Investor to purchase and pay for the Investor Stock is subject to
the fulfillment prior to or on the Closing Date of the following conditions, any
of which may be waived in whole or in part by Investor:
(a) No Errors, etc. The representations and warranties of the
--------------
Company under this Agreement shall be deemed to have been made again on the
Closing Date and shall then be true and correct in all material respects (except
to the extent already qualified as to materiality, in which case such
representations and warranties shall then be true and correct in all respects).
(b) Compliance with Agreement. The Company shall have performed
-------------------------
and complied with all agreements and conditions required by this Agreement to be
performed or complied with by it on or before the Closing Date.
(c) No Default. There shall not exist on the Closing Date any
Default (as hereinafter defined) or Event of Default (as hereinafter defined) or
any event or condition which, with the giving of notice or lapse of time or
both, would constitute a Default or Event of Default.
(d) Certificate of Company. The Company shall have delivered to
----------------------
Investor a certificate dated the Closing Date, executed by the Chief Executive
Officer and
14
<PAGE>
Chief Financial Officer of the Company, certifying the satisfaction of the
conditions specified in subsections (a), (b) and (c) of this Section 7.1.
(e) Opinion of the Company's Counsel. The Investor shall have
--------------------------------
received from Stradling Yocca Carlson & Rauth, a professional corporation,
counsel for the Company, a favorable opinion dated the Closing Date
substantially in the form of Exhibit B hereto.
---------
(f) Qualification Under State Securities Laws. All
-----------------------------------------
registrations, qualifications, permits and approvals required under applicable
state securities laws shall have been obtained for the lawful execution,
delivery and performance of this Agreement, including without limitation the
offer, sale, issue and delivery of the Investor Stock.
(g) Supporting Documents. Investor shall have received the
--------------------
following:
(i) Copies of resolutions of the Board, certified by the
Secretary of the Company, authorizing and approving the execution, delivery and
performance of this Agreement, and all other documents and instruments to be
delivered pursuant hereto and thereto, and taking all such other actions as
required by the Delaware General Corporation Law with respect to this Agreement
and the transactions contemplated hereby and thereby;
(ii) A certificate of incumbency executed by the Secretary
of the Company certifying the names, titles and signatures of the officers
authorized to execute the documents referred to in subsection (1) above and
further certifying that the Amended and Restated Certificate of Incorporation,
Amended and Restated Bylaws of the Company and Certificate of Designation
delivered to the Investors at the time of the execution of this Agreement have
been validly adopted, filed and have not been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Investor or
its special counsel, Paul, Hastings, Janofsky & Walker LLP ("Investor Counsel"),
----------------
may reasonably request.
(h) Proceedings and Documents. All corporate and other
-------------------------
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transactions, shall be satisfactory in
form and substance to Investor and to Investor Counsel.
(i) Lender's Consent. The Company's lenders with respect to any
----------------
Indebtedness for Borrowed Money shall have approved this Agreement and the
transactions contemplated hereby, and shall otherwise provide such assurances to
Investor as Investor may reasonably request with respect to the use of the
proceeds from the sale of the Investor Stock and the continuing availability and
renewal of such lenders' current credit
15
<PAGE>
facility to the Company (or the Company shall have provided such assurances to
Investor with respect to a substitute credit facility).
(j) Due Diligence. Investor and Investor Counsel shall have
-------------
completed their legal due diligence investigation of the Company and its
business prospects, and Investor shall be satisfied with the results thereof in
its sole discretion (including without limitation investigation of the Company's
D&O insurance policies).
(k) NASDAQ-NMS Approval. The Company shall have obtained any
-------------------
waiver or approval from NASDAQ-NMS required with respect to this Agreement and
the issuance of the Investor Stock.
(l) Waiver of Existing Rights Agreement. If necessary, the
-----------------------------------
requisite percentage of the Holders (as defined therein) party to the Investors'
Rights Agreement dated as of October 10, 1996, by and among the Company and the
Holders (the "Existing Rights Agreement"), shall have waived the application of
-------------------------
the Existing Rights Agreement (including without limitation Section 1.12
thereof) to the issuance of the Investor Stock and the registration rights
granted hereunder with respect to the Investor Stock.
(m) Government and Other Consents. Any approval, consent or
-----------------------------
waiting period required by any governmental agency or authority, or any other
Person, necessary or material to the consummation of the transactions
contemplated hereby shall have been obtained or expired, as the case may be,
including without limitation any approval from NASDAQ and any applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
(n) Warrants. The Company shall have executed and delivered to
--------
the Investor (a) a Warrant to purchase 350,000 shares of the Company's Common
Stock, in the form attached hereto as Exhibit C-1 and (b) a conditional Warrant
-----------
to purchase 50,000 shares of the Company's Common Stock, in the form attached
hereto as Exhibit C-2 (together with the Warrant referenced in Section 10.2, the
-----------
"Warrants").
(o) Certificate of Designation. The Certificate of Designation,
--------------------------
in the form attached hereto as Exhibit A, shall have been filed with the
---------
Delaware Secretary of State.
(p) Extension of Greyrock Line. Greyrock shall have entered into
--------------------------
an amendment (i) extending the term of the Company's credit facility through
April 30, 2001 on substantially the same terms as the current facility or on
terms reasonably acceptable to the Company and Investor, (ii) agreeing to
release the $2,500,000 of cash collateral currently held by Greyrock upon
receipt of the financial statements referenced in Section 7.2(d) below, (iii)
agreeing to release the $1,000,000 guaranty of Herve Caen and the $4,000,000
guaranty of Investor in exchange for the Guaranty, and (iv) consenting to the
security interest referenced in Section 8.17 below upon Investor's execution of
an intercreditor agreement reasonably acceptable to Greyrock.
16
<PAGE>
(q) Accountants' Opinion. Arthur Andersen LLP, the Company's
--------------------
accountants, shall have issued an unqualified opinion (without any "going
concern" qualification) on the Company's financial statements for the year ended
December 31, 1999.
(r) Fargo Proxy. Fargo shall have granted to Investor an
-----------
irrevocable proxy (the "Fargo Proxy") to vote Fargo's shares of the Company's
stock in favor of the transactions contemplated by this Agreement at any meeting
of the Company's stockholders.
(s) Security Agreement. The Company shall have executed and
------------------
delivered to Investor a Security Agreement, on commercially reasonable terms
(the "Security Agreement"), pursuant to which the Company grants to Investor a
second priority security interest in its assets.
(t) Waiver. The Company, Investor and Fargo shall have executed
------
a waiver of compliance with the terms of Sections 2.6, 3.5 and 3.6 and Article
IV of the Stockholder Agreement dated November 2, 1999 among the Company,
Investor and Fargo.
7.2 Conditions of Company's Obligations. The Company's obligation to
-----------------------------------
issue and sell the Investor Stock to Investor on the Closing Date is subject to
the fulfillment prior to or at the Closing Date of the following conditions:
(a) No Errors, etc. The representations and warranties of the
--------------
Investor in Section 4.2 and Section 6 of this Agreement shall be deemed to have
been made again on the Closing Date and shall then be true and correct in all
material respects (except to the extent already qualified as to materiality, in
which case such representations and warranties shall then be true and correct in
all respects).
(b) Certain Conditions. All of the conditions precedent
------------------
specified in paragraphs (f), (i), (k), (l) and (m) of Section 7.1 hereof shall
have been satisfied.
(c) Guaranty. The Investor shall have executed and delivered to
--------
the Company a Guaranty, in the form attached hereto as Exhibit D (the
---------
"Guaranty"), pursuant to which the Investor guarantees $20,000,000 of the
Company's obligations to Greyrock Business Credit.
(d) Provision of Financial Statements. By April 30, 2000, or as
---------------------------------
soon thereafter as practicable, Investor shall deliver to the Company any
documents reasonably required by Greyrock to release to the Company $2.5 million
in cash collateral, including, without limitation, the unaudited financial
statements of Titus Interactive SA as of and for the six-month period ended
December 31, 1999.
(e) Waiver. The Company, Investor and Fargo shall have executed
------
a waiver of compliance with the terms of Sections 2.6, 3.5 and 3.6 and Article
IV of the Stockholder Agreement dated November 2, 1999 among the Company,
Investor and Fargo.
17
<PAGE>
(f)
8. Affirmative Covenants of the Company. The Company agrees that unless
------------------------------------
Investor otherwise agrees in writing, from the date hereof through the later of
(i) the effective date of registration statement with respect to the Investor
Shares or (ii) April 30, 2001 (the "Covenant Period"), unless another period is
---------------
expressly provided for in this Section 8, the Company (and each of its
Subsidiaries unless the context otherwise requires) will do the following:
8.1 Maintain Corporate Rights and Facilities. Maintain and preserve
----------------------------------------
its corporate existence and all rights, franchises and other authority adequate
for the conduct of its business; maintain its properties, equipment and
facilities in good order and repair; and conduct its business in an orderly
manner without voluntary interruption.
8.2 Maintain Insurance. Maintain in full force and effect a policy
------------------
or policies of insurance issued by insurers of recognized responsibility,
insuring it and its properties and business against such losses and risks, and
in such amounts, as are customary in the case of corporations of established
reputation engaged in the same or a similar business and similarly situated.
8.3 Pay Taxes and Other Liabilities. Pay and discharge, before the
-------------------------------
same become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental charges upon or against it or any of its
properties, and all its other material liabilities at any time existing, except
to the extent and so long as (i) the same are being contested in good faith and
by appropriate proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of redemption from
any sale thereunder, and (ii) it shall have set aside on its books reserves
(segregated to the extent required by generally accepted accounting principles)
deemed by it adequate with respect thereto.
8.4 Records and Reports. Accurately and fairly maintain its books of
-------------------
account in accordance with generally accepted accounting principles, as approved
from time to time by a majority of the Board and its independent certified
public accountants; permit Investor and its representatives to have access to
and to examine its properties, books and records (and to copy and make extracts
therefrom) at such reasonable times and intervals as Investor may request and to
discuss its affairs, finances and accounts with its officers and auditors, all
to such reasonable extent and at such reasonable times and intervals as Investor
may request; and furnish Investor:
(a) As soon as available, and in any event within thirty (30)
days after the close of each monthly accounting period, financial statements
prepared on a consolidated basis (together with consolidating statements in
support thereof) consisting of a balance sheet of the Company as of the end of
such monthly accounting period and statements of income, shareholders' equity
and cash flow for such monthly accounting period, and for the portion of the
Company's fiscal year ending with the last day of such monthly accounting
period, all in reasonable detail, prepared and certified by the chief
18
<PAGE>
executive officer or the chief financial officer of the Company as fairly
presenting the financial condition as of the balance sheet date and results of
operations and cash flows for the period then ended in accordance with generally
accepted accounting principles consistently applied, subject to normal year end
adjustments which in the aggregate shall not be material;
(b) Promptly upon, and in any event within three (3) business
days following, the learning of the occurrence of a Default or an Event of
Default or a condition or event which with the giving of notice or the lapse of
time, or both, would constitute a Default or an Event of Default, a certificate
signed by the chief executive officer or chief financial officer of the Company
describing such Default, Event of Default or condition or event and stating what
steps are being taken to remedy or cure the same;
(c) Promptly upon the receipt thereof by the Company or the
Board, copies of all reports, all management letters and other detailed
information submitted to the Company or the Board by independent accountants in
connection with each annual or interim audit or review of the accounts or
affairs of the Company made by such accountants;
(d) Concurrently with their delivery to the Commission, all
reports, registration statements, proxy statements, and any other document, form
or report submitted to, or filed with, the Commission; and
(e) With reasonable promptness, such other information relating
to the finances, properties, business and affairs of the Company and each
Subsidiary, as Investor reasonably may request from time to time.
Notwithstanding the foregoing, the Company's obligation to provide any
such information to the Investor under this Section 8.4 shall be subject to the
Company's right to refuse to provide such information if, in the good faith
judgment of the Company, such information has not been provided, directly or
indirectly, to the general public or to any governmental agency (unless and to
the extent filed on a confidential basis), and is confidential and/or
competitively sensitive in nature, unless Investor executes an agreement, in
form reasonably satisfactory to the Company, pursuant to which Investor agrees
(i) to keep such information strictly confidential and not to use it for any
purpose not reasonably related to its interest as a stockholder of the Company,
and (ii) to comply with all of its obligations under the Securities Act and the
Exchange Act with respect to such information.
8.5 Notice of Litigation and Disputes. Promptly notify Investor of
---------------------------------
each legal action, suit, arbitration or other administrative or governmental
investigation or proceeding (whether federal, state, local or foreign)
instituted or threatened against the Company which could materially and
adversely affect its condition (financial or otherwise), properties, assets,
liabilities, business, operations or prospects, or of any occurrence or dispute
which involves a reasonable likelihood of any such action, suit, arbitration,
investigation or proceeding being instituted.
8.6 Intentionally Omitted.
---------------------
19
<PAGE>
8.7 Conduct of Business. Conduct its business in accordance with all
-------------------
applicable provisions of federal, state, local and foreign law.
8.8 Compliance with Legal Requirements. Comply promptly with all
----------------------------------
legal requirements that applicable law may impose upon it with respect to the
transactions contemplated by this Agreement, and cooperate promptly with, and
furnish information to, Investor in connection with any such requirements
imposed upon the Company in connection therewith or herewith.
8.9 Replacement of Certificates. Upon receipt of evidence reasonably
---------------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any certificate representing any of the Investor Stock, issue a new certificate
representing such Investor Stock in lieu of such lost, stolen, destroyed, or
mutilated certificate.
8.10 Compliance with Section 7. Use commercially reasonable efforts
-------------------------
to cause the conditions specified in Section 7.1 hereof to be met by the Closing
Date.
8.11 Securities Law Filings. Make all filings necessary to perfect in
----------------------
a timely fashion exemptions from (i) the registration and prospectus delivery
requirements of the Securities Act and (ii) the registration or qualification
requirements of all applicable securities or blue sky laws of any state or other
jurisdiction, for the issuance of the Investor Stock to Investor.
8.12 Compliance With Amended and Restated Certificate of Incorporation
-----------------------------------------------------------------
and Amended and Restated Bylaws. Perform and observe all requirements of the
- -------------------------------
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws.
8.13 Use of Proceeds. Use the proceeds from the sale of the Investor
---------------
Stock hereunder solely for working capital purposes, including product
development; provided, however, that the Company shall not use such proceeds to
-------- -------
pay more than $250,000 in outstanding Indebtedness for Borrowed Money, except to
the extent that the amounts so paid may immediately be re-borrowed.
8.14 HSR Filing. To the extent that Investor is required in
----------
connection with the transactions contemplated hereby, or the transactions
contemplated by the Universal Agreement, to file a notification and report form
in compliance with the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as
amended, or the rules and regulations promulgated thereunder (collectively, the
"HSR Act"), the Company shall cooperate fully with Investor to enable Investor
-------
to promptly make such filing and to respond to any requests for additional
information in connection therewith. The filing fee associated with any
required Hart-Scott-Rodino filing shall be borne equally by the Company and the
Investor.
8.15 Development of Operating Plan. The Company shall cooperate with
-----------------------------
Investor, and Investor's officers, employees and representatives in the
development of an extended operating plan for the Company for the Company's
fiscal year ending December 31, 2001 (the "Operating Plan").
20
<PAGE>
8.16 Right of First Refusal. If, during the period (the "Guaranty
----------------------
Period") beginning on the date hereof and ending on the earlier to occur of (I)
if Investor is not required to pay under the Guaranty, the date upon which the
Guaranty is extinguished and (ii) if Investor is required to pay any amounts
under the Guaranty, the date upon which such amounts are reimbursed to Investor
in full and the Guaranty is extinguished, (a) the Company shall commence any
material communication concerning the acquisition of properties or assets of the
Company (including without limitation publishing rights, distribution rights or
subsidiaries) having a fair market value in excess of $100,000, the Company
shall give written notice of such communications to Investor and (b) upon
receipt of a bona fide offer from a third party (the "Offer") to acquire any
assets of the Company (including without limitation publishing rights,
distribution rights or subsidiaries) having a fair market value in excess of
$100,000, the Company will provide written notice of such offer (the "Notice")
to Investor. The Notice shall contain the identity of the proposed purchaser
and a summary of all material terms of the Offer. Investor shall have the
option, exercisable, if at all, by written notice to the Company within twenty
(20) business days following receipt of the Notice, to elect to purchase such
assets on all of the economic terms of the Offer, and otherwise on commercially
reasonable terms. Investor may offset against the purchase price for such
assets any amounts then owing to Investor by the Company under the Credit
Facility or due to payments made by Investor under the Guaranty. In the event
that the purchase price contained in the Offer is other than in cash, Investor
may elect to pay, in lieu thereof, an amount of cash equal to the fair market
value thereof as mutually determined by the Company and Investor, or, if the
parties are unable to agree, by a third party selected by mutual agreement of
the Company and Investor.
8.17 Further Assurances. The Company agrees from time to time, at its
------------------
expense, it will promptly execute and deliver all further instruments and
documents, and take all further action that may be necessary or reasonably
desirable or that Investor may reasonably request, in order to perfect and
protect any security interest granted or purported to be granted under the
Security Agreement or to enable Investor to exercise and enforce its rights and
remedies under the Security Agreement.
8.18 Stockholder Meeting. The Company will use its best efforts to
-------------------
call a meeting of its stockholders by July 31, 2000 and will use commercially
reasonable efforts to cause the stockholders to approve the transactions
contemplated by this Agreement.
9. Negative Covenants of the Company. The Company agrees that unless
---------------------------------
Investor otherwise agrees in writing, during the Covenant Period (with respect
to Sections 9.5 and 9.6, during the Guaranty Period) the Company (and each of
its Subsidiaries unless the context otherwise requires) will not do any of the
following:
9.1 Senior Securities. Issue, assume or suffer to exist (a) any
-----------------
security that is senior to, or on parity with, the Investor Stock, or (b) any
Indebtedness for Borrowed Money that is an Equity Security or is issued with an
Equity Security.
9.2 Changes in Type of Business. Make any substantial change in the
---------------------------
character of its business.
21
<PAGE>
9.3 Loans; Guarantees. Make any loan or advance to any Person,
-----------------
including, without limitation any employee or director of the Company or any
Subsidiary, except advances for travel and entertainment expenses and similar
expenditures in the ordinary course of business or under the terms of an
employee stock option plan or stock purchase agreement approved by the Board,
and except for de minimis loans to employees consistent with past practice; or
-- -------
guarantee, directly or indirectly, any Indebtedness for Borrowed Money except
for trade accounts of the Company or any Subsidiary arising in the ordinary
course of business.
9.4 Restrictive Agreements. Enter into or become a party to any
----------------------
agreement or instrument which by its terms would violate or be in conflict with,
or restrict the Company's performance of, its obligations under this Agreement.
9.5 Sale of Assets. Enter into any agreement for the sale of any
--------------
assets or properties of the Company (including without limitation publishing
rights, distribution rights or subsidiaries) having a fair market value in
excess of $100,000.
9.6 Greyrock Covenants. Enter into or make any new operating or
------------------
financial position covenants to Greyrock pursuant to any agreement covered by
the Guaranty.
9.7 Issuance of Shares. Until the approval of the transactions
------------------
contemplated by this Agreement by the Company's stockholders, the Company shall
not issue a number of voting securities such that the sum of (a) the voting
securities of the Company held by Investor, plus (b) the voting securities of
the Company subject to the Fargo Proxy, would constitute fifty percent (50%) or
less of the total voting securities of the Company.
10. Affirmative Covenants of Investor. Investor agrees that, unless the
---------------------------------
Company otherwise agrees in writing, Investor will:
10.1 Compliance with Laws. Comply promptly with all legal
--------------------
requirements that applicable law may impose upon it with respect to the
transactions contemplated by this Agreement, and cooperate promptly with, and
furnish information to, the Company in connection with any such requirements
imposed upon Investor in connection therewith or herewith.
10.2 Credit Facility; Warrant. Provide the Company with a secured
------------------------
revolving credit facility in the amount of $5,000,000 (the "Credit Facility"),
to be evidenced by an agreement in the form attached hereto as Exhibit D-1. The
-----------
outstanding amounts under the Credit Facility shall bear interest at the rate of
12% per annum, or the maximum rate permitted by law, whichever is less, payable
quarterly, and all outstanding principal and interest will be due on May 1,
2001. As consideration of such Credit Facility, the Company shall issue to
Investor a warrant, in the form attached hereto as Exhibit D-2, to purchase
-----------
100,000 shares of the Company's Common Stock, which warrant shall vest from time
to time in proportion to the maximum amount outstanding at any one time under
the Credit Facility.
11. Registration of Registrable Stock.
----------------------------------
22
<PAGE>
11.1 Required Registration. On or before April 15, 2001, the Company
---------------------
shall prepare and file a registration statement under the Securities Act, on a
form selected by the Company, covering all of the shares of Common Stock
issuable upon conversion of the Shares and upon exercise of the Warrants
(collectively, the "Registrable Stock") and shall use its best efforts to cause
-----------------
such registration statement to become effective as expeditiously as possible and
to remain effective until the earlier to occur of the date (a) the Registrable
Stock covered thereby has been sold, or (b) by which all Registrable Stock
covered thereby may be sold under Rule 144(k). Notwithstanding the foregoing,
if the Company enters into an agreement to cause a sale or other disposition of
all or substantially all of the assets or outstanding Common Stock of the
Company and the Investor would be materially prejudiced in such transaction by
holding unregistered Common Stock, then the Company shall promptly register the
Registrable Stock.
