-----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, EjTw7CRN6UP9FLIwe+KskWQA5cC5mgor112MvFrDU00Se5nSfrcT/SE31Pm4kg9W jbQxgkauED06Q1bWhJb6CQ== 0000898430-01-502257.txt : 20010903 0000898430-01-502257.hdr.sgml : 20010903 ACCESSION NUMBER: 0000898430-01-502257 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010831 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24363 FILM NUMBER: 1729862 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-K/A 1 d10ka.txt FORM 10-K/A Securities and Exchange Commission Washington, DC 20549 FORM 10-K/A (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year ended December 31, 2000 OR [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-24363 INTERPLAY ENTERTAINMENT CORP. (Exact name of Registrant as specified in its charter) ___________________________ Delaware 33-0102707 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 16815 Von Karman Avenue, Irvine, California 92606 (Address of principal executive offices) Registrant's telephone number, including area code: (949) 553-6655 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) ___________________________ 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. [_] As of August 13, 2001, 44,980,708 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 $21,752,670. DOCUMENTS INCORPORATED BY REFERENCE None. AMENDMENT NO. 2 TO THE ANNUAL REPORT ON FORM 10-K FILED BY INTERPLAY ENTERTAINMENT CORP. ON APRIL 17, 2001, AS AMENDED ON APRIL 30, 2001. The following Items amend the Annual Report on Form 10-K filed by Interplay Entertainment Corp. (the "Company") on April 17, 2001, as amended by Form 10-K/A on April 30, 2001 (the "Form 10-K"), as permitted by rules and regulations promulgated by the Securities Exchange Commission. That Form 10-K is hereby amended and restated to insert those Items as set forth herein. All capitalized terms used herein but not defined shall have the meanings ascribed to them in the Form 10-K. 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 publishing and distribution business by developing interactive entertainment software for PCs and current and next generation video game consoles, such as the Sony PlayStation and PlayStation 2, Microsoft Xbox and Nintendo GameCube. 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 Advanced Dungeons and Dragons, Matrix, Star Trek and Caesars Palace, for incorporation into certain of its products. Of the more than 20 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 2 sales and marketing personnel and is distributing substantially all of the Company's titles in Europe, CIS, Africa and the Middle East. As part of the terms of the April 2001 settlement between Virgin and the Company, VIE Acquisition Group LLC ("VIE") redeemed the Company's membership interest in VIE. See "Business--Sales and 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 2000 with Titus Interactive S.A. ("Titus"), a significant shareholder, 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 approximately $55 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Performance--Control by Titus". In April 2001, the Company completed a private placement of 8,126,770 shares of Common Stock for $12.7 million, and received net proceeds of approximately $11.5 million. 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. 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 Microsoft Windows, and for video game consoles such as the Sony PlayStation and PlayStation 2. The Company also develops and has plans to publish products for the Microsoft Xbox and Nintendo GameCube video game consoles, which are scheduled for release in the latter part of 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. 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, changes 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, Microsoft and Nintendo pursuant to which the Company has the right to develop, sublicense, publish, and distribute products for the licensor's respective platforms in specified territories. In certain cases, 3 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, including 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 internal development studios, its subsidiary Shiny Entertainment Inc. ("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." During the years ended December 31, 2000, 1999 and 1998, the Company spent $22.2 million, $20.6 million and $24.5 million, respectively, on product research and development activities. Those amounts represented 21.2%, 20.2% and 19.3%, 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, 2000. Once a design is selected by the Company, a production team, development schedule and 4 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 and video compression for the production and development of its interactive entertainment software titles. The Company's internal development organization is divided into separate studios, 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 studio, 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 the separate studios 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 separate studios 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 in development under the Matrix license. The Company plans to publish and distribute this title worldwide under the Shiny label. Shiny's development group consisted of approximately 24 people at December 31, 2000. International Development. The Company has international development resources through its European subsidiary, Interplay Productions Limited ("Interplay Europe"), whose software producers manage the efforts of third party developers in various European countries. The Company currently has several original products, under development through Interplay Europe. Interplay Europe's development group consisted of approximately 3 people at December 31, 2000. External Product Development In order to expand its product offerings to include hit titles created by third party developers, and to leverage its publishing 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. As part of the April 2001 settlement between Virgin and the Company, the Product Publishing Agreement was amended to provide for the Company to publish only one future title developed by Virgin. In the years ended December 31, 2000, 1999 and 1998, approximately 70%, 75% and 70%, 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 5 territory). The Company typically funds external development through the payment of advances upon the completion of milestones, which advances are credited against royalties based on sales of the products. Further, the Company's publishing arrangements typically provide the Company with ownership of the trademarks relating to the product as well as exclusive rights to sequels to the product. The Company manages the production of external development projects by appointing a producer from one of its internal product development studios to oversee the development process 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 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, to control product placement and to increase the penetration of the Company's products in domestic and international markets. Over the past several years, the Company has increased its sales and distribution efforts in international markets through the formation of Interplay Europe, through the Virgin Distribution Agreement covering Europe, CIS, Africa and the Middle East, 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, as well as 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, through catalogs and through 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, K-Mart, Target, Toys-r-us and Software Acquisitions (Babbages). The Company's principal distributors in North America include Navarre and Softek. 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 place the Company's products in the appropriate channels for distribution. 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 period are substantially dependent on orders received in that period. Any 6 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 achieve or 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 cycle. Although the product life cycle for each title varies based on a number of factors, including the quality of the title, the number and quality of competing titles, and in certain instances seasonality, the Company typically considers a title to be "back catalog" item 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 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 people 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% and 9.6% of the Company's net revenues in the years ended December 31, 1999 and 1998, 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 as amended, the Company pays Virgin a distribution fee for its marketing and distribution of the Company's products, as well as certain direct costs and expenses. The Company also grants Virgin the near exclusive right to distribute our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. The Company believes that the prices charged to Virgin are comparable to the prices that the Company could charge an unaffiliated third party distributor in the territories in which Virgin has distribution rights. As part of the April 2001 settlement between Virgin and the Company, VIE redeemed the Company's membership interest in VIE. 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. 7 In July 1997, the Company initiated a licensing strategy in Japan in order to expand its Japanese sales. The Company has also licensed a number of its titles to Sony Computer Entertainment to publish in Japan on the PlayStation console. The Company has entered into an agreement with Tech Pacific Australia Pty Ltd ("Tech Pacific") in 2000 and terminated its agreement with Roadshow Entertainment Pty. Ltd.("Roadshow"), pursuant to which Tech Pacific has the exclusive right to sell and distribute the Company's ongoing PC and video game console products in Australia. The Company has an agreement with Roadshow to market and distribute its PC and video game console products in New Zealand. OEM. Interplay OEM employs approximately 22 people, including 6 in Europe and one in Singapore, 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, 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, Fox Interactive, Virgin, Gathering of Developers, Rage Software, MacPlay and Titus. Interplay OEM's hardware customers include many of the industry's largest computer and peripheral manufacturers including IBM, Compaq, Packard Bell/NEC, Creative Labs, Pioneer Electronics, Canon, Dell and Logitech. OEM devotes four employees to modifying existing products into suitable OEM products. In 2000, Interplay OEM launched a new division, bundledirect.com, which sells fixed bundle packs to Value-Added Resellers and System Builders. Interplay OEM 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 8 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 certain distribution channels. The Company's reserve for estimated returns, exchanges, markdowns, price concessions, and warranty costs was $6.5 million and $9.2 million at December 31, 2000 and 1999, 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 product development studios and Shiny to promote a focused marketing strategy and brand image for each studio. Integrated into these product groups are public relations for each studio. In addition, the marketing department has four functional groups (web department, event coordination, creative services and advertising) that support the 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 also sends direct and electronic mail promotional materials to its database of gamers, and has selectively used radio and television advertisements in connection with the introduction of certain of its products. The Company budgets a portion of each product's sales for cooperative advertising and market development funds with retailers. Every title and brand is launched with a multi-tiered marketing campaign that is developed on an individual basis to promote product awareness and customer pre-orders. The Company anticipates that over time, as the market for its products matures and competition becomes more intense, it will become necessary to devote more overall resources to marketing its products but marketing costs for its products 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 9 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., Take Two Interactive Software Inc, THQ Inc., The 3DO Company, Eidos PLC, Infogrames Entertainment, Activision, Inc., Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc., Acclaim Entertainment, Inc., Vivendi Universal Interactive Publishing and Ubi Soft Entertainment Inc. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Microsoft Corporation, 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." Manufacturing The Company's PC-based products consist primarily of CD-ROMs and DVDs, manuals, and packaging materials. Substantially all of the Company's CD-ROM and DVDs duplication is performed by unaffiliated third parties. Printing of the manuals and packaging materials, 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 manufactures and ships finished products that are compatible with its video game consoles to the Company for distribution. PlayStation 2 products consist of DVDs and PlayStation products consist of CD- ROMs. Both products include manuals and 10 packaging and are typically delivered by Sony Computer Entertainment within a relatively short lead-time. If the Company experiences unanticipated delays in the delivery of manufactured software products by the manufacturers, its net sales and operating results could be materially adversely affected. 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--Dependence on Third Party Software Developers." 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 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. 11 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, 2000, the Company had 413 employees, including 241 in product development, 102 in sales and marketing and 70 in finance, general and administrative. Included in these counts are 27 employees of Shiny, 22 employees of Interplay OEM and 7 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. 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, 2000, 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, 1999 High Low ------------------------------------ ---- --- First Quarter................................. $3.00 $1.69 Second Quarter................................ 2.63 1.88 12 Third Quarter................................. 2.94 2.00 Fourth Quarter................................ 4.44 1.56 For the Year ended December 31, 2000 High Low ------------------------------------ ---- --- First Quarter................................ $4.50 $2.91 Second Quarter............................... 3.31 1.75 Third Quarter................................ 3.81 2.25 Fourth Quarter............................... 4.00 2.56 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 credit agreement with a bank 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, 2000 involving sales of the Company's securities that were not registered under the Securities Act: In April 2000, the Company issued 719,424 shares of Series A Preferred Stock to Titus Interactive S.A., an accredited investor, for $20 million in a transaction that included the issuance of warrants to Titus to purchase up to 500,000 shares of Common Stock at $3.79 per share. These shares and warrants were issued in reliance upon the exemption provided by Section 4(2) and/or Rule 506 of the Securities Act. In April 2001, the Company sold 8,126,770 shares of its Common Stock to 26 accredited investors for $12.7 million, and received net proceeds of approximately $11.5 million. The shares were issued at $1.5625 per share, and included warrants to purchase one share of Common Stock for each share purchased. The warrants are exercisable at $1.75 per share, and one-half of the warrants can be exercised immediately with the other half exercisable after June 27, 2001, if (and only if) the closing price of the Company's Common Stock as reported on Nasdaq does not equal or exceed $2.75 for 20 consecutive trading days prior to June 27, 2001. The Company may also require the holder to exercise the warrants if the closing price of the Company's common stock as reported on Nasdaq equals or exceeds $3.00 for 20 consecutive trading days prior to June 27, 2001. The warrants expire in March 2006. The transaction provides for a registration statement covering the shares sold or issuable upon exercise of such warrants to be filed by April 16, 2001 and become effective by May 31, 2001. In addition, because we have not yet registered the shares issued in the private placement, the Company has, as of August 1, 2001, an accrued obligation to pay the private placement investors an aggregate amount of $517,120 in cash, payable on demand. This obligation will continue to accrue at approximately $250,000 each month that the Company does not register the shares. There is no cap on the penalty due to the Company's failure to register such shares. In the event that the filing and effective dates of the registration statement are not met, the Company is subject to a two percent penalty per month, payable in cash or stock, until the filing and effective 13 dates are met. These shares were sold in reliance on Rule 506 and/or Section 4(2) of the Securities Act. On August 13, 2001, Titus, converted 336,070 shares of Series A Preferred Stock of the Company into 6,679,306 shares of Common Stock. After the conversion, Titus owns approximately 19,496,561 shares of Common Stock, which constitutes approximately 43 percent of the total outstanding common stock of the Company. In addition, Titus holds a remaining 383,354 shares of Series A Preferred Stock, which, depending upon the conversion ratio, upon conversion most likely would result in Titus owning a majority of the Company's issued and outstanding shares of Common Stock. Titus did not pay any additional consideration for the Common Stock issued upon conversion of the Series A preferred stock. The issuance of the Common Stock upon conversion of the Series A Preferred Stock was made in reliance upon the exemption provided by Section 4(2) and/or Rule 506 of the Securities Act. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the Consolidated Financial Statements and notes thereto and other information included or incorporated by reference herein. General We derive 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, and from direct sales to end-users through our catalogs and the Internet. We also derive 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. We record revenues when we deliver products 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, we recognize revenue at the delivery of the product master or the first copy. We recognize per copy royalties on sales that exceed the guarantee as copies are duplicated. We generally are not contractually obligated to accept returns, except for defective, shelf-worn and damaged products. However, on a case-by-case negotiated basis, we permit customers to return or exchange product and may provide price concessions to our retail distribution customers on unsold or slow moving products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," we record revenue net of a provision for estimated returns, exchanges, markdowns, price concessions, and warranty costs. We record such reserves 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 provided in the accompanying consolidated financial statements. We provide customer support only via telephone and the Internet. Customer support costs are not material and we charge such costs to expenses as we incur them. In order to expand our distribution channels and engage in software development in overseas markets, in 1995 we established operations in the United Kingdom and in 1997, we initiated a 14 licensing strategy in Japan. In February 1999, we undertook a restructuring of our operations in the United Kingdom that included our investment in VIE Acquisition Group LLC, or VIE. In connection with our investment in VIE, we entered into an exclusive distribution agreement with Virgin Entertainment Interactive Limited, or Virgin, an entity controlled by VIE, and integrated our distribution operations with Virgin, which substantially reduced our sales and marketing personnel in Europe. As part of an April 2001 settlement between us and Virgin, VIE redeemed our LLC membership interest in VIE. Pursuant to such settlement, we agreed to assume responsibility for marketing functions in Europe. We also maintain European OEM and product development operations. International net revenues accounted for approximately 33.5% of our net revenues for the year ended December 31, 2000, 29.7% of our net revenues for the year ended December 31, 1999, and 28.2% of our net revenues for the year ended December 31, 1998. In January 1997, we formed a wholly-owned subsidiary, Interplay OEM, which had previously operated as a division of ours. Interplay OEM distributes our interactive entertainment software titles, as well as those of other software publishers, to computer and peripheral device manufacturers for use in bundling arrangements. During 2000, Interplay OEM expanded its bundling arrangements into the non-Information Technology marketplace and created a division named bundledirect.com, which transacts with value-added resellers and system builders. We also derive net revenues from the licensing of intellectual property and products to third parties for distribution in markets and through channels that are outside of our primary focus. OEM, royalty and licensing net revenues collectively accounted for net revenues of 12.5% for the year ended December 31, 2000, 21.8% for the year ended December 31, 1999, and 13.6% for the year ended December 31, 1998. OEM, royalty and licensing net revenues generally are incremental net revenues and do not have significant additional product development or sales and marketing costs, and accordingly do not have a significant impact on our operating losses. Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers. Cost of goods sold related to royalty-based net revenues primarily represents third party licensing fees and royalties paid by us. 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 video game console and affiliate label products. We also include in the cost of goods sold amortization of prepaid royalty and license fees we pay to third party software developers. We expense prepaid royalties over a period of six months commencing with the initial shipment of the title at a rate based upon the numbers of units shipped. We evaluate the likelihood of future realization of prepaid royalties quarterly, on a product-by-product basis, and charge the cost of goods sold for any amounts that we deem unlikely to realize through future product sales. For the year ended December 31, 2000, our net loss was $12.1 million. Our results from operations were adversely affected by several factors. The interactive entertainment software industry experienced lower prices for titles, especially with current generation video console platforms, such as Sony PlayStation and Nintendo N64. Sony introduced the PlayStation 2 in October 2000 but did not ship the number of units it originally forecasted. In addition, the sales of personal computers decreased for the year ended December 31, 2000 as compared to the same period in 1999. As a result of these factors, we experienced lower unit sales volume than we expected. We expect our unit sales volumes on next generation video console platforms to increase and our unit sales volume on personal computer platforms to remain relatively constant in the 12 months ended December 31, 2001 as compared to the same period in 2000. 15 Our operating results have fluctuated significantly in the past and likely will 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 our control. We cannot assure you that we will be profitable in any particular period. 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. 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." Results of Operations The following table sets forth consolidated statements of operations data and segment and platform data for the periods indicated expressed as a percentage of net revenues: Year Ended December 31 ------------------------ 2000 1999 1998 ------ ------ ------ STATEMENTS OF OPERATIONS DATA: Net revenues 100.0% 100.0% 100.0% Cost of goods sold 51.7 59.9 56.7 ------ ------ ------ Gross margin 48.3 40.1 43.3 Operating expenses: Marketing and sales 25.3 31.8 31.1 General and administrative 9.8 15.0 10.1 Product development 21.2 20.2 19.3 Other -- 5.2 -- ------ ------ ------ Total operating expenses 56.3 72.2 60.5 ------ ------ ------ Operating loss (8.0) (32.1) (17.2) Other expense (3.5) (3.4) (3.9) ------ ------ ------ Loss before income taxes (11.5) (35.5) (21.1) Provision for income taxes -- 5.3 1.1 ------ ------ ------ Net loss (11.5)% (40.8)% (22.2)% ====== ====== ====== SELECTED OPERATING DATA: Net revenues by segment: North America 54.0% 48.5% 58.2% International 33.5 29.7 28.2 OEM, royalty and licensing 12.5 21.8 13.6 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== Net revenues by platform: Personal computer 73.5% 64.1% 53.1% Video game console 14.0 14.1 33.3 OEM, royalty and licensing 12.5 21.8 13.6 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== 16 YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 North American, International and OEM, Royalty and Licensing Net Revenues Overall net revenues for the year ended December 31, 2000 increased 3 percent compared to the same period in 1999. This increase resulted from a 14 percent increase in North American net revenues and a 16 percent increase in International net revenues, offset by a 41 percent decrease in OEM, royalties and licensing, as described below. The increase in North American and International net revenues for the year ended December 31, 2000 was mainly because the titles released this year generated $5.7 million more sales volume and because of a decrease by $6.1 million in product returns and price concessions compared to 1999. Our efforts to focus on product planning and release fewer, but higher quality titles resulted in five fewer title releases across multiple platforms this year as compared to last year. We expect that North American and International publishing net revenues in 2001 will increase compared to 2000. The decrease in OEM, royalty and licensing net revenues in the year ended December 31, 2000 compared to the same period in 1999 was due to decreased net revenues in the OEM business and in licensing transactions. The $5.1 million decrease in the OEM business was primarily due to a decrease in the volume of transactions which relates to the general market decrease in personal computer sales, and the decrease in licensing transactions is primarily due to the recognition of $2.3 million of deferred revenue for the shipment of a major title to a customer in 1999 without a comparable transaction in 2000. We expect that OEM, royalty and licensing net revenues in 2001 will increase compared to 2000. Platform Net Revenues PC net revenues increased 18 percent during the year ended December 31, 2000 compared to the same period in 1999 primarily due to the release of seven major hit titles such as Star Trek Klingon Academy, Icewind Dale, Sacrifice, Baldur's Gate II, Giants, Star Trek StarFleet Command II and Star Trek New Worlds, compared to six major hit titles released in 1999. In addition, we continue to experience strong sales from Baldur's Gate and Baldur's Gate: Tales of the Sword Coast, both of which were released prior to 2000. The increase in PC net revenues was partially offset by our release of 18 titles in 2000 compared to 28 titles in 1999. We expect our PC net revenues to decrease in 2001 due to our increased focus on next generation console titles. Video game console net revenues increased 2 percent in the year ended December 31, 2000 compared to the same period in 1999, due to higher unit sales of our major console title releases, partially offset by approximately 10 percent lower price points for current generation console titles. We released four major video game console titles in 2000, including MDK 2 (Dreamcast), Gekido (PlayStation), Caesar's Palace 2000 (PlayStation) and Wild Wild Racing (PlayStation 2), compared to three major video game console titles released in 1999. We expect our video game console net revenues to increase in 2001 as a result of a substantial increase in planned major title releases for new generation game consoles in 2001 compared to 2000. 17 Cost of Goods Sold; Gross Margin Cost of goods sold decreased 12 percent in the year ended December 31, 2000 compared to the same period in 1999, due to releasing a higher percentage of internally developed titles and the discontinuation of the affiliate label distribution business that typically has a higher cost of goods component relative to net sales. The 1999 period also reflects $1.7 million of non- recurring write-offs of prepaid royalties relating to titles that had been canceled mainly due to our discontinuation of our licensed sports product line during 1999. We expect our cost of goods sold to increase in 2001 as compared to 2000 due to an expected higher net revenues base from the planned release of more major next generation game console titles in the 2001 period. The 24 percent increase in gross profit margin was primarily due to a 33 percent increase in internally developed titles sold without a royalty component in cost of goods sold, and a 25 percent decrease in product returns and price concessions compared to the 1999 period. We expect our future gross profit margin to decrease in 2001 as compared to 2000 due to an increase in next generation video game console title releases, which typically have a higher cost of goods relative to net revenues. However, we expect a higher dollar gross profit on an increased net revenue base in 2001 compared to 2000. Marketing and Sales Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses. The 10 percent decrease in marketing and sales expenses for the year ended December 31, 2000 compared to the 1999 period is attributable primarily to a $1.3 million decrease in personnel costs and a $0.5 million decrease in advertising and retail marketing support expenditures. In addition, we amended our International Distribution Agreement with Virgin Interactive Entertainment Limited, or Virgin, effective January 1, 2000, which eliminated the fixed monthly overhead fees of approximately $2.3 million we incurred in the 1999 period. We expect our marketing and sales expenses to remain about the same in 2001 compared to 2000, due to continued planned decreases in advertising and retail marketing support expenditures and lower personnel costs, offset by the $1.3 million in overhead fees payable to Virgin in 2001 to be incurred in connection with the terms of our April 2001 settlement with Virgin. 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. The 44 percent decrease in general and administrative expenses for the year ended December 31, 2000 compared to the same period in 1999 is primarily attributable to a $6.6 million decrease in bad debt expense and a $1.1 million decrease in personnel costs. We are continuing our efforts to reduce North American operating expenses and expect our general and administrative expenses to decrease in 2001 compared to 2000. Product Development We charge product development expenses, which consist primarily of personnel and support costs, to operations in the period incurred. The 8 percent increase in product development expenses for the year ended December 31, 2000 compared to the same period in 1999 is due to a $1.5 million increase in expenditures devoted to our focus on developing next generation video game console 18 platforms. We expect our product development expenses to remain approximately constant in absolute dollars in 2001 compared to 2000. Other Operating Expense Other operating expenses are one-time and non-recurring expenses associated with our operations in 1999. During the year ended December 31, 2000, we did not incur any other operating expenses. Other operating expenses of $5.3 million for the year ended December 31, 1999 were due to a provision of $1.6 million for estimated asset valuation and restructuring charges in connection with the reductions in our European operations, $2.9 million for minimum operating charges payable to Virgin which did not repeat in 2000, and $0.8 million charge for severance expense due to the departure of two of our former executives during the year ended December 31, 1999. Other Expense, Net Other expense consists primarily of interest expense on our lines of credit and foreign currency exchange transaction losses. The 6 percent decrease for the year ended December 31, 2000 compared to the same period in 1999 was due to a $0.6 million decrease in interest expense on lower average borrowings under our line of credit, partially by $0.7 million in foreign currency exchange transaction losses incurred in connection with European distribution activities. Provision (Benefit) for Income Taxes We did not record a tax provision for the year ended December 31, 2000, compared with a tax provision of $5.4 million for the year ended December 31, 1999. The tax provision recorded during 1999 represents an increase to the valuation allowance on the deferred tax asset due to the uncertainty of realization of the deferred tax asset in future periods. We have a deferred tax asset of approximately $39 million that has been fully reserved at December 31, 2000. This tax asset would reduce future provisions for income taxes and related tax liabilities when realized, subject to limitations. YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 North American, International and OEM, Royalty and Licensing Net Revenues Overall net revenues for the year ended December 31, 1999 decreased 20 percent compared to the same period in 1998. This decrease resulted from a 33 percent decrease in North American net revenues and a 15 percent decrease in International net revenues, offset by a 29 percent increase in OEM, royalties and licensing, as described below. The decrease in North American and International net revenues for the year ended December 31, 1999 was due primarily to the release of four fewer major titles across multiple platforms and the resulting $46.9 million decrease in sales volume in the 1999 period. OEM, royalty and licensing net revenues increased $5.0 million in the year ended December 31, 1999 compared to the same period in 1998 due to a $1.8 million increase in net revenues in the OEM business and a $3.2 million increase in net revenues in licensing. 19 Platform Net Revenues PC net revenues decreased 3 percent in the year ended December 31, 1999 compared to the same period in 1998 due to the release of four fewer titles overall, including one less major title, offset by continued sales of Baldur's Gate. We released six new major titles in 1999, such as Baldur's Gate: Tales of the Sword Coast, Descent 3, Freespace 2, Kingpin, Starfleet Command and Torment, compared to seven new major titles in 1998. Video game console net revenues decreased 66 percent in the year ended December 31, 1999 compared to the same period in 1998 due to our release of three fewer major titles. Major console title releases in the 1999 period included Baseball 2000 (PlayStation), Caesar's Palace II (Game Boy Color) and Incoming (Dreamcast). Cost of Goods Sold; Gross Margin Cost of goods sold decreased 15 percent in the year ended December 31, 1999 compared to the same period in 1998 due to a 20 percent decrease in net revenues, which may have a higher cost of goods sold, and a shift in product mix. Video game console revenues, comprised 14 percent of total net revenues in 1999 compared to 33 percent in 1998. The decrease in cost of goods sold was offset by $1.7 million write-offs of prepaid royalties relating to titles that we canceled due to our discontinuation of our licensed sports product line. The 26 percent decrease in gross margin was due primarily to a high level of product returns and price concessions attributable to the inability of some of our titles to gain broad, market acceptance from customers, which reduced net sales substantially. 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 25 percent in the year ended December 31, 1999 compared to the same period in 1998. The decrease is attributable primarily to a $7.4 million decrease in advertising, specifically television advertising, and other marketing costs associated with fewer major titles released during the 1999 period. In addition, we reduced personnel and commission expense by $2.5 million in connection with the restructuring of European operations, including the new distribution arrangements we made with Virgin starting in February 1999. 