-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OXVMCOykXlT039QmPJToO7rJayjcPfumYSk679wrlL3fYxDaAcxLoYqRqtqxfanj un7lVdN57v9SeKBkigJ41g== 0001021408-00-001516.txt : 20000418 0001021408-00-001516.hdr.sgml : 20000418 ACCESSION NUMBER: 0001021408-00-001516 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPLAY ENTERTAINMENT CORP CENTRAL INDEX KEY: 0001057232 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330102707 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24363 FILM NUMBER: 602734 BUSINESS ADDRESS: STREET 1: 16815 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92606 BUSINESS PHONE: 9495536655 MAIL ADDRESS: STREET 1: 16815 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92606 10-K405 1 INTERPLAY -10-K - 12/31/1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 ---------------- 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 ---------------- 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) ---------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INTERPLAY ENTERTAINMENT CORP. INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
Page ---- 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
2 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. 3 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. 4 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." 5 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 6 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 7 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, 8 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 9 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 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 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 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 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.
For the Year ended December 31, 1998 High Low ------------------------------------ ----- ----- Second Quarter.................................................. $6.19 $5.75 Third Quarter................................................... 7.50 3.19 Fourth Quarter.................................................. 3.00 1.50 For the Year ended December 31, 1999 High Low ------------------------------------ ----- ----- First Quarter................................................... $3.00 $1.69 Second Quarter.................................................. 2.63 1.88 Third Quarter................................................... 2.94 2.00 Fourth Quarter.................................................. 4.44 1.56
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 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.
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) 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 December 31, April 30, -------------------------------- -------------------------- 1999 1998 1997 1997 1996 1995 -------- -------- ------------ -------- ------- ------- (Dollars in thousands) 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
- -------- (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 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 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 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:
Year Ended Eight Months Ended December 31, December 31, Year Ended --------------- ------------------------ April 30, 1999 1998 1997 1996 1997 ------ ------ --------- ------------ ---------- (unaudited) 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% ====== ====== ========= ========= =====
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 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, 19 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 20 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 21 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. 22 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. 23 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 24 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 25 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, 26 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, 27 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 28 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. 29 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. 30 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, 31 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 32 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 33 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 34 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 35 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 36 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. 37 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 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 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.
Signature Title Date --------- ----- ---- /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
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Signature Title Date --------- ----- ---- /s/ James Barnett Director April 14, 2000 ______________________________________ James Barnett /s/ Charles S. Paul Director April 14, 2000 ______________________________________ Charles S. Paul
41 EXHIBIT INDEX
Exhibit No. Description ------- ----------- 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)
42
Exhibit No. Description ------- ----------- 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.)
43
Exhibit No. Description ------- ----------- 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.
44 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Page ---- 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
F-1 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 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, ----------------- 1999 1998 -------- ------- 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 ======== =======
The accompanying notes are an intergral part of these consolidated financial statements. F-3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Eight Months Years Ended December 31, Ended Year Ended -------------------------- December 31, April 30, 1999 1998 1997 1997 ------------ ------------ ------------ ----------- 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 ============ ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands)
Accumulated Common Stock Retained Other ------------------ Paid-in Earnings Comprehensive Comprehensive Shares Amount Capital (Deficit) Income (Loss) Loss ---------- ------ ------- --------- ------------- ------------- 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 ========== ==== ======= ======== ====
The accompanying notes are an integral part of these consolidated financial statements. F-5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years Ended Eight Months December 31, Ended Year Ended ------------------ December 31, April 30, 1999 1998 1997 1997 -------- -------- ------------ ---------- 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 $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. F-6 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 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 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 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 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:
December 31, ------------- 1999 1998 ------ ------ (Dollars in thousands) Packaged software......................................... $4,394 $4,070 CD-ROMs, DVDs, cartridges, manuals, packaging and supplies................................................. 1,663 2,233 ------ ------ $6,057 $6,303 ====== ======
F-11 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other Current Assets Other current assets consist of the following:
December 31, ------------- 1999 1998 ------ ------ (Dollars in thousands) Prepaid expenses............................................ $ 764 $ 639 Deposits.................................................... 110 46 ------ ------ $ 874 $ 685 ====== ======
Property and Equipment Property and equipment consists of the following:
December 31, ----------------- 1999 1998 -------- ------- (Dollars in thousands) 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 ======== =======
Accrued Liabilities Accrued liabilities consist of the following:
December 31, --------------- 1999 1998 ------- ------- (Dollars in thousands) 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 ======= =======
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 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Current Debt Current debt consists of the following:
December 31, --------------- 1999 1998 ------- ------- (Dollars in thousands) Loan Agreement............................................ $19,218 $24,475 Other..................................................... 412 176 ------- ------- $19,630 $24,651 ======= =======
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:
Years Ended Eight Months December 31, Ended Year Ended ------------------ December 31, April 30, 1999 1998 1997 1997 -------- -------- ------------ ---------- (Dollars in thousands) 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) ======== ======== ======= ========
F-13 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The provision (benefit) for income taxes is comprised of the following:
Year Years Ended Eight Ended December 31, Months Ended April ------------- December 31, 30, 1999 1998 1997 1997 ------ ------ ------------ ------- (Dollars in thousands) 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) ====== ====== ===== =======
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:
Years Ended Eight Year December 31, Months Ended Ended --------------- December 31, April 30, 1999 1998 1997 1997 ------ ------ ------------ --------- 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)% ====== ====== ===== =====
F-14 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:
December 31, ------------------ 1999 1998 -------- -------- (Dollars in thousands) 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 ======== ========
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: 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 =======