11.2 Registration Procedures. When the Company effects the
-----------------------
registration of the Registrable Stock under the Securities Act pursuant to
Section 11.1 hereof, the Company will, at its expense, as expeditiously as
possible:
(a) In accordance with the Securities Act and the rules and
regulations of the Commission, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period described herein, and prepare and file with the Commission such
amendments to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration statement
effective for such period and such registration statement and prospectus
accurate and complete for such period; the plan of distribution set forth in
such registration statement or in any amendment or supplement shall be subject
to the approval of Investor;
(b) Furnish to Investor such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as Investor may reasonably request in order to facilitate the public
offering of such securities;
(c) Use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as Investor may reasonably request within twenty (20)
days following the original filing of such registration statement, except that
the Company shall not for any purpose be required to execute a general consent
to service of process or to qualify to do business as a foreign corporation in
any jurisdiction where it is not so qualified;
(d) Notify Investor, promptly after it shall receive notice
thereof, of the date and time when such registration statement and each post-
effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(e) Notify Investor promptly of any request by the Commission
for the amending or supplementing of such registration statement or prospectus
or for additional information;
23
<PAGE>
(f) Prepare and file with the Commission, promptly upon the
request of Investor, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for Investor, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Registrable Stock by Investor;
(g) Prepare and promptly file with the Commission, and promptly
notify Investor of the filing of, such amendments or supplements to such
registration statement or prospectus as may be necessary (i) to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) to revise or amend the plan of
distribution of the Registrable Stock, as requested by Investor;
(h) In case Investor is required to deliver a prospectus at a
time when the prospectus then in circulation is not in compliance with the
Securities Act or the rules and regulations of the Commission, prepare promptly
upon request such amendments or supplements to such registration statement and
such prospectus as may be necessary in order for such prospectus to comply with
the requirements of the Securities Act and such rules and regulations; and
(i) Advise Investor, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
11.3 Expenses. With respect to any registration effected pursuant to
--------
Section 11.1 hereof, the Company agrees to bear all fees, costs and expenses of
and incidental to such registration and the public offering in connection
therewith; provided, however, that Investor shall bear its pro rata share of any
underwriting discounts or commissions. The fees, costs and expenses of
registration to be borne as provided in this Section 11.3 shall include, without
limitation, all registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and disbursements
of counsel for the underwriter or underwriters of such securities (if the
Company and/or selling security holders are otherwise required to bear such fees
and disbursements), all legal fees and disbursements and other expenses of
complying with state securities or blue sky laws of any jurisdictions in which
the securities to be offered are to be registered or qualified, reasonable fees
and disbursements of one firm of counsel for the Investor (not to exceed
$15,000), and the premiums and other costs of policies of insurance against
liability of directors and officers arising out of such public offering.
24
<PAGE>
11.4 Indemnification.
---------------
(a) The Company will indemnify and hold harmless Investor and
any underwriter (as defined in the Securities Act) for Investor, and any Person
who controls Investor or such underwriter within the meaning of the Securities
Act, and any officer, director, employee, agent, partner or affiliate of
Investor, from and against, and will reimburse Investor and each such
underwriter, controlling person, officer, director, employee, agent, partner and
affiliate with respect to, any and all claims, actions, demands, losses,
damages, liabilities, costs and expenses to which Investor or any such
underwriter or controlling Person or any such officer, director, employee,
agent, partner or affiliate may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
claim, action, demand, loss, damage, liability, cost or expense is caused by an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity in all material respects with information furnished to the
Company by Investor, such underwriter or such controlling person or such
officer, director, employee, agent, partner or affiliate in writing specifically
for use in the preparation thereof.
(b) Investor will indemnify and hold harmless the Company, and
any Person who controls the Company within the meaning of the Securities Act,
from and against, and will reimburse the Company and such controlling Persons
with respect to, any and all losses, damages, liabilities, costs or expenses to
which the Company or such controlling Person may become subject under the
Securities Act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or are caused by the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was so made in reliance upon and in conformity in all
material respects with written information furnished by Investor to the Company
in writing specifically for use in the preparation thereof. Notwithstanding the
foregoing, the liability of Investor pursuant to this subsection (b) shall be
limited to an amount equal to the per share sale price (less any brokerage or
underwriting discount and commissions) multiplied by the number of shares of
Registrable Stock sold by Investor pursuant to the registration statement which
gives rise to such obligation to indemnify (less the aggregate amount of any
damages which Investor has otherwise been required to pay in respect of such
losses, damages, liabilities, costs or expenses or any substantially similar
losses, damages, liabilities, costs or expenses arising from the sale of such
Registrable Stock).
25
<PAGE>
(c) Promptly after receipt by a party indemnified pursuant to the
provisions of paragraph (a) or (b) of this Section 11.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of paragraph (a)
or (b), notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 11.4 and shall not relieve the indemnifying party from liability under
this Section 11.4 except to the extent that such indemnifying party is
materially prejudiced by such omission. In case such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall have the right to participate in, and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provisions of such paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall be liable to an indemnified party for any settlement of any action or
claim without the consent of the indemnifying party. No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a complete and unconditional release from all
liability in respect to such claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b) of
this Section 11.4 is held by a court of competent jurisdiction to be unavailable
to a party to be indemnified with respect to any claims, actions, demands,
losses, damages, liabilities, costs or expenses referred to therein, then each
indemnifying party under any such subsection, in lieu of indemnifying such
indemnified party thereunder, hereby agrees to contribute to the amount paid or
payable by such indemnified party as a result of such claims, actions, demands,
losses, damages, liabilities, costs or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with the statements
or omissions which resulted in such claims, actions, demands, losses, damages,
liabilities, costs or expenses, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding the foregoing, the amount
Investor shall be obligated to contribute pursuant to this subsection (d) shall
be limited to an amount equal to the per share sale price (less any brokerage or
underwriting discount and commissions) multiplied by the number of shares of
Registrable Stock sold by Investor pursuant to the registration statement which
gives rise to such obligation to contribute (less the aggregate amount of any
damages which Investor has otherwise been required to pay in respect of such
claim, action, demand, loss, damage, liability, cost or
26
<PAGE>
expense or any substantially similar claim, action, demand, loss, damage,
liability, cost or expense arising from the sale of such Registrable Stock). No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution hereunder from
any person who was not guilty of such fraudulent misrepresentation.
11.5 Reporting Requirements Under the Exchange Act. The Company shall
---------------------------------------------
timely file such information, documents and reports as the Commission may
require or prescribe under Section 13 or 15(d) of the Exchange Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 11.5 are (a) to enable Investor to comply with the current public
information requirement contained in paragraph (c) of Rule 144 should Investor
ever wish to dispose of any of the Registrable Stock without registration under
the Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision) and (b) to qualify the Company for the use of registration statements
on Form S-3.
11.6 Investor Information. The Company may require Investor to
--------------------
furnish the Company such information with respect to Investor and the
distribution of the Registrable Stock as the Company may from time to time
reasonably request in writing as shall be required by law or by the Commission
in connection therewith.
11.7 Transferability of Registration Rights. Notwithstanding anything
--------------------------------------
to the contrary in this Section 11, the rights of the Investor under this
Section 11 shall automatically transfer to any transferee of at least ten
percent (10%) of the Registrable Stock in accordance with Section 15.5 hereof.
12. Enforcement.
-----------
12.1 Survival of Representations and Warranties. The
------------------------------------------
representations, warranties, covenants and agreements of the parties hereto
contained in this Agreement or in any writing delivered pursuant to the
provisions of this Agreement or at the Closing shall survive any examination by
or on behalf of any party hereto and shall survive the Closing and the
consummation of the transactions contemplated hereby until the date which is
twelve (12) months after the Closing Date; provided, however, that each of the
representations and warranties contained in Sections 5.4, 5.7 and 5.9 hereof
shall survive any examination by or on behalf of any party hereto and shall
survive the Closing and the consummation of the transactions contemplated hereby
until the expiration of any applicable statute of limitations with respect to
such representation and warranty.
12.2 Indemnification.
---------------
(a) Subject to Section 12.2(e), the Company hereby covenants and
agrees to defend, indemnify and save and hold harmless Investor, together with
its officers, directors, shareholders, employees, attorneys and representatives
and each Person who controls Investor within the meaning of the Securities Act,
from and against any loss, cost, expense, liability, claim or legal damages
(including, without limitation, reasonable fees and disbursements of counsel and
accountants and other costs and expenses incident to any
27
<PAGE>
actual or threatened claim, suit, action or proceeding (each, an "Action") and
------
all costs of investigation) (collectively, the "Damages") arising out of or
-------
resulting from (i) any Default, or any inaccuracy in or breach of, or failure to
perform or observe, any representation, warranty, covenant or agreement made by
the Company or Fargo in this Agreement or in any writing delivered pursuant to
this Agreement or at the Closing, or (ii) any claims of third parties claiming
compensation, commissions or expenses for services as a broker or finder based
upon obligations incurred by the Company.
(b) In the event that any indemnified party is made a defendant
in or party to any action, suit, proceeding or claim, judicial or
administrative, instituted by any third party for Damages or other relief (any
such third party action, suit, proceeding or claim being referred to as a
"Claim"), the indemnified party (referred to in this clause (b) as the
-----
"notifying party") shall give notice thereof (a "Notice of Claim") as soon as
--------------- ---------------
practicable and in any event within thirty (30) days after the notifying party
receives notice thereof. The failure to give such notice shall not affect
whether an indemnifying party is liable for reimbursement unless such failure
has resulted in the loss of substantive rights with respect to the indemnifying
party's ability to defend such Claim, and then only to the extent of such loss.
Notice of the intention so to contest and defend shall be given by the
indemnifying party to the notifying party within twenty (20) business days after
the notifying party's notice of such Claim (but, in all events, at least ten
(10) business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the indemnifying party and approved by the indemnified party (which
approval will not be unreasonably withheld). The indemnifying party shall have
the sole right to control the contest and defense of such Claim. The notifying
party shall be entitled, at its own cost and expense (which expense shall not
constitute Damages unless the notifying party reasonably determines that the
indemnifying party because of a conflict of interest, may not adequately
represent, the interests of the indemnified parties, and has provided the
indemnifying party with notice of such determination, and only to the extent
that such expenses are reasonable), to participate in such contest and defense
and to be represented by attorneys of its or their own choosing. The notifying
party will cooperate with the indemnifying party in the conduct of such defense.
Neither the notifying party nor the indemnifying party may concede, settle or
compromise any Claim without the consent of the other party, which consent will
not be unreasonably withheld or delayed in light of all factors of importance to
such party; provided, however, that if the indemnified party shall fail to
consent to the settlement of any Claim where (i) such settlement includes an
unconditional release of all claims against the indemnified party and requires
no payment on the part of the indemnified party to the claimant or any other
party, (ii) such settlement does not require any action on the part of the
indemnified party and does not impose terms restricting or adversely affecting
the indemnified party's activity, and (iii) the claimant has affirmatively
indicated that it will accept such settlement, then the indemnifying party shall
no liability with respect to any payment to be made in respect of such claim in
excess of the proposed settlement amount.
(c) In the event any indemnified party shall have a claim
against any indemnifying party that does not involve a Claim, the indemnified
party shall deliver a notice of such claim with reasonable promptness to the
indemnifying party. The failure to
28
<PAGE>
give such notice shall not affect whether an indemnifying party is liable for
reimbursement unless such failure has resulted in the loss of substantive rights
with respect to the indemnifying party's ability to defend such claim, and then
only to the extent of such loss. If the indemnifying party notifies the
indemnified party that it does not dispute the claim described in such notice or
fails to notify the indemnified party within thirty (30) days after delivery of
such notice by the indemnified party whether the indemnifying party disputes the
claim described in such notice, the Damages in the amount specified in the
indemnified party's notice will be conclusively deemed a liability of the
indemnifying party and the indemnifying party shall pay the amount of such
Damages to the indemnified party on demand.
(d) Any claim for indemnity under this Section 12.2 shall be
delivered in writing to the indemnifying party and set forth with reasonable
specificity as to the amount claimed and the underlying facts supporting such
claim. The indemnifying party shall have thirty (30) days to accept or dispute
such claim by written notice to the indemnified party (a "Contest Notice");
--------------
provided, however, that if, at the time a Notice of Claim is submitted to the
indemnifying party the amount of the Claim in respect thereof has not yet been
determined, such thirty (30) day period shall not commence until a further
written notice (a "Notice of Liability") has been sent or delivered by the
-------------------
indemnified party to the indemnifying party setting forth the amount of the
Claim incurred by the indemnified party that was the subject of the earlier
Notice of Claim. Such Contest Notice shall specify the reasons or bases for the
objection of the Indemnifying Party to the claim, and if the objection relates
to the amount of the Claim asserted, the amount, if any, which the indemnifying
party believes is due the indemnified party. If no such Contest Notice is given
with such 30-day period, the obligation of the indemnifying party to pay to the
indemnified party the amount of the Claim set forth in the Notice of Claim, or
subsequent Notice of Liability, shall be deemed established and accepted by the
indemnifying party. If, on the other hand, the indemnifying party contests a
Notice of Claim or Notice of Liability (as the case may be) within such 30-day
period, the indemnified party and the indemnifying party shall thereafter
attempt in good faith to resolve their dispute by agreement. If the parties are
unable to so resolve their dispute within the immediately succeeding thirty (30)
days, such dispute shall be resolved by binding arbitration in Los Angeles,
California, as provided in Section 15.13 below. The award of the arbitrator
shall be final and binding on the parties and may be enforced in any court of
competent jurisdiction. Upon final determination of the amount of the Claim that
is the subject of an indemnification claim (whether such determination is the
result of the indemnifying party's acceptance of, or failure to contest, a
Notice of Claim or Notice of Liability, or of a resolution of any dispute with
respect thereto by agreement of the parties or binding arbitration), such amount
shall be payable, in cash by the indemnifying party to the indemnified parties
who have been determined to be entitled thereto within fifteen (15) days of such
final determination of the amount of the Claim due by the indemnifying party.
Any amount that becomes due hereunder and is not paid when due shall bear
interest at the maximum legal rate per annum from the date due until paid.
(e) Anything to the contrary notwithstanding, (i) the Investor
shall not be indemnified and held harmless in respect of any Damages unless and
until the aggregate amount of such Damages exceeds $100,000, in which event the
Investor shall be
29
<PAGE>
indemnified and held harmless in respect of all Damages without regard to the
foregoing $100,000 limit, and (ii) the liability of the Company to the Investor
shall be limited to an amount equal to the Purchase Payment.
(f) Investor hereby covenants and agrees to defend, indemnify
and save and hold harmless the Company, together with officers, directors,
shareholders, employees, attorneys and representatives and each Person who
controls the Company within the meaning of the Securities Act from and against
any Damages arising out of or resulting from (i) any inaccuracy in breach of, or
failure to perform or observe, any representation, warranty, covenant or
agreement made by Investor in this Agreement or in any writing or other
agreement delivered pursuant hereto, or (ii) any claims of third parties
claiming compensation, commissions or expenses for services as a broker or
finder based upon obligations incurred by Investor.
(g) Except as provided in Section 12.3, the provisions of this
Section 12.2 shall be the exclusive remedy or exclusive means to obtain relief,
as the case may be, of any party in the event of any breach of any
representation, warranty, covenant or agreement contained herein (or in any
certificate or other document delivered pursuant hereto) by another party, or
with respect to any Action or Claim; provided, however, that this subsection (g)
-------- -------
shall not limit any statutory claim, or any claim in tort, which any party may
have against the other party.
12.3 Injunctive Relief. (a) Any party may bring a claim seeking
-----------------
specific performance by way of injunctive relief before a court of competent
jurisdiction to enforce the provisions of this Agreement, (b) any party seeking
to enforce a claim for indemnification may bring any claim of indemnification
which is not resolved within the thirty day period provided in Section 12.2(b)
before a court of competent jurisdiction, and (c) in the event of any breach by
either party of Section 14.9, the other party may seek injunctive relief from a
court of competent jurisdiction to restrain any such breach.
12.4 No Implied Waiver. Except as expressly provided in this
-----------------
Agreement, no course of dealing between the Company and Investor and no delay in
exercising any such right, power or remedy conferred hereby or now or hereafter
existing at law in equity, by statute or otherwise, shall operate as a waiver
of, or otherwise prejudice, any such right, power or remedy.
30
<PAGE>
13. Definitions. Unless the context otherwise requires, the terms defined
-----------
in this Section 14 shall have the meanings herein specified for all purposes of
this Agreement, applicable to both the singular and plural forms of any of the
terms herein defined. All accounting terms defined in this Section 14 and those
accounting terms used in this Agreement not defined in this Section 14 shall,
except as otherwise provided for herein, be construed in accordance with those
generally accepted accounting principles that the Company is required to employ
by the terms of this Agreement. If and so long as the Company has any
Subsidiary, the accounting terms defined in this Section 14 and those accounting
terms appearing in this Agreement but not defined in this Section 14 shall be
determined on a consolidated basis for the Company and its Subsidiaries, and the
financial statements and other financial information to be furnished by the
Company pursuant to this Agreement shall be consolidated and presented with
consolidating financial statements of the Company and its Subsidiaries.
"Action" shall have the meaning assigned to it in Section
------
12.2(a).
"Affiliate" shall mean any Person which directly or indirectly
---------
controls, is controlled by, or is under common control with, the indicated
Person.
"Agreement" shall mean this Agreement.
---------
"Balance Sheet" and "Balance Sheet Date" shall have the meanings
------------- ------------------
assigned to these terms in Section 5.12 hereof.
"Board" shall mean the Board of Directors of the Company.
-----
"Certificate of Designation" shall have the meaning set forth in
--------------------------
Section 1 above.
"Claim" shall have the meaning assigned to it in Section 12.2(b).
-----
"Closing" and "Closing Date" shall have the meanings assigned to
------- ------------
these terms in Section 3.
"Common Stock" shall mean the Company's common stock, $.001 par
------------
value.
"Commission" shall mean the Securities and Exchange Commission.
----------
"Covenant Period" shall have the meaning set forth in Section 8.
---------------
"Damages" shall have the meaning assigned to it in Section
-------
12.2(a).
"Default" shall mean a default or failure in the due observance
-------
or performance of any covenant, condition or agreement on the part of the
Company or any of its Subsidiaries to be observed or performed under the terms
of this Agreement, if such default or failure in performance shall remain
unremedied for ten (10) days.
"Designated Key Employees" shall have the meaning assigned to it
------------------------
in
31
<PAGE>
Section 5.15.
"Designee" shall have the meaning assigned to it in Section
--------
7.6(a).
"Developing Software" shall have the meaning assigned to it in
-------------------
Section 5.27(b).
"Equity Security" shall mean any stock or similar security of the
---------------
Company or any security (whether stock or Indebtedness for Borrowed Money)
convertible or exchangeable, with or without consideration, into or for any
stock or similar security, or any security (whether stock or Indebtedness for
Borrowed Money) carrying any warrant or right to subscribe to or purchase any
stock or similar security, or any such warrant or right.
"Event of Default" shall mean (a) the failure of either the
----------------
Company or any Subsidiary to pay any Indebtedness for Borrowed Money, or any
interest or premium thereon, within ten (10) days after the same shall become
due, whether such Indebtedness shall become due by scheduled maturity, by
required prepayment, by acceleration, by demand or otherwise, (b) an event of
default under any agreement or instrument evidencing or securing or relating to
any such Indebtedness, or (c) the failure of either the Company or any
Subsidiary to perform or observe any material term, covenant, agreement or
condition on its part to be performed or observed under any agreement or
instrument evidencing or securing or relating to any such Indebtedness when such
term, covenant or agreement is required to be performed or observed.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Existing Rights Agreement" shall have the meaning assigned to it
-------------------------
in Section 7.1(p).
"Indebtedness" shall mean any obligation of the Company or any
------------
Subsidiary which under generally accepted accounting principles is required to
be shown on the balance sheet of the Company or such Subsidiary as a liability.
Any obligation secured by a Lien on, or payable out of the proceeds of
production from, property of the Company or any Subsidiary shall be deemed to be
Indebtedness even though such obligation is not assumed by the Company or
Subsidiary.
"Indebtedness for Borrowed Money" shall mean (a) all Indebtedness
-------------------------------
in respect of money borrowed including, without limitation, Indebtedness which
represents the unpaid amount of the purchase price of any property and is
incurred in lieu of borrowing money or using available funds to pay such amounts
and not constituting an account payable or expense accrual incurred or assumed
in the ordinary course of business of the Company or any Subsidiary, (b) all
Indebtedness evidenced by a promissory note, bond or similar written obligation
to pay money, or (c) all such Indebtedness guaranteed by the Company or any
Subsidiary or for which the Company or any Subsidiary is otherwise contingently
liable.
"Investor Counsel" shall have the meaning assigned to it in
----------------
Section 7.1(g)(3).
32
<PAGE>
"Investor Stock" shall have the meaning assigned to it in Section
--------------
4.2.
"Lien" shall mean any mortgage, pledge, security interest,
----
encumbrance, lien or charge of any kind, including, without limitation, any
conditional sale or other title retention agreement, any lease in the nature
thereof and the filing of or agreement to give any financing statement under the
Uniform Commercial Code of any jurisdiction and including any lien or charge
arising by statute or other law.