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 41 percent in the year ended December 31, 1999 compared to the same period in 1998. The increase is attributable primarily to a provision for bad debt expense of $6.9 million in 1999 in response to, among other things, the deteriorating financial condition of some of our customers, which placed serious doubts on their ability and intent to pay. General and administrative expenses other than bad debt expense decreased $1.6 million in the 1999 period. This decrease is due primarily to the reorganization of our European operations and successful efforts to reduce North American general and administrative expenses. 20 Product Development We charge product development expenses, which consist primarily of personnel and support costs, to operations in the period incurred. Product development expenses decreased 16 percent in the year ended December 31, 1999 compared to the same period in 1998. The decrease is due to a $3.8 million reduction in expense achieved as a result of the reorganization of the development process. Other Operating Expense Other operating expenses are one-time and non-recurring expenses associated with our operations 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. We incurred charges primarily in connection with restructuring the European operations, including establishing the new distribution arrangements in Europe whereby Virgin replaced our third party distribution arrangements and we 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, we recorded a $2.9 million provision for minimum operating charges payable to Virgin. Other Income (Expense) Other income (expense) primarily consists of interest expense on our line of credit. Other expense decreased in the year ended December 31, 1999 compared to the same period in 1998. This decrease was due primarily to decreased interest expense of $1 million on lower borrowings under our line of credit and the repayment of the Subordinated Secured Promissory Notes in June 1998. We repaid these borrowings with the proceeds of our initial public offering in June 1998 and the equity investments by Titus Interactive, S.A. in 1999. Provision (Benefit) for Income Taxes We recorded a tax provision of $5.4 million in the year ended December 31, 1999, compared with a tax provision of $1.4 million in the year ended December 31, 1998. 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. At the end of 1999, we had fully reserved for all deferred tax assets. Liquidity and Capital Resources We have funded our 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 our initial public offering, from the proceeds from licensing agreements, and from operations. As of December 31, 2000 our principal sources of liquidity included cash of $2.8 million and our line of credit that expired on April 30, 2001. In addition, $4 million was available under on our supplemental line of credit with Titus. In April 2001, we repaid all amounts outstanding on the Titus line of credit and terminated the line of credit. 21 In April 2001, we secured a new working capital line of credit from a bank and repaid all amounts outstanding on our former line of credit and supplemental line of credit. These lines of credit were terminated upon full payment. Our new working capital line of credit line bears interest at the bank's prime rate, or, at our option, a portion of the outstanding balance bears interest at LIBOR plus 2.5%, for a fixed short-term. At June 30, 2001, borrowings under the new working capital line of credit bore interest at various interest rates between 6.39 percent and 7 percent. Our new line of credit provides for borrowings and letters of credit of up to $15 million based in part upon qualifying receivables and inventory. Under the new line of credit the Company is required to maintain a $2 million personal guarantee by the Company's Chairman and Chief Executive Officer ("Chairman"). The new line of credit has a term of three years, subject to review and renewal by the bank on April 30 of each subsequent year. As of June 30, 2001, we are not in compliance with the financial covenants under the new line of credit pertaining to net worth and minimum earnings before interest, taxes, depreciation and amortization. If the bank does not waive compliance with the required covenants under the credit agreement, the bank could terminate the credit agreement and accelerate payment of all outstanding amounts. Because we depend on this credit agreement to fund our operations, the bank's termination of the credit agreement could cause material harm to our business, including our ability to continue as a going concern. In addition, in April 2001, we completed a private placement of 8,126,770 shares of Common Stock for $12.7 million, and received net proceeds of approximately $11.9 million. The shares were issued at $1.5625 per share, and included warrants to purchase one share of Common Stock for each share sold. The warrants are exercisable at $1.75 per share, and the warrants can be exercised immediately. The warrants expire in March 2006. The transaction provides for a registration statement covering the shares sold or issuable upon exercise of such warrants to be filed by April 16, 2001 and become effective by May 31, 2001. In the event that the agreed effective date of the registration statement is not met, we are subject to a two percent penalty per month, payable in cash, until the registration statement is effective. We did not meet the effective date of the registration statement and we are incurring a monthly penalty of $254,000, payable in cash, until the effectiveness of the registration. This obligation will continue to accrue each month that the registration statement is not declared effective and does not have a limit on the amount payable to these investors. Because this payment is cumulative, this obligation could have a material adverse effect on our financial condition. Moreover, we may be unable to pay the total penalty due to the investors. In April 2001, our Chairman provided us with a $3 million loan, payable in May 2002, with interest at 10 percent. In connection with this loan to us and the $2 million guarantee he provided under the new line of credit from a bank, the Chairman received warrants to purchase 500,000 shares of our Common Stock at $1.75 per share, vesting upon issuance and expiring in April 2004. Our primary capital needs historically have been to fund working capital requirements necessary to fund our net losses, our 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. 22 Our operating activities used cash of $23.2 million during the year ended December 31, 2000, primarily attributable to the $12.1 million net loss for the year, a $5.9 million increase in trade receivables, and a $12.1 million decrease in accounts payable and accrued liabilities, partially offset by a $2.7 million decrease in inventory. The increase in trade receivables at December 31, 2000 compared to December 31, 1999 was due to a $3.5 million increase in sales during the fourth quarter of 2000 compared to the same quarter in 1999 and a $2.6 million decrease in allowances for doubtful trade accounts receivable. We believe that our allowances for doubtful accounts receivable are adequate based on historical experience, and our current estimate of potential sales allowances and doubtful accounts. The decrease in accounts payable and accrued liabilities is due to increased borrowings under our line of credit and collections of increased trade receivables, along with reductions to these liabilities, which resulted from overall decreases in the related operating expenditures. The decrease in inventory is due to successful efforts to manage inventory, which reduced purchasing lead times and improved inventory turns. Cash provided by financing activities of $28.9 million for the year ended December 31, 2000 consisted primarily of the proceeds from the equity investments by Titus, borrowings on our line of credit and the release of restricted cash by the our senior creditor. Cash used in investing activities of $3.2 million for the year ended December 31, 2000 consisted of normal capital expenditures, primarily for office and computer equipment used in our operations. We do not currently have any material commitments with respect to any future capital expenditures. We have incurred significant net losses in recent periods, including losses of $12.1 million during fiscal 2000 and $41.7 million during fiscal 1999. These losses are due in part to the high fixed costs to developing our products, to the relatively short life cycle and limited period for sales of our products, and to failure of game console manufactures to timely introduce their products which use our software. To reduce our working capital needs, we have implemented various measures including a reduction of personnel, a reduction of fixed overhead commitments, and a scaling back of marketing programs. We will continue to pursue various alternatives to improve future operating results, including further expense reductions as long as they do not have an adverse impact on our ability to develop, market and sell successful new interactive entertainment software. We believe that funds available under our new line of credit, amounts received from the equity financings transactions discussed above, amounts to be received under various product license and distribution agreements and anticipated funds from operations will be sufficient to satisfy our short-term capital and commitments in the normal course of business at least through December 31, 2001. Our long-term capital commitments consist of lease commitments and potential loss contingencies. Historically, we have funded these requirements from normal operating cash flows and available balances from the existing line of credit. Should these funds be insufficient, additional funding may not be available or may only be available on unfavorable terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Performance - Liquidity, Future Capital Requirements." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's Consolidated Financial Statements begin on page F-1 of this report. We do not have any derivative financial instruments as of December 31, 2000. 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 23 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 The table below provides information as of December 31, 2000 about our other financial instruments that are sensitive to changes in interest rates. Working Capital Line of Credit (Variable Rate) Amount borrowed at December 31, 2000 $24.4 million Maximum amount of Line $25 million (1) Variable interest rate 11.65% (2) Expiration April 30, 2001 (3) (1) Within the total credit limit, we may borrow up to $7 million in excess of our borrowing base, which is based on qualifying receivables and inventory. (2) Borrowings bear interest at LIBOR plus 4.87 percent. (3) In April 2001 we replaced our existing line of credit with a new three year loan and security agreement with a bank providing for a $15 million working capital line of credit. Advances under the line are limited to an advance formula of qualified accounts receivable and inventory and bear interest at the banks prime rate, or at LIBOR plus 2.5 percent at our option. 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 foreign receivables, primarily from Virgin. We recognized losses of $935,000, $125,000 and $288,000 during the years ended December 31, 2000, 1999 and 1998, respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable from Virgin. Based upon the average foreign currency rates for the year ended December 31, 2000, a hypothetical 10 percent change in the applicable foreign exchange rates would have increased our loss by approximately $94,000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions With Fargo In March 2000, the Company entered into a Film Production Joint Venture Agreement with Mr. Fargo under which Mr. Fargo will provide up to $1.0 million to fund the marketing of certain of the Company's game concepts, characters and trademarks as motion picture projects. Under the terms of the Film Production Joint Venture Agreement, net profits that the venture generates from the Company's properties would be allocated first to reimburse Mr. Fargo for the amount of his contributions, and then to the Company. In addition, certain intellectual properties owned by Mr. Fargo may be marketed by the venture. Any net profits that the venture generates from Fargo properties will be allocated to Mr. Fargo. 24 In April 2000, the Company entered into a joint venture agreement with Mr. Fargo pursuant to which each of Interplay and Mr. Fargo will contribute up to $1 million each, as well as licenses for intellectual property suitable for development as film projects. During fiscal 2000, Mr. Fargo contributed $$360,000 to the joint venture. The contributions of up to $1 million value each will be at each party's discretion. Proceeds from the joint venture, if any, will be allocated to each party in accordance with its capital contributions and then to the party contributing the intellectual property that generated the proceeds. In April 2001, the Company borrowed $3 million from Mr. Fargo for the purpose of repaying the outstanding balance on its line of credit from Titus. The Fargo loan is for a term of one year, bears interest at an annual rate of 10%, and is otherwise subject to the terms of a Secured Promissory Note and a Security Agreement with Mr. Fargo, both dated April 12, 2001. Also in April 2001, Mr. Fargo gave a $2 million personal guaranty of the Company's line of credit from LaSalle Business Credit, Inc. In consideration for the loan and guaranty, the Company issued to Mr. Fargo a three-year Warrant for 500,000 shares of the Company's Common Stock, exercisable at $1.75 per share. In connection with an acquisition of the Company's stock by Universal Studios, Inc. in 1994, the Company's Board of Directors awarded Mr. Fargo a bonus of $1 million. Mr. Fargo deferred payment of the bonus, and there is currently a remaining unpaid balance of $282,000. Transactions with Titus and Fargo In March 1999, the Company entered into a Stock Purchase Agreement with Titus Interactive SA and Brian Fargo (the "Titus I Agreement"). Under the terms of the Titus I Agreement, the Company issued Two Million Five Hundred Thousand (2,500,000) shares of its common stock to Titus in exchange for consideration of Ten Million Dollars ($10,000,000). Pursuant to the terms of the Stock Purchase Agreement, the purchase price was recalculated based on the average closing price per share of the Company's common stock as reported by Nasdaq during the ten trading days ended June 30, 2000 and the purchase price was recalculated again based on the average closing price per share of the Company's common stock as reported by Nasdaq during the ten trading days ending August 20, 2000. Pursuant to the June 30, 2000, adjustment, the Company issued to Titus 1,161,771 additional shares of common stock without additional consideration, for a total of 3,661,771 shares, and issued to Titus a promissory note in the principal amount of $1,120,202.90, bearing interest at the rate of 10% per annum and due January 1, 2000. As a result of the August 1999 recalculation, and following stockholder approval of the transaction, the purchase price was adjusted to $2.20, and the number of shares of common stock to be issued under the Titus I Agreement was adjusted to 4,545,455. In August 2000, the Company issued to Titus the remaining 883,684 shares of common stock, and Titus cancelled the June 1999 promissory note. In May 1999 the Company signed a letter of intent with Titus pursuant to which Titus loaned the Company $5,000,000 and the Company and Titus agreed to negotiate certain additional transactions. Pursuant thereto, on July 19, 1999, the Company and Titus entered into a Stock Purchase Agreement (the "Titus II Agreement") providing for the sale and issuance of Six Million Two Hundred Fifty Thousand (6,250,000) shares of Company's common stock to Titus in exchange for total consideration of $25,000,000, including the $5,000,000 previously loaned to the Company. Upon the closing of the Titus II Agreement (the "Closing"), Interplay, Titus and Fargo entered into a stockholder agreement pursuant to which: (a) Titus and Fargo each had the right to designate two directors and together had the right to designate the remaining three directors to our Board of 25 Directors; (b) Titus and Fargo granted to each other a right of first refusal with respect to either party's sale our stock; (c) we granted Titus and Fargo preemptive rights with respect to our future issuances of stock; (d) Titus and Fargo granted each other co-sale rights with respect to either party's sale of our stock; and (e) we were restricted from amending our Certificate of Incorporation or Bylaws. The Stockholder Agreement has since terminated but is on file with Securities and Exchange Commission as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1999. In addition, at the Closing the Company entered into Employment Agreements with each of Brian Fargo and Herve Caen, pursuant to which Messrs. Fargo and Caen are employed as Chief Executive Officer and President, respectively, of the Company, which agreements shall each have an initial term of three years. Titus and Fargo have also entered into an Exchange Agreement, which was consummated concurrent with the Titus II Agreement, pursuant to which Fargo exchanged 2,000,000 shares of the Company's common stock for 96,666 shares of Titus common stock. In April 2000, the Company entered into a Stock Purchase Agreement with Titus (the "Titus III Agreement") providing for the issuance to Titus of 719,424 shares of the Company's newly-designated Series A Preferred Stock (the "Preferred Stock") with certain voting and conversion rights, and Warrants to purchase up to 500,000 shares of the Company's common stock, in return for consideration from Titus in the form of $20 million cash and Titus's agreement to certain obligations. Among the obligations that the Titus III Agreement imposed upon Titus were: (i) that Titus provide a $20 million guaranty (the "Titus Guaranty") of the Company's line of credit from Greyrock Capital; (ii) that Titus extend to the Company a $5 million supplemental line of credit; and (iii) that Titus provide the Company with financial reports required by Greyrock Capital as a condition to the release of $2.5 million in cash collateral held by Greyrock Capital. The Preferred Stock bears a six percent per annum cumulative dividend. The Company was obligated to repay to Titus any amounts that Titus may pay under the Titus Guaranty, and such repayment was secured by a second- priority security interest in the Company's assets. Moreover, as a condition of the Titus Guaranty, the Company granted Titus a right of first refusal on the Company's sale of assets for $100,000 or more. In December 2000 through March 2001, the Company drew approximately $3 million on the Titus line of credit. The Titus line of credit was repaid in full and terminated, and the Titus Guaranty was released, in April 2001. Titus can convert the Preferred Stock into the Company's common stock at any time following May 31, 2001. The number of shares of the Company's common stock to be issued upon such conversion is determined by multiplying the number of shares of Preferred Stock to be converted by the conversion ratio applicable at the time. The conversion ratio is defined as a fraction, the numerator of which is the initial purchase price per share of the Preferred Stock, $27.80, and the denominator of which (the "Denominator") is adjustable. The initial Denominator is the lower of $2.78 or 85% of the average market price of the Company's common stock for the 20 trading days preceding the date of conversion. The ratio shall be adjusted to account for stock splits or similar other changes in the Company's capital structure. The Company may redeem any unconverted shares of Preferred Stock at the original purchase price, plus accrued but unpaid dividends, at any time prior to its conversion. In addition, the Preferred Stock is entitled to voting power equivalent to the voting power of the shares of the Company's common stock into which the Preferred Stock can be converted, subject to a maximum of 7,619,047 votes. 26 There were three Warrants issued in connection with the Titus III Agreement for the purchase of the Company's common stock in the amounts of 350,000 shares, 100,000 shares, and 50,000 shares. All three Warrants are exercisable at $3.79 per share, and are for a term of 10 years. The 350,000 share Warrant and the 50,000 share Warrant are fully exercisable. The 100,000 share warrant is exercisable as to 60,000 shares pursuant to a pre-determined calculation, as provided in that Warrant. The Company is obligated to register all of the Company's common stock issued pursuant to the Titus I Agreement and the Titus II Agreement, and all of the common stock issuable upon conversion of the Series A Preferred Stock and the Warrants issued pursuant to the Titus III Agreement. In June 2000, the Company and Titus entered into a Technology and Content License Agreement by which Titus licensed the content for the game "Messiah", the trademarks "Mummy" and "Kingpin", and the game engine for Messiah. In connection with such license, Titus paid the Company an advance payment of royalties of $3 million. In May 2001, the Company entered into an agreement with Titus, Fargo and Herve Caen by which the Company agreed: (i) not to assert that any facts contained in Titus's May 15, 2001 Schedule 13D/A filing was untrue; (ii) to call an annual meeting of the Company's stockholders by August 15, 2001 with no less than 40 days' notice, and with a record date of the day before any redemption of Series A Preferred Stock but in no case later than June 19, 2001; and (iii) not to amend its Bylaws or Certificate of Incorporation prior to the annual meeting. Herve Caen agreed not to deliver any notice of a meeting of Interplay's stockholders prior to June 1, 2001. Transactions with Titus and Virgin In February 1999, the Company acquired a 43.9% interest in VIE Acquisition Group, LLC ("VIE"), the parent entity of Virgin Interactive Entertainment Limited ("Virgin"). Management of VIE was governed by an Operating Agreement, to which the Company became a party. In connection with the acquisition, the Company entered into an International Distribution Agreement with Virgin. Pursuant to the International 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. The International Distribution Agreement required the Company to pay certain overhead fees and minimum commissions. Also in connection with the acquisition of equity in Virgin's parent, the Company entered into a Product Publishing Agreement with Virgin pursuant to which the Company published substantially all lain of Virgin's titles in North and South America and Japan. The Company, VIE and Virgin also entered into a Termination Agreement which provided terms for the Company's withdrawal as a member of VIE and termination of the International Distribution Agreement. In late 1999, Titus acquired the holder of a 50.1% equity interest in VIE. In early 2000, Titus acquired the remaining 6% of VIE. In May 2000, the Company and Virgin amended the International Distribution Agreement to, among other things, eliminate the overhead fees and minimum commissions payable by the Company. 27 In April 2001, the Company settled certain disputes with Virgin and amended the International Distribution Agreement, the Termination Agreement and the Product Publishing Agreement. As a result of the settlement, VIE redeemed the Company's interest in VIE and Virgin paid the Company $3.1 million in net past due balances owed under the International Distribution Agreement. In addition, the Company will pay Virgin a one-time marketing fee of $333,000 for the period ended June 30, 2001, and monthly overhead fees of $111,000 per month for a nine month period beginning April 2001 and $83,000 per month for a six month period beginning January 2002, with no further commitment for overhead fees for the remainder of the term of the International Distribution Agreement. The Product Publishing Agreement was amended such that it would only cover the publishing rights for a product currently known as "Lotus". Other Transactions Beginning in March 1998, the Company has entered into Indemnification Agreements with all of its directors and executive officers providing for indemnification of such persons by the Company in certain circumstances. FACTORS AFFECTING FUTURE PERFORMANCE Our future operating results depend upon many factors and are subject to various risks and uncertainties. Some of the risks and uncertainties which may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results are as follows: We currently have a number of obligations that we are unable to meet without generating additional revenues or raising additional capital. If we cannot generate additional revenues or raise additional capital in the near future, we may become insolvent and our stock would become illiquid or worthless. As of June 30, 2001, our cash balance was approximately $677,000 and our outstanding accounts payable totaled approximately $14.8 million. If we do not receive sufficient financing we may (i) liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue operations, but incur material harm to our business, operations or financial condition. In addition, because we have not yet registered the shares issued in our April 2001 private placement of common stock, we have, as of August 1, 2001, an accrued obligation to pay the private placement investors an aggregate amount of $508,000 in cash payable on demand. This obligation will continue to accrue at approximately $250,000 each month that we do not register the shares. There is no cap on the penalty due to our failure to register such shares. Because of our financial condition, our Board of Directors has a duty to our creditors that may conflict with the interests of our stockholders. If we cannot obtain additional capital, the Board may make decisions that favor the interests of creditors at the expense of our stockholders. We depend, in part, on external financing to fund our capital needs. If we are unable to obtain sufficient financing on favorable terms, we may not be able to continue to operate our business. Historically, our business has not generated revenues sufficient to create operating profits. To supplement our revenues, we have funded our capital requirements with debt and equity financing. Our ability to obtain additional equity and debt financing depends on a number of factors including: 28 . the progress and timely completion of our product development programs; . our products' commercial success; . our ability to license intellectual property on favorable terms; . the introduction and acceptance of new hardware platforms by third parties; and . our compliance with the financial covenants of our existing line of credit. If we cannot raise additional capital on favorable terms, we will have to reduce our costs by selling or consolidating our operations, and by delaying, canceling, suspending or scaling back product development and marketing programs. These measures could materially limit our ability to publish successful titles and may not decrease our costs enough to restore our operations to profitability. Our failure to comply with the covenants in our existing credit agreement could result in the termination of the agreement and a substantial reduction in the cash available to finance our operations. Pursuant to our credit agreement with LaSalle Business Credit Inc., or "LaSalle," entered into in April 2001, we agreed: . to safeguard, maintain and insure substantially all of our property, which property is collateral for any loans made under the credit agreement; . not to incur additional debt, except for trade payables and similar transactions, or to make loans; . not to enter into any significant corporate transaction, such as a merger or sale of substantially all of our assets without the knowledge and consent o LaSalle; . to maintain an agreed-upon tangible consolidated net worth, to be set by the parties for periods subsequent to April 2001; . to maintain a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense of at least 1.25 to 1.00; . not to make capital expenditures in an aggregate amount of more than $2.5 million in any fiscal year without the consent of LaSalle; and . to maintain EBITDA of at least the following amounts for the following periods: - negative $7.2 million for the six month period from January 1, 2001 through June 30, 2001; - negative $3.5 million for the nine month period from January 1, 2001 through September 30, 2001; and 29 - $7.7 million during any consecutive twelve-month period from and after January 1, 2001. We are not in compliance with the financial covenants pertaining to net worth and minimum EBITDA. If LaSalle does not waive compliance with these covenants, or if we breach other covenants or if there are other events of default in effect under the credit agreement and LaSalle does not waive compliance with them, LaSalle would be able to terminate the credit agreement and all outstanding amounts owed to LaSalle would immediately become due and payable. Because we depend on our credit agreement to fund our operations, LaSalle's termination of the credit agreement could cause material harm to our business. A change of control may cause the termination of several of our material contracts with our licensors and distributors. If there were a change of control of our Board of Directors, some of our third-party developers and licensors may assert that this event constitutes a change of control and they may attempt to terminate existing development and distribution agreements with us. In particular, our license for "the Matrix" allows for the licensor to terminate the license if there is a change of control without their approval. The loss of the Matrix license would materially harm our projected operating results and financial condition. The unpredictability of our quarterly results may cause our stock price to decline. Our operating results have fluctuated in the past and may fluctuate in the future due to several factors, some of which are beyond our control. These factors include: . demand for our products and our competitors' products; . the size and rate of growth of the market for interactive entertainment software; . changes in personal computer and video game console platforms; . the timing of announcements of new products by us and our competitors and the number of new products and product enhancements released by us and our competitors; . changes in our product mix; . the number of our products that are returned; and . the level of our international and original equipment manufacturer 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; 30 . approvals required from content and technology licensors; and . the timing of the release and market penetration of new game hardware platforms. It is likely that in some future periods our operating results will not meet the expectations of the public or of public market analysts. Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause securities analysts and investors to revalue our stock and this may cause fluctuations in our stock price. There are high fixed costs to developing our products. If our revenues decline because of delays in the introduction of our products, or if there are significant defects or dissatisfaction with our products, our business could be harmed. We have incurred significant net losses in recent periods, including a net loss of $20.8 million in the six months ended June 30, 2001, $12.1 million during 2000 and $41.7 million during 1999. Our losses stem partly from the significant costs we incur to develop our entertainment software products. Moreover, a significant portion of our operating expenses are relatively fixed, with planned expenditures based largely on sales forecasts. At the same time, 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. Relatively fixed costs and short windows in which to earn revenues mean that sales of new products are important in enabling us to recover our development costs, to fund operations and to replace declining net revenues from older products. Our failure to accurately assess the commercial success of our new products, and our delays in releasing new products, could reduce our net revenues and our ability to recoup development and operational costs. In the past, revenues have been reduced by: . delays in the introduction of new software products; . delays in the introduction, manufacture or distribution of the platform for which a software product was developed; . a higher than expected level of product returns and markdowns on products released during the year; . the cost of restructuring our operations, including international distribution arrangements; and . lower than expected worldwide sales of entertainment software releases. Similar problems may occur in the future. Any reductions in our net revenues could harm our business and financial results. Our growing dependence on revenues from game console software products increases our exposure to seasonal fluctuations in the purchases of game consoles. 31 The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occurring during the year-end holiday buying season. As a result, our net revenues, gross profits and operating income have historically been highest during the second half of the year. The impact of this seasonality will increase as we rely more heavily on game console net revenues in the future. Moreover, delays in game console software products largely depend on the timeliness of introduction of game console platforms by the manufacturers of those platforms, such as Sega and Nintendo. The introduction by a manufacturer of a new game platform too late in the holiday buying season could result in a substantial loss of revenues by us. Seasonal fluctuations in revenues from game console products may cause material harm to our business and financial results. If our products do not achieve broad market acceptance, our business could be harmed significantly. 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 believe that our future revenue will continue to depend 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 cause material harm to our business. Further, if we do not achieve market acceptance, we could be forced to accept substantial product returns or grant significant pricing concessions to maintain our relationship with retailers and our access to distribution channels. If we are forced to accept significant product returns or grant significant pricing concessions, our business and financial results could suffer material harm. Our largest stockholder, Titus Interactive SA, may implement or block corporate actions in ways that are not in the best interests of our stockholders as a whole. Titus currently owns approximately 43.3% of our common stock, and, in connection with their ownership of our Series A Preferred Stock, controls approximately 48% of the total voting power of our stock. Upon conversion of the Series A Preferred Stock held by Titus as of August 14, 2001, Titus could own up to approximately 7.7 million additional shares of our common stock, bringing its total ownership to approximately 51.6%, of our common stock. Titus may continue to convert each share of their Series A Preferred Stock, to the extent not previously redeemed by us, into a number of shares of our Common Stock determined by dividing $27.80 by the lesser of (i) $2.78 or (ii) 85 percent of the average closing price per share as reported by Nasdaq for the twenty trading days preceding the date of conversion. Pursuant to the terms of our Series A Preferred Stock, Titus also has the ability to block approval of a merger or change in control that the holders of a majority of our common stock may deem beneficial. 