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 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 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 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 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:
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 --------- -------- --------- -------- --------- -------- --------- -------- 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 ========= ========= ========= =========
The following outlines the significant assumptions used to calculate the fair value information presented utilizing the Black-Scholes Single Option approach with ratable amortization:
Years Ended Eight December 31, Months Ended Year Ended ---------------------- December 31, April 30, 1999 1998 1997 1997 ---------- ---------- ------------ ---------- 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
A detail of the options outstanding and exercisable as of December 31, 1999 is as follows:
Options Outstanding Options Exercisable --------------------------------------- ----------------------- Weighted Weighted Range of Average Weighted Average Exercise Number Remaining Average Number Exercise Prices Outstanding Contract Life Price Outstanding Price -------- ----------- ------------- -------- ----------- -------- $0.15-$ 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 ========= ==== ===== ========= =====
F-19 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:
Years Ended Eight Year December 31, Months Ended Ended ------------------ December 31, April 30, 1999 1998 1997 1997 -------- -------- ------------ --------- (Dollars in thousands, except per share amounts) 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) ======== ======== ======= ========
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 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 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:
Year Ended December 31, Eight Months Year Ended ----------------------- Ended December 31, April 30, 1999 1998 1997 1997 ----------- ----------- ------------------ ---------- (Dollars in thousands) 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 =========== =========== ======= ========
Net revenues were made to geographic regions as follows:
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) 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% ======== ===== ======== ===== ========== ======== ======= =====
F-22 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-lived assets by geographic regions, net:
December 31, December 31, 1999 1998 --------------- -------------- Amount Percent Amount Percent ------- ------- ------ ------- (Dollars in thousands) 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% ======= ===== ====== =====
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 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
Pro- Actual forma -------- -------- (Dollars in thousands) 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 ======== ========
F-24 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Amounts in Thousands)
Trade Receivables Allowance ------------------------------------------------------ Balance at Provisions for Beginning of Returns and Returns and Balance at End Period Period Discounts Discounts of Period ------ ------------ -------------- ----------- -------------- 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 ======= ======= ======== =======
F-25 EX-10.31 2 STOCK PURCHASE AGMT DATED APRIL 14, 2000 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 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 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 3 719,424 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 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 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 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 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 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 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 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 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 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 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 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 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 (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 (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 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 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 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 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 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 (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 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 (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 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 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 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 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 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 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 "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 "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 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 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 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 [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 EXHIBIT A --------- FORM OF CERTIFICATE OF DESIGNATION ---------------------------------- 39 EXHIBIT B --------- OPINION OF STRADLING YOCCA CARLSON & RAUTH ------------------------------------------ 40 EXHIBIT C-1 ----------- FORM OF WARRANTS ---------------- 41 EXHIBIT C-2 FORM OF CONDITIONAL WARRANT --------------------------- 42 EXHIBIT D-1 ----------- CREDIT FACILITY --------------- 43 EXHIBIT D-2 ----------- FORM OF CREDIT FACILITY WARRANT ------------------------------- 44 EX-10.32 3 CERTIFICATE OF DESIGNATION DATED APRIL 14, 2000 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 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 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 (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 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 (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 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 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 (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 EX-10.33 4 WARRANT DATED APRIL 14, 2000 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 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 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 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 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 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 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 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.) EX-10.34 5 WARRANT DATED APRIL 14, 2000 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 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 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 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 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 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 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 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.) EX-10.35 6 WARRANT DATED APRIL 14, 2000 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. (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 (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 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 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 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 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 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.) EX-10.36 7 AMENDMENT TO LOAN DOCUMENTS DATED APRIL 14, 2000 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- 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- 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- EX-10.37 8 REVOLVING NOTE DATED APRIL4, 2000 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 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 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 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 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 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 Schedule of Advances --------------------
Amount Amount of Unpaid of Principal Principal Notation Date Advance Paid or Repaid Balance made by - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- -------- - ------ ------- -------------- --------- --------
7 EX-10.38 9 REIMBURSEMENT AND SECURITY AGMT DATED 4/14/00 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. "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- 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- 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- 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- 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- 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- (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- 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- 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- 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- 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- 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- 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- EX-10.39 10 AMENDMENT NO. 1 TO DISTRIBUTION AGMT DATED7/1/99 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 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- 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- EX-23.1 11 CONSENT OF ARTHUR ANDERSEN 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 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 399 0 2,597 22,209 6,057 51,385 16,848 (12,623) 56,936 59,007 0 0 0 30 (2,392) 56,936 93,266 101,930 61,103 61,103 77,102 25,187 (3,640) (36,275) (5,410) (41,685) 0 0 0 (41,685) 1.86 1.86
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