"Material Adverse Effect" on a Person means a material adverse
-----------------------
effect, or any condition, situation or set of circumstances that could
reasonably be expected to have an adverse effect, on such Person and its
Subsidiaries, taken as a whole.
"Operational Software" shall have the meaning assigned to it in
--------------------
Section 5.27(a).
"Permitted Liens" shall mean (a) Liens for taxes and assessments
---------------
or governmental charges or levies not at the time due or in respect of which the
validity thereof shall currently be contested in good faith by appropriate
proceedings; (b) Liens in respect of pledges or deposits under workers'
compensation laws or similar legislation, carriers', warehousemen's, mechanics',
laborers' and materialmen's and similar Liens, if the obligations secured by
such Liens are not then delinquent or are being contested in good faith by
appropriate proceedings; and (c) Liens incidental to the conduct of the business
of the Company or any Subsidiary which were not incurred in connection with the
borrowing of money or the obtaining of advances or credits and which do not in
the aggregate materially detract from the value of its property or materially
impair the use thereof in the operation of its business.
"Person" shall include any natural person, corporation, trust,
------
association, company, partnership, limited liability company, joint venture and
other entity and any government, governmental agency, instrumentality or
political subdivision.
"Purchase Payment" shall have the meaning assigned to it in
----------------
Section 2.
"Registrable Stock" shall have the meaning assigned to it in
-----------------
Section 11.1.
"Securities Act" shall mean the Securities Act of 1933, as
--------------
amended.
"Series A Preferred Stock" shall have the meaning assigned to it
------------------------
in Section 1.
"Subsidiary" shall mean any corporation, association or other
----------
business entity at least fifty percent (50%) of the outstanding voting stock of
which is at the time owned or controlled directly or indirectly by the Company
or by one or more of such subsidiary entities or both, where "voting stock"
means any shares of stock having general voting power in electing the board of
directors (irrespective of whether or not at the time stock of any other class
or classes has or might have voting power by reason of any contingency).
33
<PAGE>
"Web Site" shall have the meaning assigned to it in Section
--------
5.28(a).
14. Miscellaneous.
-------------
14.1 Waivers and Amendments. With the written consent of Investor,
----------------------
the obligations of the Company and the rights of Investor under this Agreement
may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board, may enter into a supplementary agreement for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of any supplemental agreement or
modifying in any manner the rights and obligations hereunder of Investor and the
Company. Neither this Agreement, nor any provision hereof, may be amended,
waived, discharged or terminated orally or by course of dealing, but only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, as provided in this Section
14.1. Specifically, but without limiting the generality of the foregoing, the
failure of Investor at any time or times to require performance of any provision
hereof by the Company shall in no manner affect the right of Investor at a later
time to enforce the same. No waiver by any party of the breach of any term or
provision contained in this Agreement, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such
breach, or a waiver of the breach of any other term or covenant contained in the
Agreement.
14.2 Rights of Investor. Investor shall have the absolute right to
------------------
exercise or refrain from exercising any right or rights which Investor may have
by reason of this Agreement or any Investor Stock, including, without
limitation, the right to consent to the waiver of any obligation of the Company
under this Agreement and to enter into an agreement with the Company for the
purpose of modifying this Agreement or any agreement effecting any such
modification, and Investor shall not incur any liability to any other
shareholder of the Company with respect to exercising or refraining from
exercising any such right or rights.
14.3 Notices. All notices, requests, consents and other
-------
communications required or permitted hereunder shall be in writing (including
telecopy or similar writing) and shall be given,
if to the Company to:
Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Attention: Mr. Brian Fargo, Chairman and
Chief Executive Officer
Telecopier: (949) 252-0667
34
<PAGE>
with a copy to:
K.C. Schaaf, Esq.
Stradling Yocca Carlson & Rauth, a professional corporation
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Telecopier: (949) 725-4100
if to Investor to:
Titus Interactive SA
c/o Titus Software Corporation
20432 Corisco Street
Chatsworth, California 91311
Attention: Mr. Herve Caen, Chairman and
Chief Executive Officer
Telecopier: (818) 709-6537
with copies to:
Titus Interactive SA
Parc de l'esplanade
12, Rue Enrico Fermi
Saint Thibault des Vignes
77462 Lagny sur Marne Cedex
France
Telecopier: 011-33-1-60-31-59-60
and
Robert A. Miller, Jr., Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street - 23/rd/ Floor
Los Angeles, California 90071
Telecopier: (213) 627-0705
if to Fargo to:
Mr. Brian Fargo
c/o Interplay Entertainment Corp.
16815 Von Karman Avenue
Irvine, California 92606
Telecopier: (949) 252-0667
or to such other address or telecopier number as such party may specify for the
purpose by notice to the other party or parties to this Agreement, as the case
may be. Any notice, request, consent or other communication hereunder shall be
deemed to have been given and received on the day on which it is delivered (by
any means including personal
35
<PAGE>
delivery, overnight air courier, United States or French mail) or telecopied
(or, if such day is not a business day or if the notice, request, consent or
communication is not telecopied during business hours of the intended recipient,
at the place of receipt, on the next following business day).
14.4 Severability. Should any one or more of the provisions of this
------------
Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement,
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.
14.5 Assignment; Parties in Interest. Neither this Agreement nor any
-------------------------------
interest herein may be assigned by either party hereto without the written
consent of the other parties hereto, except that Investor may assign all of its
rights hereunder to any Subsidiary of Investor. Subject to the foregoing, all
the terms and provisions of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, whether so expressed or not. Subject to the immediately
preceding sentence, this Agreement shall not run to the benefit of or be
enforceable by any Person other than a party to this Agreement and its
successors and assigns.
14.6 Headings. The headings of the Sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
14.7 Choice of Law; Jurisdiction and Venue. The internal substantive
-------------------------------------
laws, and not the laws of conflicts, of the State of California shall govern the
enforceability and validity of this Agreement, the construction of its terms and
the interpretation of the rights and duties of the parties. The parties hereby
consent and agree that the United States District Court for the Central District
of California, or the Superior Court of California for the County of Orange will
have exclusive jurisdiction over any legal action or proceeding arising out of
or relating to this Agreement, and each party consents to the in personam
jurisdiction of such courts for the purpose of any such action or proceeding and
agrees that venue is proper in such courts.
14.8 Satisfaction of Investor Obligations. The Company and Investor
------------------------------------
hereby agree that upon consummation of the transactions contemplated by this
Agreement, Investor shall have satisfied its obligations in full pursuant to
Section 9.2 of that certain Stock Purchase Agreement, dated as of July 20, 1999,
by and between Investor, the Company and Brian Fargo.
14.9 Publicity. Without the prior consent of the other parties, no
---------
party shall, and each party shall cause its directors, officers, employees,
representatives and agents not to, make any public statement or press release
with respect to the transactions contemplated by this Agreement or otherwise
disclose to any Person the existence, terms, content or effect of this
Agreement; provided, however, that if a disclosure is required by law, the party
--------
required to make such disclosure shall be permitted to make such disclosure
36
<PAGE>
but shall use best efforts to consult with the other parties hereto before
making the required disclosure. The foregoing restriction shall not limit the
applicability of the Nondisclosure Agreements between the Company and Investor
dated November 10, 1998, and March 3, 1999, which shall continue in full force
and effect in accordance with their respective terms.
14.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts (including by facsimile) and by different parties hereto in
separate counterparts, with the same effect as if all parties had signed the
same document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument.
14.11 Entire Agreement. This Agreement, and the Exhibits, Schedules,
----------------
certificates, and documents referred to herein constitute the entire agreement
of the parties hereto with respect to the subject matter hereof, and supersede
all prior understandings with respect to the subject matter hereof, and no
representation or warranty not included herein has been relied upon by any party
hereto.
14.12 Attorneys' Fees. In the event of any dispute, controversy, or
---------------
proceeding between the parties concerning this Agreement or the transactions
contemplated hereby, the prevailing party shall be entitled to receive from the
non-prevailing party its costs and expenses, including attorneys' fees.
14.13 Arbitration. Except for actions to obtain injunctions or other
-----------
equitable remedies, all disputes between the parties hereto shall be determined
solely and exclusively by arbitration under, and in accordance with the rules
then in effect of, the American Arbitration Association, or any successors
thereto ("AAA"), in Los Angeles, California, unless the parties otherwise agree
---
in writing. The parties shall, in connection with such arbitration, in addition
to any discovery permitted under AAA rules, be permitted to conduct discovery in
accordance with Section 1283.05 of the California Code of Civil Procedure, the
provisions of which are incorporated herein by this reference. The parties
shall jointly select an arbitrator. In the event the parties fail to agree upon
an arbitrator within ten (10) days, then each party shall select an arbitrator
and such arbitrators shall then select a third arbitrator to serve as the sole
arbitrator; provided, that if either party, in such event, fails to select an
--------
arbitrator within seven (7) days, such arbitrator shall be selected by the AAA
upon application of either party. Judgment upon the award of the agreed upon
arbitrator or the so chosen third arbitrator, as the case may be, shall be
binding and may be entered in any court of competent jurisdiction.
37
<PAGE>
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective duly authorized officers as of the day and year
first above written.
INTERPLAY ENTERTAINMENT CORP., a
Delaware corporation
By: /s/ Brian Fargo
---------------------------------
An Authorized Officer
TITUS INTERACTIVE SA, a French
corporation
By: /s/ Herve Caen
---------------------------------
An Authorized Officer
38
<PAGE>
EXHIBIT A
---------
FORM OF CERTIFICATE OF DESIGNATION
----------------------------------
39
<PAGE>
EXHIBIT B
---------
OPINION OF STRADLING YOCCA CARLSON & RAUTH
------------------------------------------
40
<PAGE>
EXHIBIT C-1
-----------
FORM OF WARRANTS
----------------
41
<PAGE>
EXHIBIT C-2
FORM OF CONDITIONAL WARRANT
---------------------------
42
<PAGE>
EXHIBIT D-1
-----------
CREDIT FACILITY
---------------
43
<PAGE>
EXHIBIT D-2
-----------
FORM OF CREDIT FACILITY WARRANT
-------------------------------
44
<PAGE>
EXHIBIT 10.32
CERTIFICATE OF DESIGNATION
OF
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF
SERIES A PREFERRED STOCK
OF
INTERPLAY ENTERTAINMENT CORP.
(Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware)
The undersigned, Brian Fargo and Manuel Marrero, hereby certify that:
FIRST: They are the duly elected and acting Chief Executive Officer
and Secretary, respectively, of Interplay Entertainment Corp., a Delaware
corporation ( the "Corporation").
SECOND: That the Amended and Restated Certificate of Incorporation of
the Corporation authorizes 5,000,000 shares of preferred stock, $0.001 par value
per share ("Preferred Stock"), none of which have been designated.
THIRD: The following is a true and correct copy of resolutions duly
adopted by the Board of Directors of the Corporation at a meeting duly held on
April 13, 2000, which constituted all requisite action on the part of the
Corporation for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Corporation is authorized to
provide for the issuance of Preferred Stock in series, and by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designations, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof; and
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of Preferred Stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of Preferred Stock and the number of shares constituting
such series and fixes the rights, preferences, privileges and restrictions
relating to such shares as follows:
Rights, Preferences and Restrictions of Series A Preferred Stock. The
----------------------------------------------------------------
rights, preferences, privileges and restrictions granted to and imposed on the
second series of Preferred Stock, which shall be designated "Series A Preferred
Stock" and which shall consist of seven hundred nineteen thousand four hundred
twenty-four (719,424) shares, are as set forth below.
1. Dividend Provisions. Subject to the rights of any series of
-------------------
Preferred Stock which may hereafter come into existence, the holders of shares
of Series A Preferred Stock shall be entitled to receive cumulative dividends,
out of any assets legally available therefore, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
<PAGE>
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of this
Corporation) on the Common Stock of this Corporation, at the rate of six percent
(6%) of the Original Series A Issue Price per annum per share, as adjusted for
any stock splits, combinations or dividends following the effectiveness of this
Certificate of Designation with respect to the Series A Preferred Stock, payable
when, as, and if declared by the Corporation's Board of Directors. Such
dividends shall be payable in cash or, at the option of the holder of Series A
Preferred Stock, in a number of shares of the Corporation's Common Stock equal
to the unpaid dividends accrued on such Series A Preferred Stock divided by the
lower of (i) the Conversion Price (as defined below) or (ii) (if paid upon the
conversion of shares of Series A Preferred Stock) the Alternate Conversion Price
(as defined below).
2. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) Preference of Series A Preferred Stock. In the event of any
--------------------------------------
liquidation, dissolution, or winding up of the Corporation (in which case the
Company shall give the holder(s) of the Series A Preferred Stock ten (10) days
prior written notice), whether voluntary or involuntary, subject to the rights
of series of Preferred Stock that may hereafter come into existence, holders of
each share of Series A Preferred Stock shall be entitled to be paid, out of the
assets of the Corporation available for distribution to holders of the
Corporation's capital stock, whether such assets are capital, surplus or
earnings, an amount equal to Twenty-Seven and 80/100 Dollars ($27.80) per
outstanding share (as adjusted for any stock dividends, combinations or splits
following the effectiveness of this Certificate of Designation with respect to
the Series A Preferred Stock) (the "Original Series A Issue Price"), plus any
accrued but unpaid dividends, whether or not declared (collectively, the "Series
A Liquidation Amount"), before any sums shall be paid or any assets distributed
among the holders of shares of Common Stock or shares ranking junior on
liquidation to the Series A Preferred Stock. If the assets of the Corporation
shall be insufficient to permit the payment in full to the holders of the Series
A Preferred Stock of the amount thus distributable, then, subject to the
liquidation preferences of any subsequently designated series of Preferred
Stock, the entire assets of the Corporation available for such distribution
shall be distributed ratably among the holders of the Series A Preferred Stock,
based on the aggregate liquidation preferences of such Series. After such
payment shall have been made in full to the holders of the Series A Preferred
Stock or funds necessary for such payment shall have been set aside by the
Corporation in trust for the account of holders of the Series A Preferred Stock
so as to be available for such payment, subject to the rights of any
subsequently designated series of Preferred Stock, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
ratably among the holders of Common Stock.
(b) Consolidation and Merger. A consolidation, reorganization
------------------------
or merger, or similar transaction or series of transactions, (other than a
consolidation, reorganization or merger, or similar transaction or series of
transactions, in which the holders of voting securities of the Corporation
immediately before the consolidation, reorganization or merger, or similar
transaction or series of transactions, own (immediately after the consolidation,
reorganization or merger, or similar transaction or series of transactions,)
voting securities of the surviving or acquiring corporation, or of a parent
party of such surviving or acquiring corporation, possessing more than 50% of
the voting power of such surviving or acquiring corporation or parent party) of
the Corporation or a sale of all or substantially all of the assets of the
Corporation (any of which events is hereinafter referred to as a
"Reorganization") shall be regarded as a liquidation, dissolution or winding up
of the affairs of the Corporation within the meaning of this Section 2. The
Corporation shall give each holder of record of Series A Preferred Stock written
notice of such impending transaction not later than twenty (20)
2
<PAGE>
days prior to the stockholders' meeting called to approve such transaction, or
twenty (20) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
transaction. Such notice shall describe the then known material terms and
conditions of the impending transaction and the provisions of this Section 2.
The transaction shall in no event take place sooner than twenty (20) days after
the Corporation has given such notice provided for herein; provided, however,
that such periods may be shortened and such notice may be waived upon the
written consent of the holders of Series A Preferred Stock that represent at
least a majority of the voting power of all then outstanding shares of Series A
Preferred Stock.
(c) Distributions Other Than Cash. Whenever the distribution
-----------------------------
provided for herein shall be paid in property other than cash, the value of such
distribution shall be the fair market value of such property as mutually
determined in good faith by the Board of Directors of the Corporation and the
holders of a majority of the Series A Preferred Stock; provided, however, in the
event the Board of Directors and the holders of the Series A Preferred Stock can
not agree on the fair market value of the property to be distributed, the fair
market value of such property shall be determined by a mutually agreed upon
third party.
3. No Reissuance of the Preferred Stock. No share or shares of the
------------------------------------
Series A Preferred Stock acquired by the Corporation by reason of purchase,
conversion or otherwise shall be reissued. The Corporation may from time to
time take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Series A Preferred Stock accordingly.
4. Conversion. The holders of Series A Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock
----------------
shall be convertible, at the option of the holder thereof, at any time after the
earlier to occur of May 31, 2001 or one hundred eighty (180) days after the
occurrence of an Adjustment Event (as defined below) which is not cured during
the Cure Period (as defined below) (except as hereinafter provided), at the
office of this Corporation or any transfer agent for such stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series A Issue Price by the conversion price applicable
to such share, determined as hereafter provided (the "Series A Conversion
Price"), in effect on the date of conversion. The initial Series A Conversion
Price per share shall be ten percent (10%) of the Original Series A Issue Price
for such share; provided, however that the Series A Conversion Price shall be
subject to adjustment as set forth in subsection 4(d). Notwithstanding the
foregoing, in no event shall the Series A Preferred Stock be convertible into
more than 5,504,507 shares of Common Stock (the "Issuance Limit") unless the
issuance of the Series A Preferred Stock has been approved by vote of the
Company's stockholders in accordance with Delaware law (the "Required Approval")
prior to the date of such proposed conversion; provided that this limitation
shall cease to apply upon an Adjustment Event. Notwithstanding the foregoing,
the Series A Preferred Stock shall not be convertible during the Cure Period (as
defined in Section 4(d)(ii)(A) below).
(b) Automatic Conversion. Each share of Series A Preferred
--------------------
Stock shall automatically be converted into shares of Common Stock at the Series
A Conversion Price in effect at the time immediately upon the vote or written
consent of holders of a majority of the then-outstanding shares of Series A
Preferred Stock, provided such vote or written consent occurs during a period in
which the Series A Preferred Stock would be convertible under Section 4(a)
above.
3
<PAGE>
(c) Mechanics of Conversion. Before any holder of Series A
-----------------------
Preferred Stock shall be entitled to convert the same into shares of Common
Stock pursuant to subsection 4(a), such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of this Corporation or of
any transfer agent for the Series A Preferred Stock, and give written notice to
this Corporation at its principal corporate office of such holder's election to
convert the same, and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. This
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, or to the nominee or nominees
of such holders, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid, together with
all unpaid dividends accruing on the Series A Preferred Stock from the date of
issuance through the date of conversion, payable as provided in Section 1
hereof, whether or not declared. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Series A Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. In the event of an automatic
conversion pursuant to subsection 4(b), the outstanding shares of Series A
Preferred Stock shall be converted automatically without further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent, provided that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Series A Preferred Stock are delivered to
the Corporation or its transfer agent.
(d) Conversion Price Adjustments of Preferred Stock. The Series
-----------------------------------------------
A Conversion Price shall be subject to adjustment from time to time as follows:
(i) Adjustment Based on Market Price. In the event that
--------------------------------
the product of (A) the average of the closing prices per share of the Company's
Common Stock as reported by Nasdaq for the twenty (20) trading days immediately
preceding the date of conversion and (B) 0.85 (such product, the "Alternate
Conversion Price") is less than the Series A Conversion Price in effect on the
date of conversion, then the Series A Conversion Price shall forthwith be
reduced to the Alternate Conversion Price.
(ii) Adjustment Upon Default. In the event that Greyrock
-----------------------
Capital or any of its successors, transferees or assignees (collectively,
"Greyrock") notifies either Titus Interactive SA or Titus Software Corporation
(collectively, "Titus") that Greyrock is making demand for payment under that
certain Continuing Guaranty dated April 14, 2000 (the "Guaranty"), or in the
event of an Event of Default under Section 54.1 of that certain Reimbursement
and Security Agreement dated April 134, 2000 among Titus Interactive SA, the
Corporation and Interplay OEM, Inc. (the "Reimbursement Agreement"), then, in
any of such events (each, an "Adjustment Event"), in addition to the other
adjustments under this Section 4(d), the Series A Conversion Price shall be
subject to the following adjustments:
(A) the Series A Conversion Price shall, automatically
upon such Adjustment Event, be reduced to $0.473998043 466818926 (subject to
adjustment for stock splits, combinations and dividends following the date
hereof with respect to the Common Stock); and
(B) in the event thatso long as (a) Titus does not pay
any amounts under the Guaranty, or (b) the Adjustment Event under Section 45.1
of the Reimbursement Agreement is
4
<PAGE>
cured by the Corporation, within one hundred eighty (180) days following the
occurrence of the Adjustment Event (the "Cure Period"), the Series A Conversion
Price shall, concurrent with such cure, automatically be increased to the Series
A Conversion Price in effect immediately prior to the adjustment made pursuant
to subsection (A) above; and
(C) in the event that (a) Titus pays amounts under the
Guaranty and (b) the Adjustment Event is not cured by the Corporation within the
Cure Period, then, as of the first day following the end of the Cure Period, the
Series A Conversion Price shall be automatically adjusted to an amount obtained
by the following formula (provided, however, that in no event shall the
resulting Series A Conversion Price be less than $0.466818926473998043 (subject
to adjustment for stock splits, combinations and dividends following the date
hereof with respect to the Common Stock) or more than $2.78 (subject to
adjustment for stock splits, combinations and dividends following the date
hereof with respect to the Common Stock):
X = 20,000,000
-------------------------------
Z + 5,000,000 (10-Y)
where: X = the new Series A Conversion Price;
Y = the lesser of (a) $10.00 per share (subject to adjustment for
stock splits, combinations and dividends following the date
hereof with respect to the Common Stock) or (b) the average
closing price per share as reported by Nasdaq for the twenty (20)
trading days immediately preceding the last day of the Cure
Period; and
Z = the greater of (a) $20,000,000 divided by $2.78 (subject to
adjustment for stock splits, combinations and dividends following
the date hereof with respect to the Common Stock) or (b)
$20,000,000 divided by the product of .85 and Y.