32 In connection with its investment, Titus has elected its Chief Executive Officer and its President to serve as members of our Board of Directors and Titus' Chief Executive Officer serves as our President. Titus may elect additional members that would constitute a majority of directors. As a consequence of its stock ownership and Board and management representation, Titus exerts significant influence over corporate policy and potentially may implement or block corporate actions that are not in the interests of Interplay and its stockholders as a whole. For example, Titus could compel us to enter into agreements with Titus or its subsidiaries on terms more favorable than those we would agree to with a third party or to forego enforcement of our rights against Titus or its subsidiaries. Titus could also use its veto over mergers to prevent a merger than may be in the best interests of our stockholders as a whole or to try to negotiate more favorable merger consideration for itself. Our stock price may decline significantly if we are delisted from the Nasdaq National Market. Our common stock currently is quoted on the Nasdaq National Market System. For continued inclusion on the Nasdaq National Market, we must meet certain tests, including a minimum bid price of $1.00 and net tangible assets of at least $4 million. We currently are not in compliance with the minimum net tangible assets requirement. In addition, during the second quarter of fiscal 2000 we were subject to a hearing before a Nasdaq Listing Qualifications Panel, which determined to continue the listing of our common stock on the Nasdaq National Market subject to certain conditions, all of which were fulfilled. However, if we continue to fail to satisfy the listing standards on a continuous basis, Nasdaq may delist our common stock from its National Market System. The variable conversion price of our Series A Preferred Stock increases our risk of being delisted in several ways: Bid Price. The substantial number of shares that are potentially issuable upon conversion of the Series A Preferred Stock and the short selling that may occur as a result of the future priced nature of those shares increases the risk that our stock price will fall below Nasdaq's minimum bid price requirement and could, as noted above, result in our being delisted. See our risk factors "Substantial sales of our common stock by our existing stockholders may reduce the price of our stock and dilute existing stockholders" and "The holder of our Series A Preferred Stock could engage in short selling..." Public Interest Concerns. If the returns on our Series A Preferred Stock are deemed "excessive" compared with those of public investors in our common stock, Nasdaq may deny inclusion or apply more stringent criteria to the continued listing of our common stock. In making this analysis, Nasdaq considers: . the amount raised in the transaction relative to our capital structure at the time of issuance; . the dilutive effect of the transaction on our existing holders of common stock; . the risk undertaken by Titus in purchasing our Series A Preferred Stock; . the relationship between the Titus and us; 33 . whether the transaction was preceded by other similar transactions; and . whether the transaction is consistent with the just and equitable principles of trade. Nasdaq also considers, as mitigating factors in its analysis, incentives that encourage Titus to hold the Series A Preferred Stock for a longer time period and limit the number of shares into which the Series A Preferred Stock may be converted. Such features may limit the dilutive effect of the transaction and increase the risk undertaken by Titus in relationship to the reward available. Change of Control and Change of Financial Structure. As of August 14, 2001, the Series A Preferred Stock was convertible into 7.7 million shares of our common stock. The exercise of these conversion rights could increase Titus' percentage ownership of our capital stock significantly and may cause Nasdaq to determine that (i) a merger or consolidation that results in a change of control or (ii) a change in financial structure has occurred. If Nasdaq determines that the conversion of our Series A Preferred Stock constitutes a change in control and a change in financial structure, we would need to re-apply for listing on Nasdaq and satisfy all initial listing requirements as of that time. We currently do not satisfy those initial listing requirements. If our common stock were delisted from the Nasdaq National Market, trading of our common stock, if any, may be conducted on the Nasdaq Small Cap Market, in the over-the-counter market on the "pink sheets" or, if available, the NASD's "Electronic Bulletin Board." In any of those cases, investors could find it more difficult to buy or sell, or to obtain accurate quotations as to the value of our common stock. The trading price per share of our common stock likely would be reduced as a result. A significant percentage of our international sales depend on our distribution agreement with Virgin and Virgin's diligent sales efforts and timely payments pursuant to that agreement. In connection with our acquisition in February 1999 of a 43.9% limited liability company membership interest in VIE Acquisition Group, LLC, or VIE, the parent entity of Virgin Interactive Entertainment Limited, or Virgin, we signed an international distribution agreement with Virgin. Under this agreement, we appointed Virgin as exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East, for a seven-year period. During the course of the last two years, due to a dispute regarding the amount of overhead fees and commissions we owed Virgin, Virgin withheld material amounts of proceeds from us from their distribution of our products from time to time. In April 2001, we entered into a settlement agreement with Virgin in which: . each party entered into a general release from claims against the other party; . Virgin paid us $3.1 million in settlement of amounts due us under the distribution agreement; . we paid Virgin $330,000 for marketing overhead related to sales of our products; . VIE redeemed our membership interest in VIE in full in exchange for the performance of our obligations under the settlement agreement; 34 . pursuant to the concurrent third amendment to our distribution agreement with Virgin, the overhead fees owed to Virgin going forward were immediately reduced and will be eliminated by July 2002; and . we no longer have an equity interest in Virgin. Virgin is a wholly-owned subsidiary of, and is controlled by, Titus. Virgin remains our exclusive distributor throughout much of the world, therefore our revenues could fall significantly and our business and financial results could suffer material harm if: . further disputes arise over amounts payable by us to Virgin; . Virgin fails to deliver to the full proceeds owed us from distribution of our products; . fails to effectively distribute our products abroad; or . otherwise fails to perform under the distribution agreement. Two of our directors have substantial, conflicting interests in our most significant distributor, Virgin Interactive Entertainment, Limited. All of the equity interests of VIE are owned by Titus, a significant stockholder of Interplay, which is controlled by two of our directors, Messrs. Herve Caen and Eric Caen. Herve Caen is the Chief Executive Officer of Titus and Eric Caen is the President of Titus. Herve Caen also serves as our President. Due to their positions with both of us and Titus, either of the Caens could influence or induce us to enter into agreements or business arrangements with VIE, or its subsidiary Virgin, on terms less favorable to us than we would negotiate with an unaffiliated third party in an arm's length transaction. Our long-term exclusive distribution agreement with Virgin may discourage potential acquirors from acquiring us. Pursuant to the settlement agreement we entered into with Titus, Virgin and VIE on April 11, 2001, during the seven-year term of our February 1999 distribution agreement with Virgin, we agreed not to sell, license our publishing rights, or enter into any agreement to either sell or license our publishing rights with respect to any products covered by the distribution agreement in the territory covered by the distribution agreement, with the exception of two qualified sales each year. The restrictions on sales and licensing of publishing rights until 2006 may discourage potential acquirors from entering into an acquisition transaction with us, or may cause potential acquirors to demand terms that are less favorable to our stockholders. In addition, the settlement agreement contains termination penalties of a minimum of $10 million, subject to substantial increases pursuant to the terms of the settlement agreement, which also may discourage potential acquirors that already have their own distribution capabilities in these territories. Our reliance on third party software developers subjects us to the risks that these developers will not supply us in a timely manner with high quality products or on acceptable terms. 35 Third party interactive entertainment software developers, such as Bioware Corp. and Planet Moon Studios develop many of our software products. Since we depend on these developers in the aggregate, we remain subject to the following risks: . continuing strong demand for the developers' products may cause developers who developed products for us in the past to instead work for our competitors in the future; . the inability for us to control whether developers complete products on a timely basis or within acceptable quality standards, or at all; . limited financial resources may force developers out of business prior to their completion of projects for us or require us to fund additional costs; and . the possibility that developers could demand that we renegotiate our arrangements with them to include new terms less favorable to us. Increased competition for skilled third party software developers also has compelled us to agree to make advance payments on royalties and to guarantee minimum royalty payments to intellectual property licensors and game developers. If the products subject to these arrangements do not generate sufficient sales volumes to recover these royalty advances and guaranteed payments, we would have to write-off unrecovered portions of these payments, which could cause material harm to our business and financial results. If we fail to anticipate changes in video game platforms and technology, our business may be harmed. The interactive entertainment software industry is subject to rapid technological change. New technologies could render our current products or products in development obsolete or unmarketable. Some of these new technologies include: . operating systems such as Microsoft Windows 2000; . technologies that support games with multi-player and online features; . new media formats such as online delivery and digital video disks, or DVDs; and . recent releases or planned releases in the near future of new video game consoles such as the Sony Playstation 2, the Nintendo Gamecube and the Microsoft Xbox. 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 new software products or modify existing products are not released on a timely basis or do not attain significant market penetration, or if we develop products for a delayed or unsuccessful platform, our business and financial results could suffer material harm. 36 New interactive entertainment software platforms and technologies also may undermine demand for products based on older technologies. Our success will depend in part on our ability to adapt our products to those emerging game platforms which gain widespread consumer acceptance. Our business and financial results may suffer material harm if we fail to: . anticipate future technologies and platforms and the rate of market penetration of those technologies and platforms; . obtain licenses to develop products for those platforms on favorable terms; or . create software for those new platforms on a timely basis. We compete with a number of companies that have substantially greater financial, marketing and product development resources than we do. The interactive entertainment software industry is intensely competitive and new interactive entertainment software programs and platforms are regularly introduced. The greater resources of our competitors permit them to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and pay higher fees than we can to licensors of desirable motion picture, television, sports and character properties and to third party software developers. 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; and . ability to obtain licenses to popular motion picture, television, sports and character properties and to third party software developers. We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant competitors include: . Electronic Arts Inc. . Activision, Inc. . Infogrames Entertainment . Microsoft Corporation . LucasArts Entertainment Company . Midway Games Inc. . Acclaim Entertainment, Inc. . Vivendi Universal Interactive Publishing . Ubi Soft Entertainment Publishing . The 3DO Company 37 . Take Two Interactive Software, Inc. . Eidos PLC . THQ Inc. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Competitors with more extensive customer bases, broader customer relationships and broader industry alliances may be able to use such resources to their advantage in competitive situations, including establishing relationships with many of our current and potential customers. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo, Microsoft Corporation and Sega compete directly with us in the development of software titles for their respective platforms and they have generally discretionary approval authority over the products we develop for their 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 online services by consumers may pose a competitive threat if customers and potential customers spend less of their available home personal computing time using interactive entertainment software and more time using the Internet and online services. We may face difficulty obtaining access to retailers necessary to market and sell our products effectively. Retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer software producers, and in particular producers of 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 require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an improving 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 cause material harm to our business. Because we sell a substantial portion of our products on a purchase order basis, our sales may decline substantially without warning and in a brief period of time. We currently sell our products through our sales force to mass merchants, warehouse club stores, large computer and software specialty chains and through catalogs in the United States and Canada, as well as to certain distributors. Outside North America, we generally sell products to third party distributors. We make our sales 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 cause material harm to our business. If we are compelled to sell a larger proportion of our products to distributors, our gross profit may decline. 38 Mass merchants are the most important distribution channel for retail sales of interactive entertainment software. A number of these mass merchants have entered into exclusive buying arrangements with software developers or other distributors, which arrangements could prevent us from selling some or all 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 lower our gross profit. This trend could cause material harm to our business. If our distributors or retailers cannot honor their credit arrangements with us, we may be burdened with payment defaults and uncollectible accounts. We typically sell to distributors and retailers on unsecured credit, with terms that vary depending upon the customer and the nature of the product. We confront the risk of non-payment from our customers due to their financial inability to pay us, or otherwise. In addition, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could cause material harm to our business. Our customers have the ability to return our products or to receive pricing concessions and such returns and concessions could reduce our net revenues and results of operations. We are exposed to the risk of product returns and pricing concessions 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 pricing concessions to our customers to manage our customers' inventory levels in the distribution channel. We could be forced to accept substantial product returns and provide pricing concessions to maintain our relationships with retailers and our access to distribution channels. Product return and pricing concessions that exceed our reserves have caused material harm to our results of operations in the recent past and may do so again in the future. Substantial sales of our common stock by our existing stockholders may reduce the price of our stock and dilute existing stockholders. We have filed registration statements covering a total of approximately 49.5 million shares of our common stock for the benefit of the holders we describe below. Assuming the effectiveness of these registration statements, these shares would be eligible for immediate resale in the public market. . Universal Studios, Inc. holds approximately 10.4%, of our outstanding common stock, all of which are being registered. . Titus currently holds approximately 43.3% of our outstanding common stock and upon conversion of all its shares of Series A Preferred Stock, may own up to approximately 51.6% of our common stock. All of the shares of common stock issuable to Titus upon the conversion of the preferred stock or the exercise of the warrants are being registered in our pending registration statements. 39 . Pursuant to registration statement 333-59088, filed on April 4, 2001, we intend to register shares equal to approximately 18% of our outstanding common stock, held by a number of our investors as set forth in that registration statement. . Employees and directors hold options and warrants to purchase 10.8% of our common stock, most of which are eligible for immediate resale. We may issue options to purchase up to an additional 2.0% of our common stock to employees and directors, which we anticipate will be freely tradable when issued. Although the holders described above are subject to restrictions on the transfer of our common stock, future sales by such holders could decrease the trading price of our common stock and, therefore, the price at which you could resell your shares. A lower market price for our shares also might impair our ability to raise additional capital through the sale of our equity securities. Any future sales of our stock would also dilute existing stockholders. We depend upon third party licenses of content for many of our products. Many of our current and planned products, such as our Star Trek, Advanced Dungeons and Dragons, Matrix and Caesars Palace titles, are lines based on original ideas or intellectual properties licensed from other parties. From time to time we may not be in compliance with certain terms of these license agreements. We may not be able to obtain new licenses, or maintain or renew existing licenses, on commercially reasonable terms, if at all. For example, Viacom Consumer Products, Inc. has granted the Star Trek license to another party upon the expiration of our rights in 2002. 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 limit our commercial success and cause material harm to our business. We may fail to obtain new licenses from hardware companies on acceptable terms or to obtain renewals of existing or future licenses from licensors. 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 Sony PlayStation and PlayStation 2, as well as video game platforms from Nintendo and Microsoft. In addition, each of these companies has the right to approve the technical functionality and content of our products for their platforms prior to distribution. Due to the competitive nature of the approval process, we must make significant product development expenditures on a particular product prior to the time we seek these approvals. Our inability to obtain these approvals could cause material harm to our business. Our sales volume and the success of our products depends in part upon the number of product titles distributed by hardware companies for use with their video game platforms. Even after we have obtained licenses to develop and distribute software, we depend upon hardware companies such as Sony Computer Entertainment, Nintendo and Microsoft to manufacture the CD-ROM or DVD-ROM media discs that contain our software. These discs are then run on the companies' video game consoles. This process subjects us to the following risks: 40 . we are required to submit and pay for minimum numbers of discs we want produced containing our software, regardless of whether these discs are sold, shifting onto us the financial risk associated with poor sales of the software developed by us; and . reorders of discs are expensive, reducing the gross margin we receive from software releases that have stronger sales than initially anticipated and that require the production of additional discs. As a result, Sony, Nintendo and Microsoft can shift onto us the risk that if actual retailer and consumer demand for our interactive entertainment software differs from our forecasts, we must either the bear the loss from overproduction or the lesser revenues associated with producing additional discs. Either situation could lead to material reductions in our net revenues. We have a limited number of key personnel. The loss of any single key person or the failure to hire and integrate capable new key personnel could harm our business. Our interactive entertainment software requires extensive time and creative effort to produce and market. The production of this software is closely tied to 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 also will depend upon our ability to attract, motivate and retain qualified employees and contractors, particularly software design and development personnel. Competition for highly skilled employees is intense, and we may fail to attract and retain such personnel. Alternatively, we may incur increased costs in order to attract and retain skilled employees. Our failure to retain the services of Brian Fargo or other key personnel, including competent executive management, or to attract and retain additional qualified employees could cause material harm to our business. Titus intends to gain control of our board of directors, which could result in a significant change in management and operations. Titus has stated that they intend to gain control of our Board of Directors. It is possible that this change in control could result in a change in our management and operations. Significant changes in the composition of our executive management team may hinder our ability to address the other challenges we face, and may cause material harm to our business or financial condition. Our international sales expose us to risks of unstable foreign economies, difficulties in collection of revenues, increased costs of administering international business transactions and fluctuations in exchange rates. Our net revenues from international sales accounted for approximately 17 percent of our total net revenues for the six months ended June 30, 2001 and approximately 28 percent for the six months ended June 30, 2000. Most of these revenues come from our distribution relationship with Virgin, pursuant to which Virgin became the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. To the extent our resources allow, we intend to continue to expand our direct and indirect sales, marketing and product localization activities worldwide. 41 Our international sales and operations are subject to a number of inherent risks, including the following: . recessions in foreign economies may reduce purchases of our products; . translating and localizing products for international markets is time- consuming and expensive; . accounts receivable are more difficult to collect and when they are collectible, they may take longer to collect; . regulatory requirements may change unexpectedly; . it is difficult and costly to staff and manage foreign operations; . fluctuations in foreign currency exchange rates; . political and economic instability; . we depend on Virgin as our exclusive distributor in Europe, the Commonwealth of Independent States, Africa and the Middle East; and . delays in market penetration of new platforms in foreign territories. These factors may cause material declines in our future international net revenues and, consequently, could cause material harm to our business. A significant, continuing risk we face from our international sales and operations stems from exchange rate fluctuations. Because we do not engage in currency hedging activities, fluctuations in currency exchange rates have caused significant reductions in our net revenues from international sales and licensing due to the loss in value upon conversion into U.S. Dollars. We may suffer similar losses in the future. Inadequate intellectual property protections could prevent us from enforcing or defending our proprietary technology. 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 one of our titles. 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, it could cause material harm to our business and financial results. Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in some international markets. Further, the laws of some countries where our 42 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 United States, or are weakly enforced. Legal protection of our rights may be ineffective in such countries, and as we leverage our software products using emerging technologies such as the Internet and online services, our ability to protect our intellectual property rights and to avoid infringing others' intellectual property rights may diminish. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies. We may unintentionally infringe on the intellectual property rights of others which could expose us to substantial damages or restrict our operations. As the number of interactive entertainment software products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Intellectual property litigation or claims could force us to do one or more of the following: . cease selling, incorporating or using products or services that incorporate the challenged intellectual property; . obtain a license from the holder of the infringed intellectual property, which license, if available at all, may not be available on commercially favorable terms; or . redesign our interactive entertainment software products, possibly in a manner that reduces their commercial appeal. Any of these actions may cause material harm to our business and financial results. Our software may be subject to governmental restrictions or rating systems. Legislation is periodically introduced at the state and federal levels in the United States 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. In addition, many foreign countries have laws that permit governmental entities to censor the content of interactive entertainment software. We believe that mandatory government-run rating systems eventually will be adopted in many countries that are significant markets or potential markets for our products. We may be required to modify our products to comply with new regulations, which could delay the release of our products in those countries. Due to the uncertainties regarding 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 some 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 caused material harm to our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business. 43 Our directors and officers control a large percentage of our voting stock and may use this control to compel corporate actions that are not in the best interests of our stockholders as a whole. Including Titus, our directors and executive officers beneficially own approximately 69% of our aggregate common stock. In the event Titus converts all of its shares of Series A Preferred Stock into common stock, the additional shares could increase Titus' ownership to approximately 51.6%. These stockholders can control substantially all matters requiring stockholder 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 voting power could discourage or prevent a change in control that otherwise could result in a premium in the price of our common stock. Moreover, since Titus owns 100% of VIE and only up to approximately 51.6% of Interplay, Titus will recognize more revenue on a consolidated basis to the extent it is able to divert revenues to the Virgin entities at the expense of Interplay. Therefore, Titus has an incentive to compel Interplay to enter into transactions with the Virgin entities on terms less favorable than might prevail in a transaction with an unaffiliated third party. We may fail to implement Internet-based product offerings successfully. We seek to establish an online presence by creating and supporting sites on the Internet and by offering our products through these sites. Our ability to establish an online presence and to offer online products successfully depends on: . increases in the Internet's data transmission capability; . growth in an online market sizeable enough to make commercial transactions profitable. Because global commerce and the exchange of information on the Internet and other open networks are relatively new and evolving, a viable commercial marketplace on the Internet may not emerge and complementary products for providing and carrying Internet traffic and commerce may not be developed. Even with the proper infrastructure, we may fail to develop a profitable online presence or to generate any significant revenue from online product offerings in the near future, or 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 online service, our business and financial condition could suffer material harm. Some provisions of our charter documents may make takeover attempts difficult, which could depress the price of our stock and inhibit our ability to receive a premium price for your shares. Our Board of Directors has the authority, without any action by the stockholders, to issue up to 4,616,646 shares of preferred stock and to fix the rights and preferences of such shares. In addition, our certificate of incorporation and bylaws contain provisions that: 44 . eliminate the ability of stockholders to act by written consent and to call a special meeting of stockholders; and . require stockholders to give advance notice if they wish to nominate directors or submit proposals for stockholder approval. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. The holder of our Series A Preferred Stock could engage in short selling to increase the number of shares of common stock issuable upon conversion of our Series A Preferred Stock. If this occurs, the market price of our common stock and the value of your investment may decline. Titus, the sole holder of shares of our Series A Preferred Stock, may convert those shares into shares of our common stock. The shares of our Series A Preferred Stock generally are convertible into a number of shares of common stock determined by dividing $27.80 by the lesser of (a) $2.78 and (b) 85 percent of the average of the closing prices per share as reported by the Nasdaq National Market for the twenty trading days preceding the date of conversion. Based on the above formula, the number of shares of our common stock that are issuable upon conversion of the Series A Preferred Stock increases as the price of our common stock decreases. Increases in the number of shares of our common stock which are publicly traded could put downward pressure on the market price of our common stock. Depending on the trading volume of our stock, the sale of a relatively limited number of shares could cause a significant decrease in price. Therefore, Titus could sell short our common stock prior to conversion of the Series A Preferred Stock, potentially causing the market price to decline and a greater number of shares to become issuable upon conversion of the Series A Preferred Stock. Titus could then convert its Series A Preferred Stock and use the shares of common stock received upon conversion to cover its short positions. Titus could thereby profit by the decline in the market price of our common stock caused by its short selling. See also the risk factor entitled "Substantial sales of our common stock by our existing stockholders may reduce the price of our stock and dilute existing stockholders." Our stock price is volatile. The trading price of our common stock has previously and could continue to fluctuate in response to factors that are largely beyond our control, and which may not be directly related to the actual operating performance of our business, including: . general conditions in the computer, software, entertainment, media or electronics industries; . changes in earnings estimates or buy/sell recommendations by analysts; 45 . investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers; and . price and trading volume volatility of the broader public markets, particularly the high technology sections of the market. 46 We do not pay dividends on our common stock. We have not paid any cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Increases in interest rates will increase the cost of our debt. Our working capital line of credit bears interest at either the bank's prime rate or LIBOR, at our option both of which are variable rates. As such, if interest rates increase, we will have to use more cash to service our debt, which could impede our ability to meet other expenses as they become due and could cause material harm to our business and financial condition. 47 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, thereunto duly authorized in the City of Irvine, State of California, on the 31st day of August, 2001. INTERPLAY ENTERTAINMENT CORP. By: /s/ Brian Fargo ------------------------- Brian Fargo, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Brian Fargo Chief Executive Officer August 31, 2001 - ---------------------- and Chairman of the Board Brian Fargo (Principal Executive Officer) President and Director -- - ---------------------- Herve Caen /s/ Manuel Marrero Chief Financial Officer and August 31, 2001 - ---------------------- Chief Operating Officer Manuel Marrero (Principal Financial and Accounting Officer) - ---------------------- Director -- Eric Caen * Director August 31, 2001 - ---------------------- Richard S.F. Lehrberg - ---------------------- Director August 31, 2001 Keven F. Baxter - ---------------------- Director August 31, 2001 R. Stanley Roach - ---------------------- *By: /s/ Brian Fargo ------------------------ Brian Fargo, Attorney-in-Fact 48 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 10.40 Joint Venture Agreement dated April 3, 2000, by and between the Company and Brian Fargo. 10.41 Agreement dated May 15, 2001, by and among the Company, Brian Fargo, Titus Interactive S.A. and Herve Caen. 10.42 Amendment to International Distribution Agreement, dated April 12, 2001, by and between the Company and Virgin Interactive Entertainment Limited. * 10.43 Retail License Agreement dated December 18, 2000, by and between the Company and Warner Bros. Consumer Products, a division of Time Warner Entertainment Company, L.P.* 10.44 Playstation(R) CD-ROM/DVD-ROM Licensed Publisher Agreement dated April 1, 2001, by and between the Company and Sony Computer Entertainment America, Inc.* 10.45 Computer Game License Agreement, dated August 8, 1994, by and between the Company and TSR, Inc.* 10.46 First Amendment to Computer Game License Agreement dated August 8, 1994, by and between the Company and TSR, Inc.* 10.47 Second Amendment to License Agreement Between TSR, Inc. and Interplay Productions, dated March 8, 1998, by and between the Company and TSR, Inc.* 23.1 Consent of Arthur Andersen LLP, independent public accountants. * Registrant has sought confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for a portion of the referenced exhibit. 49 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, 2000 and 1999 F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-6 Notes to Consolidated Financial Statements F-7 Schedule II -- Valuation and Qualifying Accounts S-1 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Interplay Entertainment Corp.: We have audited the accompanying consolidated balance sheets of Interplay Entertainment Corp. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As discussed further in Note 15, subsequent to April 16, 2001, the date of our original report, the Company incurred losses of $20.8 million during the six months ended June 30, 2001, and as of that date, based on unaudited financial statements, the Company's current liabilities exceeded its current assets by $9.2 million and the Company has experienced, and expects to continue to experience, negative operating cash flows which will require the need for additional financing. Additionally, the Company is in violation of its debt covenants. These factors, among others, as described in Note 15, create a substantial doubt about the Company's ability to continue as a going concern and an uncertainty as to the recoverability and classification of recorded asset amounts and the amounts and classification of liabilities. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Our audits were made for the purpose of forming an opinion on the accompanying financial statements taken as a whole. The supplemental Schedule II as shown on page S-1 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Orange County, California April 16, 2001, except for the matters discussed in Note 15 as to which the date is August 23, 2001 F-2 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, ----------------------------------- ASSETS 2000 1999 ------ ----------------------------------- Current Assets: Cash $ 2,835 $ 399 Restricted Cash - 2,597 Trade receivables, net of allowances of $6,543 and $9,161, respectively 28,136 22,209 Inventories 3,359 6,057 Prepaid licenses and royalties 17,704 19,249 Other 772 874 --------- --------- Total current assets 52,806 51,385 Property and Equipment, net 5,331 4,225 Other Assets 944 1,326 --------- --------- $ 59,081 $ 56,936 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current Liabilities: Current debt $ 25,433 $ 19,630 Accounts payable 12,270 21,462 Accrued liabilities 14,980 17,915 -------- -------- Total current liabilities 52,683 59,007 -------- -------- Commitments and Contingencies (see Note 7) Stockholders' Equity (Deficit): Series A Preferred Stock, $.001 par value, authorized 5,000,000 shares; issued and outstanding 719,424 and zero shares, respectively 20,604 - Common Stock, $.001 par value, authorized 100,000,000 and 50,000,000 shares, respectively; issued and outstanding 30,143,636 and 29,989,125 shares, respectively 30 30 Paid-in capital 88,759 87,390 Accumulated deficit (103,259) (89,782) Accumulated other comprehensive income 264 291 -------- -------- Total stockholders' equity (deficit) 6,398 (2,071) -------- -------- $ 59,081 $ 56,936 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Years Ended December 31, ---------------------------------------------- 2000 1999 1998 -------------- ----------- ----------- Net revenues $ 104,582 $ 101,930 $ 126,862 Cost of goods sold 54,061 61,103 71,928 ------------- ----------- ----------- Gross profit 50,521 40,827 54,934 ------------- ----------- ----------- Operating expenses: Marketing and sales 26,482 29,524 39,471 General and administrative 10,249 18,155 12,841 Product development 22,176 20,629 24,472 Other - 5,323 - ------------- ----------- ----------- Total operating expenses 58,907 73,631 76,784 ------------- ----------- ----------- Operating loss (8,386) (32,804) (21,850) ------------- ----------- ----------- Other income (expense): Interest expense (2,992) (3,640) (4,620) Other (697) 169 (313) ------------- ----------- ----------- Total other income (expense) (3,689) (3,471) (4,933) ------------- ----------- ----------- Loss before provision for income taxes (12,075) (36,275) (26,783) Provision for income taxes - 5,410 1,437 ------------- ----------- ----------- Net loss $ (12,075) $ (41,685) $ (28,220) ============= =========== =========== Cumulative dividend on participating preferred stock $ 870 $ - $ - Accretion of warrant on preferred stock 532 - - ------------- ----------- ----------- Net loss attributable to common stockholders $ (13,477) $ (41,685) $ (28,220) ============= =========== =========== Net loss per share: Basic/diluted $ (0.45) $ (1.86) $ (1.91) ============= =========== =========== Weighted average number of common shares outstanding: Basic/diluted 30,046,701 22,418,463 14,762,644 ============= =========== =========== 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)