The formula set forth above shall be equitably adjusted in the event of any
stock splits, combinations and dividends following the date hereof with respect
to the Common Stock so as to preserve, as closely as possible, the conversion
rights of the Series A Preferred Stock hereunder.
(iii) Adjustment for Splits and Dividends. In the event
-----------------------------------
the Corporation should at any time or from time to time following the
effectiveness of this Certificate of Designation fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into or exercisable for, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Series A Conversion Price shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each share
of Series A Preferred Stock shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.
5
<PAGE>
(iv) Adjustment for Combinations. If the number of shares
---------------------------
of Common Stock outstanding at any time following the effectiveness of this
Certificate of Designation is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Series A Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of the Series A
Preferred Stock shall be decreased in proportion to such decrease in outstanding
shares.
(e) Other Distributions. In the event this Corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection (iii), then, in
each such case, the holders of Series A Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of the Corporation into which their shares
of Series A Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(f) Recapitalizations. If at any time or from time to time
-----------------
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4), provision shall be made so that the holders of Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of such
Series A Preferred Stock the number of shares of stock or other securities or
property of the Corporation or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of Series
A Preferred Stock after the recapitalization to the end that the provisions of
this Section 4 (including adjustment of the Series A Conversion Price then in
effect and the number of shares purchasable upon conversion of Series A
Preferred Stock) shall be applicable after that event as nearly equivalent as is
practicable.
(g) No Impairment. This Corporation will not, by amendment of
-------------
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of Series A Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the
conversion of any share or shares of Series A Preferred Stock, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion
(ii) Upon the occurrence of each adjustment or readjustment
of the Series A Conversion Price pursuant to this Section 4, this Corporation,
at its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare
6
<PAGE>
and furnish to each holder of Series A Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. This Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (A)
such adjustment and readjustment, (B) the Series A Conversion Price at the time
in effect, and (C) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of a
share of Series A Preferred Stock.
(iii) Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred Stock such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Series A Preferred
Stock, in addition to such other remedies as shall be available to the holder of
such Series A Preferred Stock, this Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any necessary amendment
to the Corporation's Certificate of Incorporation, as then in effect.
(iv) Notices. Any notice required by the provisions of
-------
this Section 4 to be given to the holders of shares of Series A Preferred Stock
shall be deemed given if deposited in the United States registered or certified
mail, postage prepaid, return receipt requested and addressed to each holder of
record at his address appearing on the books of this Corporation.
5. Redemption. At any time and from time to time following the
----------
issuance of any shares of Series A Preferred Stock, the Corporation may, in its
sole discretion, redeem all or any portion of the outstanding shares of Series A
Preferred Stock by paying for each share in cash an amount equal to the Original
Series A Issue Price (as adjusted for stock splits, stock dividends or similar
events with respect to the Series A Preferred Stock) plus all accrued but unpaid
dividends, if any (whether or not declared), such amount being referred to
herein as the "Redemption Price" for such shares; provided, however, that the
Corporation may not exercise any rights under this Section 5 at any time that
the Guaranty is outstanding or Titus or its assignee has not been repaid all
amounts due and owing under the Reimbursement Agreement.
(i) Surrender of Stock. Within ten (10) business days
------------------
following receipt of written notice from the Corporation of its election to
redeem shares of Series A Preferred Stock hereunder, each holder of shares of
Series A Preferred Stock to be redeemed shall surrender the certificate or
certificates representing such shares to the Corporation, and thereupon the
Redemption Price for such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof, and
each surrendered certificate shall be cancelled and retired. In the event less
than all shares represented by such certificate are redeemed, a new certificate
will be issued representing the unredeemed shares.
(ii) Partial Redemption. From and after each date of
------------------
redemption of shares of Series A Preferred Stock (each, a "Redemption Date"),
unless there shall have been a default in payment of the Redemption Price, all
rights of the holders as to the shares of Series A Preferred Stock to be
redeemed on such date (except the right to receive the Redemption Price
7
<PAGE>
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever.
(iii) Redemption Mechanics. On the applicable Redemption
--------------------
Date, the Corporation shall deposit the aggregate Redemption Prices for the
Series A Preferred Stock to be redeemed with a bank or trust company having
aggregate capital and surplus in excess of $100,000,000 as a trust fund for the
benefit of the respective holders of the shares surrendered for redemption and
not yet redeemed. Simultaneously, this Corporation shall deposit irrevocable
instructions and authority to such bank or trust company to pay, on and after
the applicable Redemption Date, the Redemption Price of the Series A Preferred
Stock to the holders thereof upon surrender of their certificates. Any moneys
deposited by the Corporation pursuant to this Section 5 for the redemption of
shares which are thereafter converted into shares of Common Stock pursuant to
Section 4 no later than the close of business on the applicable Redemption Date
shall be returned to the Corporation forthwith upon such conversion. The
balance of any moneys deposited by the Corporation pursuant to this Section 5
remaining unclaimed at the expiration of one year following the applicable
Redemption Date shall thereafter be returned to the Corporation, provided that
the shareholder to which such monies would be payable hereunder shall be
entitled, upon proof of its ownership of the Series A Preferred Stock and
payment of any bond requested by the Corporation, to receive such monies, but
without interest, from the applicable Redemption Date.
6. Voting Rights. The holder of each share of Series A Preferred
-------------
Stock shall have the right to one vote for each share of Common Stock into which
such share of Series A Preferred Stock could then be converted (subject to the
limitation set forth in the penultimate sentence of Section 4(a)), and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the Bylaws of this Corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote as a single class,
unless otherwise prohibited by law. Fractional votes shall not, however, be
permitted and any fractional voting rights available on an as-converted basis
(after aggregating all shares into which shares of Series A Preferred Stock held
by each holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward).
7. Protective Provisions of Series A Preferred Stock. So long as
-------------------------------------------------
at least 100,000 shares of Series A Preferred Stock (as adjusted for stock
splits, combinations or similar events) are outstanding, this Corporation shall
not, without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of a majority of the outstanding shares of
Series A Preferred Stock voting as a single class (with each share of Series A
Preferred Stock having a number of votes equal to the number of shares of Common
Stock into which such share is then convertible):
(a) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation ) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Corporation is disposed of;
(b) alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock so as to affect adversely the shares;
8
<PAGE>
(c) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Preferred Stock or Common
Stock;
(d) create (by new authorization, reclassification,
recapitalization or otherwise) any class or series of stock or any other
securities convertible into equity securities of this Corporation having a
preference over, or being on a parity with, the rights, preferences or
privileges of the Series A Preferred Stock;
(e) effect a reclassification or recapitalization of the
outstanding capital stock of the Corporation in which any capital stock has any
preference or priority as to dividends or assets senior to or on parity with the
preferences of the Series A Preferred Stock;
(f) amend or waive any provision of the Corporation's Amended
and Restated Certificate of Incorporation relating to the Series A Preferred
Stock;
(g) authorize or pay any cash dividends with respect to any
share or shares of Common Stock;
(h) redeem, purchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose) any share or shares of Common Stock;
provided, however, that this restriction shall not apply to the repurchase of
shares of Common Stock from employees, officers, directors, consultants or other
persons performing services for the Corporation or any subsidiary pursuant to
agreements under which the Corporation has the option to repurchase such shares
at cost or at cost upon the occurrence of certain events, such as the
termination of employment; or
(i) effect the dissolution, liquidation or winding up of the
Corporation.
RESOLVED FURTHER, that the President and Secretary of the Corporation be,
and they hereby are, authorized and directed to prepare, execute, verify and
file with the Secretary of State of the State of Delaware, a Certificate of
Designation in accordance with these resolutions and as required by law.
9
<PAGE>
EXHIBIT 10.33
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") NOR QUALIFIED UNDER THE CALIFORNIA CORPORATE
SECURITIES LAW OF 1968, AS AMENDED, (THE "CALIFORNIA SECURITIES LAW"). THIS
WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT AND THE SECURITIES LAW. THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE
THEREOF MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH THE
CALIFORNIA SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION AND COMPLIANCE ARE NOT REQUIRED.
Warrant to Purchase
350,000 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
INTERPLAY ENTERTAINMENT CORP.
This is to certify that, for value received, Titus Interactive SA, or a
proper assignee (in each case, the "Holder"), is entitled to purchase, subject
to the provisions of this Warrant, from Interplay Entertainment Corp., a
Delaware corporation (the "Company"), having its principal place of business at
16815 Von Karman Avenue, Irvine, California 92606, at any time during the period
from the date hereof (the "Commencement Date") to 5:00 p.m., California time, on
April 7, 2010 (the "Expiration Date") at which time this Warrant shall expire
and become void, Three Hundred Fifty Thousand (350,000) shares ("Warrant
Shares") of the Company's Common Stock (the "Common Stock"). This Warrant shall
be exercisable at Three and 79/100 Dollars ($3.79) per share (the "Exercise
Price"). The number of shares of Common Stock to be received upon exercise of
this Warrant and the Exercise price shall be adjusted from time to time as set
forth below. This Warrant also is subject to the following terms and conditions:
1. Exercise and Payment.
--------------------
(a) This Warrant may be exercised in whole or in part at any
time from and after the date hereof and before the Expiration Date, but if such
date is a day on which federal or state chartered banking institutions located
in the State of California are authorized to close, then on the next succeeding
day on which such institutions are open. Exercise shall be by presentation and
surrender to the Company at its principal office, or at the office of any
transfer agent designated by the Company, of (i) this Warrant, (ii) the attached
exercise form properly executed, and (iii) either (A) a certified or official
bank check or wire payment for the Exercise Price for the number of Warrant
Shares specified in the exercise form; or (B) other securities of the Company
owned by the Holder and having a fair market value determined as set forth in
Section 3 hereof equal to the Exercise Price for the number of Warrant Shares
specified in the exercise form; (C) a written notice
<PAGE>
to the Company that the Holder is exercising the Warrant (or a portion thereof)
and authorizing the Company to withhold from issuance a number of shares of
Common Stock issuable upon such exercise of the Warrant having a fair market
value determined as set forth in Section 3 hereof equal to the Exercise Price
for the number of Warrant Shares specified in the exercise form; or (D) any
combination of the consideration specified in the foregoing clauses (A), (B) and
(C). If this Warrant is exercised in part only, the Company or its transfer
agent shall, upon surrender of the Warrant, execute and deliver a new Warrant
evidencing the rights of the Holder to purchase the remaining number of Warrant
Shares purchasable hereunder. Upon receipt by the Company of this Warrant in
proper form for exercise, accompanied by payment as aforesaid, the Holder shall
be deemed to be the holder of record of the Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of the Company shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder.
(b) Conditions to Exercise. The restrictions in Section 7 shall
----------------------
apply, to the extent applicable by their terms, to any exercise of this Warrant
permitted by this Section 1.
2. Reservation of Shares. The Company shall, at all times until the
---------------------
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number of Warrant Shares which shall be required for issuance
and delivery upon exercise of this Warrant.
3. Fractional Interests. The Company shall not issue any fractional
--------------------
shares or script representing fractional shares upon the exercise of this
Warrant. With respect to any fraction of a share resulting from the exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current fair market value per share of Common Stock,
determined as follows:
(a) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on the last business day
prior to the date of exercise of this Warrant or if no such sale is made on such
day, the mean of the closing bid and asked prices for such day on such exchange
or NASDAQ;
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges or quoted on NASDAQ, the current fair market value shall be
the mean of the last bid and asked prices reported on the last business day
prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
fair market value shall be an amount, not less than book value, determined by
the mutual agreement of the Company's Board of Directors and the Holder, in good
faith.
4. No Rights as Shareholders. This Warrant shall not entitle the Holder
-------------------------
to any rights as a shareholder of the Company, either at law or in equity. The
rights of the Holder are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.
2
<PAGE>
5. Adjustments in Number and Exercise Prices of Warrant Shares.
-----------------------------------------------------------
5.1 If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or smaller
number of shares, the number of shares of Common Stock for which this Warrant
may be exercised shall be increased or reduced, as of the record date for such
recapitalization in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the exercise price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
5.2 In the event of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value or from no
par value to par value, or from par value to no par value, or as a result of a
subdivision or combination) or in the event of any consolidation or merger of
the Company with another entity after which the Company is not the surviving
entity, at any time prior to the expiration of this Warrant, upon subsequent
exercise of this Warrant the Holder shall have the right to receive the same
kind and number of shares of Common Stock and other securities, cash or other
property as would have been distributed to the Holder upon such reorganization,
reclassification, consolidation or merger had the Holder exercised this Warrant
immediately prior to such reorganization, reclassification, consolidation or
merger, appropriately adjusted for any subsequent event described in this
Section 5. The Holder shall pay upon such exercise the Exercise Price that
otherwise would have been payable pursuant to the terms of this Warrant. If any
such reorganization, reclassification, consolidation or merger results in a cash
distribution in excess of the then applicable Exercise Price, the holder may, at
the Holder's option exercise this Warrant without making payment of the Exercise
Price, and in such case the Company shall, upon distribution to the Holder,
consider the Exercise Price to have been paid in full, and in making settlement
to the Holder, shall deduct an amount equal to the Exercise Price from the
amount payable to the Holder. In the event of any such reorganization, merger
or consolidation, the corporation formed by such consolidation or merger or the
corporation which shall have acquired the assets of the Company shall execute
and deliver a supplement hereto to the foregoing effect, which supplement shall
also provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Warrant.
5.3 If the Company shall, at any time before the expiration of this
Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the
right to receive upon exercise of this Warrant, in lieu of the shares of Common
Stock of the Company that the Holder otherwise would have been entitled to
receive, the same kind and amount of assets as would have been issued,
distributed or paid to the Holder upon any such dissolution, liquidation or
winding up with respect to such Common Stock receivable upon exercise of this
Warrant on the date for determining those entitled to receive any such
distribution. If any such dissolution, liquidation or winding up results in any
cash distribution in excess of the Exercise Price provided by this Warrant, the
Holder may, at the Holder's option, exercise this Warrant without making payment
of the Exercise Price and, in such case, the Company shall, upon distribution to
the Holder, consider the Exercise Price to have been paid in full and, in making
settlement to the Holder, shall deduct an amount equal to the Exercise Price
from the amount payable to the Holder.
5.4 Whenever the number of Warrant Shares or Exercise Price shall be
adjusted as required by the provisions of this Section 5, the Company forthwith
shall file in the custody of its secretary or an assistant secretary, at its
principal office, an officer's certificate showing the adjusted
3
<PAGE>
number of Warrant Shares and Exercise Price and setting forth in reasonable
detail the circumstances requiring the adjustment. Each such officer's
certificate shall be made available at all reasonable times during reasonable
hours for inspection by the Holder.
5.5 If any event occurs of the type contemplated by the provisions of
this Section 5 but not expressly provided for by such provisions or definition
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
board of directors in its reasonable judgment shall make an appropriate
adjustment in the number of Warrant Shares obtainable upon exercise of this
Warrant so as to protect the rights of the holders of the Warrant.
6. Notices to Holder. So long as this Warrant shall be outstanding (a)
-----------------
if the Company shall pay any dividends or make any distribution upon the Common
Stock or (b) if the Company shall offer generally to the holders of Common Stock
the right to subscribe to or purchase any shares of any class of Common Stock or
securities convertible into Common Stock or any similar rights or (c) if there
shall be any capital reorganization of the Company in which the Company is not
the surviving entity, recapitalization of the capital stock of the Company,
consolidation or merger of the Company with or into another corporation, sale,
lease or other transfer of all or substantially all of the property and assets
of the Company, or voluntary or involuntary dissolution, liquidation or winding
up of the Company, then in such event, the Company shall cause to be mailed to
the Holder, at least thirty days prior to the relevant date described below (or
such shorter period as is reasonably possible if thirty days is not reasonably
possible), a notice containing a description of the proposed action and stating
the date or expected date on which a record of the Company's shareholders is to
be taken for the purpose of any such dividend, distribution of rights, or such
reclassification, reorganization, consolidation, merger, conveyance, lease or
transfer, dissolution, liquidation or winding up is to take place and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event.
7. Transfer, Exercise, Exchange, Assignment or Loss of Warrant, Warrant
--------------------------------------------------------------------
Shares or Other Securities.
- --------------------------
7.1 This Warrant and the Warrant Shares or any other securities
("Other Securities") received upon exercise of this Warrant shall be subject to
restrictions on transferability until registered under the Securities Act of
1933, as amended (the "Securities Act"), unless an exemption from registration
is available. Until this Warrant and the Warrant Shares or Other Securities are
so registered, this Warrant and any certificate for Warrant Shares or Other
Securities issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, stating that this Warrant, the Warrant Shares or Other Securities
may not be sold, transferred or otherwise disposed of unless, in the opinion of
counsel satisfactory to the Company, which may be counsel to the Company, that
the Warrant, the Warrant Shares or Other Securities may be transferred without
such registration. This Warrant and the Warrant Shares or Other Securities may
also be subject to restrictions on transferability under applicable state
securities or blue sky laws.
7.2 Until this Warrant, the Warrant Shares or Other Securities are
registered under the Securities Act, the Company may require, as a condition of
transfer of this Warrant, the Warrant Shares, or Other Securities that the
transferee (who may be the Holder in the case of an exercise or exchange)
represent that the securities being transferred are being acquired for
investment
4
<PAGE>
purposes and for the transferee's own account and not with a view to or for sale
in connection with any distribution of the security. The Company may also
require that transferee provide written information adequate to establish that
the transferee is an "accredited investor" within the meaning of Regulation D
issued under the Securities Act, a purchaser meeting the requirements of Section
25102(f) of the Securities Law, or otherwise meets all qualifications necessary
to comply with exemptions to the Securities Act and Securities Laws, all as
determined by counsel to the Company.
7.3 Any transfer permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office or to the Transfer Agent at
its offices with a duly executed request to transfer the Warrant, which shall
provide adequate information to effect such transfer and shall be accompanied by
funds sufficient to pay any transfer taxes applicable. Upon satisfaction of all
transfer conditions, the Company or Transfer Agent shall, without charge,
execute and deliver a new Warrant in the name of the transferee named in such
transfer request, and this Warrant promptly shall be cancelled.
7.4 Upon receipt by the Company of evidence satisfactory to it of
loss, theft, destruction or mutilation of this Warrant and, in the case of loss,
theft or destruction, of reasonable satisfactory indemnification, or, in the
case of mutilation, upon surrender of this Warrant, the Company will execute and
deliver, or instruct the Transfer Agent to execute and deliver, a new Warrant of
like tenor and date, and any such lost, stolen or destroyed Warrant thereupon
shall become void.
7.5 Each Holder of this Warrant, the Warrant Shares and any Other
Securities shall indemnify and hold harmless the Company, its directors and
officers, and each other person, if any, who controls the Company, against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer or any such person may become subject under the
Securities Act, Securities Law or any statute or common law, to the extent that
such losses, claims, damages or liabilities, or actions in respect thereof,
arise out of or are based upon the disposition by such Holder of the Warrant,
the Warrant Shares or Other Securities in violation of this Warrant.
7.6 The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Common
Stock. Each share of Common Stock issuable upon exercise of this Warrant shall,
upon payment of the Exercise Price therefor, be fully paid and nonassessable and
free from all liens and charges with respect to the issuance thereof.
7.7 Notwithstanding any other provision hereof, if an exercise of any
portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this Warrant
may, at the election of the holder hereof, be conditioned upon the consummation
of the public offering or sale of the Company in which case such exercise shall
not be deemed to be effective until the consummation of such transaction.
8. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or otherwise, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times, in good
faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
5
<PAGE>
9. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery or facsimile transmission to the party to be notified, or one
(1) day after deposit with a nationally recognized overnight delivery service,
all delivery charges paid, or three (3) days after deposit with the United
States mail, by registered or certified mail, postage prepaid, in any such case
addressed (a) if to Holder, at the address of Holder appearing on the records of
the Company, or at such other address as Holder shall have furnished to the
Company in writing in accordance with this Section 9, or (b) if to the Company,
at its principal office set forth above, or any other address which the Company
shall have furnished to Holder in writing in accordance with this Section 9.
10. Amendment. Any provision of this Warrant may be amended or the
---------
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and the Holder.
11. Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
6
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant as of April 14,
2000.
Interplay Entertainment Corp.
By: /s/ Brian Fargo
--------------------------
Brian Fargo
Chief Executive Officer
7
<PAGE>
Annex A
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[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ shares of Common
Stock and herewith tenders payment for such shares of Common Stock to the order
of __________________ the amount of $__________ in accordance with the terms
hereof. The undersigned requests that a certificate for such shares of Common
Stock be registered in the name of _______________________________ whose address
is ___________________________________. If said number of shares of Common
Stock is less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of the shares of Common Stock be registered in the name of
________________________________________ whose address is _____________________
and that such Warrant Certificate be delivered to ________________________,
whose address is _________________________________.
Dated:
Signature:___________________________________
(Signature must conform in all respects to
name of holders as specified on the face of
the Warrant Certificate.)
_________________________________
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE>
EXHIBIT 10.34
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") NOR QUALIFIED UNDER THE CALIFORNIA CORPORATE
SECURITIES LAW OF 1968, AS AMENDED, (THE "CALIFORNIA SECURITIES LAW"). THIS
WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT AND THE SECURITIES LAW. THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE
THEREOF MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH THE
CALIFORNIA SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION AND COMPLIANCE ARE NOT REQUIRED.
Warrant to Purchase
50,000 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
INTERPLAY ENTERTAINMENT CORP.
This is to certify that, for value received, Titus Interactive SA, or a
proper assignee (in each case, the "Holder"), is entitled to purchase, subject
to the provisions of this Warrant, from Interplay Entertainment Corp., a
Delaware corporation (the "Company"), having its principal place of business at
16815 Von Karman Avenue, Irvine, California 92606, at any time during the
period from March 31, 2001 (the "Commencement Date") to 5:00 p.m., California
time, on April 7, 2010 (the "Expiration Date") at which time this Warrant shall
expire and become void, Fifty Thousand (50,000) shares ("Warrant Shares") of the
Company's Common Stock (the "Common Stock"). This Warrant shall be exercisable
at Three and 79/100 Dollars ($3.79) per share (the "Exercise Price"). The
number of shares of Common Stock to be received upon exercise of this Warrant
and the Exercise price shall be adjusted from time to time as set forth below.
This Warrant also is subject to the following terms and conditions:
1. Exercise and Payment.
--------------------
(a) This Warrant shall only be exercisable if the Company's
audited pre-tax income for the fiscal year ended December 31, 2000 is less than
Two Million One Hundred Fifteen Thousand Dollars ($2,115,000).
(b) This Warrant may be exercised in whole or in part at any
time from and after March 31, 2001 (or such later date on which the Company's
audit of its financial statements for the fiscal year ended December 31, 2000 is
finalized) and before the Expiration Date, but if such date is a day on which
federal or state chartered banking institutions located in the State of
California are authorized to close, then on the next succeeding day on which
such institutions are open. Exercise shall be by presentation and surrender to
the Company at its principal office, or at the office
<PAGE>
of any transfer agent designated by the Company, of (i) this Warrant, (ii) the
attached exercise form properly executed, and (iii) either (A) a certified or
official bank check or wire payment for the Exercise Price for the number of
Warrant Shares specified in the exercise form; or (B) other securities of the
Company owned by the Holder and having a fair market value determined as set
forth in Section 3 hereof equal to the Exercise Price for the number of Warrant
Shares specified in the exercise form; (C) a written notice to the Company that
the Holder is exercising the Warrant (or a portion thereof) and authorizing the
Company to withhold from issuance a number of shares of Common Stock issuable
upon such exercise of the Warrant having a fair market value determined as set
forth in Section 3 hereof equal to the Exercise Price for the number of Warrant
Shares specified in the exercise form; or (D) any combination of the
consideration specified in the foregoing clauses (A), (B) and (C). If this
Warrant is exercised in part only, the Company or its transfer agent shall, upon
surrender of the Warrant, execute and deliver a new Warrant evidencing the
rights of the Holder to purchase the remaining number of Warrant Shares
purchasable hereunder. Upon receipt by the Company of this Warrant in proper
form for exercise, accompanied by payment as aforesaid, the Holder shall be
deemed to be the holder of record of the Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of the Company shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder.
(b) Conditions to Exercise. The restrictions in Section 7 shall
----------------------
apply, to the extent applicable by their terms, to any exercise of this Warrant
permitted by this Section 1.
2. Reservation of Shares. The Company shall, at all times until the
---------------------
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number of Warrant Shares which shall be required for issuance
and delivery upon exercise of this Warrant.
3. Fractional Interests. The Company shall not issue any fractional
--------------------
shares or script representing fractional shares upon the exercise of this
Warrant. With respect to any fraction of a share resulting from the exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current fair market value per share of Common Stock,
determined as follows:
(a) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on the last business day
prior to the date of exercise of this Warrant or if no such sale is made on such
day, the mean of the closing bid and asked prices for such day on such exchange
or NASDAQ;
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges or quoted on NASDAQ, the current fair market value shall be
the mean of the last bid and asked prices reported on the last business day
prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
fair market value shall be an amount, not less than book value, determined by
the mutual agreement of the Company's Board of Directors and the Holder in good
faith.
2
<PAGE>
4. No Rights as Shareholders. This Warrant shall not entitle the Holder
-------------------------
to any rights as a shareholder of the Company, either at law or in equity. The
rights of the Holder are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.
5. Adjustments in Number and Exercise Prices of Warrant Shares.
-----------------------------------------------------------
5.1 If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or smaller
number of shares, the number of shares of Common Stock for which this Warrant
may be exercised shall be increased or reduced, as of the record date for such
recapitalization in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the exercise price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
5.2 In the event of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value or from no
par value to par value, or from par value to no par value, or as a result of a
subdivision or combination) or in the event of any consolidation or merger of
the Company with another entity after which the Company is not the surviving
entity, at any time prior to the expiration of this Warrant, upon subsequent
exercise of this Warrant the Holder shall have the right to receive the same
kind and number of shares of Common Stock and other securities, cash or other
property as would have been distributed to the Holder upon such reorganization,
reclassification, consolidation or merger had the Holder exercised this Warrant
immediately prior to such reorganization, reclassification, consolidation or
merger, appropriately adjusted for any subsequent event described in this
Section 5. The Holder shall pay upon such exercise the Exercise Price that
otherwise would have been payable pursuant to the terms of this Warrant. If any
such reorganization, reclassification, consolidation or merger results in a cash
distribution in excess of the then applicable Exercise Price, the holder may, at
the Holder's option exercise this Warrant without making payment of the Exercise
Price, and in such case the Company shall, upon distribution to the Holder,
consider the Exercise Price to have been paid in full, and in making settlement
to the Holder, shall deduct an amount equal to the Exercise Price from the
amount payable to the Holder. In the event of any such reorganization, merger
or consolidation, the corporation formed by such consolidation or merger or the
corporation which shall have acquired the assets of the Company shall execute
and deliver a supplement hereto to the foregoing effect, which supplement shall
also provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Warrant.
5.3 If the Company shall, at any time before the expiration of this
Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the
right to receive upon exercise of this Warrant, in lieu of the shares of Common
Stock of the Company that the Holder otherwise would have been entitled to
receive, the same kind and amount of assets as would have been issued,
distributed or paid to the Holder upon any such dissolution, liquidation or
winding up with respect to such Common Stock receivable upon exercise of this
Warrant on the date for determining those entitled to receive any such
distribution. If any such dissolution, liquidation or winding up results in any
cash distribution in excess of the Exercise Price provided by this Warrant, the
Holder may, at the Holder's option, exercise this Warrant without making payment
of the Exercise Price and, in such case, the Company shall, upon distribution to
the Holder, consider the Exercise Price to have been
3
<PAGE>
paid in full and, in making settlement to the Holder, shall deduct an amount
equal to the Exercise Price from the amount payable to the Holder.
5.4 Whenever the number of Warrant Shares or Exercise Price shall be
adjusted as required by the provisions of this Section 5, the Company forthwith
shall file in the custody of its secretary or an assistant secretary, at its
principal office, an officer's certificate showing the adjusted number of
Warrant Shares and Exercise Price and setting forth in reasonable detail the
circumstances requiring the adjustment. Each such officer's certificate shall be
made available at all reasonable times during reasonable hours for inspection by
the Holder.
5.5 If any event occurs of the type contemplated by the provisions of
this Section 5 but not expressly provided for by such provisions or definition
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
board of directors in its reasonable judgment shall make an appropriate
adjustment in the number of Warrant Shares obtainable upon exercise of this
Warrant so as to protect the rights of the holders of the Warrant.
6. Notices to Holder. So long as this Warrant shall be outstanding (a)
-----------------
if the Company shall pay any dividends or make any distribution upon the Common
Stock or (b) if the Company shall offer generally to the holders of Common Stock
the right to subscribe to or purchase any shares of any class of Common Stock or
securities convertible into Common Stock or any similar rights or (c) if there
shall be any capital reorganization of the Company in which the Company is not
the surviving entity, recapitalization of the capital stock of the Company,
consolidation or merger of the Company with or into another corporation, sale,
lease or other transfer of all or substantially all of the property and assets
of the Company, or voluntary or involuntary dissolution, liquidation or winding
up of the Company, then in such event, the Company shall cause to be mailed to
the Holder, at least thirty days prior to the relevant date described below (or
such shorter period as is reasonably possible if thirty days is not reasonably
possible), a notice containing a description of the proposed action and stating
the date or expected date on which a record of the Company's shareholders is to
be taken for the purpose of any such dividend, distribution of rights, or such
reclassification, reorganization, consolidation, merger, conveyance, lease or
transfer, dissolution, liquidation or winding up is to take place and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event.
7. Transfer, Exercise, Exchange, Assignment or Loss of Warrant, Warrant
--------------------------------------------------------------------
Shares or Other Securities.
- --------------------------
7.1 This Warrant and the Warrant Shares or any other securities
("Other Securities") received upon exercise of this Warrant shall be subject to
restrictions on transferability until registered under the Securities Act of
1933, as amended (the "Securities Act"), unless an exemption from registration
is available. Until this Warrant and the Warrant Shares or Other Securities are
so registered, this Warrant and any certificate for Warrant Shares or Other
Securities issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, stating that this Warrant, the Warrant Shares or Other Securities
may not be sold, transferred or otherwise disposed of unless, in the opinion of
counsel satisfactory to the Company, which may be counsel to the Company, that
the Warrant, the Warrant Shares or Other Securities may be transferred without
such registration. This Warrant and
4
<PAGE>
the Warrant Shares or Other Securities may also be subject to restrictions on
transferability under applicable state securities or blue sky laws.
7.2 Until this Warrant, the Warrant Shares or Other Securities are
registered under the Securities Act, the Company may require, as a condition of
transfer of this Warrant, the Warrant Shares, or Other Securities that the
transferee (who may be the Holder in the case of an exercise or exchange)
represent that the securities being transferred are being acquired for
investment purposes and for the transferee's own account and not with a view to
or for sale in connection with any distribution of the security. The Company
may also require that transferee provide written information adequate to
establish that the transferee is an "accredited investor" within the meaning of
Regulation D issued under the Securities Act, a purchaser meeting the
requirements of Section 25102(f) of the Securities Law, or otherwise meets all
qualifications necessary to comply with exemptions to the Securities Act and
Securities Laws, all as determined by counsel to the Company.
7.3 Any transfer permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office or to the Transfer Agent at
its offices with a duly executed request to transfer the Warrant, which shall
provide adequate information to effect such transfer and shall be accompanied by
funds sufficient to pay any transfer taxes applicable. Upon satisfaction of all
transfer conditions, the Company or Transfer Agent shall, without charge,
execute and deliver a new Warrant in the name of the transferee named in such
transfer request, and this Warrant promptly shall be cancelled.
7.4 Upon receipt by the Company of evidence satisfactory to it of
loss, theft, destruction or mutilation of this Warrant and, in the case of loss,
theft or destruction, of reasonable satisfactory indemnification, or, in the
case of mutilation, upon surrender of this Warrant, the Company will execute and
deliver, or instruct the Transfer Agent to execute and deliver, a new Warrant of
like tenor and date, and any such lost, stolen or destroyed Warrant thereupon
shall become void.
7.5 Each Holder of this Warrant, the Warrant Shares and any Other
Securities shall indemnify and hold harmless the Company, its directors and
officers, and each other person, if any, who controls the Company, against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer or any such person may become subject under the
Securities Act, Securities Law or any statute or common law, to the extent that
such losses, claims, damages or liabilities, or actions in respect thereof,
arise out of or are based upon the disposition by such Holder of the Warrant,
the Warrant Shares or Other Securities in violation of this Warrant.
7.6 The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Common
Stock. Each share of Common Stock issuable upon exercise of this Warrant shall,
upon payment of the Exercise Price therefor, be fully paid and nonassessable and
free from all liens and charges with respect to the issuance thereof.
7.7 Notwithstanding any other provision hereof, if an exercise of any
portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this Warrant
may, at the election of the holder hereof, be conditioned
5
<PAGE>
upon the consummation of the public offering or sale of the Company in which
case such exercise shall not be deemed to be effective until the consummation of
such transaction.
8. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or otherwise, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times, in good
faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
9. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery or facsimile transmission to the party to be notified, or one
(1) day after deposit with a nationally recognized overnight delivery service,
all delivery charges paid, or three (3) days after deposit with the United
States mail, by registered or certified mail, postage prepaid, in any such case
addressed (a) if to Holder, at the address of Holder appearing on the records of
the Company, or at such other address as Holder shall have furnished to the
Company in writing in accordance with this Section 9, or (b) if to the Company,
at its principal office set forth above, or any other address which the Company
shall have furnished to Holder in writing in accordance with this Section 9.
10. Amendment. Any provision of this Warrant may be amended or the
---------
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and the Holder.
11. Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
6
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant as of April 14,
2000.
Interplay Entertainment Corp.
By: /s/ Brian Fargo
-----------------------------
Brian Fargo
Chief Executive Officer
7
<PAGE>
Annex A
-------
[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ shares of Common
Stock and herewith tenders payment for such shares of Common Stock to the order
of __________________ the amount of $__________ in accordance with the terms
hereof. The undersigned requests that a certificate for such shares of Common
Stock be registered in the name of _______________________________ whose address
is ___________________________________. If said number of shares of Common Stock
is less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of the shares of Common Stock be registered in the name of
________________________________________ whose address is ______________________
and that such Warrant Certificate be delivered to ________________________,
whose address is _________________________________.
Dated:
Signature:___________________________________
(Signature must conform in all respects to
name of holders as specified on the face of
the Warrant Certificate.)
________________________________
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE>
EXHIBIT 10.35
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") NOR QUALIFIED UNDER THE CALIFORNIA CORPORATE
SECURITIES LAW OF 1968, AS AMENDED, (THE "CALIFORNIA SECURITIES LAW"). THIS
WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT AND THE SECURITIES LAW. THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE
THEREOF MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH THE
CALIFORNIA SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION AND COMPLIANCE ARE NOT REQUIRED.
Warrant to Purchase
100,000 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
INTERPLAY ENTERTAINMENT CORP.
This is to certify that, for value received, Titus Interactive SA, or a
proper assignee (in each case, the "Holder"), is entitled to purchase, subject
to the provisions of this Warrant, from Interplay Entertainment Corp., a
Delaware corporation (the "Company"), having its principal place of business at
16815 Von Karman Avenue, Irvine, California 92606, at any time during the
period from May 1, 2001 (the "Commencement Date") to 5:00 p.m., California time,
on April 12, 2010 (the "Expiration Date") at which time this Warrant shall
expire and become void, One Hundred Thousand (100,000) shares ("Warrant Shares")
of the Company's Common Stock (the "Common Stock"). This Warrant shall be
exercisable at Three and 79/100 Dollars ($3.79) per share (the "Exercise
Price"). The number of shares of Common Stock to be received upon exercise of
this Warrant and the Exercise price shall be adjusted from time to time as set
forth below. This Warrant also is subject to the following terms and
conditions:
1. Exercise and Payment.
--------------------
(a) This Warrant shall only be exercisable in the event that the
Company borrows amounts under that certain [Revolving Credit Facility] dated
April 12, 2000 (the "Credit Facility"). In such event, the number of Warrant
Shares for which this Warrant shall be exercisable shall equal the total number
of Warrant Shares multiplied by a fraction, the numerator of which shall be the
maximum principal amount outstanding at any one time under the Credit Facility
during the term thereof, and the denominator of which shall be $5,000,000. For
example, if the maximum amount outstanding at any time during the term of the
Credit Facility is $3,000,000, this Warrant shall be exercisable for 60,000
Warrant Shares. Following the expiration or termination of the Credit Facility,
the Company and Holder shall execute a memorandum setting forth the maximum
amount outstanding at any time during the term of the Credit Facility, and shall
append such memorandum to this Warrant.
<PAGE>
(b) This Warrant (to the extent exercisable under Section 1(a)
above) may be exercised in whole or in part at any time from and after May 1,
2001 and before the Expiration Date, but if such date is a day on which federal
or state chartered banking institutions located in the State of California are
authorized to close, then on the next succeeding day on which such institutions
are open. Exercise shall be by presentation and surrender to the Company at its
principal office, or at the office of any transfer agent designated by the
Company, of (i) this Warrant, (ii) the attached exercise form properly executed,
and (iii) either (A) a certified or official bank check or wire payment for the
Exercise Price for the number of Warrant Shares specified in the exercise form;
or (B) other securities of the Company owned by the Holder and having a fair
market value determined as set forth in Section 3 hereof equal to the Exercise
Price for the number of Warrant Shares specified in the exercise form; (C) a
written notice to the Company that the Holder is exercising the Warrant (or a
portion thereof) and authorizing the Company to withhold from issuance a number
of shares of Common Stock issuable upon such exercise of the Warrant having a
fair market value determined as set forth in Section 3 hereof equal to the
Exercise Price for the number of Warrant Shares specified in the exercise form;
or (D) any combination of the consideration specified in the foregoing clauses
(A), (B) and (C). If this Warrant is exercised in part only, the Company or its
transfer agent shall, upon surrender of the Warrant, execute and deliver a new
Warrant evidencing the rights of the Holder to purchase the remaining number of
Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant in proper form for exercise, accompanied by payment as aforesaid, the
Holder shall be deemed to be the holder of record of the Common Stock issuable
upon such exercise, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such Warrant Shares shall
not then be actually delivered to the Holder.
(b) Conditions to Exercise. The restrictions in Section 7 shall
----------------------
apply, to the extent applicable by their terms, to any exercise of this Warrant
permitted by this Section 1.
2. Reservation of Shares. The Company shall, at all times until the
---------------------
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number of Warrant Shares which shall be required for issuance
and delivery upon exercise of this Warrant.
3. Fractional Interests. The Company shall not issue any fractional
--------------------
shares or script representing fractional shares upon the exercise of this
Warrant. With respect to any fraction of a share resulting from the exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current fair market value per share of Common Stock,
determined as follows:
(a) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on the last business day
prior to the date of exercise of this Warrant or if no such sale is made on such
day, the mean of the closing bid and asked prices for such day on such exchange
or NASDAQ;
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges or quoted on NASDAQ, the current fair market value shall be
the mean of the last bid and asked prices reported on the last business day
prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
2
<PAGE>
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
fair market value shall be an amount, not less than book value, determined by
the mutual agreement of the Company's Board of Directors and the Holder in good
faith.
4. No Rights as Shareholders. This Warrant shall not entitle the Holder
-------------------------
to any rights as a shareholder of the Company, either at law or in equity. The
rights of the Holder are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.
5. Adjustments in Number and Exercise Prices of Warrant Shares.
-----------------------------------------------------------
5.1 If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or smaller
number of shares, the number of shares of Common Stock for which this Warrant
may be exercised shall be increased or reduced, as of the record date for such
recapitalization in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the exercise price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
5.2 In the event of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value or from no
par value to par value, or from par value to no par value, or as a result of a
subdivision or combination) or in the event of any consolidation or merger of
the Company with another entity after which the Company is not the surviving
entity, at any time prior to the expiration of this Warrant, upon subsequent
exercise of this Warrant the Holder shall have the right to receive the same
kind and number of shares of Common Stock and other securities, cash or other
property as would have been distributed to the Holder upon such reorganization,
reclassification, consolidation or merger had the Holder exercised this Warrant
immediately prior to such reorganization, reclassification, consolidation or
merger, appropriately adjusted for any subsequent event described in this
Section 5. The Holder shall pay upon such exercise the Exercise Price that
otherwise would have been payable pursuant to the terms of this Warrant. If any
such reorganization, reclassification, consolidation or merger results in a cash
distribution in excess of the then applicable Exercise Price, the holder may, at
the Holder's option exercise this Warrant without making payment of the Exercise
Price, and in such case the Company shall, upon distribution to the Holder,
consider the Exercise Price to have been paid in full, and in making settlement
to the Holder, shall deduct an amount equal to the Exercise Price from the
amount payable to the Holder. In the event of any such reorganization, merger
or consolidation, the corporation formed by such consolidation or merger or the
corporation which shall have acquired the assets of the Company shall execute
and deliver a supplement hereto to the foregoing effect, which supplement shall
also provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Warrant.
5.3 If the Company shall, at any time before the expiration of this
Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the
right to receive upon exercise of this Warrant, in lieu of the shares of Common
Stock of the Company that the Holder otherwise would have been entitled to
receive, the same kind and amount of assets as would have been issued,
distributed or paid to the Holder upon any such dissolution, liquidation or
winding up with respect to such Common Stock receivable upon exercise of this
Warrant on the date for determining those
3
<PAGE>
entitled to receive any such distribution. If any such dissolution, liquidation
or winding up results in any cash distribution in excess of the Exercise Price
provided by this Warrant, the Holder may, at the Holder's option, exercise this
Warrant without making payment of the Exercise Price and, in such case, the
Company shall, upon distribution to the Holder, consider the Exercise Price to
have been paid in full and, in making settlement to the Holder, shall deduct an
amount equal to the Exercise Price from the amount payable to the Holder.