Preferred Stock Common Stock Paid-in Accumulated ----------------------- ----------------------- Shares Amount Shares Amount Capital Deficit --------- ----------- ------------ --------- ----------- ---------------- Balance, December 31, 1997 - $ - 10,951,828 $ 11 $ 18,408 $ (19,877) 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 - Proceeds from warrants Compensation for stock options granted - - - - 190 - Net loss - - - - - (28,220) Other comprehensive income, net of income taxes: Foreign currency translation adjustment - - - - - - Other comprehensive income - - - - - - Comprehensive loss - - - - - - --------- ----------- ------------- --------- ----------- --------------- Balance, December 31, 1998 - - 18,292,431 18 51,918 (48,097) Issuance of common stock - - 11,408,736 12 34,838 - Exercise of stock options - - 287,958 - 608 - Compensation for stock options granted - - - - 26 - Net loss - - - - - (41,685) Other comprehensive income, net of income taxes: Foreign currency translation adjustment - - - - - - Other comprehensive income - - - - - - Comprehensive loss - - - - - - --------- ----------- ------------- --------- ----------- --------------- Balance, December 31, 1999 - - 29,989,125 30 87,390 (89,782) Issuance of common stock, net of issuance costs - - 40,661 - 439 - Issuance of Series A preferred stock 719,424 19,202 - - - - Issuance of warrants - - - - 798 - Exercise of stock options - - 113,850 - 42 - Accretion of warrant - 532 - - - (532) Accumulated accrued dividend on Series A Preferred Stock - 870 - - - (870) Compensation for stock options granted - - - - 90 - Net loss - - - - - (12,075) Other comprehensive income, net of income taxes: Foreign currency translation adjustment - - - - - - Other comprehensive income - - - - - - Comprehensive loss - - - - - - --------- ----------- ------------- --------- ----------- --------------- Balance, December 31, 2000 719,424 $ 20,604 30,143,636 $ 30 $ 88,759 $ (103,259) ========= =========== ============= ========= =========== =============== Accumulated Other Comprehensive Comprehensive Income (Loss) Income (Loss) Total ----------------- ----------------- ------------- Balance, December 31, 1997 $ 191 $ - $ (1,267) Issuance of common stock, net of issuance costs - - 24,395 Issuance of warrants - - 316 Exercise of warrants - - 8,601 Exercise of stock options - - 15 Proceeds from warrants - - - 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 163 163 163 ----------------- Comprehensive loss - $ (28,057) - ----------------- ================= ------------ Balance, December 31, 1998 354 - 4,193 Issuance of common stock - - 34,850 Exercise of stock options - - 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 income (63) (63) (63) ----------------- Comprehensive loss - $ (41,748) - ----------------- ================= ------------ Balance, December 31, 1999 291 - (2,071) Issuance of common stock, net of issuance costs - - 439 Issuance of Series A preferred stock - - 19,202 Issuance of warrants - - 798 Exercise of stock options - - 42 Accretion of warrant - - - Accumulated accrued dividend on Series A Preferred Stock - - - Compensation for stock options granted - - 90 Net loss - $ (12,075) (12,075) Other comprehensive income, net of income taxes: Foreign currency translation adjustment - (27) - ----------------- Other comprehensive income (27) (27) (27) ----------------- Comprehensive loss - $ (12,102) - ----------------- ================= ------------ Balance, December 31, 2000 $ 264 $ 6,398 ================= ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OF CASH FLOWS (Dollars in thousands)
Years Ended December 31, 2000 1999 1998 ---------- ---------- ---------- Cash flows from operating activities: Net loss $ (12,075) $ (41,685) $ (28,220) Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation and amortization 2,512 3,023 3,415 Noncash expense for stock options 90 26 190 Noncash interest expense - 300 68 Write-off of other assets - 82 - Loss on asset valuation, restructuring - 410 - Deferred income taxes - 5,336 2,022 Minority interest in loss of subsidiary - (143) (117) Changes in assets and liabilities: Trade receivables, net (5,927) 14,198 693 Inventories 2,698 246 35 Income taxes receivable - - 1,427 Prepaid licenses and royalties 1,545 (1,121) (5,501) Other current assets 102 (489) 1,657 Other assets - - (3) Accounts payable (9,192) (1,941) 6,282 Accrued liabilities (2,935) (4,653) (166) Income taxes payable - 14 (607) ---------- ---------- ---------- Net cash used in operating activities (23,182) (26,397) (18,825) ---------- ---------- ---------- Cash flows from investing activities: Purchase of property and equipment (3,236) (1,595) (1,684) ---------- ---------- ---------- Net cash used in investing activities (3,236) (1,595) (1,684) ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (payments) on line of credit 6,215 (5,257) 1,229 Payments of subordinated secured promissory notes and warrants - - (6,054) Repayments on notes payable (412) - (76) Net proceeds from issuance of common stock 439 35,450 24,310 Net proceeds from issuance of Series A Preferred Stock and warrants 20,000 - - Proceeds from exercise of stock options 42 8 15 Reductions (additions) to restricted cash 2,597 (2,597) - Other financing activities - 236 - ---------- ---------- ---------- Net cash provided by financing activities 28,881 27,840 19,424 ---------- ---------- ---------- Effect of exchange rate changes on cash (27) (63) 163 ---------- ---------- ---------- Net increase (decrease) in cash 2,436 (215) (922) Cash, beginning of year 399 614 1,536 ---------- ---------- ---------- Cash, end of year $ 2,835 $ 399 $ 614 ========== ========== ========== Supplemental cash flow information: Cash paid during the year for interest $ 3,027 $ 3,608 $ 4,671 ========== ========== ========== 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 (the "Company"), develop, publish, and distribute interactive entertainment software; and distribute selected software to computer and 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 next generation video game consoles, such as the Sony PlayStation 2, Microsoft Xbox and Nintendo GameCube. The Company incurred a net loss of $12.1 million and used cash in operating activities of $23.2 million for the year ended December 31, 2000. During 2000, the Company's working capital improved to a positive $123,000 at year end compared to a negative $7.6 million at the end of 1999. In April 2001, the Company obtained a new three year working capital line of credit with a bank and completed the sale of $12.7 million of Common Stock in a private placement transaction (see Notes 5, 8 and 14). The Company believes that funds available under its new line of credit, funds received from the sale of equity securities and anticipated funds from operations including licensing and distribution transactions, if any, 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 end of 2001 (See Notes 5, 14 and 15). However, there can be no assurance that the Company will have or be able to raise sufficient funds to satisfy its projected working capital and capital expenditure needs beyond 2001. 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 platform introductions by hardware manufactures, new product introductions by the Company, product delays, rapidly changing technology, intense competition, dependence on distribution channels and risk of customer returns. The Company's consolidated financial statements have been presented on the basis that the Company 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. 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. 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 F-7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 as of December 31, 1999, represents cash collateral deposits made in accordance with the Company's amended Loan and Security Agreement (see Note 5). The restricted cash was released during 2000. Inventories Inventories consist of CD-ROMs or DVDs, manuals, packaging materials and supplies, and packaged software finished goods ready for shipment, including video game console software. Inventories 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 goods sold over six months commencing with 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 product release date. 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, 2000 and 1999 was $2.1 million and $1.7 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. F-8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 approximates 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. Guaranteed minimum royalties on sales that do not meet the guarantee are recognized as the minimum payments come due. 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 markdown allowances 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. 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 asset 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 financial statements as other comprehensive income (loss). Losses resulting from foreign currency transactions amounted to $935,000, $125,000 and $288,000 during the years ended December 31, 2000, 1999 and 1998, respectively, and are included in other income (expense) in the consolidated statements of operations. F-9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Net Loss Per Share The Company accounts for net loss per share in accordance with SFAS No. 128 "Earnings Per Share." 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, 2000, 1999 and 1998, 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) 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. Stock-Based Compensation The Company accounts for employee stock options in accordance with the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and makes the necessary pro forma disclosures mandated by SFAS No. 123 "Accounting for Stock-based Compensation" (see Note 10). Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 2000 as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in the earnings unless specific hedge accounting criteria are met. The adoption of this standard on January 1, 2001, did not have a material impact on the Company's results of operations. In December 1999, the Securities and Exchange Commission ("SEC") staff released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as amended by SAB No. 101A and SAB No. 101B, 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 versus net revenue presentation and financial statement and Management's Discussion and Analysis disclosures related to revenue recognition. The Company adopted SAB No. 101 effective January 1, 2000 and the adoption of this standard reduced net sales and cost of sales by approximately $1.7 million for the year ended December 31, 2000, but did not have an impact on the Company's gross profit or net loss. The Company did not apply this standard to the 1999 period as the impact would have been immaterial to the financial statements taken as a whole. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB 25. This Interpretation clarifies (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a material effect on the Company's financial position or results of operations. F-10 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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, 2000, the Company had not been required to make any additional payments in accordance with the purchase agreement (see Note 7). In March 2001, the Company acquired the remaining nine percent equity interest in Shiny for $600,000 (see Note 14). 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, ------------------------ 2000 1999 ---------- ---------- (Dollars in thousands) Packaged software finished goods $ 2,628 $ 4,394 CD-ROMs, DVDs, manuals, packaging and supplies 731 1,663 ---------- ---------- $ 3,359 $ 6,057 ========== ========== Other Current Assets Other current assets consist of the following: December 31, ------------------------ 2000 1999 ---------- ---------- (Dollars in thousands) Prepaid expenses $ 689 $ 764 Deposits 83 110 ---------- ---------- $ 772 $ 874 ========== ========== Property and Equipment Property and equipment consists of the following: December 31, ------------------------ 2000 1999 ---------- ---------- (Dollars in thousands) Computers and equipment $ 10,175 $ 14,651 Furniture and fixtures 123 849 Leasehold improvements 1,380 1,348 ---------- ----------- 11,678 16,848 Less: Accumulated depreciation and amortization (6,347) (12,623) ---------- ---------- $ 5,331 $ 4,225 ========== ========== F-11 INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) For the years ended December 31, 2000, 1999 and 1998, the Company incurred depreciation expense of $2.1 million, $2.6 million and $3 million, respectively. During the year ended December 31, 2000, the Company disposed of fully depreciated equipment having an original cost of $8.3 million. Accrued Liabilities Accrued liabilities consist of the following: December 31, -------------------------- 2000 1999 ------------- ------------ (Dollars in thousands) Royalties payable $ 7,258 $ 7,950 Accrued payroll 1,441 2,337 Payable to distributor 3,115 2,908 Accrued bundle and affiliate 547 1,563 Deferred revenue 1,708 2,039 Other 911 1,118 ------------- ------------ $ 14,980 $ 17,915 ============= ============ 5. Current Debt Current debt consists of the following: December 31, -------------------------- 2000 1999 ------------- ------------ (Dollars in thousands) Loan Agreement $ 24,433 $ 19,218 Supplemental line of credit from Titus 1,000 - Other - 412 ------------- ------------ $ 25,433 $ 19,630 ============= ============ Loan Agreement Borrowings under the Loan and Security Agreement ("Loan Agreement") bear interest at LIBOR (6.78 percent at December 31, 2000 and 6.48 percent at December 31, 1999) plus 4.87 percent (11.65 percent at December 31, 2000 and 11.35 percent at December 31, 1999). In April 2000, the Company amended its line of credit under the Loan Agreement with a financial institution to extend its current line of credit through April 2001. 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, which is based on qualifying receivables and inventory. At December 31, 2000, the Company had availability of $600,000 on its line of credit. In addition, the Company is required to maintain the $5 million personal guarantee by the Company's Chairman and Chief Executive Officer ("Chairman") and Titus is required to provide a $20 million corporate guarantee. The Company is currently in compliance with the terms of the Loan Agreement. In April 2001, the Company replaced its line of credit under a loan and security agreement with a new bank (see Note 14). Supplemental line of credit from Titus In April 2000, the Company secured a $5 million supplemental line of credit with Titus expiring in May 2001. Amounts borrowed under this line are subject to interest at the maximum legal rate for parties other than financial institutions, currently 10 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 and is exercisable if and to the extent that the Company borrows under the line of credit, as defined. At F-12 INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2000, the Company had availability of $4 million on its supplemental line of credit. Subsequent to December 31, 2000, the Company borrowed an additional $2 million under the supplemental line, and during April 2001, the total outstanding balance plus accrued interest in the aggregate amount of approximately $3.1 million was paid in full. 6. Income Taxes Loss before provision (benefit) for income taxes consists of the following: Years Ended December 31, ------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (Dollars in thousands) Domestic $ (10,801) $ (32,294) $ (25,038) Foreign (1,274) (3,981) (1,745) ----------- ----------- ----------- Total $ (12,075) $ (36,275) $ (26,783) =========== =========== =========== The provision (benefit) for income taxes is comprised of the following: Years Ended December 31, ----------------------------- 2000 1999 1998 ------- -------- -------- (Dollars in thousands) Current: Federal $ - $ - $ - State - 8 8 Foreign - 66 (571) ------- -------- -------- - 74 (563) Deferred: Federal - 4,536 2,000 State - 800 - ------- -------- -------- - 5,336 2,000 ------- -------- -------- $ - $ 5,410 $ 1,437 ======= ======== ======== 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 $107.8 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 2020. The Company's NOL's for State tax reporting purposes approximate $50.2 million and expire through the year 2005. 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 December 31, ----------------------------- 2000 1999 1998 ------- -------- -------- (Dollars in thousands) Statutory income tax rate State and local income taxes, net of (34.0)% (34.0)% (34.0)% Federal income tax benefit (3.0) (3.0) (3.0) Valuation allowance 37.0 51.9 39.8 Other - - 2.6 ------- -------- -------- - % 14.9 % 5.4 % ======= ======== ======== F-13 INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The components of the Company's net deferred income tax asset (liability) are as follows: December 31, ------------------------ 2000 1999 ------------------------ (Dollars in thousands) Current deferred tax asset (liability): Prepaid royalties $ (7,081) $ (7,652) Nondeductible reserves 3,135 4,184 Accrued expenses 763 1,007 Foreign loss and credit carryforward 965 454 Federal and state net operating losses 39,672 35,952 Research and development credit carryforward 831 831 Other 294 314 ---------- ---------- $ 38,579 $ 35,090 ---------- ---------- Non-current deferred tax asset (liability): Depreciation expense $ 50 $ (126) Nondeductible reserves 389 318 Other (6) (5) ---------- ---------- $ 433 $ 187 ---------- ---------- Total deferred tax asset before valuation allowance $ 39,012 $ 35,277 Valuation allowance (39,012) (35,277) ---------- ---------- Net deferred tax asset $ - $ - ========== ========== 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): 2001 $ 1,864 2002 1,755 2003 1,758 2004 1,907 2005 1,789 Thereafter 3,648 ---------- $ 12,721 ========== Total rent expense was $2.8 million, $3.2 million and $2.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. F-14 INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES 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 and December 31, 1997 and 1998. 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 consolidated 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 NOL, could impact the Company's future cashflows and 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 under the applicable agreements. In March 2001, the Company settled this dispute with the former owner of Shiny which, among other things, amended the original purchase agreement of Shiny and modified the terms of additional cash payments for the delivery of future software titles (see Note 14). Virgin Interactive Entertainment Limited ("Virgin") has disputed an amendment effective as of January 2000 to the International Distribution Agreement with the Company, and claims that the Company is obligated, among other things, to pay a contribution to their overhead of up to approximately $9.3 million annually, subject to decrease by the amount of commissions earned by Virgin on its distribution of the Company's products. The Company settled this dispute with Virgin in April 2001 (see Note 14). Employment Agreements The Company has entered into employment agreements with certain key employees 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. F-15 INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Stockholders' Equity Preferred Stock and 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 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. Under the agreement, the Company did not repurchase any shares. 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. In 1999, the Company entered into an Agreement and Release with an employee and 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. In April 2000, the Company completed a $20 million transaction with Titus under a Stock Purchase Agreement and issued 719,424 shares of newly designated Series A Preferred Stock ("Preferred Stock") and a warrant for 350,000 shares of the Company's Common 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 cumulative dividend per annum payable in cash or, at the option of Titus, in shares of the Company's Common Stock as declared by the Company's Board of Directors. The Company may redeem the Preferred Stock shares at the original issue price plus all accrued but unpaid dividends at any time after termination of Titus's guarantee of the Company's principal line of credit. Titus may convert the Preferred Stock shares into shares of Common Stock at any time after May 2001 or earlier under certain events as defined. The conversion rate is the lesser of $2.78 (7,194,240 shares of Common Stock) 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 subject to a maximum of 7,619,047 votes. In October 2000, the Company's stockholders approved the issuance of the Preferred Stock to Titus. In connection with this transaction, Titus received a warrant for 350,000 shares of the Company's Common Stock exercisable at $3.79 per share at anytime. The fair value of the warrant was estimated on the date of the grant using the Black-Scholes pricing model with the F-16 INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) following weighted average assumptions: dividend yield of zero percent; expected volatility of 92 percent; risk-free interest rate of 5.85 percent; and an expected life of one-year. This resulted in the Company allocating $19,202,000 to the Preferred Stock and $798,000 to the warrant which is included in paid in capital. The discount on the Preferred Stock is being accreted over a one-year period as a dividend to the Preferred Stock. As of December 31, 2000, the Company had accreted $532,000. In addition, Titus received a warrant for 50,000 shares of the Company's Common Stock exercisable at $3.79 per share which became exercisable by Titus since the Company did not meet certain financial operating performance targets for the year ending December 31, 2000, as defined. Both warrants expire in April 2010. In April 2001, Titus' guarantee of the Company's principal line of credit was released and the Company may redeem the Preferred Stock at anytime thereafter (see Note 14). In connection with the $20 million corporate guarantee provided by Titus on the extension of the Company's line of credit (see Note 5), if the Company defaults on the line of credit agreement, 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 and 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. The Common Stock shares issuable upon conversion of the Preferred Stock or the exercise of the warrants are subject to certain registration rights. In April 2001, Titus' guarantee of the Company's principal line of credit was released eliminating the potential for adjustment to the conversion rights into and up to approximately 42.8 million shares of Common Stock (see Note 14). In connection with this line of credit, Titus received a warrant to acquire up to 100,000 shares of the Company's Common Stock at $3.79 per share that will expire in April 2010 and is exercisable if and to the extent that the Company borrows under the line of credit, as defined (see Note 5). As of December 31, 2000, part of the warrant became exercisable for 20,000 shares of the Company's Common Stock. In August 2000, the Company issued a warrant to purchase up to 100,000 shares of the Company's Common Stock. The warrant vests at certain dates over a one year period and has exercise prices between $3.00 per share and $6.00 per share, as defined. The warrant expires in August 2003. During 2000, the Company's Board of Directors approved a resolution that increased the number of authorized shares of the Company's Common Stock from 50 million to 100 million. In March 2001, the Company completed a private placement of 8,126,770 shares of Common Stock for $12.7 million, and received net proceeds of approximately $11.5 million. The shares were issued at $1.5625 per share, and included warrants to purchase one share of Common Stock for each share sold. The warrants are exercisable at $1.75, and one half of the warrants can be exercised immediately with the other half exercisable after June 27, 2001, only if prior to this date, the Company's Common Stock trading price does not exceed $2.75 for a period of 20 consecutive trading days, as defined. The warrants also have a call provision by the Company if the Company's Common Stock trades at or above $3.00, as defined. If the Company issues additional shares of Common Stock at a per share price below the exercise price of the warrants, then the warrants are to be repriced, as defined, subject to stockholder approval. The warrants expire in March 2006. The transaction provides for registration rights with a registration statement to be filed by April 16, 2001 and become effective by May 31, 2001. In the event that the filing and effective dates of the registration statement are not met, the Company is subject to a two percent penalty per month, payable in cash or stock, until the filing and effective dates are met. (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. During the year, the Board of Directors increased the number of F-17 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) shares authorized to 300,000. Of the 300,000 shares authorized to be issued under the plan, approximately 131,000 shares remained available for issuance at December 31, 2000. Employees purchased 40,661 and 72,225 shares in 2000 and 1999 for $89,000 and $127,000, respectively. 9. Loss Per Share Basic loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive securities. Diluted loss per share is the same as basic because the effect of outstanding stock options and warrants is anti-dilutive. There were options and warrants outstanding to purchase 4,449,967 and 3,740,780 shares of Common Stock at December 31, 2000 and 1999, respectively, and there were 484,848 shares of restricted Common Stock at December 31, 2000 and 1999, which were excluded from the loss per share computation. At December 31, 1998 there were options to purchase 2,132,738 shares of common stock, which were not included in the loss per share computation. The weighted average exercise price at December 31, 2000, 1999 and 1998 was $3.03, $3.30 and $4.73, respectively, for the options and warrants 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 111,000 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 150,000 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 4,000,000 shares of common stock. Options under all three plans generally vest from three to 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 $90,000, $26,000 and $190,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The following is a summary of option activity pursuant to the Company's stock option plans:
Years Ended December 31, ----------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ---------- ---------- ---------- ---------- ---------- Options outstanding at beginning of period 3,340,780 $3.30 2,132,738 $4.73 1,838,972 $5.29 Granted 968,498 2.64 2,208,028 2.14 451,100 6.91 Exercised (123,711) 0.37 (287,958) 0.04 (12,084) 1.27 Canceled (655,600) 5.14 (712,028) 5.29 (139,750) 8.44 Rescinded - - - - (5,500) 8.00 ---------- ---------- ---------- ---------- ---------- ---------- Options outstanding at end of period 3,529,967 $2.90 3,340,780 $3.30 2,132,738 $4.73 ========== ========== ========== ========== ========== ========== Options exercisable 1,496,007 1,209,734 1,448,143 ========== ========== ==========
F-18 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 December 31, -------------------------------------- 2000 1999 1998 ---------- ----------- ----------- Risk free rate 6.2% 6.3% 5.1% Expected life 7.3 years 7.12 years 7.74 years Expected volatility 90% 90% 70% Expected dividends - - - Weighted- average grant-date fair value of options granted $ 2.14 $ 1.91 $ 2.95
A detail of the options outstanding and exercisable as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable ------------------------------------------------ ------------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Number Exercise Range of Exercise Prices Number Outstanding Contract Life Price Outstanding Price - ------------------------ ------------------ ------------- ---------- ----------- ---------- $ 0.15 - $ 0.47 572,874 1.24 $ 0.15 572,874 $ 0.15 $ 1.94 - $ 4.44 2,469,143 8.72 2.58 594,943 2.47 $ 4.50 - $ 6.66 96,500 6.99 5.18 53,100 5.38 $ 7.00 - $ 10.00 391,450 6.04 8.40 275,090 8.57 ------------------ ------------- ---------- ----------- ----------- $ 0.15 - $ 10.00 3,529,967 7.16 $ 2.90 1,496,007 $ 2.81 ================== ============= ========== =========== ===========
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 December 31, ---------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ (Dollars in thousands, except per share amounts) Net loss attributable to common stockholders, as reported $ (13,477) $ (41,685) $ (28,220) Pro forma compensation expense (1,370) (1,242) (1,011) ------------ ------------ ------------ Pro forma net loss attributable to common stockholders $ (14,847) $ (42,927) $ (29,231) ============ ============ ============ Basic and diluted net loss as reported $ (0.45) $ (1.86) $ (1.91) Basic and diluted pro forma net loss $ (0.49) $ (1.91) $ (1.98) ============ ============ ============