5.4 Whenever the number of Warrant Shares or Exercise Price shall be
adjusted as required by the provisions of this Section 5, the Company forthwith
shall file in the custody of its secretary or an assistant secretary, at its
principal office, an officer's certificate showing the adjusted number of
Warrant Shares and Exercise Price and setting forth in reasonable detail the
circumstances requiring the adjustment. Each such officer's certificate shall
be made available at all reasonable times during reasonable hours for inspection
by the Holder.
5.5 If any event occurs of the type contemplated by the provisions of
this Section 5 but not expressly provided for by such provisions or definition
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
board of directors in its reasonable judgment shall make an appropriate
adjustment in the number of Warrant Shares obtainable upon exercise of this
Warrant so as to protect the rights of the holders of the Warrant.
6. Notices to Holder. So long as this Warrant shall be outstanding (a)
-----------------
if the Company shall pay any dividends or make any distribution upon the Common
Stock or (b) if the Company shall offer generally to the holders of Common Stock
the right to subscribe to or purchase any shares of any class of Common Stock or
securities convertible into Common Stock or any similar rights or (c) if there
shall be any capital reorganization of the Company in which the Company is not
the surviving entity, recapitalization of the capital stock of the Company,
consolidation or merger of the Company with or into another corporation, sale,
lease or other transfer of all or substantially all of the property and assets
of the Company, or voluntary or involuntary dissolution, liquidation or winding
up of the Company, then in such event, the Company shall cause to be mailed to
the Holder, at least thirty days prior to the relevant date described below (or
such shorter period as is reasonably possible if thirty days is not reasonably
possible), a notice containing a description of the proposed action and stating
the date or expected date on which a record of the Company's shareholders is to
be taken for the purpose of any such dividend, distribution of rights, or such
reclassification, reorganization, consolidation, merger, conveyance, lease or
transfer, dissolution, liquidation or winding up is to take place and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event.
7. Transfer, Exercise, Exchange, Assignment or Loss of Warrant, Warrant
--------------------------------------------------------------------
Shares or Other Securities.
- --------------------------
7.1 This Warrant and the Warrant Shares or any other securities
("Other Securities") received upon exercise of this Warrant shall be subject to
restrictions on transferability until registered under the Securities Act of
1933, as amended (the "Securities Act"), unless an exemption from registration
is available. Until this Warrant and the Warrant Shares or Other Securities are
so registered, this Warrant and any certificate for Warrant Shares or Other
Securities issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, stating that this Warrant, the Warrant Shares
4
<PAGE>
or Other Securities may not be sold, transferred or otherwise disposed of
unless, in the opinion of counsel satisfactory to the Company, which may be
counsel to the Company, that the Warrant, the Warrant Shares or Other Securities
may be transferred without such registration. This Warrant and the Warrant
Shares or Other Securities may also be subject to restrictions on
transferability under applicable state securities or blue sky laws.
7.2 Until this Warrant, the Warrant Shares or Other Securities are
registered under the Securities Act, the Company may require, as a condition of
transfer of this Warrant, the Warrant Shares, or Other Securities that the
transferee (who may be the Holder in the case of an exercise or exchange)
represent that the securities being transferred are being acquired for
investment purposes and for the transferee's own account and not with a view to
or for sale in connection with any distribution of the security. The Company
may also require that transferee provide written information adequate to
establish that the transferee is an "accredited investor" within the meaning of
Regulation D issued under the Securities Act, a purchaser meeting the
requirements of Section 25102(f) of the Securities Law, or otherwise meets all
qualifications necessary to comply with exemptions to the Securities Act and
Securities Laws, all as determined by counsel to the Company.
7.3 Any transfer permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office or to the Transfer Agent at
its offices with a duly executed request to transfer the Warrant, which shall
provide adequate information to effect such transfer and shall be accompanied by
funds sufficient to pay any transfer taxes applicable. Upon satisfaction of all
transfer conditions, the Company or Transfer Agent shall, without charge,
execute and deliver a new Warrant in the name of the transferee named in such
transfer request, and this Warrant promptly shall be cancelled.
7.4 Upon receipt by the Company of evidence satisfactory to it of
loss, theft, destruction or mutilation of this Warrant and, in the case of loss,
theft or destruction, of reasonable satisfactory indemnification, or, in the
case of mutilation, upon surrender of this Warrant, the Company will execute and
deliver, or instruct the Transfer Agent to execute and deliver, a new Warrant of
like tenor and date, and any such lost, stolen or destroyed Warrant thereupon
shall become void.
7.5 Each Holder of this Warrant, the Warrant Shares and any Other
Securities shall indemnify and hold harmless the Company, its directors and
officers, and each other person, if any, who controls the Company, against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer or any such person may become subject under the
Securities Act, Securities Law or any statute or common law, to the extent that
such losses, claims, damages or liabilities, or actions in respect thereof,
arise out of or are based upon the disposition by such Holder of the Warrant,
the Warrant Shares or Other Securities in violation of this Warrant.
7.6 The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Common
Stock. Each share of Common Stock issuable upon exercise of this Warrant shall,
upon payment of the Exercise Price therefor, be fully paid and nonassessable and
free from all liens and charges with respect to the issuance thereof.
5
<PAGE>
7.7 Notwithstanding any other provision hereof, if an exercise of any
portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this Warrant
may, at the election of the holder hereof, be conditioned upon the consummation
of the public offering or sale of the Company in which case such exercise shall
not be deemed to be effective until the consummation of such transaction.
8. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or otherwise, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times, in good
faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
9. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery or facsimile transmission to the party to be notified, or one
(1) day after deposit with a nationally recognized overnight delivery service,
all delivery charges paid, or three (3) days after deposit with the United
States mail, by registered or certified mail, postage prepaid, in any such case
addressed (a) if to Holder, at the address of Holder appearing on the records of
the Company, or at such other address as Holder shall have furnished to the
Company in writing in accordance with this Section 9, or (b) if to the Company,
at its principal office set forth above, or any other address which the Company
shall have furnished to Holder in writing in accordance with this Section 9.
10. Amendment. Any provision of this Warrant may be amended or the
---------
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and the Holder.
11. Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
6
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant as of April 14,
2000.
Interplay Entertainment Corp.
By: /s/ Brian Fargo
------------------------
Brian Fargo
Chief Executive Officer
7
<PAGE>
Annex A
-------
[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ shares of Common
Stock and herewith tenders payment for such shares of Common Stock to the order
of __________________ the amount of $__________ in accordance with the terms
hereof. The undersigned requests that a certificate for such shares of Common
Stock be registered in the name of _______________________________ whose address
is ______________________________. If said number of shares of Common Stock is
less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of the shares of Common Stock be registered in the name of
___________________________ whose address is _____________________________ and
that such Warrant Certificate be delivered to ________________________, whose
address is _________________________________.
Dated:_______________________
Signature:___________________________________
(Signature must conform in all respects to
name of holders as specified on the face of
the Warrant Certificate.)
_____________________________
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE>
EXHIBIT 10.36
Amendment to Loan Documents
Borrowers: Interplay Entertainment Corp. (successor by merger to Interplay
Productions, a California corporation)
Interplay OEM, Inc.
Date: April 14, 2000
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between GREYROCK CAPITAL
(formerly Greyrock Business Credit), a Division of Banc of America Commercial
Finance Corporation (formerly known as NationsCredit Commercial Corporation)
("GBC"), whose address is 10880 Wilshire Blvd., Suite 1850, Los Angeles, CA
90024 and the borrowers named above (jointly and severally, "Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated June 16, 1997 (as heretofore amended, the "Loan Agreement"), as follows,
effective on the date hereof. (This Amendment, the Loan Agreement, the prior
written amendments to said agreements signed by GBC and the Borrower, and all
other written documents and agreements between GBC and the Borrower are referred
to herein collectively as the "Loan Documents". Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
1. Extension of Maturity Date. Section 6.1 of the Loan Agreement is amended in
its entirety to read as follows:
"6.1 Maturity Date. This Agreement shall continue in effect until
-------------
April 30, 2001 (the "Maturity Date")."
2. Cash Collateral, Pledges and Guaranties.
(a) The $2,500,000 Cash Collateral provided pursuant to Section 8.1
of the Schedule shall continue to be held by GBC, provided that said Cash
Collateral shall be released by GBC upon receipt by GBC of the unaudited
consolidated financial statements of Titus Interactive S.A. as of December 31,
1999 and for the six month period then ended.
(b) The Continuing Guaranties of Interplay Productions Limited (U.K.)
and Brian Fargo shall continue in full force and effect throughout the term of
the Loan Agreement and until all Obligations have been paid and performed in
full, and all pledge agreements executed and delivered by Brian Fargo and the
other guarantors shall continue in full force and effect throughout the term of
the Loan Agreement and until all Obligations have been paid and performed in
full.
(c) GBC agrees that, upon satisfaction of the conditions precedent
set forth in Section 4 below, the Continuing Guaranty of Herve Caen with respect
to the Borrower dated September 1, 1999 in favor of GBC shall be of no further
force or effect, and Herve Caen shall have no further liability or obligations
thereunder.
-1-
<PAGE>
Greyrock Capital Amendment to Loan Documents
________________________________________________________________________________
(d) Concurrently, Titus Interactive SA and Titus Software Corporation
("Titus US") shall execute and deliver to GBC a Continuing Guaranty with respect
to all of the Obligations (the "Titus Guaranty") in such form as GBC shall
specify, which Borrower shall cause to continue in full force and effect
throughout the term of the Loan Agreement and until all Obligations have been
paid and performed in full. The Titus Guaranty shall, as to Titus Interactive
SA, amend and restate in its entirety the existing September 1, 1999 Guaranty of
Titus Interactive SA. The Titus Guaranty shall be on the same terms and
conditions as the existing September 1, 1999 Guaranty of Titus Interactive SA,
as previously amended, except that the amount "$4,000,000" in Section 1A
thereof, entitled "Limit of Liability," shall read "20,000,000".
3. Fee. In consideration for GBC entering into this Amendment, the Borrower
shall pay GBC a fee of $400,000, which shall be in addition to all other
interest and fees. Said fee shall payable on the earlier of April 30, 2001 or
termination of the Loan Agreement, provided that if Borrower terminates the Loan
Agreement and pays in full all of the Obligations prior to April 30, 2001, then
such fee shall be reduced by $33,333 for each full month from the date the Loan
Agreement terminates and all Obligations are paid in full to April 30, 2001.
4. Conditions Precedent. This Amendment shall not be effective unless and
until the following conditions precedent has been satisfied, and Borrower agrees
to cause such condition to be satisfied on or before April 30, 2000: (i) The
Borrower shall receive additional cash consideration for the issuance of equity
securities of Borrower of not less than $20,000,000 after the date hereof and
shall provide evidence of the same to GBC reasonably acceptable to GBC, and (ii)
Borrower and Titus Interactive SA shall enter into a loan agreement, pursuant to
which Titus Interactive SA shall provide a $5 million line of credit to
Borrower, and Borrower shall provide evidence of the same to GBC reasonably
acceptable to GBC.
5. Consent. GBC consents to Borrower issuing its Series A Preferred Stock to
Titus Interactive S.A. for a purchase price of $20,000,000, and agrees that any
change in the controlling stock ownership of Borrower to Titus Interactive S.A.
as a result of the issuance of said stock will not constitute an Event of
Default under Section 7.1(n) of the Loan Agreement or any of the other
provisions of the Loan Documents.
6. General Provisions. As herein expressly amended, all of the terms and
provisions of the Loan Agreement and the other Loan Documents shall continue in
full force and effect, and the same are hereby ratified and confirmed. This
Amendment, the Loan Agreement, and the other Loan Documents set forth in full
all of the representations and agreements of the parties with respect to the
subject matter hereof and supersede all prior discussions, representations,
agreements and understandings between the parties with respect to the subject
hereof. This Amendment shall be governed by the laws of the State of California.
-2-
<PAGE>
Greyrock Capital Amendment to Loan Documents
________________________________________________________________________________
Borrower: GBC:
INTERPLAY ENTERTAINMENT CORP. GREYROCK CAPITAL, a Division of
Banc of America Commercial Finance
Corporation (formerly known as
NationsCredit Commercial
Corporation)
By /s/ Manuel Marrero
-------------------------------
President or Vice President
By /s/ Lisa Nagano
---------------------------------
Title______________________________
Borrower:
INTERPLAY OEM, INC.
By /s/ Manuel Marrero
-------------------------------
President or Vice President
Consent-Guarantors
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the guarantees of the undersigned,
or the security agreements, pledge agreements and other agreements between the
undersigned and GBC, all of which are hereby ratified and affirmed.
/s/ Brian Fargo Interplay Productions Limited (U.K.)
- ---------------------------------
Brian Fargo, individually
By /s/ Brian Fargo
-----------------------------------
Title________________________________
Titus Software Corporation, Titus Interactive SA, a French
a California corporation corporation
By /s/ Herve Caen
-----------------------------------
By /s/ Herve Caen Title________________________________
-------------------------------
Title____________________________
-3-
<PAGE>
EXHIBIT 10.37
SECURED REVOLVING NOTE
$5,000,000.00 April 14, 2000
FOR VALUE RECEIVED, the undersigned, INTERPLAY ENTERTAINMENT CORP., a
Delaware corporation (the "Borrower"), promises to pay to the order of TITUS
--------
INTERACTIVE SA, a French corporation (hereafter, together with any holder
hereof, called "Lender"), on May 1, 2001 (the "Maturity Date") at such place as
------ -------------
Lender may designate in writing to Borrower, in lawful money of the United
States of America, and in immediately available funds, the principal sum of FIVE
MILLION DOLLARS ($5,000,000.00) or, if less, so much thereof as may from time to
time be advanced by Lender to Borrower pursuant to an Advance (as defined below)
hereunder, plus interest as hereinafter provided. Such Advances may be endorsed
from time to time on the Schedule of Advances attached hereto, but the failure
to make such notations shall not affect the validity of Borrower's obligation to
repay unpaid principal and interest hereunder.
Subject to the terms hereof, Lender shall make advances of funds available
hereunder ("Advances") to Borrower. Borrower shall give Lender irrevocable
--------
written notice requesting an Advance at least five business days before the date
on which Borrower wishes to receive the Advance (unless a shorter period is
consented to by Titus). Such Advance shall be for a minimum of $500,000.00 or
such larger amount as may be measured in increments of $500,000.00.
Notwithstanding any term or provision of this Note which may be construed to the
contrary, at no time shall Lender be required to make an Advance hereunder if
(a) an Event of Default (defined below) shall have occurred or (b) the amount of
such Advance together with the aggregate principal amount of all Advances
outstanding pursuant to this Note exceeds $5,000,000.00 (the "Maximum Amount").
--------------
From and after the date hereof (until maturity or default as hereinafter
provided), interest shall accrue on the principal amount of this Note which is
outstanding from time to time at a rate per annum equal to ten percent (10%).
If, however, an interest rate of 10% is not allowable under California law, then
interest shall accrue on the principal amount of this Note from time to time at
a rate per annum equal to the highest maximum allowable percentage rate under
California law. Interest shall be computed on the daily outstanding principal
balance hereunder on the basis of a 365 day year, as the case may be, counting
the number of actual days elapsed. Interest shall accrue and be payable
quarterly. The principal balance of all Advances then outstanding, together
with all accrued but unpaid interest thereon shall be due and payable on the
Maturity Date or on such earlier date on which the maturity hereof is
accelerated pursuant to the provisions hereof.
From and after the occurrence of an Event of Default, interest shall accrue
on any amount past due hereunder (whether by acceleration, maturity or
otherwise) at a rate equal to five percent (5.0%) per annum in excess of the
interest rate otherwise payable
<PAGE>
hereunder. All such interest accruing on amounts past due hereunder shall be due
and payable on demand.
The loan represented by this Note is a revolving credit line such that,
during the term hereof, Borrower may borrow, repay and re-borrow from time to
time hereunder, subject to the terms and conditions set forth herein; provided,
however, that the aggregate principal amount outstanding hereunder may increase
or decrease, but shall never exceed the Maximum Amount. Borrower, at its
option, may repay or prepay all or any portion of the outstanding principal
amount on the Advances, together with all accrued and unpaid interest, at any
time without penalty by giving Lender at least one business day's prior written
notice of any such prepayment. All payments received by Lender shall be applied
first to fees, costs and expenses which may be due to Lender, second to accrued
and unpaid interest under the Advances and third to the outstanding principal
balance of the Advances.
Notwithstanding any provision to the contrary contained in this Note,
Borrower shall not be required to pay, and Lender shall not be permitted to
collect, any amount of interest in excess of the maximum amount of interest
permitted by law ("Excess Interest"). If any Excess Interest is provided for or
---------------
determined by a court of competent jurisdiction to have been provided for in
this Note, then in such event: (1) the provisions of this paragraph shall
govern and control; (2) Borrower shall not be obligated to pay any Excess
Interest; (3) any Excess Interest that Lender may have received hereunder shall
be, at Lender's option, (a) applied as a credit against the outstanding
principal balance of this Note or the accrued and unpaid interest (not to exceed
the maximum amount permitted by law), (b) refunded to the payor thereof, or (c)
any combination of the foregoing; (4) the interest rate provided for herein
shall be automatically reduced to the maximum lawful rate allowed from time to
time under applicable law (the "Maximum Rate"), and this Note shall be deemed to
------------
have been and shall be, reformed and modified to reflect such reduction; and (5)
Borrower shall not have any action against Lender for any damages arising out of
the payment or collection of any Excess Interest. Notwithstanding the
foregoing, if for any period of time interest on this Note is calculated at the
Maximum Rate rather than the applicable rate under this Note, and thereafter the
Maximum Rate exceeds the applicable rate, the rate of interest payable on this
Note shall become the Maximum Rate until Lender shall have received the amount
of interest which Lender would have received during such period on this Note had
the rate of interest not been limited to the Maximum Rate during such period.
BORROWER, AND LENDER BY ACCEPTING THIS NOTE, EACH AGREE AND STIPULATE THAT
THE ONLY CHARGE IMPOSED UPON BORROWER FOR THE USE OF MONEY IN CONNECTION WITH
THIS NOTE IS AND SHALL BE THE INTEREST DESCRIBED IN THE THIRD PARAGRAPH HEREOF,
AND FURTHER AGREE AND STIPULATE THAT ALL OTHER CHARGES IMPOSED BY LENDER ON
BORROWER IN CONNECTION WITH THIS NOTE, INCLUDING WITHOUT LIMITATION, ALL DEFAULT
CHARGES, LATE CHARGES, AND ATTORNEYS' FEES, ARE CHARGES MADE TO COMPENSATE
LENDER FOR UNDERWRITING OR ADMINISTRATIVE SERVICES AND COSTS OR LOSSES PERFORMED
OR INCURRED, AND TO BE PERFORMED OR INCURRED, BY LENDER IN CONNECTION WITH THIS
NOTE AND SHALL UNDER NO CIRCUMSTANCES BE DEEMED TO BE CHARGES FOR THE USE OF
MONEY.
2
<PAGE>
ALL CHARGES OTHER THAN CHARGES FOR THE USE OF MONEY SHALL BE FULLY EARNED AND
NONREFUNDABLE WHEN DUE.
Each of the following events shall constitute an "Event of Default" under
----------------
this Note: (i) failure of Borrower to pay any principal, interest or other
amount due hereunder within five (5) business days of the date due, or Borrower
shall in any way fail to comply with the other terms, covenants or conditions
contained in this Note, when such failure continues for a period of thirty (30)
days following notice thereof from Lender; (ii) any representation or warranty
made at any time by Borrower to Lender shall prove to have been incorrect or
misleading in any material respect when made; (iii) Borrower shall fail to
comply with any of the terms, covenants or conditions contained in any other
document, instrument, contract or agreement now or hereafter entered into by
Borrower and Lender or executed by Borrower in favor of Lender, when such
failure continues for a period of thirty (30) days following notice thereof from
Lender; (iv) a default, event of default, or event which with the giving of
notice or the passage of time or both would constitute a default or event of
default, shall have occurred under any document, instrument, contract or
agreement evidencing or securing indebtedness of Borrower for borrowed money in
excess of $100,000; (v) a warrant, writ of attachment, levy or other similar
process shall be issued against any property of Borrower and not vacated within
thirty (30) days; (vi) the occurrence of any "Event of Default" as defined in
that certain Reimbursement and Security Agreement dated April 13, 2000 among
Borrower and Lender (the "Security Agreement"); (vii) any security interest
granted or intended by this Note to be granted to the Lender shall cease to be a
valid and perfected security interest (except with respect to the security
interests granted to Greyrock Capital ("Greyrock") pursuant to that certain Loan
and Security Agreement, dated as of June 16, 1997 among Greyrock, Borrower and
Interplay OEM, Inc. or a lesser priority if expressly permitted by the Lender)
in any of the collateral covered or purported to be covered thereby; (viii)
final judgment or judgments (after the expiration of all times to appeal
therefrom) for the payment of money in excess of $1,000,000 in the aggregate
shall be rendered against the Borrower or any subsidiary of the Borrower; (ix)
Borrower shall (a) commence a voluntary case under the Bankruptcy Code of 1978,
as amended or other federal bankruptcy law (as now or hereafter in effect); (b)
file a petition seeking to take advantage of any other laws, domestic or
foreign, relating to bankruptcy, insolvency, reorganization, winding up or
composition for adjustment of debts; (c) consent to or fail to contest in a
timely and appropriate manner any petition filed against it in an involuntary
case under such bankruptcy laws or other laws; (d) apply for or consent to, or
fail to contest in a timely and appropriate manner, the appointment of, or the
taking of possession by, a receiver, custodian, trustee, or liquidator of itself
or of a substantial part of its property, domestic or foreign; (e) admit in
writing its inability to pay its debts as they become due; (f) make a general
assignment for the benefit of creditors; or (g) make a conveyance fraudulent as
to creditors under any state or federal law; or (x) a case or other proceeding
shall be commenced against Borrower in any court of competent jurisdiction
seeking (a) relief under the Bankruptcy Code of 1978, as amended or other
federal bankruptcy law (as now or hereafter in effect) or under any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding
up or adjustment of debts or (b) the appointment of a trustee, receiver,
custodian, liquidator or the like for Borrower or all or any substantial part of
its assets, domestic or foreign, and such proceeding shall not have been stayed
or dismissed within 60 days.