Profit Sharing 401(k) Plan The Company sponsors a 401(k) plan ("the Plan") for most fulltime 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, 2000, 1999 and 1998 was $267,000, $257,000 and $256,000, respectively. F-19 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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, 2000 and 1999 were $2.5 million. Such amounts at December 31, 2000 and 1999 are fully reserved. 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 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. In connection with the Company's new working capital line of credit obtained subsequent to year end and the retirement of the current debt existing under the Company's previous working capital line of credit arrangements (see Notes 5 and 14), the secured personal guarantee of $5 million previously provided by the Chairman was released, and a new personal guarantee for $2 million, secured by $1 million in cash, was provided to the new bank by the Chairman. In addition, the Chairman provided the Company with a $3 million loan, payable in May 2002, with interest at 10 percent. In connection with the new guarantee and loan, the Chairman received warrants to purchase 500,000 shares of the Company's Common Stock at $1.75 per share, expiring in April 2011. In connection with the International Distribution Agreement executed in February 1999, the Company subleases office space from Virgin. Rent expense paid to Virgin was $101,000 and $50,000 for the years ended December 31, 2000 and 1999. Distribution and Publishing Agreements In February 1999, the Company entered into an International Distribution Agreement with Virgin which provides for the exclusive distribution of substantially all of the Company's products in Europe, CIS, Africa and the Middle East for a seven-year period, cancelable under certain conditions, subject to termination penalties and costs. Under the Agreement, the Company pays Virgin a monthly overhead fee, certain minimum operating charges, a distribution fee based on net sales, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on behalf of the Company. The Company amended its International Distribution Agreement with Virgin effective January 1, 2000. Under the amended Agreement, the Company no longer pays Virgin an overhead fee or minimum commissions. In addition, the Company extended the term of the agreement through February 2007 and implemented an incentive plan that will allow Virgin to earn a higher commission rate, as defined. Virgin disputed the amendment to the International Distribution Agreement with the Company, and claimed that the Company was obligated, among other things, to pay a contribution to their overhead of up to approximately $9.3 million annually, subject to decrease by the amount of commissions earned by Virgin on its distribution of our products. The Company settled this dispute with Virgin in April 2001 (see Note 14). In connection with the International Distribution Agreement, the Company incurred distribution commission expense of $4.6 million and $3.4 million for the years ended December 31, 2000 and 1999, respectively. In addition, the Company recognized overhead fees of $3.9 million and certain minimum operating charges to Virgin of $2.9 million for the year ended December 31, 1999. The Company has also entered into 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. As part of terms of the April 2001 settlement between Virgin and the Company the Product Publishing Agreement was amended to provide for the Company to publish only one future title developed by Virgin (see Note 14). In connection with the Product Publishing Agreement with Virgin, the Company earned $63,000 and $41,000 for performing publishing and distribution services on behalf of Virgin for the years ended December 31, 2000 and 1999, respectively. F-20 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As of December 31, 2000 and 1999, Virgin owed the Company $12.1 million and $9.1 million, and the Company owed Virgin $4.8 million and $7.8 million, respectively. The net amount outstanding as of December 31, 2000 was fully paid by Virgin in April 2001. In connection with the equity investments by Titus (see Note 8), the Company performs distribution services on behalf of Titus for a fee. In connection with such distribution services, the Company recognized fee income of $435,000 and $200,000 for the years ended December 31, 2000 and 1999, respectively. During the year ended December 31, 2000, the Company recognized $3 million in licensing revenue under a multi-product license agreement with Titus for the technology underlying one title and the content of three titles for multiple game platforms, extended for a maximum period of twelve years, with variable royalties payable to the Company from five to ten percent, as defined. The Company earned a $3 million non-refundable fully-recoupable advance against royalties upon signing and completing all of its obligations under the agreement. During the year ended December 31, 1999, the Company executed publishing agreements with Titus for three titles. As a result of these agreements, the Company recognized revenue of $2.6 million for delivery of these titles to Titus. In addition, during 2000 the Company borrowed $1 million from Titus under the supplemental line of credit (see Note 5). As of December 31, 2000 and 1999, Titus owed the Company $280,000 and zero and the Company owed Titus $1.1 million and $0.3 million, respectively. Investment in Affiliate In connection with the International Distribution Agreement and Product Publishing Agreement, the Company has also entered into 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. During 1999, Titus acquired a 50.1 percent equity interest in VIE and in 2000, Titus acquired the 6 percent originally owned by the two former members of the management of Interplay Productions Limited, the Company's United Kingdom subsidiary. The Company and Titus together held a 100 percent equity interest in VIE as of December 31, 2000. As part of the terms of the April 2001 settlement, VIE redeemed the Company's membership interest in VIE (see Note 14). The Company accounted 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 years ended December 31, 2000 and 1999. The Company recognizes sales to Virgin, net of sales commissions, only after Virgin recognizes 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 years ended December 31, 2000 and 1999, Virgin accounted for approximately 29 and 22 percent, respectively, of net revenues in connection with the International Distribution Agreement (see Note 11). No single customer accounted for ten percent or more of net revenues in the year ended December 31, 1998. F-21 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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: Years Ended December 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Net revenues: (Dollars in thousands) United States $ 104,377 $ 92,244 $ 94,727 United Kingdom 205 9,686 32,135 ---------- ---------- ---------- Consolidated net revenues $ 104,582 $ 101,930 $ 126,862 ========== ========== ========== Income (loss) from operations: United States $ (7,057) $ (28,824) $ (20,315) United Kingdom (1,329) (3,980) (1,535) ---------- ---------- ---------- Consolidated loss from operations $ (8,386) $ (32,804) $ (21,850) ========== ========== ========== Expenditures made for the acquisition of long-lived assets: United States $ 3,177 $ 1,595 $ 1,067 United Kingdom 59 - 422 Other - - 195 ---------- ---------- ---------- Total expenditures for long-lived assets $ 3,236 $ 1,595 $ 1,684 ========== ========== ========== Net revenues were attributable to geographic regions as follows: Years Ended December 31, ------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------- Amount Percent Amount Percent Amount Percent --------- --------- --------- --------- --------- --------- (Dollars in thousands) North America $ 56,454 54.0 % $ 49,443 48.5 % $ 73,865 58.2 % Europe 28,107 26.9 23,901 23.4 28,777 22.7 Rest of World 6,970 6.6 6,409 6.3 7,016 5.5 OEM, royalty and licensing 13,051 12.5 22,177 21.8 17,204 13.6 --------- --------- --------- --------- --------- --------- $ 104,582 100.0 % $ 101,930 100.0 % $ 126,862 100.0 % ========= ========= ========= ========= ========= ========= Long-lived assets, net, by geographic regions are as follows: December 31, December 31, 2000 1999 ------------------- ------------------- Amount Percent Amount Percent -------- --------- -------- --------- (Dollars in thousands) North America $ 6,139 97.8 % $ 5,435 97.9 % Europe 76 1.2 47 0.9 Rest of World - - - - OEM, royalty and licensing 60 1.0 69 1.2 -------- --------- -------- --------- $ 6,275 100.0 % $ 5,551 100.0 % ======== ========= ======== ========= F-22 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Subsequent Events Replacement of Credit Facility In April 2001, the Company entered into a new three year loan and security agreement with a bank providing for a $15 million working capital line of credit. Advances under the line are limited to an advance formula of qualified accounts receivable and inventory, and bear interest at the banks prime rate, or at LIBOR plus 2.5% at the Company's option, as defined. The line is subject to review and renewal by the bank on April 30, 2002 and 2003, and is secured by substantially all of the Company's assets, plus a personal guarantee from the Chairman of $2 million, secured by $1 million in cash. The line requires that the Company meet certain financial covenants, as defined. The funds available from this transaction have been used to retire current debt under the Loan Agreement (see Note 5) existing at December 31, 2000, and to fund future operations. The working capital line of credit balance as of April 13, 2001 was $6.1 million. Sale of Common Stock In April 2001, the Company completed a private placement of 8,126,770 shares of Common Stock for 12.7 million, and received net proceeds of approximately $11.5 million. The shares were issued at $1.5625 per share, and included warrants to purchase one share of Common Stock for each share sold. The warrants are exercisable at $1.75 per share, and one-half of the warrants can be exercised immediately with the other half exercisable after June 27, 2001, if (and only if) the closing price of the Company's Common Stock as reported on Nasdaq does not equal or exceed $2.75 for 20 consecutive trading days prior to June 27, 2001. The Company may also require the holder to exercise the warrants if the closing price of the Company's Common Stock as reported on Nasdaq equals or exceeds $3.00 for 20 consecutive trading days prior to June 27, 2001. The warrants expire in March 2006. The transaction provides for a registration statement covering the shares sold or issuable upon exercise of such warrants to be filed by April 16, 2001 and become effective by May 31, 2001. In the event that the filing and effective dates of the registration statement are not met, the Company is subject to a two percent penalty per month, payable in cash or stock, until the filing and effective dates are met. The funds available from this transaction have been used to retire current debt under the Loan Agreement (see Note 5) existing at December 31, 2000, and to fund future operations. F-23 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Unaudited Pro-forma Condensed Balance Sheet In April 2001, current debt was reduced by approximately $11.5 million. The following pro-forma balance sheet reflects the Company's financial position as if the new financing, including the private placement of Common Stock, and the new working capital line of credit had been completed as of December 31, 2000. UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET December 31, 2000
ASSETS Actual Pro-forma ------ ----------- ----------- Current Assets: (Dollars in thousands) Cash $ 2,835 $ 2,835 Trade receivables, net 28,136 28,136 Inventories 3,359 3,359 Prepaid licenses and royalties 17,704 17,704 Other 772 772 ----------- ----------- Total current assets 52,806 52,806 ----------- ----------- Property and Equipment, net 5,331 5,331 Other Assets 944 944 ----------- ----------- $ 59,081 $ 59,081 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Current debt $ 25,433 $ 13,887 Accounts payable 12,270 12,270 Accrued liabilities 14,980 14,980 ----------- ----------- Total current liabilities 52,683 41,137 ----------- ----------- Commitments and Contingencies Stockholders' Equity: Series A Preferred stock, $.001 par value, authorized 5,000,000 shares; issued and outstanding 719,424 shares 19,735 19,735 Common stock, $.001 par value, authorized 50,000,000 shares; issued and outstanding 30,143,636 and 38,270,406 proforma shares 30 38 Paid-in capital 88,759 100,297 Accumulated deficit (102,390) (102,390) Accumulated other comprehensive income 264 264 ----------- ----------- Total stockholders' equity 6,398 17,944 ----------- ----------- $ 59,081 $ 59,081 =========== ===========
Loan from Chairman and Chief Executive Officer In April 2001, the Chairman provided the Company with a $3 million loan, payable in May 2002, with interest at 10 percent. In connection with this loan to the Company and the $2 million guarantee on behalf of the Company for the credit facility, the Chairman received warrants to purchase 500,000 shares of the Company's Common Stock at $1.75 per share, can be exercised immediately and expires in April 2011. F-24 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Amendment to Shiny Purchase Agreement In March 2001, the Company entered into an amendment to the Shiny purchase agreement (see Notes 3 and 7) which, among other things, settles a dispute with the former owner of Shiny, and provide for the Company to acquire the remaining nine percent equity interest in Shiny for $600,000. The amendment also provides for additional cash payments to the former owner of Shiny for two interactive entertainment software titles to be delivered in the future. The former owner of Shiny will earn royalties after the future delivery of the two titles to the Company. Settlement of Dispute with Virgin Interactive Entertainment Limited In April 2001, the Company settled its dispute with Virgin (see Note 7) and amended the International Distribution Agreement, the Termination Agreement and the Product Publishing Agreement entered into in February 10, 1999 (see Note 11). As a result of the settlement, Virgin dismissed its claim for overhead fees, VIE Acquisition Group LLC ("VIE") redeemed the Company's membership interest in VIE and Virgin paid the Company $3.1 million in net past due balances owed under the International Distribution Agreement. In addition, the Company will pay Virgin a one-time marketing of $333,000 for the period ending June 30, 2001 and the monthly overhead fee was revised for the Company to pay $111,000 per month for a nine month period beginning April 2001, and $83,000 per month for a six month period beginning January 2002, with no further overhead commitment for the remainder of the term of the International Distribution Agreement. 15. Subsequent Event - Factors Affecting Future Performance and Going Concern As of June 30, 2001, the Company's current liabilities exceeded its current assets by $9.2 million. For the six months ended June 30, 2001, the Company incurred a net loss of $20.8 million based on its unaudited financial statements. However, net cash used in operating activities was $1.7 million as the Company's negative operating results were largely offset by strong trade receivable collections and conservative management of inventories and disbursements. During the same period last year, the net cash used in operating activities was $19.7 million. In June 2001, the Company experienced significant delays in the production and release of certain titles. These delays resulted in significant declines in the operating revenues of the Company as compared to budget for the quarter ended June 30, 2001. The Company has not released sufficient product during the three month period ended June 30, 2001 to generate a profitable level of revenues, or sufficient accounts receivable to maximize the use of its line of credit. The Company also anticipates that delays in product releases could continue in the short-term, and funds available under its new line of credit and from ongoing operations are not sufficient to satisfy the projected working capital and capital expenditure needs in the normal course of business. In addition, the Company is not in compliance with certain financial covenants set forth in the new line of credit agreement as of June 30, 2001 and these violations have not been cured as of August 23, 2001. If the bank does not waive compliance with the required covenants, terminates the credit agreement and demands acceleration of payment of the outstanding amounts, the Company would not have the funds to repay the bank and would be unable to continue to draw on the credit facility to fund future operations. The Company continues to implement cost reduction programs including a reduction of personnel, a reduction of fixed overhead commitments, cancelled or suspended development on future titles and have scaled back certain marketing programs. During the six months ended June 30, 2001, the Company incurred $2.2 million in write-offs of prepaid royalties for titles in development that have been canceled. The Company may continue to incur write-offs if additional projects are canceled in order to reduce future operating expenditures. The Company has, and expects to continue to, incur costs related to penalties arising from the April 2001 private placement registration statement not being declared effective (see Note 14). This obligation will continue to accrue each month that the registration statement is not declared effective and does not have a limit on the amount payable to these investors. As of August 23, 2001, this registration statement is not declared effective and the Company has accrued penalties of $508,000. The Company is seeking external sources of funding, including but not limited to, a sale or merger of the Company, a private placement of Company capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially carry out management's long-term strategic objectives. However, there can be no assurance that the Company can complete the transactions necessary to provide the required funding on a timely basis in order to continue ongoing operations in the normal course of business. F-25 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) If the Company is unable to secure the required funding on a timely basis, it will continue to reduce its costs by selling or consolidating its operations, and by continuing to delay or cancel product development and marketing programs. 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 platform introductions by hardware manufacturers, commercially successful new product introductions by the Company, new product introduction delays, rapidly changing technology, intense competition, dependence on distribution channels and risk of customer returns. Conversion of Series A Preferred Stock On August 13, 2001, Titus converted 336,070 shares of Series A Preferred Stock into 6,679,306 shares of Common Stock (See Note 8). Subsequent to this partial conversion, Titus owns 19,496,561 shares of Common Stock and 383,354 shares of Series A Preferred Stock with voting rights equivalent to 4,059,903 shares of Common Stock. Collectively, Titus has 48 percent of the total voting power of the Company capital stock as of August 13, 2001. Distribution Agreement In August 2001, the Company received an advance of $4 million for the North American distribution rights of a future title. The advance will be recouped against future distribution commissions payable, based on the future sales of the title. F-26 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Quarterly Financial Data (Unaudited) The Company's summarized quarterly financial data is as follows:
March 31 June 30 September 30 December 31 ---------- ---------- ------------ ----------- (Dollars in thousands, except per share amounts) Year ended December 31, 2000: Net revenues $ 18,143 $ 24,921 $ 31,631 $ 30,773 ========= ========= ========= =========== Gross profit $ 8,571 $ 13,465 $ 15,436 $ 13,061 ========= ========= ========= =========== Net loss $ (5,498) $ (1,903) $ 113 $ (4,772) ========= ========= ========= =========== Net loss per share basic/diluted $ (0.18) $ (0.08) $ (0.01) $ (0.18) ========= ========= ========= =========== Year ended December 31, 1999: Net revenues $ 21,620 $ 29,430 $ 23,636 $ 27,323 ========= ========= ========= =========== Gross profit $ 9,054 $ 11,814 $ 8,303 $ 11,609 ========= ========= ========= =========== Net loss $ (8,278) $ (6,921) (16,976) $ (9,563) ========= ========= ========= =========== Net loss per share basic/diluted $ (0.44) $ (0.33) $ (0.75) $ (0.35) ========= ========= ========= ===========
F-27 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
Trade Receivables Allowance ----------------------------------------------------------- Balance at Provisions for Beginning of Returns Returns and Balance at End Period Period and Discounts Discounts of Period ------ ------ ------------- --------- --------- 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 ========== ============= ========== ============ Year ended December 31, 2000 $ 9,161 $ 19,016 $ (21,634) $ 6,543 ========== ============= ========== ============
EX-10.40 3 dex1040.txt JOINT VENTURE AGREEMENT APRIL 3, 2000 EXHIBIT 10.40 JOINT VENTURE AGREEMENT ----------------------- THIS JOINT VENTURE AGREEMENT (this "Agreement") is dated as of April 3, 2000 and is entered into by and between Interplay Entertainment Corp. ("Interplay"), a Delaware corporation, and Brian Fargo ("Fargo") with reference to the following facts: A. Interplay now owns, and will in the future obtain or develop, certain intellectual properties suitable for development as film projects (hereinafter referred to as the "Interplay Properties"). B. Fargo now owns, and will in the future obtain or develop, certain intellectual properties suitable for development as film projects (hereinafter referred to as the "Fargo Properties"; the Interplay Properties and the Fargo Properties are collectively referred to herein as the "Properties"). C. The Venturers have provided funding for the exploitation of the Properties as film projects. D. The parties are entering into this Agreement in order jointly to develop and exploit the Properties, and to provide for the treatment of past contributions and disbursements for such purposes. Accordingly, the parties agree as follows: 1 FORMATION AND RELATED MATTERS. ----------------------------- 1.1. Formation. The parties to this Agreement (jointly, the --------- "Venturers," and individually, a "Venturer") hereby enter into and form a joint venture (the "Venture") for the limited purpose of operating that certain film production venture currently known as Interplay Films. 1.2. Scope of Authority. This Agreement shall not be deemed to create ------------------ a general partnership between the Venturers. Except as expressly provided in this Agreement, the relationship formalized in this Agreement shall not: 1.2.1. Vest either Venturer with the authority to bind or act for, or assume any obligation or responsibility on behalf of, the other Venturer; 1.2.2. Make either Venturer responsible or liable for any indebtedness or obligation of the other Venturer incurred or arising either before or after the execution of this Agreement; or 1.2.3. Make either Venturer liable to the other Venturer for any loss, liability, claim or damage sustained by the other Venturer unless such loss, liability, claim or damage shall have been the result of fraud, deceit, gross negligence, reckless or intentional conduct, or a knowing violation of law by such Venturer. 1.3. Term. The term of the Venture shall commence as of the first ---- date set forth above, and shall continue for 25 years or until the Venturers agree in writing to terminate this Agreement. 2 CONTRIBUTIONS. The parties contemplate that they will contribute ------------- Properties, funds and efforts to the Venture as set forth herein. The contribution of Properties shall consist of licenses to exploit the Properties as film projects, with specific rights to be agreed on a case-by-case basis for each Property. 2.1. Fargo Contributions. ------------------- 2.1.1. Intellectual Property. Fargo shall, from time to time --------------------- and in his sole discretion, contribute Fargo Properties to the Venture. 2.1.2. Funds. Fargo shall contribute funds to cover the ----- Venture's operating expenses, up to an aggregate amount of $1 million. Fargo's contribution of funds beyond the initial $1 million shall be at Fargo's sole discretion. 2.2. Interplay Contributions. ----------------------- 2.2.1. Intellectual Property. Interplay shall, from time to --------------------- time and in its sole discretion, contribute Interplay Properties to the Venture. Current Interplay contributions of Interplay Properties include those certain properties currently known as "Redneck Rampage", and "Wild 9". 2.2.2. Funds. Interplay may, from time to time by mutual ----- agreement of the Venturers, contribute funds to the Venture. At Interplay's election, such contributions may be set off against that certain $1 million deferred bonus payable by Interplay to Fargo in relation to Interplay's employment of Fargo. 2.3. Devotion of Time. Notwithstanding anything to the contrary in ---------------- this Agreement, no Venturer shall be obligated to devote all of such Venturer's time or business efforts to the Venture, but shall devote whatever time, effort and skill to the Venture as such Venturer deems appropriate, in such Venturer's sole and absolute discretion. 3 ALLOCATION OF PROFITS AND LOSSES. -------------------------------- 3.1. Allocation of Profits. --------------------- 3.1.1. Allocation. The Venture's Net Profits shall be ---------- allocated in the following order: a. First, to Fargo until Fargo's contribution of funds to the Venture is reimbursed; b. Second, if any Net Profits remain, to Interplay until Interplay's contribution of funds to the Venture (to the extent such contributions have not been set off against Fargo's bonus) is reimbursed; c. Third, if any Net Profits remain, Net Profits from Interplay Properties shall be allocated to Interplay, and Net Profits from Fargo Properties shall be allocated to Fargo. -2- 3.1.2. Definition of Net Profits. Net Profits shall be ------------------------- calculated whenever the Properties generate revenues, and no less frequently than once per calendar quarter. For purposes of this Agreement, "Net Profits" means all cash receipts arising from the Venture's exploitation of the Properties, less all (a) unpaid operating charges and expenses of the Venture, including, without limitation, debt service on the Venture's indebtedness, provided that such charges and expenses are approved by the Venturers as provided in this Agreement, (b) other unreimbursed costs in connection with the Venture, and (c) reasonable reserves required for the operation of the Venture, as determined by mutual agreement of the Venturers. 3.1.3. Compensation of Venturers. Except for the Net ------------------------- Profits distributed to each Venturer as set forth under this Section 3, --------- neither Venturer shall receive any compensation whatsoever for carrying out the Venturer's duties on behalf of the Venture, nor shall either Venturer be entitled to any interest with respect to any contribution of funds to the Venture. 3.2. Allocation of Losses. Losses shall be determined from time -------------------- to time, at least once per calendar quarter. All losses shall be allocated to Fargo. 4 MANAGEMENT OF THE VENTURE. The Venturers shall jointly manage ------------------------- the Venture. The Venturers may, by mutual agreement, appoint one or more managers to manage the Venture. All of the Venture's documents and records shall be maintained in a location where such documents and records are available to both Venturers and shall be reasonably available to both Venturers upon any termination of this Agreement and the Venture. 5 TREATMENT OF PAST CONTRIBUTIONS. The $406,000 thus far ------------------------------- contributed by Brian Fargo for the purpose of exploiting the Properties as film projects shall be treated as if made under this Agreement. 6 COMPETITION. The Venturers may engage or invest in any activity ----------- even if it directly or indirectly competes with the business of the Venture. Neither Venturer shall have any right in or to such other activities or to the income or proceeds derived therefrom. No Venturer shall be obligated to present any investment opportunity to the other Venturer, even if the opportunity is one that could be taken by the Venturers in connection with the Venture. Each Venturer shall have the right to hold any investment opportunity for his or its own account or to recommend such opportunity to persons other than the Venturers. Each Venturer acknowledges that the other Venturer owns or manages other businesses that might compete with the Venture, and hereby waives any and all rights and claims that he or it may otherwise have, if any, against the other Venturer as a result of any of such activities. 7 NO TRANSFER OF INTEREST. No Venturer shall be entitled to ----------------------- convey, assign or otherwise transfer any right created under this Agreement, including, without limitation, any right to develop, market or sell any Property. If either Venturer shall at any time convey, transfer or assign, or attempt to convey, transfer or assign, any such interest in violation of this Agreement, then the other Venturer shall, in addition to all rights and remedies at law and in equity, be entitled to a decree or order restraining and enjoining any such conveyance, transfer or assignment, and the offending Venturer shall not plead in defense thereto that there would be an adequate remedy at law. The Venturers hereby acknowledge and agree that damages at law will be an inadequate remedy for a breach or threatened breach of the violation of the covenants set forth in this Section 7. --------- -3- 8 TERMINATION OF VENTURE. Upon the termination of this Agreement and ---------------------- the termination of the Venture as provided in this Agreement, the following shall apply: 8.1. All rights to Interplay Properties shall revert to Interplay, and all rights to Fargo Properties shall revert to Fargo. 8.2. If, at the time of any such termination of the Venture, the Venturers jointly own any assets other than those described in Section 8.1, such ----------- assets shall be distributed in kind to the Venturers, proportionately to their right to receive Net Profits, as provided under this Agreement. 9 MISCELLANEOUS. ------------- 9.1. Amendment, Modification, and Waiver. This Agreement may not be ----------------------------------- amended, modified or supplemented except pursuant to an instrument in writing signed by each of the parties hereto, except that any party to this Agreement may waive any obligation owed to such party by another party under this Agreement, provided such waiver is in writing. The waiver by any party hereto of a breach of any provisions of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 9.2. Severability. If any provision of this Agreement as applied to ------------ any party or to any circumstance shall be found by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement, and any provision that is found to be void, invalid or unenforceable shall be curtailed and limited only to the extent necessary to bring such provision within the requirements of the law. 9.3. Entire Agreement. This Agreement contains the entire agreement ---------------- among the parties hereto with respect to the transactions contemplated hereby and supersedes all prior agreements or understandings among the parties with respect thereto. 9.4. Attorneys' Fees. In the event of any litigation or arbitration --------------- between or among the parties hereto respecting or arising out of this Agreement, the successful or prevailing party shall be entitled to recover his reasonable attorneys' fees and other costs in connection therewith, including, without limitation, any attorneys' fees incurred after a judgment has been rendered by a court of competent jurisdiction. 9.5. Further Acts. Each party shall execute and deliver all such ------------ further instruments, documents and papers, and shall perform any and all acts necessary to give full force and effect to all of the terms and provisions of this Agreement. 9.6. Descriptive Headings. The paragraph and section headings in this -------------------- Agreement are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. 9.7. Counterparts. This Agreement may be executed in any number of ------------ counterparts, and each of which shall be deemed an original, but all such counterparts together shall constitute but one agreement. -4- 9.8. Binding Effect. All the terms and provisions of this Agreement -------------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Anything contained herein to the contrary notwithstanding, this Agreement shall not be assignable by any party hereto without the consent of the other party hereto. 9.9. Third Party Beneficiaries. No person shall be a third party ------------------------- beneficiary of this Agreement and no person other than the parties hereto and their permitted successors and assigns shall receive any of the benefits of this Agreement. 9.10. Notices. All notices, statements and other documents that any ------- party is required or desires to give to any other party hereunder shall be given in writing and shall be served in person by express mail, by certified mail, by overnight delivery, or by facsimile at the respective addresses of the parties as set below, or at such other addresses as may be designated in writing by such party in accordance with the terms of this paragraph. If to Interplay: Interplay Entertainment Corp. ATTN: President 16815 Von Karman Avenue Irvine, California 92606 If to Fargo: Brian Fargo 426 Harbor Island Drive Newport Beach, California 92660 Delivery shall be deemed conclusively made (i) at the time of service, if personally served, (ii) when deposited in the United States mail, properly addressed and postage prepaid, if delivered by express mail or certified mail, (iii) upon deposit with the private overnight deliverer, if served by overnight delivery, and (iv) at the time of electronic transmission (as confirmed in writing), provided a copy is mailed within twenty-four (24) hours after such transmission. The time to respond to any notice shall run from the time the notice is actually delivered to the person to whom the notice is addressed. 9.11. Applicable Law. This Agreement shall be governed by and -------------- construed in accordance with the laws of the State of California (without regard to conflicts of law principles), and the parties hereby consent to the jurisdiction of California state courts or federal courts located within California over all matters relating to this Agreement. 9.12. Plural Includes Singular. Whenever used in this Agreement, the ------------------------ singular shall include the plural and the plural shall include the singular. -5- IN WITNESS WHEREOF, the Venturers have executed this Agreement as of the first date set forth above. "INTERPLAY" By:___________________________________ Herve Caen President "FARGO" _____________________________________ Brian Fargo -6- EX-10.41 4 dex1041.txt AGREEMENT DATED MAY 15, 2001 EXHIBIT 10.41 AGREEMENT THIS AGREEMENT (this "AGREEMENT") is made and entered into as of May 15, 2001, by and among INTERPLAY ENTERTAINMENT CORP., a Delaware corporation (the "INTERPLAY"), Brian Fargo, an individual ("FARGO"), Titus Interactive, S.A. ("TITUS") and Herve Caen, an individual ("CAEN") (Caen, Fargo, Titus and Interplay are herein collectively referred to as the "PARTIES"). RECITALS A. Titus, Fargo and Interplay were parties to that certain Stockholders Agreement dated as of November 2, 1999 (the "STOCKHOLDERS AGREEMENT"), pursuant to which Titus and Fargo agreed to vote their shares of stock to elect a board of directors of Interplay (the "BOARD") comprised as set forth in Section 2 of the Stockholders Agreement. B. The Stockholders Agreement has terminated in accordance with its terms. C. Caen is also an executive officer and Director of Titus, a significant stockholder of Interplay, and Fargo is the Chief Executive Officer, Chairman, and a significant stockholder of Interplay. D. The Parties desire to enter into this Agreement to govern their conduct pending the election of successors to the members of the Board. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and subject to the conditions set forth herein, the parties agree as follows: 1. COVENANTS OF INTERPLAY. 1.1 Interplay and Fargo agree that, to their current actual knowledge, the form of Amendment No. 5 to the Schedule 13D (the "13D AMENDMENT") filed by Titus, a copy of which is attached as ATTACHMENT A hereto, is true and accurate in all respects. 1.2 Interplay and Fargo each agree and covenant never to file a lawsuit, arbitration proceeding or any other administrative proceeding against any Caen or Titus, or any of their respective affiliates or agents for any causes of action, claims, actions, rights, or remedies arising out of or from (i) any inaccuracies in, omissions from, or any delays in filing of, the 13D Amendment, or (ii) asserting any fact that if true would render the 13D Amendment untrue or misleading in any material respect. 1.3 Interplay shall call, upon no less than 40 days' notice to all stockholders, and hold its annual meeting of its stockholders (the "ANNUAL MEETING") by August 15, 2001 for the purpose of electing all of its directors and for such other purposes as may be determined by the Board. The record date for the Annual Meeting and any subsequent adjournments or postponements thereof shall be no later than the earlier to occur of June 19, 2001 or the day preceding the date upon which any share of Series A Preferred Stock is first called for redemption. 1.4 Interplay represents and warrants that this Agreement constitutes the legal, valid and binding obligation of Interplay and is enforceable against Interplay 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. All corporate acts and proceedings required for the valid authorization, execution and delivery of this Agreement and the performance of this Agreement have been lawfully and validly taken. 1.5 Interplay and Fargo each agree that they will not during the period commencing on the date hereof and ending at the close of business on the date of the Annual Meeting, amend the Bylaws or the Certificate of Incorporation of Interplay or take any action the effect or purpose of which would be to amend the Bylaws or the Certificate of Incorporation of Interplay. 2. COVENANTS BY CAEN AND TITUS. 2.1 Caen agrees not to deliver notice of any stockholders meeting prior to June 1, 2001. 2.2 Titus represents and warrants that this Agreement constitutes the legal, valid and binding obligation of Titus and is enforceable against Titus in accordance with its terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally. All corporate acts and proceedings required for the valid authorization, execution and delivery of this Agreement and the performance of this Agreement have been lawfully and validly taken. 3. INJUNCTIVE RELIEF. It is hereby agreed and acknowledged that it will be impossible to measure in money the damages that would be suffered if the Parties fail to comply with any of the obligations herein imposed on them and that in the event of any such failure, an aggrieved Party will be irreparably damaged and will not have an adequate remedy at law. Any such Party shall, therefore, be entitled to injunctive relief, including specific performance, to enforce such obligations, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. 4. MISCELLANEOUS. 4.1 NOTICES. All notices, requests, demands and other communications (collectively, "NOTICES") given pursuant to this Agreement shall be in writing, and shall be delivered by personal service, courier, facsimile transmission (which must be confirmed) or by United States first class, registered or certified mail, postage prepaid, to the following addresses: (a) if to Titus or to Caen, to: Herve Caen c/o Titus Software Corporation 20432 Corisco Street Chatsworth, California 91311 Attention: Mr. Herve Caen, Chairman and Chief Executive Officer Telecopier: (818) 709-6537 Page 2 with copies to: Murray Markiles, Esq. Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East - 24th Floor Los Angeles, California 90067-3010 Telecopier: (310) 728-2233 (b) if to Interplay or to Fargo: Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, California 92606 Attention: Mr. Brian Fargo, Chairman and Chief Executive Officer Telecopier: (949) 252-0667 with a copy to: Jeffrey Coyne, Esq. Stradling Yocca Carlson & Rauth, a professional corporation 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660 Telecopier: (949) 725-4100 Any Notice, other than a Notice sent by registered or certified mail, shall be effective when received; a Notice sent by registered or certified mail, postage prepaid return receipt requested, shall be effective on the earlier of when received or the third day following deposit in the United States mails. Any party may from time to time change its address for further Notices hereunder by giving notice to the other parties in the manner prescribed in this Section. 4.2 ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement and understanding of the parties with respect to the entire subject matter of this Agreement, and any and all prior discussions, negotiations, commitments and understandings, whether oral or otherwise, related to the subject matter of this Agreement are hereby merged herein. 4.3 ASSIGNMENT. No party may assign this Agreement, and any attempted or purported assignment or any delegation of any party's duties or obligations arising under this Agreement to any third party or entity shall be deemed to be null and void, and shall constitute a material breach by such party of its duties and obligations under this Agreement. 4.4 WAIVER AND AMENDMENT. No provision of this Agreement may be waived unless in writing signed by all the parties to this Agreement, and waiver of any one provision of this Agreement shall not be deemed to be a waiver of any other provision. This Agreement may be amended only by a written agreement executed by all of the parties to this Agreement. 4.5 GOVERNING LAW; JURISDICTION. This Agreement shall be construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. In the event of any action, suit or proceeding brought under or in connection with Page 3 this Agreement exclusive venue and jurisdiction shall lie with the state and federal courts of the State of Delaware. 4.6 SEVERABILITY. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be or become prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 4.7 CAPTIONS. The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. 4.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 4.9 COSTS AND ATTORNEYS' FEES. If any action, suit, arbitration or other proceeding is instituted to remedy, prevent or obtain relief from a default in the performance by any party to this Agreement of its obligations under this Agreement, the prevailing party shall recover all of such party's attorneys' fees incurred in each and every such action, suit, arbitration or other proceeding, including any and all appeals or petitions therefrom. As used in this Section, attorneys' fees shall be deemed to mean the full and actual costs of any legal services actually performed in connection with the matters involved calculated on the basis of the usual fee charged by the attorney performing such services and shall not be limited to "reasonable attorneys' fees" as defined in any statute or rule of court. 4.10 JUDICIAL INTERPRETATION. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any person by reason of the rule of construction that a document is to be construed more strictly against the person who itself or through its agent prepared the same, it being agreed that all parties have participated in the preparation of this Agreement. 4.11 FORCE MAJEURE. If any party to this Agreement is delayed in the performance of any of its obligations under this Agreement or is prevented from performing any such obligations due to causes or events beyond its control, including, without limitation, acts of God, fire, flood, earthquake, strike or other labor problem, injunction or other legal restraint, present or future law, governmental order, rule or regulation, then such delay or nonperformance shall be excused and the time for performance thereof shall be extended to include the period of such delay or nonperformance. (SIGNATURES ON FOLLOWING PAGE) Page 4 IN WITNESS WHEREOF, this Agreement has been made and entered into as of the date and year first above written. INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: /s/ BRIAN FARGO ------------------------------------- Brian Fargo Its: Chief Executive Officer BRIAN FARGO /s/ BRIAN FARGO ------------------------------------- TITUS INTERACTIVE S.A., a French corporation By: /s/ HERVE CAEN -------------------------------------- Herve Caen Its: Chairman of the Board HERVE CAEN /s/ HERVE CAEN ------------------------------------- EX-10.42 5 dex1042.txt AMENDMENT TO INT'L DISTRIBUTION AGREEMENT EXHIBIT 10.42 AMENDMENT TO INTERNATIONAL DISTRIBUTION AGREEMENT This Amendment to International Distribution Agreement (this "Agreement"), is entered into as of April 12, 2001, by and between INTERPLAY ENTERTAINMENT CORP., a Delaware corporation whose principal place of business is at 16815 Von Karman Avenue, Irvine, California 92606 (hereinafter "Interplay"), and VIRGIN INTERACTIVE ENTERTAINMENT LIMITED, a corporation formed under the laws of England and Wales whose principal place of business is at 74A Charlotte St., London, England, W1P 1LR (hereinafter "Virgin"), with respect to the following recitals: RECITALS A. Interplay and Virgin are parties to that certain Settlement and Release Agreement, dated as of the date hereof (the "Settlement Agreement"), which Settlement Agreement provides for the execution and delivery of this Agreement as a condition precedent to the consummation of the parties' respective obligations thereunder. B. Pursuant to Section 14(b) of that certain International Distribution ------------- Agreement, entered into effective February 10, 1999 (the "Original Agreement"), between Virgin and Interplay, Virgin and Interplay are amending the Original Agreement as set forth herein. All capitalized terms used in this Agreement and not defined herein shall have the meanings given such terms in the Original Agreement. C. The parties intend this Agreement to be an amendment, effective as of the date first set forth above, of the Original Agreement, and not a novation. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual agreements and promises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Payments. Subject to Section 2 below, Exhibit B to the Original -------- --------- Agreement is hereby amended as follows: 1.1 The Minimum Monthly Overhead Fee. Section 3 of Exhibit B of the -------------------------------- Original Agreement is hereby amended as follows: 1.1.1 Interplay shall pay to Virgin an aggregate Minimum Monthly Overhead Fee of [*] for the period from [*] through [*], which amount shall be paid by Interplay to Virgin as follows: (a) [*] (b) [*] * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 1.1.2 Notwithstanding Section 1.1.1 to the contrary, if the ------------- Original Agreement is terminated by either party for any reason, including as of a result of breach by either party, all unpaid amounts provided for in Section ------- 1.1.1, in addition to any other amounts that may be payable by Interplay as a - ----- result of such termination, shall be immediately due and payable, without notice, as of the date of such termination. 1.1.3 For the period from [*] through termination or expiration of the Original Agreement, no Minimum Monthly Overhead Fee shall be payable by Interplay to Virgin, and Section 3 of Exhibit B of the Original Agreement shall cease to have any further force or effect. 1.2 Right of Offset. Each of Virgin and Interplay shall have the right --------------- to set off against any amounts payable by one such party (the "First Party") to the other such party (the "Second Party") under the Original Agreement all or any portion of any amounts then payable by the Second Party to the First Party under the Original Agreement, as amended by this Agreement, including, without limitation, the Minimum Monthly Overhead Fee. 1.3 Adjustment of the Minimum Monthly Overhead Fee. Section 4 of ---------------------------------------------- Exhibit B of the Original Agreement is hereby deleted in its entirety. The parties agree that any prior purported amendments to the Distribution Agreement are void. 1.4 Minimum Distribution Fee. Section 5 of Exhibit B of the Original ------------------------ Agreement is hereby deleted in its entirety. 2. Marketing. The Original Agreement, including, without limitation, --------- Section 4 and Sections 5(b), (c), (d) and (j), is hereby amended to the maximum extent necessary to provide that from and after July 1, 2001, Interplay shall be solely responsible for and shall provide all marketing, advertising, promotion, localization and testing (of packaging, Products and advertising) of the Products in the Territory. 3. Additional Audit Rights. In addition to the rights and obligations of ----------------------- the parties provided for in Section 6(c) of the Original Agreement, a certified public accountant (or the European equivalent thereof) appointed by Interplay may, at Interplay's expense and to Interplay's satisfaction, examine Virgin's books and records for the purpose of verifying the accuracy of any charges made by Virgin to Interplay for reimbursement of expenses incurred by Virgin on Interplay's behalf. These additional audit rights shall be subject to the other terms and conditions of Section 6(c). Additionally, Section 6(c) is hereby amended to provide that, if Virgin disagrees with the results of any audit conducted pursuant to Section 6(c), Interplay shall have the right to obtain copies of all relevant backup documents prepared or reviewed by the auditors in connection with the audit only to the extent such documents relate to the Products. Additionally, the parties agree to cooperate in any audit conducted pursuant to Section 6(c). 4. Returns; etc. Sections 5(e) and (f) of the Original Agreement are ------------ hereby amended to provide that Virgin shall not have the right to retain from the payments due to Interplay under the Original Agreement any reserve against Returns. _________________________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 2 Interplay shall, however, be responsible for actual Returns, which amounts shall be determined on a monthly basis during the Term and credited against any payments thereafter due to Interplay under the Original Agreement if during the term of this Agreement, and paid by Interplay to Virgin upon demand if such amount exists at or after termination of the Original Agreement. 5. Payments by the Parties. ----------------------- 5.1 By Virgin. Section 1 of Exhibit B to the Original Agreement is --------- hereby amended to provide that all payments to be made by Virgin to Interplay pursuant to Section 1 of Exhibit B shall be paid within [*] after the end of the month in which the Products with respect to which such payments relate are invoiced by Virgin to its customers. If Virgin fails to pay any amounts due under this Section 1 when due, Interplay may withhold such amounts from payments due under Section 2 of Exhibit B for the duration of such non-payment by Virgin. 5.2 By Interplay. Section 2 of Exhibit B to the Original Agreement is ------------ hereby amended to provide that, in lieu of Virgin deducting the amounts provided for in such section from the amounts payable by Virgin to Interplay under Section 1 of Exhibit B, Interplay shall pay such amounts to Virgin within [*] after the date of the invoice for such obligation. Notwithstanding the immediately preceding sentence to the contrary, if Virgin is required to pay any amount set forth in Section 2 of Exhibit B before the [*] period referred to above, Interplay shall pay Virgin such amount on or before the day such invoice is payable by Virgin. If Interplay fails to pay any amounts when due, Virgin may withhold such amounts from the payments due Interplay under Section 1 of Exhibit B for the duration of such non-payment by Interplay. 6. Console Products. Section 5(k)(C) of the Original Agreement is hereby ---------------- amended to provide that, with respect to Products on video game console systems (e.g., PlayStation, N64, Dreamcast), Interplay shall be responsible for ordering the Products from the system licensor and the payment of the cost of goods and royalties to such system licensors. Interplay shall not have any right to utilize Virgin's line of credit with any of the system licensors to facilitate ordering Products from such system licensors. If requested by Interplay, Virgin shall have the right, at its option (and without the obligation to do so), to order Products on video game console systems from the system licensors and pay any amounts to the system licensors agreed to by Interplay and Virgin, and otherwise arrange for the production and delivery of such Products to Virgin's facilities. If Virgin orders such Products at Interplay's request, Virgin shall have the right to set off against any amounts due Interplay by Virgin the full cost and expense incurred by Virgin in connection with the order by Virgin of such console Products, including, without limitation, any cost of goods and royalties paid to such system licensors and all shipping costs, taxes and other amounts incurred in the delivery of such Products to Virgin. 7. Miscellaneous. Except as expressly set forth in this Agreement, all of ------------- the terms of the Original Agreement shall remain in full force and effect. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made in, and to be performed within, said state. _______________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 3 8. Condition to Effectiveness. This Agreement shall become effective -------------------------- upon, and not before the "Closing" (as defined in the Settlement Agreement.), and if such Closing does not occur on or prior to April 30, 2001, this Agreement shall be void and of no effect ab initio. _______________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 4 IN WITNESS WHEREOF, this Agreement has been made and entered into as of the day and year first set forth above. INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: ___________________________ Brian Fargo Its: Chief Executive Officer VIRGIN INTERACTIVE ENTERTAINMENT LIMITED, a corporation formed under the laws of England and Wales By: ___________________________ Its: ___________________________ _______________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 5 EX-10.43 6 dex1043.txt RETAIL LICENSE WARNER BROS. CONSUMER PRODUCTS EXHIBIT 10.43 RETAIL LICENSE WARNER BROS. CONSUMER PRODUCTS #12420-MATR LICENSE AGREEMENT made December 18, 2000, by and between Warner Bros. Consumer Products, a division of Time Warner Entertainment Company, L.P., whose address is 4000 Warner Blvd., Burbank, CA 91522 (hereinafter referred to as "LICENSOR") and Interplay Entertainment Corp., a Delaware corporation, whose address is 16815 Von Karman Avenue, Irvine, CA 92606, Attention: Brian Fargo (hereinafter referred to as "LICENSEE"). RECITALS A. Licensor is in the business of licensing certain entertainment and other properties. Licensee is in the business of developing, designing, manufacturing and selling interactive game products. Licensee presently has a written agreement (the "Shiny Agreement") with Shiny Entertainment ("Shiny") for, among other things, the exclusive right to the game development and design services of David Perry ("Perry"). Licensor desires to use the services of Shiny and Perry in the development of the prototypes for the Licensed Products (defined below). WITNESSETH: The parties hereto hereby agree as follows: 1. DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: (a) "Advertising and Promotion Commitment": Licensee shall spend certain minimum amounts on advertising, marketing, promotion and brand building of the Licensed Products (as defined below). Licensee shall submit to Licensor, as part of Licensee's initial Business Plan (as defined below), a proposed Advertising and Promotion Commitment on a country-by-country and year-by-year basis. Such Advertising and Promotion Commitment shall include, without limitation: (i) advertising and promotional spending for the Licensed Products for the Term of this Agreement, in an aggregate amount of not less than [*] of gross sales of the Licensed Products, provided however, that such advertising and promotional spend shall in no event be less than [*] and shall not be required to exceed [*]. (ii) approximately [*] of the overall advertising and promotional spend set forth in subparagraph (i) above shall be spent in connection with the initial launch of the first Licensed Products (i.e., during the period commencing nine (9) months before and ending nine (9) months after such launch); provided, however, that the amount spent on such initial launch shall be not less than [*] and shall not be required to be more than [*]; (iii) if Licensee conducts any online advertising or promotion, a minimum of [*] of Licensee's online advertising and promotional spend shall be used to purchase advertising with Warner Bros. Online in connection with advertising on the wb.com/matrix.com website. For purposes of this paragraph, the Advertising and Promotion Commitment shall include amounts spent on the following: television, radio, print, direct mail and online media buys; in-store point of purchase materials; and such other consumer oriented advertising and promotion for the Licensed Products as may be approved by Licensor after review of Licensee's marketing plan. The Advertising and Promotion Commitment specifically excludes commercial production and other advertising production costs, agency fees or commissions, and, except as otherwise specifically approved by Licensor in advance in writing, trade oriented marketing costs. Licensee shall, no later than [*] days following the end of each calendar quarter during the Term, submit a statement evidencing fulfillment of the Advertising and Promotion Commitment for the immediately preceding calendar quarter. (b) "Business Plan": Licensee shall, no later than [*], submit to Licensor an outline of Licensee's business plan (the "Outline") for Licensee's activities during the Term in connection with this Agreement. On or before execution of this Agreement, Licensee shall submit to - ------------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Licensor a more detailed business plan based on the Outline (the "Business Plan"). Both the Outline and the Business Plan are subject to the approval of Licensor in its sole discretion. The Business Plan shall, without limitation, address the following areas: (i) The channels of distribution for each country within the Territory (as defined below); (ii) Projected sales of the Licensed Products (in units), by Platform, categorized by Licensed Product, by Platform, by channel of distribution, and by country within the Territory; (iii) Projected sales price of each Licensed Product for each country within the Territory (For countries outside of the United States, such sales price shall be provided in both US Dollars and in local currency); (iv) Projected revenue forecast in US Dollars of each Licensed Product and each country within the Territory (For countries outside of the United States, such forecast shall be provided in both US Dollars and in local currency); (v) Projected market share of the Licensed Products for each country within the Territory; (vi) Overall marketing strategy and specific marketing strategies for each country within the Territory; (vii) Overall promotional plans and specific promotional plans for each country within the Territory; (viii) Plans for participation in trade shows for each country within the Territory; (ix) Advertising and promotional budgets for each Licensed Product for each country within the Territory; (x) Planned product development schedule, ship dates and Marketing Dates, by Platform, for each Licensed Product for each country within the Territory; (xi) Plans for modifying the Licensed Products for [*], as well as Licensee's prospective partners with expertise in the [*] interactive game industry and Licensee's distribution, marketing and sales plans for [*]. On or before [*] of each calendar year during the Term, Licensee shall submit for Licensor's prior written approval, an updated version of the Business Plan addressing the above items for the remainder of the Term. Any significant deviation during the Term from the most recently approved Business Plan must be submitted to Licensor for prior written approval. (c) "Business Reviews": Licensee shall meet with Licensor on at least a quarterly basis to discuss the implementation of the Business Plan and results of the business relating to the Licensed Products. At such quarterly Business Reviews (and at such other times during the Term as Licensor shall reasonably request), Licensee shall provide to Licensor: (i) copies of all market research results relating to the Licensed Products or advertising therefor, including, without limitation, viability tests, commercial tests and line tests. Licensee shall also provide to Licensor access to Licensee's head of market research for purposes of interpretation of such market research results; and (ii) information, in such form as Licensor shall reasonably request, regarding inventory movement, inventory on-hand, and sales results for each Licensed Product on a country-by-country [*] basis [*]; and (iii) market share data, in such form as Licensor shall reasonably request, including, without limitation, applicable Nielsen data. - ------------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 2 (d) "Editorial and Executive Production Fees": Licensee shall pay to Licensor the following Editorial and Executive Production Fees for each title developed by Licensee: [*]. The Editorial and Executive Production Fees shall be charged for each title for the Term of this Agreement. Licensee shall pay the Editorial and Executive Production Fees within [*] from the date of this Agreement. [*]. Payment shall be due [*] days from the date of the invoice. Provided that Licensee is not otherwise in default hereunder, any unused balance of fees after completion of a particular title will be refunded to Licensee within thirty (30) days after Gold Master approval. (e) "Licensed Property": The elements, including, but not limited to, trademarks, copyrights, logos, character names, artwork, environmental settings, costumes and plot elements (the "Movie Elements"), depicted, included in, or associated with: (i) the released version of the theatrical motion picture whose working title is "THE MATRIX 2" ("Movie II"); and (ii) the released version of the theatrical motion picture whose working title is "THE MATRIX 3" ("Movie III"). but only to the extent merchandising rights have been granted to Licensor in and to such Movie Elements. References herein to a "Motion Picture" or the "Motion Pictures" shall mean either or both of Movie II and Movie III. Excluded herefrom is the right to reproduce the names, likenesses, autographs, signatures, visual representations, audio recordings or voices (the "Name and Likeness") of the actors and actresses in the Motion Pictures (the "Performer(s)") except to the extent specifically permitted otherwise in writing by Licensor and then only to the extent the Performer(s) have granted merchandising rights to Licensor. Notwithstanding the foregoing, all uses of any of the Movie Elements and the Name and Likeness of the Performer(s) afforded hereunder must be specifically approved in writing by Licensor, pursuant to Paragraph 10 herein. [*] (f) "Licensed Product(s)" (each category below may be referred to from time to time herein as a "Platform"): (i) Sony Playstation II (ii) Sega Dreamcast (iii) Nintendo Color Gameboy (iv) Nintendo Gameboy Advance (v) Nintendo Gamecube (vi) Microsoft's upcoming X-Box (vii) CD-ROM and DVD-ROM specifically targeted and marketed solely for use as video games (i.e. in no event shall such product be targeted, marketed or sold as a "home entertainment" product or otherwise in a manner that in Licensor's reasonable judgment may be confused with product distributed and sold by Warner Home Video). The following products are specifically excluded from this Agreement: (A) [*]; (B) [*]; (C) [*]; (D) [*]; (E) [*]; (F) [*]; - ------------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 3 (G) [*]; (H) [*]; and (I) [*]. (g) "Marketing Date": (i) For the first title based on Movie II, for Licensed Product (i)(Sony Playstation II), the Marketing Date shall be: (A) For the United States, Puerto Rico, U.S. Virgin Islands and Canada ("North America"), [*]; (B) For countries or territories other than North America, [*]. (ii) For Platforms other than Sony Playstation II, the Marketing Date for Licensed Products based on either Movie II or Movie III shall be no later than the target release date for such Platform as set forth in Licensee's initial Business Plan, as approved by Licensor. In the event that Licensee fails to provide such dates, [*], then Licensor shall set the Marketing Dates by written notice to Licensee. (iii) The Licensed Products shall not be released prior to [*] unless otherwise agreed by Licensor in writing. (h) "Territory": (i) Worldwide excluding [*]. (ii) Prior to the execution of this Agreement, Licensee has submitted to Licensor a business plan for [*] which includes, in addition to the information requested for the general Business Plan, the names of Licensee's prospective partners with expertise in the [*] interactive game industry, who will assist Licensee in modifying the Licensed Products for the [*] market and in distributing the Licensed Products in [*]. Licensor will add [*] to the Territory if, on or before [*], Licensee shall have engaged its partner for [*] from the prospective partners identified in Licensee's business plan for [*]. If Licensee does not timely satisfy the foregoing condition, Licensor shall be free to solicit other licensees for the Licensed Property for [*]. (i) "WBSS Sales": Licensee shall sell the Licensed Products to Warner Bros. Studio Stores ("WBSS") in accordance with the following terms: (i) Licensee shall at all times give highest priority to WBSS in the filling and shipment of orders for Licensed Products. In the event of a shortage of inventory of Licensed Products, Licensee shall supply WBSS with all quantities ordered by WBSS before filling orders for retailers in any other Channel of Distribution. (ii) Licensee shall offer the Licensed Products for sale to WBSS at a price equal to [*] and subject to any applicable legal restrictions. (iii) With respect to sales of Licensed Products made to WBSS locations within the United States, Licensee shall [*]. With respect to sales of Licensed Products made to WBSS locations within the United States, Licensee [*] shall report such sales separately in the periodic statements required in Paragraph 6 below. [*]. (iv) With respect to sales of Licensed Products made to WBSS locations outside the United States, Licensee shall [*] report such sales separately in the periodic statements required in Paragraph 6 below. Royalties with respect to sales of Licensed Products made to WBSS locations outside the United States [*]. (j) Product Design and Development; Conversions: (i) Shiny and Perry shall be primarily responsible for the design and development of the initial Platform for the Licensed Products so long as their services are available to Licensee, and Licensee shall allow them to devote the amount of time reasonably necessary to - ------------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 4 develop the Licensed Products in compliance with Licensee's obligations hereunder. Licensee shall reasonably consult with Licensor if Licensee desires to reassign Shiny and/or Perry prior to the completion of design and development of the initial Platform for the Licensed Products; provided, however, that Licensee shall have final approval over any such reassignment of Shiny and/or Perry. In the event that Shiny or Perry are terminated by Licensee, or if there exists an incurable material default by Licensee under its agreement with Perry for his services, as determined by a court of competent jurisdiction, such that Perry or Shiny will no longer provide services to or on behalf of Licensee (through no fault of Licensor or its affiliates), Licensor shall be permitted to take any action that it deems to be necessary or advisable in order to have Shiny and/or Perry complete design and development of the Licensed Products, including without limitation entering into separate agreements with Shiny and/or Perry or any other entity that will provide the services of Perry, provided that Licensee's costs in connection with the Licensed Products shall be reimbursed in full and Licensor shall then pay to Licensee a developer's royalty upon all sales of the Licensed Products which Shiny and/or Perry helped to design, such royalty to be negotiated by the parties at such time, consistent with then prevailing industry standards. (ii) The conversion of a particular title from Platform to Platform may be handled by Licensee or by a conversion house chosen by Licensee, subject to the approval of Licensor. Shiny and Perry will be involved in such conversions to the extent necessary to maintain the creative integrity of subsequent Platforms in relation to the initial Platform (Sony Playstation II) unless at least [*] of the assets from such initial Platform are used in the new Platform, in which case Shiny and Perry need not be involved in the conversion. (k) Milestones: Licensee shall deliver to Licensor the items set forth on Exhibit 1, on or before the dates specified for such items. (l) Related Agreements: On or before [*], Licensee shall deliver the following related agreements executed by Licensee, in a form acceptable to Licensor. [*]: (i) [*]; (ii) [*]; (iii) [*]; and (iv) [*]. A default under this Agreement shall constitute a default under each of the above listed agreements, and a default under any of the above listed agreements shall constitute a default under this Agreement. 2. GRANT OF LICENSE. (a) Upon the terms and conditions hereinafter set forth, Licensor hereby grants to Licensee and Licensee hereby accepts for the Term of this Agreement, as hereinafter defined, a license to utilize the Licensed Property [*] solely upon or in connection with the manufacture, distribution and sale of the Licensed Products solely for retail sale throughout the Territory, subject to the provisions of Paragraph 2(b), below. (b) [*]: (i) [*]. (ii) [*]; (iii) [*]; and (iv) [*]. [*] (c) No license is granted hereunder for the manufacture, distribution or sale of the Licensed Product(s) for publicity purposes, for sale or gift in combination with other products or services, as giveaways, as premiums used for the purpose of publicizing, promoting or increasing - ------------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 5 sales of any other product(s) or service(s), or in connection with any similar method of merchandising. Notwithstanding anything to the contrary contained herein, Licensee may (i) distribute, for promotional purposes only, not more than [*] units of each Licensed Product in the United States, and a total of not more than [*] units of each Licensed Product in territories other than the United States, as well as [*] "time limited" or reduced feature "demo" versions, subject to Licensor's approval rights set forth in Paragraph 10; and (ii) subject to the prior written approval of Licensor on a case-by-case basis, and timely payment of all amounts that may then be due hereunder, allow the Licensed Products to be bundled with other products in connection with Licensee's "OEM" (Original Equipment Manufacturer) business where, by way of example only, multiple software products may be included with the purchase of a game console or pc hardware. (d) Licensee specifically understands and agrees that no rights are granted herein with respect to the Warner Bros. "shield" logo or trademark (the "Warner Bros. Shield"), or any other trademark(s), logo(s) or copyrights owned by Licensor other than those specifically set forth above in the Licensed Property, it being understood that all rights in and to said properties are reserved exclusively to Licensor for use and/or licensing as it deems appropriate to third party(s) of its choice. (e) Notwithstanding anything to the contrary contained herein, including the general prohibition on use of the Warner Bros. Shield, the Licensed Property shall also include the Warner Bros. Interactive Entertainment Name/Logo (the "Name/Logo") as shall be provided by Licensor and as such may be changed by Licensor from time to time. Licensee shall utilize the Name/Logo on such Licensed Products and in such manner as Licensor shall designate. The parties agree that, notwithstanding anything to the contrary contained elsewhere in this Agreement, Licensee's use of the Name/Logo shall be on a non-exclusive basis. (f) Without limiting any other approval rights of Licensor as contained herein, no television commercials may be utilized under this Agreement without the specific prior written approval of Licensor. (g) Subject to the terms and conditions hereof, Licensee may advertise, promote and sell the Licensed Product(s) online over the Internet, in compliance with Licensor's online policies and guidelines, and provided that Licensee's online site contains a hyperlink to Licensor's website for the Motion Picture. 3. TERM. The term ("Term") of this Agreement shall commence on May 1, 2000 and shall expire on [*]. Notwithstanding anything to the contrary set forth above, as to any Licensed Products developed hereunder subsequent to, and other than, any Platform for the first title (i.e. other than for any Platform of "Game 1"), the Term shall be extended to the date which is three (3) years after the first to occur of [*]. 