3
<PAGE>
Upon the occurrence of an Event of Default (other than an Event of Default
described in clause (ix) or (x) of the definition thereof), any and all of the
obligations hereunder, at the option of Lender, exercisable in its sole
discretion, and without demand or notice of any kind, may be immediately
declared, and thereupon shall immediately become in default and due and payable
and Lender may exercise any and all rights and remedies available to it at law,
in equity or otherwise. Upon the occurrence of an Event of Default described in
clause (ix) or (x) of the definition thereof, any and all of the obligations
hereunder, without demand or notice of any kind, shall immediately become in
default and due and payable and Lender may exercise any and all rights and
remedies available to it at law, in equity or otherwise. Nothing in this
paragraph shall limit the right of the Lender to make demand, at any time, with
or without the occurrence of an Event of Default, for payment in full of all
amounts due hereunder.
Borrower agrees to pay all costs and expenses (including without limitation
attorney's fees) incurred by Lender in connection with or related to this Note,
or its enforcement, whether or not suit be brought.
All payments of principal, interest and other amounts to be made by
Borrower under this Note shall be made without any deduction, set-off or
counterclaim whatsoever. The receipt of any check or other item of payment by
Lender shall not be considered a payment on this Note until such check or other
item of payment is honored at the drawee bank. Lender may delay the credit of
such payment until the funds become available, and interest under this Note
shall accrue until the funds are in fact collected.
The obligations represented by this Note are secured by, and Lender is
entitled to the benefits of, the Security Agreement. Nothing herein shall be
deemed to limit any of the terms or provisions of the Security Agreement or any
other present or future document, instrument or agreement, between Borrower and
the Lender, and all of the Lender's rights and remedies hereunder and thereunder
are cumulative.
Time is of the essence of this Note.
No delay or failure on the part of Lender in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
Lender of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy.
All amendments to this Note, and any waiver or consent of Lender, must be
in writing and signed by Lender and Borrower.
Borrower hereby waives notice of default, presentment or demand for
payment, protest or notice of nonpayment or dishonor, and all other notices or
demands of any kind or character, and to the fullest extent permitted by law,
the right to invoke any statute of limitations as a defense to any demand
hereunder. No delay or failure on the part of the Lender in the exercise of any
right or remedy shall operate as a waiver thereof, and no single or partial
exercise of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy. Borrower acknowledges that this
Note is executed as part of a commercial transaction and that the proceeds of
this Note will not be used for any personal or consumer purpose.
4
<PAGE>
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF
CALIFORNIA, AS THE SAME MAY FROM TIME TO TIME BE IN EFFECT. BORROWER HEREBY (i)
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY FEDERAL COURT, OR AT THE OPTION
OF LENDER, ANY STATE COURT, LOCATED IN LOS ANGELES COUNTY, CALIFORNIA OVER ANY
CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER, PERTAINING DIRECTLY OR
INDIRECTLY TO THIS NOTE OR TO ANY MATTER ARISING THEREFROM OR RELATING THERETO;
(ii) WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND CONSENTS
THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER, CERTIFIED MAIL OR
REGISTERED MAIL AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE
EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN
POSTED TO BORROWER'S ADDRESS; (iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
BORROWER MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT
IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY
OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY
LAW; AND (v) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST
LENDER OR ANY OF LENDER'S EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER
ARISING OUT OF OR RELATING TO THIS NOTE IN ANY COURT OTHER THAN ONE LOCATED IN
LOS ANGELES COUNTY, CALIFORNIA. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR
IMPAIR LENDER'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR
LENDER'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
LENDER AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i)
THIS NOTE; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
LENDER AND BORROWER PERTAINING TO BORROWED MONEY; OR (iii) ANY CONDUCT, ACTS OR
OMISSIONS OF LENDER OR BORROWER OR ANY OF THEIR EMPLOYEES, AGENTS, ATTORNEYS OR
ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER ARISING OUT OF THE
TRANSACTIONS CONTEMPLATED HEREBY; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A
FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF.
In the event any one or more of the provisions of this Note shall for any
reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
5
<PAGE>
This Note inures to and binds the heirs, successors and assigns of Borrower
and Lender. Lender may assign its rights under this Note. However, Borrower
may not assign any rights or obligations under this Note without Lender's prior
written consent.
All notices and other communications provided for hereunder shall be in
writing and shall be sent to Lender's principal place of business or Borrower's
address set forth below its signature hereto, as the case may be. All such
notices and other communications shall be effective when received.
IN WITNESS WHEREOF, Borrower has executed and delivered this Promissory
Note as of the date and year first written above.
INTERPLAY ENTERTAINMENT CORP.
By: /s/ Brian Fargo
-----------------------------------------
Name:
Title:
Address for notices:
Interplay Entertainment Corp.
16815 Von Karman Ave
Irvine, California 92606
6
<PAGE>
Schedule of Advances
--------------------
<TABLE>
<CAPTION>
Amount
Amount of Unpaid
of Principal Principal Notation
Date Advance Paid or Repaid Balance made by
- ------ ------- -------------- --------- --------
<S> <C> <C> <C> <C>
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
- ------ ------- -------------- --------- --------
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</TABLE>
7
<PAGE>
EXHIBIT 10.38
REIMBURSEMENT, SECURITY AND PLEDGE AGREEMENT
--------------------------------------------
THIS REIMBURSEMENT AND SECURITY AGREEMENT (this "Agreement") is made and
entered into as of April 14, 2000, by and among TITUS INTERACTIVE SA, a French
corporation ("Titus"), INTERPLAY ENTERTAINMENT CORP., a Delaware Corporation
(successor by merger to Interplay Productions, a California Corporation)
("Interplay") and INTERPLAY OEM, INC., a California corporation ("Interplay OEM"
and jointly and severally with Interplay, the "Borrower").
RECITALS
--------
WHEREAS, on or about June 16, 1997, Greyrock Capital (formerly Greyrock
Business Credit) ("Greyrock Capital") and the Borrower entered into that
certain Loan and Security Agreement dated June 16, 1997, as amended by that
Amendment to Loan Documents dated December 20, 1999, that Letter Agreement dated
March 22, 2000 and that Amendment to Loan Documents dated April 14, 2000 (as
amended, the "Loan and Security Agreement");
WHEREAS, pursuant to the Loan and Security Agreement, Greyrock Capital
agreed to loan to the Borrower the sum of twenty five million dollars
($25,000,000) excluding interest and fees thereon with a maturity date of April
30, 2001 (the "Maturity Date");
WHEREAS, Titus executed and delivered to Greyrock Capital that certain
Continuing Guaranty, dated April 14, 2000 (the "Guaranty") for the sum of up to
Twenty Million Dollars ($20,000,000) with respect to all present and future
indebtedness, liabilities and obligations of the Borrower to Greyrock Capital
pursuant to the Loan and Security Agreement;
WHEREAS, in consideration for Titus' execution of the Guaranty, Borrower
desires to grant to Titus a security interest in the Borrower's interest in
certain collateral;
NOW THEREFORE, in consideration of the mutual covenants and conditions set
forth herein, and for such other good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS
-----------
Unless a particular word or phrase is otherwise defined or the context
otherwise requires, capitalized words and phrases used in this Agreement and
other agreements and documents in connection herewith shall have the meanings
provided below.
<PAGE>
"Accounts" shall mean all "accounts" (as defined in the Code), accounts
--------
receivable, contract rights and general intangibles relating thereto, notes,
drafts, and other forms of obligations owed to or owned by Borrower arising or
resulting from the sale of goods or the rendering of services.
"Code" shall mean the Uniform Commercial Code as adopted and in effect in
----
the State of California from time to time.
"Deposit Account" shall have the meaning set forth in Section 105 of the
---------------
Code.
"Equipment" shall mean all of Borrower's present and hereafter acquired
---------
machinery, molds, computers, printers, telecommunications equipment, machine
tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures,
motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal
property (other than Inventory) of every kind and description used in Borrower's
operations or owned by Borrower and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions, additions
or improvements to any of the foregoing, wherever located.
"Financing Documents" means this Agreement, the Guaranty, financing
-------------------
statements (Form UCC-1), continuation statements (Form UCC-2), all evidence of
corporate authority, and all instruments, certificates and agreements at any
time delivered to Titus pursuant to any of the foregoing, and all written
amendments, modifications, renewals, extensions and rearrangements of, and
substitutions for, any of the foregoing.
"General Intangibles" shall mean all general intangibles of Borrower,
-------------------
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
patents, patent applications, trademarks and the goodwill of the business
symbolized thereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Titus, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, contract rights, distribution rights, publishing rights, development
rights, and all insurance policies and claims insurance, liability insurance,
property insurance and other insurance), tax refunds and claims, computer
programs, video games, source codes, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or granted to Borrower,
all rights to indemnification and all other intangible property of every kind
and nature (other than Receivables).
"Intellectual Property" shall mean all present and future designs, patents,
---------------------
patent rights and applications therefor, trademarks and registrations or
applications therefor,
-2-
<PAGE>
trade names, inventions, copyrights and all applications and registrations
therefor, software or computer programs, source codes, license rights, trade
secrets, methods, processes, know-how, drawings, specifications, descriptions,
and all memoranda, notes and records with respect to any research and
development, whether now owned or hereafter acquired, all goodwill associated
with any of the foregoing, and proceeds of all of the foregoing, including,
without limitation, proceeds of insurance policies thereon.
"Inventory" shall mean all of Borrower's now owned and hereafter acquired
---------
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including all raw
materials, work in process, finished goods and goods in transit), and all
materials and supplies of every kind, nature and description which are or might
be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all loans, advances, debts, liabilities and
-----------
obligations, for the performance of covenants, tasks or duties or for payment of
monetary amounts (whether or not such performance is then required or
contingent, or such amounts are liquidated or determinable) owing by Borrower to
Titus, and all covenants and duties regarding such amounts, of any kind or
nature, present or future, whether or not evidenced by any note, agreement or
other instrument, arising under this Agreement, any of the other Financing
Documents or that certain Five Million Dollar ($5,000,000) revolving loan (the
"Revolving Loan") provided for in Section 10.2 of that certain Stock Purchase
--------------
Agreement, dated April 14, 2000 by and between Titus and Interplay. This term
shall include all principal, interest, (including all interest which accrues
after the commencement of any case or proceeding in bankruptcy, after the
insolvency of, or the reorganization of Borrower, whether or not allowed in such
proceeding), fees, charges, expenses, attorneys' fees and any other sum
chargeable to Borrower under this Agreement, any of the other Financing
Documents or the Revolving Loan.
"Person" shall mean and include natural persons, corporations, limited
------
partnerships, general partnerships, limited liability companies, joint stock
companies, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations, whether or not
legal entities, and governments and agencies and political subdivisions thereof.
"Receivables" shall mean all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
-3-
<PAGE>
2. REIMBURSEMENT AND PAYMENT TERMS
-------------------------------
2.1 In the event that any demand is made upon Titus pursuant to the
Guaranty for payment of any amounts due thereunder (a "Guaranty Payment"),
Borrower hereby agrees to pay to Titus an amount equal to the Guaranty Payment
on the date that the Guaranty Payment is due (unless another time is mutually
agreed to by Borrower and Titus), together with all fees, expenses and charges,
if any, payable to Greyrock Capital for or under the Guaranty in addition to the
Guaranty Payment.
2.2 Borrower shall pay to Titus interest on any and all amounts unpaid and
due by Borrower to Titus pursuant to Section 2.1 hereof for each day from the
date such amounts became due until paid in full, payable on demand, at a rate
equal to the lesser of (i) 12% per annum or (ii) the highest interest rate
allowable under applicable law; and
2.3 All payments made by Borrower to Titus hereunder shall be made in
lawful currency of the United States and in immediately available funds via wire
transfer to an account designated in writing by Titus or by such other means as
may be designated by Titus in writing to Borrower.
3. SECURITY INTEREST
-----------------
3.1 To secure the payment and performance of the Obligations including all
renewals, extensions, amendments, restructurings and refinancings of any or all
of the Obligations, Borrower hereby grants to Titus a continuing security
interest in all of the following, whether nor owned or hereafter acquired, and
wherever located (collectively, the "Collateral"): all Inventory, Equipment,
Receivables, General Intangibles and Intellectual Property, Pledged Securities
(as defined in paragraphs 4.1 and 4.1 below), including, without limitation, all
of Borrower's Deposit Accounts, all money, all collateral in which Greyrock
Capital is granted a security interest pursuant to any other present or future
agreement, all property now or at any time in the future in Greyrock Capital's
possession, and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties) all products of the
foregoing, and all books and records related to any of the foregoing. The
security interest in the Collateral granted by Borrower to Titus hereunder is
intended to be a second priority security interest second only to the security
interest in the Collateral granted by Borrower to Greyrock Capital pursuant to
the Loan and Security Agreement until such time as the obligations owing by
Borrower to Greyrock Capital pursuant to the Loan and Security Agreement have
been paid in full at which time this Agreement shall grant to Titus a first
priority security interest in the Collateral.
-4-
<PAGE>
4. PLEDGE
------
4.1 To secured the payment and performance of the Obligations, Interplay,
Interplay OEM and any of their subsidiaries (each hereinafter referred to as a
"Pledgor" and collectively referred to as "Pledgors") hereby delivers, pledges
and grants a security interest in and assigns to Titus all Pledgors' right,
title and interest in and to all securities or limited liability company
interests now or hereafter owned by Pledgors, including without limitation,
those more particularly described on Exhibit A attached hereto, together with
all distributions, dividends, substitutions, conversions or proceeds thereof
(all in suitable form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignments in blank, and any required transfer tax
stamps), as well as all general intangibles, investment property and securities
entitlements relating thereto and proceeds resulting therefrom.
4.2 In the case of certificated securities, each Pledgor under paragraph
4.1 shall promptly deposit with Titus, any certificates, stock, securities,
warrants, options or other documents representing and of the rights pledged. In
the case of uncertificated securities, each Pledgor hereby agrees to give
written instructions to the issuer thereof to register the pledge hereunder in
the books and records maintained by such issuer, and to obtain from such issuer
a Confirmation of Issuer in the form satisfactory to Titus to confirm that the
Issuer has so registered said pledge. Such certificates, stock, equity
securities, warrants, options, voting or other rights and all proceeds thereof
shall stand pledged and assigned as collateral security of the Obligations in
the same manner as the property described in paragraphs 4.1 and 4.2 hereof. (All
of the property described in paragraphs 4.1 and 4.2 hereof is hereinafter
collectively called the "Pledged Securities.")
5. EVENTS OF DEFAULT
-----------------
The occurrence of any of the following shall constitute an event of default
("Event of Default") under this Agreement:
5.1 If Borrower shall fail to pay to Titus when due any amounts due under
Section 2 hereunder.
5.2 If Borrower shall fail to fully perform or observe, when and as
required, any covenant, condition, or agreement contained in this Agreement or
any other Financing Document, other than the payment of principal and/or
interest, and such non-performance or non-observance shall continue for a period
of ten (10) days after written notice thereof by Titus to Borrower.
5.3 If Borrower shall (i) file a petition seeking relief under Title 11 of
the United States Code, as amended from time to time (the "U.S. Bankruptcy
Code'), or file an answer consenting to, admitting the material allegations of,
or otherwise not
-5-
<PAGE>
controverting, a petition filed against it seeking relief under the U.S.
Bankruptcy Code, or (ii) file a petition or answer seeking relief under the
provisions of any other now-existing or future-applicable bankruptcy,
insolvency, or other similar federal or state law providing for the
reorganization, winding up or liquidation of business organizations or for an
arrangement, composition, extension or adjustment with creditors.
5.4 If -
(i) an order for relief shall be entered against Borrower under
the U.S. Bankruptcy Code, which order is not stayed; or
(ii) an entered order, judgment, or decree by operation of law
or by a court having jurisdiction in the premises which is not stayed (A)
adjudges Borrower a bankrupt or insolvent under, or ordering relief against
Borrower under, or approves as properly filed, a petition seeking relief against
Borrower under the provisions of any other now-existing or future-applicable
bankruptcy, insolvency or other similar federal or state law providing for the
reorganization, winding up, or liquidation of business organizations or for any
arrangement, composition, extension or adjustment with creditors; (B) appoints a
receiver, liquidator, assignee, trustee or custodian for Borrower or with
respect to any substantial part of its properties; or (C) orders the
reorganization, winding up or liquidation of Borrower's affairs; or (D) if
Borrower voluntarily or involuntarily dissolves or is dissolved, terminates or
is terminated; or
(iii) any involuntary petition is filed against Borrower seeking
any relief available under the U.S. Bankruptcy Code or any other law described
in this Section without the petition being dismissed within sixty (60) days
after filing.
5.5 If Borrower shall (i) make a general assignment for the benefit of its
creditors; (ii) consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, or custodian of Borrower or of all or
substantially all of its property; (iii) admit its insolvency or inability to
pay its debts generally as such debts become due; or (iv) take any action
initiating the dissolution of Borrower.
5.6 If Borrower shall enter into any agreement with all or a significant
number of its creditors regarding any moratorium or other indulgence with
respect to its debts, or the participation of such creditors or their
representatives in the supervision, management, or control of the business of
Borrower.
5.7 If a final judgment for the payment of money in excess of One Million
Dollars ($1,000,000) shall be entered against Borrower which is not satisfied
within ninety (90) days of the entry thereof, unless an appeal is pending and
all appropriate appellate bonds or other security have been posted, if required.
-6-
<PAGE>
5.8 If any execution, levy or attachment is placed on the personal
property or other assets of Borrower, or any portion thereof, and is not
released or satisfied within ninety (90) days thereof.
5.9 If Borrower shall conceal, remove or permit to be concealed all or any
part of its properties and assets, with the intent to hinder or defraud its
creditors, or make or suffer any transfer of any of its properties or assets
which may be fraudulent under any bankruptcy, fraudulent conveyance, or similar
law, or shall make any transfer of its property to or for the benefit of
creditors at a time when other creditors similarly have not been paid.
5.10 If any of the Events of Default described herein shall occur and
Borrower shall fail to give written notice to Titus forthwith on the occurrence
of such Event of Default.
6. REMEDIES; ACCELERATION
----------------------
6.1 If an Event of Default shall occur under Section 4 hereof, then, at
the option of Titus, the entire unpaid principal balance owing hereunder and all
accrued, unpaid interest thereon shall immediately become due and payable to
Titus, without notice of default, demand for payment or presentment, protest or
notice of nonpayment or dishonor, or any other notices or demands of any kind or
nature. From and after the date of an Event of Default, the unpaid balance owing
under this Agreement shall continue to bear interest at the rate specified in
Section 2.2 hereof plus five percent (5%) (or, if lower, the maximum amount
allowable under applicable law) until the amounts owing hereunder are paid in
full. Titus shall also have all the rights and remedies of a secured party under
the California Commercial Code and the Code or other applicable law, including
the power of sale upon notice, and all rights and remedies provided in this
Agreement, all of which rights and remedies shall, to the fullest extent
permitted by law, be cumulative.
6.2 Without limiting the generality of the foregoing and subject to the
remaining provisions of this Section 5, upon any Event of Default which has not
been expressly waived in writing, Titus may, at its option, do any one or more
or all of the following acts (subject to the limitations on the rights of Titus
set forth in that certain Subordination Agreement (the "Subordination
Agreement"), dated as of April 14, 2000, by and among Titus, Borrower and
Greyrock Capital), as Titus in its complete and sole discretion may determine
and at such time or times and in such sequence as Titus in its complete and sole
discretion may determine subject only to, where noted, any applicable notice
requirement:
(i) Exercise any and all the rights and remedies available to
secured parties under applicable law in foreclosure or otherwise;
-7-
<PAGE>
(ii) Institute legal proceedings for the specific performance of
any covenant or agreement undertaken by Borrower under this Agreement or under
any other Financing Document, or for aid in the execution of any power or remedy
herein granted or available at law or in equity;
(iii) Institute legal proceedings for the sale or assignment,
under the judgment or decree of any court of competent jurisdiction, of any or
all of the Collateral;
(iv) Immediately take possession, personally or by agents or
attorneys, of any part or all of the Collateral, without process of law, and
without being responsible for loss or damage (except such damages as result from
Titus' willful misconduct); or
(v) Sell or otherwise dispose of all or any part of the
Collateral (free from any and all claims of Borrower or any other party claiming
by, through, or under Borrower at law, in equity or otherwise), at any one or
more public or private sales, in such place or places, at such time or times,
for cash or credit and upon such terms as Titus may in its complete and sole
discretion determine. All demands for performance, notice of sale,
advertisements, manner of sale and presence of the Collateral at any sale,
except only as provided by California Commercial Code Section 9504(3), are
hereby specifically waived by Borrower. Any sale may be conducted by Titus, who
may do other acts required to be done under California Commercial Code Section
9504(3), may deliver possession of the Collateral so sold to the purchaser or
purchasers thereof and Titus in its own right and free from any claim of
Borrower and from any right of redemption, and may purchase and hold any of the
Collateral at any sale. The power of sale hereunder shall not be exhausted by
one or more sales, and Titus may from time to time adjourn any sale.