4. CONSIDERATION. In full consideration for the rights, licenses and privileges herein granted to Licensee, Licensee shall pay to Licensor the following: (a) Guaranteed Consideration: For the rights herein granted the sum of [*] payable as follows: DATE AMOUNT ---- ------ Upon execution of this Agreement [*] On or before [*] [*] On or before [*] [*] On or before [*] [*] All Guaranteed Consideration paid by Licensee pursuant to this subparagraph 4(a) shall be applied against such royalties as are or have become due Licensor under subparagraph 4(d). [*]. - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 6 (b) Additional Consideration: (i) It is contemplated that a minimum of two Licensed Product titles will be developed and sold pursuant to this Agreement, one title for Movie II and one title for Movie III. It is critical to Licensor that the first Platform (i.e., Licensed Product (i) (Sony Playstation II)) based on Movie II be released for general distribution and sale to the public [*]. The development of such Licensed Products, and the distribution and sale of such Licensed Products [*], is integral to the development, filming, production, distribution and marketing of Movie II. If the Sony Playstation II Platform based on Movie II is not released for general distribution and sale to the public [*], then Licensee shall pay to Licensor the additional consideration provided for below (collectively, the "Additional Consideration"): (A) [*], which shall be immediately due and payable by Licensee to Licensor; or (B) alternatively, in lieu of the payment provided for in subparagraph (A) above, Licensee in its sole discretion, upon written notice to Licensor delivered on or before the Marketing Date for such Sony Playstation II Platform, may elect instead to increase the royalty rates payable under Paragraph 4(d) of this Agreement by [*]. Such additional [*] royalty shall be payable on all Net Sales of all Licensed Products (including OEM sales) until the cumulative amount of such additional [*] royalty equals [*] or until the end of the Term (including any extension thereof, if applicable), whichever is first to occur. (ii) Notwithstanding anything to the contrary set forth in this Agreement, the Additional Consideration shall not be offset by, or applied against, Royalties, Guaranteed Consideration or any other amounts that may otherwise be due or payable hereunder. (iii) Licensee shall be given a day for day extension for delays that are caused by Licensor or others engaged by Licensor to perform services in connection with the Licensed Products (a "Licensor's Delay"), provided that Licensee gives Licensor written notice as soon as reasonably possible, and in any event within seven (7) days after the occurrence of such alleged Licensor's Delay, indicating that development of the Licensed Products is being delayed, the party that Licensee believes is responsible for such delay, and the act or omission that is causing such delay. The Additional Consideration shall become due and payable only after Licensee has been credited for any such Licensor's Delays with respect to the applicable title. Any such extension of the Marketing Date as the result of such Licensor's Delay must be confirmed in writing by Licensor to be effective. (iv) In addition, Licensor and Licensee will implement the following procedure in order to, if possible, ensure that the parties achieve the goal of releasing the Sony Playstation II Platform [*]. Licensor and Licensee understand that changes are difficult to incorporate and may necessitate changes that can impact the Licensed Products on many levels. Consequently, substantially all fundamental game play changes must be provided to Licensee on or before [*] or the date which is [*], whichever is later. Within forty-five (45) days after such date, Licensor and Licensee, including the development teams working on the Licensed Products and Licensor's licensing team, will meet to determine whether there are any fundamental game play changes to be undertaken, which ones, and whether any or all of those fundamental game play changes pose a threat to the goal of releasing the Sony Playstation II Platform based on Movie II, [*]. Licensee's development team will advise Licensor which changes cannot be made, or which features cannot be completed, in time to release the Sony Playstation II Platform [*]. If Licensor nonetheless wants such changes or features incorporated, then a new Marketing Date will be established by mutual agreement of the parties at such meeting and the Additional Consideration provided for hereunder shall not be due and payable unless Licensee fails to meet such new Marketing Date requirement. (v) If Licensee elects to make the lump sum payment of Additional Consideration, and Licensor has timely received such payment but subsequently decides to terminate this Agreement prior to the release of the Sony Playstation II Platform based on Movie II due to the delay in releasing such Licensed Products, then if such termination by Licensor is within six (6) months after the Marketing Date, Licensor will refund the Additional Consideration to Licensee within ten (10) business days after the date of Licensor's notice of termination. Nothing contained in this Paragraph shall limit or restrict any other rights or remedies of Licensor, including any other termination rights, pursuant to this Agreement. - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 7 (c) [*]. (d) Royalty Payments: Licensee shall pay to Licensor royalties on all Net Sales (as such term "Net Sales" is defined herein) of the Licensed Products, as follows: (i) [*] of all Net Sales, from [*] units of each original title, including all platforms and formats except for OEM sales of Licensed Products; and thereafter, (ii) [*] of all Net Sales, from [*] units of the same original title, including all platforms and formats except for OEM sales of Licensed Products; and thereafter, (iii) [*] of all Net Sales, from [*], of the same original title, including all platforms and formats except for OEM sales of Licensed Products. (iv) Notwithstanding anything to the contrary set forth above, royalties on OEM sales of Licensed Products shall be [*] of Net Sales of such Licensed Products throughout the Term of this Agreement, without any escalation, and quantities of OEM sales shall not be counted for purposes of determining increases in the royalty rates, above. The term "Net Sales" shall mean all monies billed or billable by Licensee, from the exercise of its rights to distribute and sell Licensed Product(s) in the Territory before any allowances or discounts have been deducted from the normal selling price, inclusive of interest, monetary correction, and any other payment charges whatsoever, less the following items only: (A) any sales, excise or value added taxes, which are separately stated, and which are required to be collected from customers as part of Net Sales, and which are payable to taxing authorities; (B) quantity discounts; (C) actual returns (i.e., that are not resold) not exceeding [*] of total units sold; and (D) [*] Except to the extent provided in the immediately preceding sentence, no deduction shall be made for the cost of goods sold or for any bad debts, or any reserves therefor, importing costs, selling costs, advertising costs, real estate taxes, business license taxes, net income taxes, franchise taxes, withholding taxes or any other taxes not billed to customers of Licensee as part of Net Sales. Net Sales shall not include any sales by Licensee or its affiliated companies, to Licensee or its affiliated companies, the primary purpose of which is the transfer of Licensed Product for eventual resale; provided, however, that Royalties as a result of such sales shall be based upon and paid when the Licensed Product is ultimately sold to the distributor (including any distributor in which Licensee has less than a controlling interest so long as the transaction is an arms-length transaction at prevailing market rates), retailer, consumer or other unaffiliated third party. Licensee will pay all taxes, customs duties, assessments, and excise charges or fees, except as provided in subparagraph 4(d)(A), and other charges levied upon the importation of or assessed against the Licensed Product under this Agreement, as well as all Licensee's costs of doing business and Licensor shall have no liability therefor. Royalties shall be payable concurrently with the periodic statements required in Paragraph 6 hereof except to the extent offset by Guaranteed Consideration theretofore remitted. It is a material term and condition of this Agreement that Licensee report Net Sales and report and pay royalties on a country-by-country or region-by-region basis, as provided in Paragraph 6, below. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. [*] (e) Separately from and in addition to the Guaranteed Consideration or Royalties or any other amounts payable hereunder, Licensor shall pass through to Licensee, and Licensee shall - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 8 either reimburse Licensor for amounts paid by Licensor, or shall pay directly to the actors and actresses, as directed by Licensor, all amounts payable to such actors and actresses in connection with the Licensed Products, as royalties or otherwise ("Talent Participation Fees"), not to exceed, in the aggregate, [*]. Licensee shall have the right to audit Licensor once in any twelve (12) month period, during normal business hours, upon not less than thirty (30) days prior written notice, for a period of two (2) years from the date of any invoice to Licensee for such amounts. For purposes of clarification, separate from the foregoing, Licensee shall be solely responsible for clearing all third party rights in connection with the Licensed Products, and for any related fees and costs, including any re-use fees or other payments to third parties that may be required under applicable law or guild or collective bargaining agreements. Upon written request by Licensee, Licensor will make reasonable efforts to assist Licensee in Licensee's efforts to clear such third party rights. 5. RESERVATION OF RIGHTS; PREMIUMS. (a) Licensor reserves all rights not expressly conveyed to Licensee hereunder. [*]. (b) Notwithstanding anything to the contrary stated herein, Licensor, for itself and its affiliates, specifically reserves the right, without limitation throughout the world, to use, or license any third party(s) of its or their choice to use the Licensed Property for the marketing, promotion, manufacture, distribution and sale of products similar or identical to those licensed herein in Paragraph 1(f) above for sale through any catalogue(s) produced or distributed by or on behalf of Licensor or its affiliated companies, or for sale or distribution in any theaters or arenas, or for sale or distribution in connection with any home video product, including DVD or other formats, or for sale or distribution in any retail stores operated by or on behalf of Licensor, its affiliated companies, franchisees, or licensees, or for sale or distribution in any theme/amusement parks operated by or on behalf of Licensor or its licensees, Six Flags, Premier Parks, Movie World, or their affiliated companies. In addition, Licensor reserves the right to allow Six Flags and Movie World to manufacture (or have manufactured by a third party) products similar or identical to those licensed herein for distribution or sale in theme and/or amusement parks owned or operated by Six Flags and/or Movie World. [*]. (c) Subject to Paragraph 2(c) hereof, Licensee agrees that it will not use, or knowingly permit the use of, and will exercise due care that its customers likewise will refrain from the use of, the Licensed Products as a premium, except with the prior written consent of Licensor. Subject to Licensor's prior written approval as aforesaid, Licensee shall pay to Licensor a sum equal to [*] of all premium sales. For purposes of this paragraph, the term "premium" shall be defined as including, but not necessarily limited to, combination sales, free or self-liquidating items offered to the public in conjunction with the sale or promotion of a product or service, including traffic building or continuity visits by the consumer/customer, or any similar scheme or device, the prime intent of which is to use the Licensed Products in such a way as to promote, publicize and or sell the products, services or business image of the user of such item. Notwithstanding anything to the contrary set forth herein, this paragraph shall not apply to OEM sales of Licensed Products, which are addressed separately elsewhere in this Agreement. 6. PERIODIC STATEMENTS. (a) Within [*] days after the end of the first calendar quarter after the date of execution of the License Agreement and promptly on the [*] day after the end of each calendar quarter thereafter, Licensee shall furnish to Licensor complete and accurate statements certified to be accurate by Licensee, or if a corporation, by an officer of Licensee, showing with respect to all Licensed Products distributed and sold by Licensee during the preceding calendar quarter, on a Platform by Platform basis, with OEM sales and WBSS sales separately reported, the (i) number of units; (ii) country or region (as specified below) in which manufactured, sold and/or to which shipped; (iii) description (as such term is defined below) of the Licensed Products; (iv) gross sales price; (v) itemized deductions from gross sales price, and (vi) Net Sales price, together with any returns made during the preceding calendar quarter. Such statements shall be in such formats as Licensor shall require (which formats may be amended by Licensor from time to time), and shall be furnished to Licensor whether or not any of the Licensed Products have been sold during the calendar quarters to which such statements refer. In the event Licensee has royalties earned in currencies other than in U.S. Dollars, then Licensee shall convert said amounts into U.S. Dollars based upon the exchange rate published by the Wall Street Journal as of the fifteenth day of the applicable month or if such day shall fall on a non-business day then as of the first business day following said fifteenth - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 9 day. Receipt or acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any sums paid hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payments made by Licensee. Upon demand of Licensor, Licensee shall at its own expense, but not more than once in any twelve (12) month period, furnish to Licensor a detailed statement certified by an officer of Licensee showing, on a Platform by Platform basis, with OEM sales and WBSS sales separately reported, the (i) number of units; (ii) country or region (as specified below) in which manufactured, sold and/or to which shipped; (iii) description of the Licensed Products; (iv) gross sales price; (v) itemized deductions from gross sales price and (vi) Net Sales price of the Licensed Products covered by this Agreement distributed and/or sold by Licensee up to and including the date upon which Licensor has made such demand. For purposes of this subparagraph, the term "Description" shall mean a detailed description of the Licensed Products including the nature of each of the Licensed Products, any and all names and likenesses, whether live actors or animated characters, from the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material, and any other components of the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material. In the event Licensor is responsible for the payment of any additional third party participations based on Licensee not reporting by character name and likeness as provided above, Licensee shall reimburse Licensor for the full amount of all such third party claims, including without limitation, the participation itself, interest, audit and attorneys' fees. Licensee understands and agrees that it is a material term and condition of this Agreement that Licensee include the Description on all statements. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. Notwithstanding anything to the contrary set forth above, Licensee shall report and pay royalties on a country-by-country basis for the following countries: [*]; and otherwise on a region-by-region basis as follows: [*]. (b) The statements and payments required hereunder shall each reference the contract number(s) and shall be delivered as follows: If by United States Postal Service, then to: WARNER BROS. CONSUMER PRODUCTS 21477 Network Place Chicago, IL 60673-1214 If by Federal Express or other overnight mail or courier service, then to: BANK ONE Attention WBCP lockbox #21477 525 West Monroe 8th Floor Mail Room Chicago, IL 60661 Telephone Number 312-732-5500 (c) Any payments which are made to Licensor hereunder after the due date required therefor, shall bear interest at [*] (or the maximum rate permissible by law, if less) from the date such payments are due to the date of payment. Licensor's right hereunder to interest on late payments shall not preclude Licensor from exercising any of its other rights or remedies pursuant to this Agreement or otherwise with regard to Licensee's failure to make timely remittances. (d) [*] 7. BOOKS AND RECORDS. (a) Licensee shall keep, maintain and preserve (in Licensee's principal place of business, or for any records more than two years old, in a reasonably secure location near such principal place of business, available on not less than forty-eight (48) hours notice) for a period of at least two years following the termination or expiration of the Term of this Agreement or any renewals hereof (if applicable), complete and accurate records of accounts including, without limitation, purchase orders, inventory records, invoices, correspondence, banking and financial and other records pertaining to the various items required to be submitted by Licensee as well as to ensure Licensee's compliance with local laws as required pursuant to Paragraph 13(f) hereof. Such - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 10 records and accounts shall be available for inspection and audit at any time or times during or for a period of up to [*] years after the Term of this Agreement or any renewal(s) hereof (if applicable) during reasonable business hours and upon reasonable notice by Licensor or its nominees. Licensee agrees not to cause or permit any interference with Licensor or nominees of Licensor in the performance of their duties. During such inspections and audits, Licensor shall have the right to take extracts and/or make copies of Licensee's records as it deems necessary. (b) The exercise by Licensor in whole or in part, at any time of the right to audit records and accounts or of any other right herein granted, or the acceptance by Licensor of any statement or statements or the receipt and/or deposit by Licensor, of any payment tendered by or on behalf of Licensee shall be without prejudice to any rights or remedies of Licensor and such acceptance, receipt and/or deposit shall not preclude or prevent Licensor from thereafter disputing the accuracy of any such statement or payment. (c) If pursuant to its right hereunder Licensor causes an audit and inspection to be instituted which thereafter discloses a deficiency between the amount found to be due to Licensor and the amount actually received or credited to Licensor, then Licensee shall, upon Licensor's demand, promptly pay the deficiency, together with interest thereon at the then current prime rate from the date such amount became due until the date of payment, and, if the deficiency is more than [*] of all royalties paid by Licensee during the period covered by the audit, then Licensee shall pay the reasonable costs and expenses of such audit and inspection. 8. INDEMNIFICATIONS. (a) During the Term, and continuing after the expiration or termination of this Agreement, Licensor shall indemnify Licensee and shall hold it harmless from any loss, liability, damage, cost or expense, arising out of any claims or suits which may be brought or made against Licensee by reason of the breach by Licensor of the warranties or representations as set forth in Paragraph 13 hereof, provided that Licensee shall give prompt written notice, and full cooperation and assistance to Licensor relative to any such claim or suit and provided, further, that Licensor shall have the option to undertake and conduct the defense of any suit so brought. Licensee shall not, however, be entitled to recover for lost profits. Licensee shall cooperate fully in all respects with Licensor in the conduct and defense of said suit and/or proceedings related thereto. (b) During the Term, and continuing after the expiration or termination of this Agreement, Licensee shall indemnify Licensor, Time Warner Entertainment Company, L.P. ("TWE") and each of its affiliates and shall hold them harmless from any loss, liability, damage, cost or expense arising out of any claims or suits which may be brought or made against Licensor, TWE or any of its affiliates, by reason of: (i) any breach of Licensee's covenants and undertakings hereunder; (ii) any unauthorized use by Licensee of the Licensed Property; (iii) any use of any trademark, or copyright (except trademarks or copyrights in the Licensed Property used in accordance with the terms of this Agreement), design, patent, process, method or device; (iv) Licensee's non- compliance with any applicable federal, state or local laws or with any other applicable regulations; [*]. (c) With regard to Paragraph 8(b) above, Licensee agrees to obtain, at its own expense, Comprehensive Commercial General Liability Insurance, including product liability and contractual liability coverage providing adequate protection for Licensor and Licensee against any such claims or suits in amounts no less than [*] per occurrence, combined single limits. Simultaneously with the execution of this Agreement, Licensee undertakes to submit to Licensor a fully paid policy or certificate of insurance naming Licensor, TWE and each of its affiliates as additional insured parties and, requiring that the insurer shall not terminate or materially modify such policy or certificate of insurance without written notice to Licensor at least thirty (30) days in advance thereof. Such insurance shall at all times be primary and not contributory with any insurance carried by Licensor, TWE or any of their affiliates. Further the delivery of the policy or certificate, as provided in this Paragraph 8(c) are material obligations of Licensee. 9. ARTWORK; TRADEMARKS AND COPYRIGHTS. Licensee shall, within thirty (30) days of receiving an invoice, pay Licensor for artwork executed for Licensee by Licensor (or by third parties under contract to Licensor) at Licensee's request for use in the development of the Licensed Products and any related packaging, display and promotional materials at Licensor's prevailing commercial art rates. The foregoing shall include any - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 11 artwork that, in Licensor's reasonable opinion, and subject to Licensee's written approval, is necessary to modify artwork initially prepared by Licensee and submitted for approval. Estimates of artwork charges are available upon request. (a) Trademarks: (i) Licensee agrees that it will cause to appear indelibly and legibly on each of the Licensed Product(s) and all advertising material, tags, labels and devices bearing the Licensed Property, the following notice or such other notice as may be approved or required by Licensor: (TM) & (C) 200X Warner Bros. (in the US and Canada) (TM) & (C) 200X Village Roadshow Films (BVI) Limited. (in all other territories) (The year date shall be as instructed by Licensor) (ii) Licensee further agrees that it will not apply for or seek to obtain trademark registration for the Licensed Property and that Licensor may, at its option, apply for and obtain in its own name trademark registrations for the Licensed Product(s), and that, upon request, Licensee will furnish necessary specimens or facsimiles for such purpose free of cost, as well as evidence of the date of first shipment or sale of each Licensed Product in interstate or foreign or other federally regulable U.S. commerce and, if earlier, also in intrastate commerce. (iii) Licensee agrees that if Licensee receives knowledge of the use of the Licensed Property by anyone other than Licensee on Licensed Product(s) or products confusingly similar thereto, Licensee will call such fact to the attention of Licensor. Licensor shall then have the option to institute legal proceedings to prevent such use, and Licensee shall cooperate and assist in the prosecution of any such action. If demanded by Licensor, Licensee shall join in or cooperate in the prosecution of any such legal proceeding as may be instituted by Licensor. Any such legal proceedings shall be solely at Licensor's expense. If Licensee is joined in such proceeding, Licensor shall indemnify and hold harmless Licensee from and against any claim, sanction, liability, damages, attorney's fees, judgments or orders of any kind arising out of such proceeding. (b) Copyrights: (i) Game Program: The copyright in and to the computer program (object and source code) incorporated into any Licensed Product (herein the "Program") shall be owned as follows: (A) If a Program is created solely by Licensee or an approved sublicensee under license or authority of Licensee without any contribution by Licensor to the creation of that Program in the form of programming effort, then the copyright in and to such Program shall be owned solely by Licensee; - ---------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 12 (B) If a Program is created jointly by Licensee and Licensor, then the copyright in and to such Program shall be owned jointly by Licensor and Licensee. (ii) Audio-Visual Display: The copyright in and to the images displayed on the screen, and the sounds produced during the course of the game play, including all possible combinations and sequences thereof, in both the "attract mode" and the "play mode," and the underlying script therefor (herein the "Audio-Visual Display") shall be owned as follows: (A) The copyright in and to all elements of the Audio- Visual Display constituting pre-existing material of Licensor as set forth in Paragraph 1(e) "Licensed Property" such as, without limitation, the characters portrayed in the Motion Pictures or any reproductions thereof, or derived therefrom and incorporating the Licensed Property, as well as any special effects provided to Licensee by Licensor or its affiliates (hereinafter "Pre- Existing Material"), are acknowledged to be the sole and exclusive property of Licensor and shall remain the sole and exclusive property of Licensor; (B) The copyright in and to all elements of the Audio- Visual Display constituting original material created by Licensee, and which does not incorporate any Licensed Property, shall be the sole and exclusive property of Licensee. Licensee retains sole and exclusive ownership of all of Licensee's inventions, whether patented or not, trade secrets and similar information and processes of a confidential nature, and works of authorship, whether copyrighted or not, whether manifested in the Audio-Visual Display or not, and whether embodied in hardware or software used to create the Audio- Visual Display. Licensee shall be free to use and license others to use elements of the Audio-Visual Display owned by Licensee. (iii) Packaging, Advertising and Promotional Materials: Except as otherwise provided herein, the copyrights in and to any original material, other than the Programs and the Audio-Visual Displays, which is created by or for Licensee for the purpose of packaging, advertising or promoting the Licensed Product(s), including but not limited to the enclosure for the Licensed Product(s), all cartons, containers, packing and wrapping material, tags, labels, imprints or other devices, and all advertising and promotional materials (all such material hereinafter referred to as the "Other Materials"), shall be owned solely and exclusively by Licensee; provided, however, that the copyright in and to all elements of the Other Materials that constitute Licensor's Pre- Existing Material, material furnished to Licensee by or on behalf of Licensor, or any material that is derivative of the foregoing, is acknowledged to be owned solely and exclusively by Licensor and shall remain the sole and exclusive property of Licensor. (iv) Limitations on Ownership Rights: The parties agree and acknowledge that each shall have the same right as any person or party with regard to any material incorporated in the Licensed Product(s), Other Materials, Programs, or Audio-Visual Displays which is in the public domain (provided that it has not entered into the public domain as the result of an act or omission in breach of this Agreement or any other written agreement by or between the parties hereto). (v) Artwork: The Licensed Property shall be displayed or used only in such form and in such manner as has been specifically approved in writing by Licensor in advance and Licensee undertakes to assure usage of the trademark(s) and character(s) solely as approved hereunder. Licensee further agrees and acknowledges that any and all Artwork (defined below) created, utilized, approved and/or authorized for use hereunder by Licensor in connection with the Licensed Products or which otherwise features or includes the Licensed Property shall be owned in its entirety exclusively by Licensor. "Artwork" as used herein shall include, without limitation, all pictorial, graphic, visual, audio, audio-visual, digital, literary, animated, artistic, dramatic, sculptural, musical or any other type of creations and applications, whether finished or not, including, but not limited to, animation, drawings, designs, sketches, images, tooling and tooling aids, illustrations, film, video, electronic, digitized or computerized information, software, object code, source code, on-line elements, music, text, dialogue, stories, visuals, effects, scripts, voiceovers, logos, one-sheets, promotional pieces, packaging, display materials, printed materials, photographs, interstitials, notes, shot logs, character profiles and translations, produced by Licensee or for Licensee, pursuant to this Agreement, excluding any intellectual property rights in and to any elements that are wholly owned by Licensee and that do not include the Licensed Property and specifically excluding any rights of Licensee in and to the Program, as provided in Paragraph 9(b)(i) above. Licensor reserves for itself or its designees all rights to use any and all Artwork created, utilized and/or approved hereunder without limitation. Licensee acknowledges that, as between Licensor and Licensee, the Licensed Property and Artwork and all other depictions expressions and derivations thereof, and all copyrights, trademarks and other proprietary rights therein are owned exclusively by Licensor and Licensee shall 13 have no interest in or claim thereto, except for the limited right to use the same pursuant to this Agreement and subject to its terms and conditions. Licensor's rights hereunder specifically exclude Licensee's ownership of any artwork that utilizes intellectual property wholly owned by Licensee or third parties and which does not incorporate the Licensed Property, whether such artwork is used in Licensee's packaging, advertising or products. (vi) Work-Made-for-Hire: Licensee agrees and acknowledges that any Artwork incorporating the Licensed Property and created by Licensee or for Licensee hereunder, including without limitation any special effects created by Licensor or any of its affiliates, but specifically excluding copyrights, trademarks or other intellectual property wholly owned by Licensee is a "work made for hire" for Licensor under the U.S. Copyright Act, and any and all similar provisions of law under other jurisdictions, and that Licensor is the author of such works for all purposes, and that Licensor is the exclusive owner of all the rights comprised in the undivided copyright and all renewals, extensions and reversions therein, in and to such works in perpetuity and throughout the universe. Licensee hereby waives and releases in favor of Licensor all rights (if any) of "droit moral," rental rights and similar rights in and to the Artwork (the "Intangible Rights") and agrees that Licensor shall have the right to revise, condense, abridge, expand, adapt, change, modify, add to, subtract from, re-title, re-draw, re-color, or otherwise modify the Artwork, without the consent of Licensee. Licensee hereby irrevocably grants, transfers and assigns to Licensor all right, title and interest, including copyrights, trademark rights, patent rights and other proprietary rights, it may have in and to the Artwork, in perpetuity and throughout the universe, and to all proprietary depictions, expressions or derivations of the Licensed Property created by or for Licensee. Licensee acknowledges that Licensor shall have the right to terminate this Agreement in the event Licensee asserts any rights (other than those specifically granted pursuant to this Agreement) in or to the Licensed Property or Artwork. Licensee hereby warrants that any and all work created by Licensee under this Agreement apart from the materials provided to Licensee by Licensor is and shall be wholly original with or fully cleared by Licensee and shall not copy or otherwise infringe the rights of any third parties, and Licensee hereby indemnifies Licensor and will hold Licensor harmless from any such claim of infringement or otherwise involving Licensee's performance hereunder. At the request of Licensor, Licensee shall execute such form(s) of assignment of copyright or other papers as Licensor may reasonably request in order to confirm and vest in Licensor the rights in the properties as provided for herein. In addition, in the event that Licensee fails to comply with Licensor's request within thirty (30) days after written request by Licensor, Licensee hereby appoints Licensor as Licensee's Attorney-in-Fact to take such actions and to make, sign, execute, acknowledge and deliver all such documents as may from time to time be necessary to confirm in Licensor, its successors and assigns, all rights granted herein. If any third party makes or has made any contribution to the creation of Artwork authorized for use hereunder, Licensee agrees to obtain from such party a full confirmation and assignment of rights so that the foregoing rights shall vest fully in Licensor, in the form of the Contributor's Agreement attached hereto as Exhibit 2 and by this reference made a part hereof, prior to commencing work, and subject to the prior written approval of Licensor, and subject to the prior written approval of Licensor ensuring that all rights in the Artwork and Licensed Property arise in and are assigned to Licensor. Promptly upon entering into each such Contributor's Agreement, Licensee shall give Licensor a copy of such Contributor's Agreement. [*] (vii) Use of Third Party Content: Licensee shall not use any third party content or technology in the Licensed Product(s), including without limitation any audio elements from the soundtracks of any motion picture or television series based upon the Licensed Property without Licensor's prior written approval, and unless: (i) Licensee is expressly permitted to use such third party content or technology pursuant to written agreements with all third party rights holders; and (ii) Licensee has acquired for Licensee and Licensor all rights, permissions, clearances, releases or other authorizations necessary to use such third party content or technology in conjunction with the development and exploitation of the Licensed Products(s) anywhere in the Territory by Licensee or Licensor or by either party's licensees, successors or assigns in perpetuity. Licensee shall be responsible, in perpetuity, for all payments in connection with the use of third party content or technology, except as the parties mutually agree upon at such time as Licensor approves of the use of such third party content or technology. Licensor shall have the right to review all Licensee agreements with third parties to ensure their acceptability and Licensee shall deliver such agreements to Licensor within fourteen (14) business days of Licensor's request therefor. - --------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 14 10. QUALITY OF LICENSED PRODUCT(S). (a) Licensee agrees that the Licensed Product(s) shall be of high standard and of such style, appearance and quality as shall be adequate and suitable to their promotion, distribution and sale to the best advantage of Licensee and Licensor. The quality and style of such product and its cartons and containers shall be subject to Licensor's approval. To this end Licensee shall, before selling or distributing any of the Licensed Product(s), furnish to Licensor free of cost for its written approval as to quality and style, the materials specified in the "Milestones" set forth on Exhibit 1 attached hereto. In the event that any Milestone deliverable shall not have been approved, disapproved, or otherwise commented upon within ten (10) business days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within seven (7) business days after receipt by it of such communication, any items so submitted shall be deemed to have been approved subject to the rights of any third parties (e.g., as to the use of the Name and Likeness of a Performer). Licensee shall, in addition, thereafter furnish to Licensor free of cost, for its written approval, forty-five (45) production samples of each such Licensed Product(s) together with their cartons and containers including packaging and wrapping material, to ensure quality control simultaneously upon distribution to the public. In addition, Licensee shall provide Licensor with six (6) catalogs which display all of Licensee's products, not just the Licensed Products, if such catalogs exist. [*]. After samples of Licensed Product(s) have been approved pursuant to this paragraph, Licensee shall not depart therefrom in any material respect without Licensor's prior written consent or add any additional element(s) such as in- pack flyers, business reply cards and so on without Licensor's approval in each case. Licensor shall have the right to withdraw its approval of samples if the quality of any Licensed Product ceases to be acceptable. (b) Any modification of a Licensed Product must be submitted in advance for Licensor's written approval as if it were a new Licensed Product. Approval of a Licensed Product which uses particular artwork does not imply approval of such artwork for use with a different Licensed Product. (c) Licensed Products must conform in all material respects to the final production samples approved by Licensor. [*]. (d) If any changes or modifications are required to be made to any material submitted to Licensor for its written approval in order to ensure compliance with Licensor's specifications or standards of quality, Licensee agrees promptly to make such changes or modifications. (e) [*]. (f) Subject to the terms hereof, including without limitation the approval process provided for in Paragraph 10(a) above, Licensee may utilize the Licensed Property for such advertising, promotional and display materials for the Licensed Product(s) as in its judgment will best promote the sale of said Licensed Product(s). Licensee agrees that it will not use the Licensed Property or any reproduction thereof in any advertising, promotional or display material or in any other manner without Licensor's prior written approval not to be unreasonably withheld. Without limiting the foregoing, no television commercials may be utilized under this License without the specific prior approval of Licensor. Notwithstanding the approval process for other materials, in the event that any material submitted to Licensor for approval in connection with a television commercial shall not have been approved, disapproved or otherwise commented upon within thirty (30) days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within ten (10) business days after receipt by it of such facsimile or overnight delivery service any items so submitted shall be deemed to have been approved subject to the rights of third parties (e.g., as to the use of the Name and Likeness of a Performer). A reasonable number of production copies of all such advertising, promotional and display materials will be furnished to Licensor free of charge. - --------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 15 (g) To avoid confusion of the public, Licensee agrees not to associate other characters or properties with the Licensed Property on the Licensed Products or in any packaging, promotional or display materials unless Licensee receives Licensor's prior written approval. Furthermore, Licensee agrees not to use the Licensed Property (or any component thereof) on any business sign, business cards, stationery or forms, nor as part of the name of Licensee's business or any division thereof. (h) Licensee shall use reasonable commercial efforts to notify its customers of the requirement that Licensor has the right to approve all promotional, display and advertising material pursuant to this Agreement. (i) Any animation used in electronic media, including but not limited to animation for television commercials and character voices for radio commercials, shall be produced by Warner Bros. Animation pursuant to a separate agreement between Licensee and Warner Bros. Animation, subject to Warner Bros. Animation's customary rates, except as may be otherwise specifically agreed in writing by Licensor. Licensee shall be provided, free of charge, with special effects and other elements of the Motion Pictures that may be developed in connection with the Motion Pictures; provided, however, that Licensee shall be required to pay for any services or materials, including without limitation any special effects, that are commissioned or requested by Licensee specifically for use in the Licensed Products, whether or not such materials are later used in either Motion Picture, at the standard rates customarily charged by such entity (even if an affiliate of Licensor), pursuant to a separate agreement with such entity. [*]. If a party other than Warner Bros. provides such services or creates or develops such materials, such other party shall be required to execute a Contributor's Agreement in the form attached hereto, confirming that Licensor is the owner of all rights in and to such materials or the results of such services. [*]. (j) Licensor's approval of Licensed Product(s) (including without limitation, the Licensed Product(s) themselves as well as promotional, display, and advertising materials) shall in no way constitute or be construed as an approval by Licensor of Licensee's use of any trademark, copyright and/or other proprietary materials, not owned by Licensor. (k) Notwithstanding the foregoing, if any of the Licensed Product(s) have already received Licensor's written approval prior to the execution of this Agreement, then Licensee shall not be required to resubmit such Licensed Product(s) for approval after execution hereof, except with respect to any modifications made to such Licensed Product(s), or to any packaging, hangtags, promotional and/or advertising materials. 