6.3 Any written notice given pursuant to California Commercial Code
Section 9504(3) in the manner described in Section 9 hereof at least ten (10)
days before the date of any act undertaken pursuant to Section 5.2 (vi) hereof
shall be deemed to be reasonable prior notice of such act, and specifically, but
without limitation, any notice of sale so given shall be deemed reasonable
notification of the time and place of any public sale hereunder and reasonable
notification of the time after which any private sale or other notification of
the time after which any private sale or other intended disposition to be made
hereunder is to be made. In compliance with the foregoing, Titus may (but shall
not be required to) give all notices required under California Commercial Code
Section 9504(3) within any notice given to Borrower by Titus of an Event of
Default.
6.4 During the existence of any Event of Default, Titus may (subject to
the limitations set forth in the Subordination Agreement) terminate Borrower's
authority to collect all or any portion of Borrower's gross revenues or other
accounts which constitute Collateral (the "Subject Accounts"), including its
outstanding accounts receivable, contract payment rights and other rights to
receive payments for services rendered or to
-8-
<PAGE>
be rendered, by written notice to Borrower in the manner set forth in Section 9
hereof. During the existence of an Event of Default, (i) Borrower shall deliver
and provide access to Titus and Titus shall have the right to possession of all
books, records and other data or information relating to the Subject Accounts,
(ii) Titus shall have the right to send a notice of assignment or a notice of
Titus' security interest in the Subject Accounts to any and all Persons
contractually or otherwise obligated to pay a or any portion of the Subject
Accounts, (iii) Titus shall have the right to place one or more of its employees
or agents, and Borrower shall grant full and complete access to Titus, into all
of Borrower's offices and other business locations to collect funds on behalf of
Titus, and (iv) Titus shall have the sole right to collect the Subject Accounts
and any other Collateral. During the existence of an Event of Default with
respect to the collection by Titus of Borrower's Subject Accounts and other
Collateral:
(i) Titus shall have the right to endorse, assign or deliver in
its name or the name of Borrower any and all checks, drafts and other
instruments for the payment of money relating to the accounts receivable or
other Collateral and Borrower hereby waives notice of presentment, protest and
non-payment of any instrument so endorsed.
(ii) Borrower irrevocably appoints Titus as Borrower's attorney-
in-fact coupled with an interest with power (A) to endorse Borrower's name upon
any notes, acceptances, checks, drafts, money orders or other evidences of
payment or Collateral that may come into Titus's possession in connection with
the collection of the Subject Accounts, (B) to sign Borrower's name to any
invoice or bill relating to any of the Subject Accounts or other Collateral,
drafts against any third party payers, assignments or verifications of the
accounts and notices to third party payers, (C) to send invoices, claims and
bills with respect to Borrower's outstanding Subject Accounts, (D) to collect or
to direct the collection of all checks or other payments received with respect
to Borrower's Subject Accounts, and (E) to do all other acts and things
necessary to carry out the provisions of and to enforce Titus's rights under
this Agreement or any other Financing Document, all of which are hereby ratified
and approved as the acts and deeds of Borrower.
(iii) Titus shall have the right, in its sole discretion, without
notice to or consent of Borrower, to sue upon or otherwise collect, extend the
time for payment of, compromise or settle for cash, credit or otherwise upon any
terms, any of the Subject Accounts or other Collateral, or release the obligor
therefrom.
(iv) Titus shall not be responsible nor liable for any shortage,
discrepancy, damage, loss or destruction of any part of the Collateral wherever
the same may be located and regardless of the cause thereof, except to the
extent that it results from Titus's gross negligence or willful misconduct.
Titus shall not, under any circumstances or in any event whatsoever, have any
liability for any error, omission or delay of any kind occurring in the
settlement, collection or payment of any of the
-9-
<PAGE>
accounts receivable or any instrument received in payment thereof or for any
damage resulting therefrom. Titus does not, as a result of this Agreement or in
any assignment or otherwise, assume any of Borrower's obligations under any
contract or agreements, and Titus shall not be responsible in any manner for the
performance by Borrower of any of the terms and conditions thereof, including,
without limitation, Borrower's contracts with other third party payers.
6.5 In the event that Titus seeks to obtain possession of any of the
Collateral by court process, Borrower hereby irrevocably waives any bonds and
any surety or security relating thereto required by any statute, court rule or
otherwise as an incident to such process or such, possession, and waives any
demand for possession prior to the commencement of any proceeding, suit or
action. Borrower also waives the right to demand a jury in any action in which
Titus is a party with respect to this Agreement or any other Financing Document.
6.6 Titus shall apply the proceeds from the collection, sale or other
disposition of the Collateral and any other amounts held by it as Collateral
hereunder in the following order:
(i) To the payment of all of Titus' actual costs and expenses,
if any (including actual attorneys' fees and costs), in preserving or collecting
the Collateral or Titus's interest in the Collateral and in enforcing or
exercising any rights or remedies or realizing against the security of the
Collateral, including costs and expenses for appraisals, storage, insurance,
advertising and sale;
(ii) To the payment of the Obligations in such order as Titus,
in its sole discretion, shall determine; and
(iii) After payment in full of all of the Obligations (including
those otherwise not due and payable at the time of the application referred to
in Sections 5.6 (i) and 5.6 (ii) hereof), to the payment to Borrower of any
surplus then remaining from such proceeds or otherwise as a court of competent
jurisdiction may direct.
6.7 The collection, sale or other disposition of all or any part of the
Collateral by Titus pursuant to this Article 5 shall not be deemed to relieve
Borrower of any of its Obligations except to the extent the proceeds thereof are
applied by Titus to the payment of such Obligations. For purposes of this
Agreement, Titus shall not be deemed to have accepted any property other than
cash in satisfaction of the Obligations unless Titus expressly elects to do so
under the provisions of California Commercial Code Section 9505.
7. BORROWER'S REPRESENTATIONS AND WARRANTIES
-----------------------------------------
-10-
<PAGE>
Borrower represents and warrants to Titus as of the date hereof that:
7.1 By virtue of the execution and delivery of this Agreement and the
other Financing Documents including the provision of written notices as required
under the California Commercial Code, Titus shall have obtained a perfected
security interest in the Collateral as security for the repayment of the
Obligations, which security interest is enforceable against Borrower and all
other Persons in accordance with its terms, and all filings, recordations and
other actions necessary or advisable under any laws to perfect and protect such
security interest will have been duly taken, except in the case of proceeds
consisting of nonidentifiable cash proceeds as provided in California Commercial
Code Section 9306 and instruments possession of which by Titus is required in
order for Titus to perfect its security interest in the Collateral.
7.2 Borrower is a corporation duly formed, validly existing and in good
standing under the laws of the State of Delaware. Borrower has full right,
power and authority to (i) enter into this Agreement, (ii) execute and deliver
this Agreement and any other Financing Document, (iii) comply with the
covenants, conditions and agreements hereof and thereof and (iv) own or lease
its properties and carry on its business activities as, and in the places where,
such properties and assets are now operated or owned or such business is now
conducted or presently proposed to be conducted, except where failure to do so
would not have a material adverse effect on the Borrower.
7.3 This Agreement and the other Financing Documents constitute the legal,
valid and binding obligation of Borrower, enforceable against Borrower in
accordance with its terms. All consents, corporate authorizations, approvals,
resolutions, authorizations, or actions required of Borrower for the execution,
delivery and performance of, and for the consummation of the transactions and
performance of the Obligations of Borrower contemplated by this Agreement and
the other Financing Documents have been or will be obtained as of the date of
this Agreement.
7.4 Each Pledgor is, and at the time of delivery of the Pledged Securities
to Titus will be, the sole holder of record and the sole beneficial owner of the
Pledged Securities pledged by such Pledgor free and clear of any Lien thereon or
affecting the title thereto, except for (i) any Lien created in connection with
the Loan and Security Agreement, and (ii) any Lien created by this Agreement.
7.5 All of the Pledged Securities have been duly authorized, validly
issued and are fully paid and non-assessable.
7.6 Such Pledgor has the right and requisite authority to pledge assign,
transfer, deliver, deposit and set over the Pledged Securities pledged to Titus
as provided herein.
-11-
<PAGE>
7.7 None of the Pledged Securities has been issued or transferred in
violation of the securities registration, securities disclosure or similar laws
of any jurisdiction to which such issuance or transfer may be subject.
8. COVENANTS OF BORROWER
---------------------
Borrower covenants and agrees that until all of Obligations are satisfied
in full:
8.1 Borrower shall not sell, convey, or otherwise dispose of any of the
Collateral or any interest therein except in the ordinary course of business, or
create or incur, or permit to exist any pledge, mortgage, lien, levy,
attachment, charge, encumbrance or security interest whatsoever in or with
respect to any of the Collateral, or the proceeds thereof, other than that
created by this Agreement and those granted to Greyrock Capital pursuant to the
Loan and Security Agreement, without the prior written consent of Titus, which
consent may be withheld in the sole discretion of Titus.
8.2 Borrower shall not change its principal place of business without the
prior written consent of Titus, which consent may be withheld in the sole
discretion of Titus.
8.3 Borrower shall, at its sole cost and expense, defend and protect
Titus's right, title, property and security interest in and to the Collateral
against the claims and demands of any Person, including appearing in and
defending any action or proceeding which may adversely affect Borrower's title
to or Titus's interest in the Collateral.
8.4 Borrower has not executed and hereafter will not execute any security
agreement or financing statement covering any of the Collateral except in favor
of Titus or Greyrock Capital pursuant to the Loan and Security Agreement and
will keep the Collateral free and clear of all pledges, mortgages, liens,
levies, attachments, charges, encumbrances or security interests whatsoever of
any kind or nature and those granted herein or to Greyrock Capital pursuant to
the Loan and Security Agreement.
8.5 Borrower will immediately notify Titus in writing of any event or
circumstance which materially affects the value of the Collateral, the ability
of Borrower to collect or dispose of the Collateral, or the rights and remedies
of Titus in relation thereto, including the levy of legal process against the
Collateral and the adoption of any marketing order, arrangement or procedure
affecting the Collateral, except where such events occur due to the security
interest of Greyrock Capital in the Collateral.
8.6 Borrower shall defend, indemnify and hold Titus harmless from and
against any and all losses, costs, damages, liabilities or expenses, including,
but not limited to, reasonable attorneys' fees that Titus may sustain or incur
by reason of defending or protecting its security interest or the priority
thereof occasioned by Borrower's breach of any covenant contained in this
Section 7 or enforcing payment of the indebtedness hereby secured, or in the
prosecution or defense of any action or proceeding concerning any matter growing
out of or connected with this Agreement, the
-12-
<PAGE>
other Financing Documents, the Obligations, or the Collateral, except to the
extent such losses, costs, damages, liabilities, expenses or fees are caused by
the gross negligence or willful misconduct of Titus.
9. ADDITIONAL WAIVERS BY BORROWER
------------------------------
Borrower waives any right to require Titus to proceed against any other
Person or to proceed against or exhaust the Collateral or any other security
which Titus, may now or hereafter have, or, with respect to the Obligations or
any other indebtedness of Borrower now or hereafter existing in favor of Titus,
pursue any other right or remedy in Titus's power and Borrower waives all
defenses arising by reason of any disability or other defense of Borrower or any
other Person, or by reason of the cessation from any cause whatsoever of the
liability of Borrower or any other Person. Until all of the Obligations are
fully performed and satisfied, Borrower shall not have any right of subrogation,
and Borrower waives any right to enforce any remedy which Titus now has or may
hereafter have against any other Person under this Agreement or otherwise, and
waives any benefit of and any right to participate in the Collateral or any
other security whatsoever now or hereafter held by Borrower. Borrower hereby
subordinates to and in favor of Titus, all rights, titles and interests now
possessed by Borrower or which Borrower may hereafter acquire in or with respect
to any of the property which is or may hereafter be or become included as part
of the Collateral, to the end and with the intent that the security interest
granted hereunder in favor of Titus shall be and remain prior and preferred to
any security interest, pledge, lien, charge or claim of Borrower of, on or with
respect to any such property until the Obligations are fully performed and
satisfied.
10. NOTICES
-------
All notices, requests, demands and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
delivered to the party to whom notice is to be given, either (i) by personal
delivery (in which case such notice shall be deemed given as of the date of
delivery), (ii) by facsimile transmission, effective upon confirmation of
receipt from the recipient party (including automatic mechanical confirmation)
or (iii) by first class mail, registered or certified, return receipt requested,
postage prepaid (in which case such notice shall be deemed given on the third
(3rd) day following the date of such mailing), and properly addressed as
follows:
If to Borrower: Interplay Entertainment Corp., 16815 Von Karman Ave, Irvine, CA
92606; Attention: Mr. Brian Fargo; Facsimile: (949) 252-0667
If to Titus: Titus Interactive SA, Parc de L'Esplanade, 12 rue Enrico Fermni,
Saint Thibault des Vignes 77 100; Attention: Mr. Herve Caen; Facsimile: 011-33-
1-60-31-5960
Either party hereto may change its address for the purposes of this Section
9 by giving the other party written notice of the new address in the manner set
forth in this Section 9.
-13-
<PAGE>
11. COSTS OF COLLECTION
-------------------
If the amounts due hereunder are not paid when and as due, Borrower hereby
agrees to pay all costs of collection, including, but not limited to, actual
attorneys' fees and expenses, incurred by the Titus hereof on account of such
collection, whether or not suit is instituted.
12. GOVERNING LAW AND SEVERABILITY
------------------------------
This Agreement and the rights and Obligations of the parties under any
other Financing Document shall in all respects be governed by and construed and
interpreted in accordance with the laws of the State of California applicable to
transactions entered into and to be wholly performed within the State of
California. Borrower and Titus agree that all actions and proceedings relating
directly or indirectly hereto shall be litigated in the State of California, and
Borrower and Titus expressly consent to the jurisdiction of any California
Superior Court and to venue therein, and consents to the service of process in
any such action or proceedings, in addition to any other manner permitted by
law, by compliance with the provisions of this Section 11. Nothing in this
Agreement or any other Financing Document shall be construed so as to require or
permit the commission of any act contrary to law, and wherever there is any
conflict between any provision of this Agreement or any other Financing Document
and any present or future statute, law, ordinance or regulation, contrary to
which the parties have no power to contract, the latter shall prevail, and the
provisions of this Agreement so affected shall be curtailed and limited, but
only to the extent necessary to bring them within the requirements of the law,
and the remainder hereof and thereof shall continue in full force and effect.
13. MISCELLANEOUS
-------------
13.1 This Agreement and the other Financing Documents embody the entire
agreement between the Borrower and Titus with respect to the transactions
contemplated herein and supersede all prior proposals, agreements and
undertakings relating to the subject matter hereof.
13.2 Borrower may not assign this Agreement or any other Financing
Document or assign or delegate any of its rights or Obligations hereunder or
thereunder, without the prior written consent of Titus. Subject to the
foregoing, this Agreement and the other Financing Documents shall be binding
upon and inure to the benefit of, and bind, the parties hereto and thereto and
their respective heirs, legal representatives, successors and assigns. Titus may
assign its rights and delegate its duties under this Agreement or under any
other Financing Document.
-14-
<PAGE>
EXHIBIT 10.39
AMENDMENT NUMBER 1
OF INTERNATIONAL DISTRIBUTION AGREEMENT
This Amendment Number 1 of International Distribution Agreement (this
"Amendment") is entered into as of July 1, 1999, by Interplay Entertainment
Corp., a Delaware corporation ("Interplay") and Virgin Interactive Entertainment
Limited, a corporation formed under the laws of England and Wales ("Virgin"),
with reference to the following facts:
A. The parties have entered into that certain International Distribution
Agreement dated February 10, 1999 (the "Agreement").
B. The parties desire to amend the Agreement in accordance with the terms
of this Amendment.
Therefore, the parties agree as follows:
I. Section 3 of Exhibit "B" of the Agreement is deleted in its entirety
and replaced with the following:
"3. Annual Overhead Fee. For each calendar year during the term of this
-------------------
Agreement, Interplay shall pay Virgin an Annual Overhead Fee in the amount
of 6,199,992 British Pounds (subject to decrease in accordance with Section
-------
4 and Section 5 of this Exhibit `B') in the following manner:
- --------- -----------
(a) Monthly Payments. For each calendar month during the term of this
Agreement, on or before the last day of such month, 141,666 British Pounds,
subject to decrease in accordance with Section 4 of this Exhibit `B'.
--------- -----------
(b) Annual Payments. For each calendar year during the term of this
Agreement, on or before February 15 of the ensuing year, 4,500,000 British
Pounds, subject to decrease in accordance with Section 5 of this Exhibit
--------- -------
`B'."
----
II. Section 4 of Exhibit "B" of the Agreement is deleted in its entirety
and replaced with the following:
"4. Adjustment of Monthly Payment of Annual Overhead Fee.
----------------------------------------------------
(a) Monthly Payments of the Annual Overhead Fee under Section 3(a)
------------
of this Exhibit `B' shall be reduced by one British Pound for every four
-----------
British Pounds of Contribution Margin (as defined below).
(b) `Contribution Margin' shall mean the gross profit earned by
Virgin or its affiliates or any of Virgin's directly or indirectly
controlled or
<PAGE>
majority-owned subsidiaries (each a `Virgin Entity' and collectively the
`Virgin Entities') attributable to rights to distribute third party
products, less the costs associated with such gross profit (including the
value of any cash, stock or other consideration paid by the Virgin Entities
to such third party solely as consideration for such distribution rights
and which is not reasonably attributable to consideration for any other
property or rights received), with such difference amortized over the term
of the relevant agreement. For purposes of clarification, the value of any
stock or other non-cash consideration paid by the Virgin Entities to such
third party solely as consideration for such distribution rights shall be
determined based upon reasonable valuation criteria with the value assigned
by contract among the parties not necessarily being determinative.
(c) The following shall be excluded from the definition of
`Contribution Margin':
(i) Gross profits to the Virgin Entities attributable to
distribution rights respecting products of Eidos (or its successors) in
China; and
(ii) Gross profits to the Virgin Entities attributable to
distribution rights with respect to the products of any party listed on
Exhibit `B-1' who was a supplier or licensor of Virgin prior to the
-------------
execution of this Agreement; provided, however, that if Virgin enters into
-------- ------- --
an agreement with any such third party that provides for the issuance to
the third party of (a) a Membership Interest Percentage (as defined in the
Operating Agreement) of more than 10% of VIE Acquisition Group, or (b) more
than 18% of the equity of any Virgin Entity, then the definition of
----
`Contribution Margin' shall include the amount by which monthly gross
profit to the Virgin Entities earned by distributing the products of such
third party exceeds the average of such monthly gross profits for the
preceding two years; and provided further that, if Virgin enters into any
---------------- --
agreement by which any party on Exhibit `B-1' offsets any Virgin overhead,
-------------
then the definition of `Contribution Margin' shall include the full amount
----
of such offset."
III. Section 5 of Exhibit "B" of the Agreement is deleted in its entirety,
and replaced with the following:
"5. Adjustment of Annual Payments of Annual Overhead Fee. Annual Payments
----------------------------------------------------
of the Annual Overhead Fee under Section 3(b) of this Exhibit `B' shall be
------------ -----------
reduced by one British Pound for every British Pound of distribution fee
that Virgin earns under this Agreement during the respective calendar year.
Within 30 days after the end of each calendar
-2-
<PAGE>
year during the term of this Agreement, Virgin shall calculate the
distribution fees earned by Virgin hereunder, and deliver to Interplay
documentation of such calculation. If Interplay disagrees with Virgin's
calculation, Interplay shall provide objections in writing. If the parties
then fail to agree on the calculation, either party may require submission
of the issue to an independent auditor for a determination by such
auditor."
IV. Miscellaneous. The Agreement and this Amendment constitute the entire
-------------
agreement between the parties on the subject matter hereof and thereof, and no
amendment of the terms herein or therein shall be valid unless made in a writing
signed by the parties. California law shall govern the interpretation and
enforcement of this Amendment without regard to conflicts of laws principles.
Unless otherwise defined herein, terms used herein shall bear the same
respective meanings ascribed to such terms in the Agreement. Except as amended
hereby, the Agreement remains in full force and effect. This Amendment may be
executed in counterparts.
Wherefore, the parties hereto have executed this Amendment as of the date
first written above.
"VIRGIN"
Virgin Interactive Entertainment Limited
By: /s/ Tim Chaney /s/ Peter Bilotta
-----------------------------------
Its: Co-President Co-President
-----------------------------------
"INTERPLAY"
Interplay Entertainment Corp.
By: /s/ Brian Fargo
-----------------------------------
Its: Chief Executive Officer
-----------------------------------
-3-
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into Interplay Entertainment Corp.'s
previously filed Registration Statements File No. 000-24363 on Form S-8.
/s/ Authur Anderson LLP
April 14, 2000
Orange County, California
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<PERIOD-START> JAN-01-1999
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