11. DISTRIBUTION; SUBLICENSE/MANUFACTURE. (a) Licensee shall sell the Licensed Products either to jobbers, wholesalers, distributors or retailers for sale or resale and distribution directly to the public. [*]. If Licensee sells or distributes the Licensed Products at a special price (i.e., a price that is less than prevailing market rates in an arms-length transaction), directly or indirectly, to itself, including without limitation, any subsidiary of Licensee (including any affiliated distributors) or to any other person, firm, or corporation affiliated with Licensee or its officers, directors or major stockholders, for ultimate sale to unrelated third parties, Licensee shall pay royalties with respect to such sales or distribution, based upon the price generally charged the trade by Licensee. (b) [*]. In the event Licensee is not the manufacturer of the Licensed Products, Licensee shall, subject to the prior written approval of Licensor, which approval shall not be unreasonably withheld, be entitled to utilize a third party manufacturer in connection with the manufacture and production of the Licensed Products, provided that such manufacturer shall execute a letter in the form of Exhibit 3 attached hereto and by this reference made a part hereof. In such event, Licensee shall remain primarily obligated under all of the provisions of this Agreement and any default of this Agreement by such manufacturer shall be deemed a default by Licensee hereunder. In no event shall any such third party manufacturer agreement include the right to grant any rights to subcontractors. 12. GOODWILL. Licensee recognizes the great value of the publicity and goodwill associated with the Licensed Property and acknowledges: (i) such goodwill is exclusively that of Licensor; and (ii) that the Licensed Property has acquired a secondary meaning as Licensor's trademarks and/or - --------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 16 identifications in the mind of the purchasing public. Licensee further recognizes and acknowledges that a breach by Licensee of any of its covenants, agreements or undertakings hereunder will cause Licensor irreparable damage, which cannot be readily remedied in damages in an action at law, and may, in addition thereto, constitute an infringement of Licensor's copyrights, trademarks and/other proprietary rights in, and to the Licensed Property, thereby entitling Licensor to equitable remedies, and costs. 13. LICENSOR'S WARRANTIES AND REPRESENTATIONS. Licensor represents and warrants to Licensee that: (a) It has, and will have throughout the Term of this Agreement, the right to license the Licensed Property to Licensee in accordance with the terms and provisions of this Agreement; and (b) The making of this Agreement by Licensor, and performance by Licensor as contemplated hereunder, does not violate any agreements, rights or obligations of any person, firm or corporation. 14. LICENSEE'S WARRANTIES AND REPRESENTATIONS. Licensee represents and warrants to Licensor that, during the Term and thereafter, except to the extent otherwise provided in subparagraphs (m), (n) and (o), below: (a) It will not attack the title of Licensor (or third parties that have granted rights to Licensor) in and to the Licensed Property or any copyright or trademarks pertaining thereto, nor will it attack the validity of the license granted hereunder; (b) It will not harm, misuse or bring into disrepute the Licensed Property, but on the contrary, will maintain the value and reputation thereof to the best of its ability; (c) It will manufacture, sell, promote and distribute the Licensed Products in an ethical manner and in accordance with the terms and intent of this Agreement, and in compliance with all applicable government regulations and industry standards; (d) It will not create any expenses chargeable to Licensor without the prior written approval of Licensor in each and every instance. It will not cause or allow any liens or encumbrances to be placed against, or grant any security interest (except to Licensor as provided hereunder) in, the Licensed Property without Licensor's prior written consent; (e) It will use commercially reasonable efforts to protect its right to manufacture, sell, promote, and distribute the Licensed Products hereunder; (f) It will at all times comply with all government laws and regulations, including but not limited to product safety, food, health, drug, cosmetic, sanitary or other similar laws, relating or pertaining to the manufacture, sale, advertising or use of the Licensed Products, and shall maintain its appropriate customary high quality standards during the Term hereof. It shall comply with any regulatory agencies which shall have jurisdiction over the Licensed Products and shall procure and maintain in force any and all permissions, certifications and /or other authorizations from governmental and/or other official authorities that may be required in response thereto. Each Licensed Product [*] distributed hereunder shall comply with all applicable laws and regulations. [*]; (g) [*]. (h) It will provide Licensor with the date(s) of first use of the Licensed Products in interstate and intrastate commerce, where appropriate; (i) It will, pursuant to Licensor's instructions, duly take any and all necessary steps to secure execution of all necessary documentation for the recordation of itself as user of the Licensed Property in any jurisdiction where this is required or where Licensor reasonably requests that such recordation shall be effected. Licensee further agrees that it will at its own expense cooperate with Licensor in cancellation of any such recordation at the expiration of this Agreement or upon termination of Licensee's right to use the Licensed Property. Licensee hereby appoints Licensor its Attorney-in-Fact for such purpose; - --------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 17 (j) It will use its best efforts to manufacture, distribute and sell the Licensed Product(s) throughout the Territory; specifically, it shall: (i) Manufacture, distribute and sell the Licensed Product(s) in such price and quality brackets as are required to meet competition by reputable manufacturers of similar articles; (ii) Make and maintain adequate arrangements for the distribution of the Licensed Product(s) throughout the Territory; (iii) Supply said retail outlets with the necessary types of the Licensed Product(s) during the first and final thirds of each calendar year; and (iv) It will not deliver or sell Licensed Product(s) outside the Territory or knowingly sell Licensed Product(s) to a third party for delivery outside the Territory. (k) [*]; (l) If requested by Licensor to do so, it will utilize specific design elements of the Licensed Property provided to Licensee by Licensor on hangtags, labels, and other materials; (m) [*]; (n) [*]. (o) For so long as Perry's services are available to Licensee, Licensee shall allow Perry and Shiny to devote the amount of time reasonably necessary to develop the Licensed Products in compliance with Licensee's obligations hereunder. 15. TERMINATION BY LICENSOR. (a) Licensor shall have the right to terminate this Agreement without prejudice to any rights that it may have, whether pursuant to the provisions of this Agreement, at law, in equity, or otherwise, upon the occurrence of any one or more of the following events (herein called "defaults"): (i) Licensee materially defaults in the performance of any of its obligations provided for in this Agreement; or (ii) Licensee shall have failed to deliver to Licensor or to maintain in full force and effect the insurance referred to in Paragraph 8(b) hereof; or (iii) Licensee shall fail to make any payment due hereunder [*]; or (iv) Licensee shall fail to deliver any of the statements hereinabove referred to or to give access to the [*] license records pursuant to the provisions hereof to Licensor's authorized representatives for the purposes permitted hereunder, and such failure shall continue for [*] days after written notice thereof is sent by Licensor to the Licensee; or (v) Licensee shall fail to comply with any laws or regulations as provided in Paragraph 14(f) hereof or any governmental agency or other body, office or official vested with appropriate authority finds that the Licensed Products are harmful or defective in any way, manner or form, or are being manufactured, sold or distributed in contravention of applicable laws or regulations, or in a manner likely to cause harm to persons or property, [*]; or (vi) Licensee shall [*] make any assignment for the benefit of creditors, or shall file any petition under the bankruptcy or insolvency laws of any nation, jurisdiction, county or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or be adjudicated a bankrupt or an insolvent; or (vii) Licensee does not commence in good faith to manufacture, distribute and sell each title on each Platform throughout the Territory on or before its applicable Marketing Date, or thereafter fails to diligently and continuously manufacture, distribute and sell each title on each Platform throughout the Territory. Such default and Licensor's resultant right of termination (or - --------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 18 recapture) shall only apply to the specific title and Platform that Licensee fails to distribute in accordance with the foregoing; or (viii) Licensee shall manufacture, sell or distribute, whichever first occurs, any of the Licensed Product(s) without the prior written approval of Licensor as provided in Paragraph 10 hereof; or (ix) [*]; or (x) Licensee uses Artwork which has not been approved by Licensor in compliance with the provisions of Paragraph 10 hereof; or (xi) [*]; or (xii) Licensee delivers or sells Licensed Products outside the Territory or knowingly sells Licensed Products(s) to a third party who Licensee knows intends to, or who Licensee reasonably should suspect intends to, sell or deliver such Licensed Products outside the Territory; or (xiii) [*]; or (xiv) [*]; or (xv) [*]. (b) In the event any of these defaults occur, Licensor shall give notice of termination in writing to Licensee by facsimile and certified mail. Licensee shall have [*] days from the date of giving notice in which to correct any of these defaults and [*] days for payment [*], and failing such, this Agreement shall thereupon immediately terminate, and any and all payments then or later due from Licensee hereunder (including Guaranteed Consideration) shall then be promptly due and payable in full [*]. Notwithstanding anything to the contrary set forth in this Agreement, Licensor shall refund to Licensee the applicable Additional Consideration received by Licensor, as and to the extent provided in Paragraph 4(b)(v), above. (c) In the event of any default by Licensor hereunder, Licensor shall have [*] days from the date of notice from Licensee in which to cure such default. Licensee shall have the right to terminate this Agreement without prejudice to any other rights which it may have, whether pursuant to the provisions of this Agreement, or otherwise at law or in equity, if Licensor defaults in the performance of any of its obligations provided for in this Agreement or in the event of a material breach by Licensor of its warranties or representations set forth in this Agreement. In the event any such default occurs, Licensee shall give notice of termination in writing to Licensor by certified mail. Licensor shall have [*] and failing such correction, this Agreement shall thereupon immediately terminate, [*]. 16. FINAL STATEMENT UPON TERMINATION OR EXPIRATION. Licensee shall deliver, as soon as practicable, but not later than thirty (30) days following expiration or termination of this Agreement, a statement indicating the number and description of Licensed Products on hand together with a description of all advertising and promotional materials relating thereto. Following expiration or termination of this Agreement, Licensee shall immediately cease any and all manufacturing of the Licensed Product. However, if Licensee has complied with all the terms of this Agreement, including, but not limited to, complete and timely payment of the Guaranteed Consideration and Royalty Payments, then Licensee may continue to distribute and sell its remaining inventory, on a non-exclusive basis only, for a period not to exceed [*] following such termination or expiration (the "Sell-Off Period") of the Term that is applicable to the particular Licensed Product, subject to payment of applicable royalties thereon. [*]. If Licensee has any remaining inventory of the Licensed Products following the Sell-Off Period, Licensee shall, at Licensor's option, make available such inventory to Licensor for purchase at or below cost, deliver up to Licensor for destruction said remaining inventory or furnish to Licensor an affidavit attesting to the destruction of said remaining inventory. Licensor shall have the right to conduct a physical inventory in order to ascertain or verify such inventory and/or statement. In the event that Licensee refuses to permit Licensor to conduct such physical inventory, Licensee shall forfeit its right to the - --------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 19 Sell-Off Period hereunder or any other rights to dispose of such inventory. In addition to the forfeiture, Licensor shall have recourse to all other legal remedies available to it. 17. PAYMENTS AND NOTICES; RELATIONSHIP OF THE PARTIES. Except as otherwise specifically provided herein, all notices which either party hereto is required or may desire to give to the other shall be given by addressing the same to the other at the address set forth above, or at such other address as may be designated in writing by any such party in a notice to the other given in the manner prescribed in this paragraph. All such notices shall be sufficiently given when the same shall be deposited so addressed, postage prepaid, in the United States mail and/or when the same shall have been delivered, so addressed, by facsimile or by overnight delivery service and the date of transmission by facsimile, receipt of overnight delivery service or two business days after mailing shall for the purposes of this Agreement be deemed the date of the giving of such notice. This Agreement does not constitute and shall not be construed as constitution of a partnership or joint venture between Licensor and Licensee. Neither party shall have any right to obligate or bind the other party in any manner whatsoever, and nothing herein contained shall give, or is intended to give, any rights of any kind to any third persons. 18. [*]. [*]. 19. BANKRUPTCY RELATED PROVISIONS. (a) The parties hereby agree and intend that this Agreement is an executory contract governed by Section 365 of the Bankruptcy Code. (b) In the event of Licensee's bankruptcy, the parties intend that any royalties payable under this Agreement during the bankruptcy period be deemed administrative claims under the Bankruptcy Code because the parties recognize and agree that the bankruptcy estate's enjoyment of this Agreement will (i) provide a material benefit to the bankruptcy estate during its reorganization and (ii) deny Licensor the benefit of the exploitation of the rights through alternate means during the bankruptcy. (c) The parties acknowledge and agree that any delay in the decision of trustee of the bankruptcy estate to assume or reject the Agreement (the "Decision Period") materially harms Licensor by interfering with Licensor's ability to alternatively exploit the rights granted under this Agreement during a Decision Period of uncertain duration. The parties recognize that arranging appropriate alternative exploitation would be a time consuming and expensive process and that it is unreasonable for Licensor to endure a Decision Period of extended uncertainty. Therefore, the parties agree that the Decision Period shall not exceed [*] days. Notwithstanding the foregoing, nothing herein shall prohibit Licensor from seeking relief from a bankruptcy court at any time, including during such [*] day period. (d) Licensor, in its interest to safeguard its valuable interests (including, without limitation, its intellectual property rights in the Licensed Property), has relied on the particular skill and knowledge base of Licensee, for, among other reasons, those set forth in Paragraph 1(j) above. Therefore, the parties acknowledge and agree that in a bankruptcy context this Agreement is a license of the type described by Section 365(c)(1) of the Bankruptcy Code and may not be assumed by a bankruptcy trustee or assigned without the prior written consent of the Licensor. 20. CONSTRUCTION. This Agreement shall be construed in accordance with the laws of the State of California of the United States of America without regard to its conflicts of laws provisions. 21. WAIVER, MODIFICATION, ETC. No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any acts other than those specifically referred to therein. The fact that the - --------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 20 Licensor has not previously insisted upon Licensee expressly complying with any provision of this Agreement shall not be deemed to be a waiver of Licensor's future right to require compliance in respect thereof and Licensee specifically acknowledges and agrees that the prior forbearance in respect of any act, term or condition shall not prevent Licensor from subsequently requiring full and complete compliance thereafter. If any term or provision of this Agreement is held to be invalid or unenforceable by any court of competent jurisdiction or any other authority vested with jurisdiction, such holding shall not affect the validity or enforceability of any other term or provision hereto and this Agreement shall be interpreted and construed as if such term or provision, to the extent the same shall have been held to be invalid, illegal or unenforceable, had never been contained herein. Headings of paragraphs herein are for convenience only and are without substantive significance. 22. CONFIDENTIALITY. The Artwork and the materials and information supplied to one party by the other hereunder constitute, relate to, contain and form a part of confidential and proprietary information of the disclosing party, including, but not limited to, Style Guides, design elements, character profiles, unpublished copyrighted material, release dates, marketing and promotional strategies, information about new products, properties and characters, computer code (if any), the terms and conditions of this Agreement, and other information which is proprietary in nature or is a trade secret (collectively, the "Proprietary Information"). The Proprietary Information is highly confidential and disclosure of the Proprietary Information will result in serious harm to the owner thereof. Among other damage, unauthorized disclosure of the Proprietary Information will (i) damage carefully planned marketing strategies, (ii) reduce interest in the Licensed Property, (iii) make unique or novel elements of the Licensed Property susceptible to imitation or copying by competitors, infringers or third parties prior to Licensor's release of the information or materials, (iv) damage proprietary protection in undisclosed or unpublished information or materials, and (v) provide unauthorized third parties with materials capable of being used to create counterfeit and unauthorized merchandise, audio-visual products or other products, all of which will seriously damage the parties' rights and business. Except as expressly approved in writing by the owner of the Proprietary Information, the other party shall not reproduce or use the Proprietary Information of the other party and shall not discuss, distribute, disseminate or otherwise disclose the Proprietary Information or the substance or contents thereof, in whole or in part, in its original form or in any other form, with or to any other person or entity other than employees of the parties and, in the case of Licensee, third parties who have executed a Contributor's Agreement (as provided in Paragraph 9(b)) or third party manufacturer's agreement (as provided in Paragraph 11(b)) and been approved by Licensor as provided hereunder, and such employees and third parties shall be given access to the Proprietary Information only on a "need-to-know" basis. The foregoing restrictions shall not apply to any information which, (i) at the time of disclosure, is in the public domain or which, after disclosure, becomes part of the public domain by publication or otherwise through no action or fault of the receiving party; (ii) information which the receiving party can show was in its possession at the time of disclosure and was not acquired, directly or indirectly, from the other party; (iii) information which was received from a third party having the legal right to transmit the same; (iv) information which is independently developed, conceived, or created without use of or reference to any Proprietary Information of the other party; (v) information which is disclosed pursuant to valid court order or other legal process; or (vi) information that must be disclosed by law or governmental regulation such as in filings with the Securities and Exchange Commission. 23. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties concerning the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, expressed, implied or statutory, between the parties other than as expressly set forth in this Agreement. 24. ACCEPTANCE BY LICENSOR. This instrument, when signed by Licensee, shall be deemed an application for license and not a binding agreement unless and until accepted by Warner Bros. Consumer Products by signature of a duly authorized officer and the delivery of such a signed copy to Licensee. The receipt and/or deposit by Warner Bros. Consumer Products of any check or other consideration given by Licensee and/or delivery of any material by Warner Bros. Consumer Products to Licensee shall not be deemed an acceptance by Warner Bros. Consumer Products of this application. The foregoing shall apply to any documents relating to renewals or modifications hereof. 21 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. AGREED AND ACCEPTED: AGREED AND ACCEPTED: LICENSOR: LICENSEE: WARNER BROS. CONSUMER PRODUCTS, INTERPLAY ENTERTAINMENT CORP., a a division of Time Warner Delaware corporation Entertainment Company, L.P. By:____________________________ By:_______________________________ Gary R. Simon Name:__________________________ Senior Vice President, Title:_________________________ Business and Legal Affairs Date:__________________________ Date:_____________________________ 22 EXHIBIT 1 #12420-MATR Milestones 1 and 2 (due on or before [*]): [*] [*] Milestone 3 (due on or before [*]): [*] Milestone 4 (due on or before [*]): [*] Milestone 5 (due on or before [*]): [*] Milestone 6 (due on or before [*]): [*] Milestone 7 (due on or before [*]): [*] - --------------- * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 23 EXHIBIT 2 #12420-MATR CONTRIBUTOR'S AGREEMENT ----------------------- I, _______________________, the undersigned ("Contributor"), have been engaged by INTERPLAY ENTERTAINMENT CORP. ("Licensee") to work on or contribute to the creation of Licensed Products, described as ____________________________, by Licensee under an agreement between Licensee and Warner Bros., a division of Time Warner Entertainment Company, L.P., c/o Warner Bros. Consumer Products, a division of Time Warner Entertainment Company, L.P. ("Warner") dated ___________________ (the "License Agreement"). I understand and agree that the Licensed Products, and all artwork or other results of my services for Licensee in connection with such Licensed Products ("Work") is a "work made for hire" for Warner and that all right, title and interest in and to the Work shall vest and remain with Warner or Licensee, as specified in the License Agreement. I reserve no rights therein. Without limiting the foregoing, I hereby assign and transfer to Warner all other rights whatsoever, in perpetuity throughout the universe which I may have or which may arise in me or in connection with the Work that is owned by Warner as provided in the License Agreement. I hereby waive all moral rights in connection with such Work together with any other rights which are not capable of assignment. I further agree to execute any further documentation relating to such transfer or waiver or relating to such Work at the request of Warner or Licensee, failing which Warner is authorized to execute same as my Attorney-in-Fact. Nothing contained herein shall be deemed to alter the rights of Warner or Licensee, as specified in the License Agreement, with respect to ownership of the Work. Contributor: By:_______________________________ signature _______________________________ print name _______________________________ address _______________________________ _______________________________ country _______________________________ date Warner Bros. Consumer Products: By:______________________________ Date:____________________________ EXHIBIT 3 #12420-MATR WARNER BROS. CONSUMER PRODUCTS 4000 Warner Boulevard Bridge Building 156 South - 4th Floor Burbank, CA 91522 Re: Approval of Third Party Manufacturer Gentlemen: This letter will serve as notice to you that pursuant to Paragraph 11(b) of the License Agreement dated ________________, 2000 between you and INTERPLAY ENTERTAINMENT CORP., we have been engaged as the manufacturer for Licensee in connection with the manufacture of the Licensed Products as defined in the aforesaid License Agreement. We hereby acknowledge that we may not manufacture Licensed Products for, or sell or distribute Licensed Products to, anyone other than Licensee. We are cognizant of the terms and conditions set forth in said License Agreement and hereby agree to observe those provisions of said License Agreement which are applicable to our function as manufacturer of the Licensed Products. It is expressly understood that we are obligated to comply with all local laws, including without limitation, labor laws, wage and hour laws and anti-discrimination laws and that you or your representatives shall, at anytime, have the right to inspect our facilities and review our records to ensure compliance therewith. It is understood that this engagement is on a royalty free basis and that we may not subcontract any of our work without your prior written approval. We understand that our engagement as the manufacturer for Licensee is subject to your written approval. We request, therefore, that you sign in the space below, thereby showing your acceptance of our engagement as aforesaid. Very truly yours, _______________________________ manufacturer/company name By:_______________________________ signature _______________________________ print name _______________________________ address _______________________________ _______________________________ country _______________________________ date _______________________________ product(s) manufacturing AGREED TO AND ACCEPTED: WARNER BROS. CONSUMER PRODUCTS, a Division of Time Warner Entertainment Company, L.P. By:______________________________ Gary R. Simon Senior Vice President, Business and Legal Affairs Date:____________________________ EX-10.44 7 dex1044.txt LICENSED PUBLISHER AGREEMENT EXHIBIT 10.44 PLAYSTATION(R)2 CD-ROM/DVD-ROM LICENSED PUBLISHER AGREEMENT This LICENSED PUBLISHER AGREEMENT (the "Agreement" or "LPA"), entered into as of the 1st day of April, 2000 (the "Effective Date"), by and between SONY COMPUTER ENTERTAINMENT AMERICA INC., with offices at 919 E. Hillsdale Boulevard, Foster City, CA 94404 (hereinafter "SCEA"), and INTERPLAY ENTERTAINMENT CORP., with offices at 16815 Von Karman Ave Irvine, CA 92606 (hereinafter "Publisher"). WHEREAS, SCEA, its parent company, Sony Computer Entertainment Inc., and/or certain of their affiliates and companies within the group of companies of which any of them form a part (collectively referred to herein as "Sony") are designing and developing, and licensing core components of, a computer entertainment system (hereinafter referred to as the "System"). WHEREAS, SCEA has the right to grant licenses to certain SCEA Intellectual Property Rights (as defined below) in connection with the System. WHEREAS, publisher desires to be granted a non-exclusive license to publish, develop, have manufactured, market, distribute and sell Licensed Products (as defined below) pursuant to the terms and conditions set forth in this Agreement; and SCEA is willing, on the terms and subject to the conditions of this Agreement, to grant Publisher such a license. NOW, THEREFORE, in consideration of the representations, warranties and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Publisher and SCEA hereby agree as follows: 1. Definition of Terms. 1.1 "Advertising Materials" means any advertising, marketing, merchandising, promotional, public relations (including press releases) and display materials relating to or concerning Licensed Products or proposed Licensed Products, or any other advertising, merchandising, promotional, public relations (including press releases) and display materials depicting any of the Licensed Trademarks. For purposes of this Agreement, Advertising Materials include any advertisements in which the System is referred to or used in any way, including but not limited to giving the System away as prizes in contests or sweepstakes and the public display of the System in product placement opportunities. 1.2 "Affiliate of SCEA" means, as applicable, either Sony Computer Entertainment Inc. in Japan, Sony Computer Entertainment Europe Ltd. in the United Kingdom or such other Sony Computer Entertainment entity as may be established from time to time. 1.3 "Designated Manufacturing Facility" means a manufacturing facility or facilities which Is designated by SCEA in its sole discretion to manufacture Licensed Products and/or their component parts, which may include manufacturing facilities owned and operated by affiliated companies of SCEA. 1.4 "Development System Agreement" means an agreement entered into between SCEA and a Licensed Publisher, Licensed Developer or other licensee for the sale or license of Development Tools. 1.5 "development Tools" means the PlayStation 2 development tools sold or licensed by SCEA to a Licensed Publisher or Licensed Developer for use in the development of Executable Software for the System. 1.6 "Executable Software" means software which includes Product Software and any software provided directly or indirectly by SCEA or an Affiliate of SCEA designed for execution exclusively on the System and which had the ability to communicate with the software resident in the System. 1.7 "Fiscal Year" means a year measured from April 1 to March 31. 1.8 "Generic Line" means the generic legal attribution line used on SCEA marketing or other materials, which shall be or be substantially similar to the following: "Product copyright and trademarks are the property of the respective publisher or their licensors". 1.9 "Guidelines" shall mean any guidelines of SCEA or an Affiliate of SCEA with respect to SCEA Intellectual Property Rights, which may be set forth in the SourceBook 2 or in other documentation provided by SCEA or an Affiliate of SCEA to Publisher. 1.10 "Legal Copy" means any legal or contractual information required to be used in connection with a Licensed Product or Product Information, including but not limited to copyright and trademark attributions, contractual credits and developer or distribution credits. 1.11 "Level 1 rebate" shall have the meaning set forth in Section 8.4 hereto. 1.12 "Level 2 Rebate" shall have the meaning set forth in Section 8.4 hereto. 1.13 "Licensed Developer" means any developer that has signed a valid and then current Licensed Developer INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 1 Agreement. 1.14 "Licensed Developer Agreement" or "LDA" means a valid and current license agreement for the development of Licensed Products for the System, fully executed between a Licensed Developer and SCEA or an Affiliate of SCEA. 1.15 "Licensed Products" means the Executable Software (which may be combined with Executable Software or other Licensed Publisher or Licensed Developers), which shall consist of one product developed for the System or for the original PlayStation game console per Unit, in final form developed exclusively for the System. Publisher shall have no right to package or bundle more than one product developed for the System or for the original PlayStation game console in a single Unit unless separately agreed with SCEA. 1.16 "Licensed Publisher" means any publisher that has signed a valid and then current Licensed Publisher Agreement. 1.17 "Licensed Publisher Agreement" or "LPA" means a valid an current license agreement for the publication, development, manufacture, marketing, distribution or sale of Licensed Products for the System, fully executed between a Licensed Publisher and SCEA or an Affiliate of SCEA. 1.18 "Licensed Territory" means the United States (including its possessions and territories) and Canada. The Licensed Territory may be modified and/or supplemented by SCEA from time to time pursuant to Section 4.4 below. 1.19 "Licensed Trademarks" means the Trademarks, service marks, trade dress, logos and other icons or indicia designated by SCEA in the SourceBook 2 or other Guidelines for use on or in connection with Licensed Products. Nothing contained in this Agreement shall in any way grant Publisher the right to use the trademark "Sony" in any manner. SCEA may amend such Licensed Trademarks from time to time in the SourceBook 2 or other Guidelines or upon written notice to Publisher. 1.20 "Manufacturing Specifications" means specifications setting forth terms relating to the manufacture and assembly of PlayStation 2 Format Discs, Packaging, Printed Materials and each of their component parts, which shall be set forth in the SourceBook 2 or other documentation provided by SCEA or a Designated Manufacturing Facility to Publisher and which may be amended from time to time upon reasonable notice to Publisher. 1.21 "Master Disc" means a recordable CD-ROM or DVD-ROM disc in the form requested by SCEA containing final pre-production Executable Software for a Licensed Product. 1.22 "Packaging" means, with respect to each Licensed Product, the carton, containers, packaging, edge labels and other proprietary labels, trade dress and wrapping materials, including any jewel case (or other CD-ROM or DVD-ROM container) or parts thereof, but excluding Printed Materials and PlayStation 2 Format Discs. 1.23 "PlayStation 2 Format Discs" means the uniquely marked or colored CD- ROM or DVD-ROM discs formatted for use with the System which, for purposes of this Agreement, are manufactured on behalf of Publisher and contain Licensed Products or SCEA Demo Discs. 1.24 "Printed Materials" means all artwork and mechanicals set forth on the disc label of the PlayStation Disc relating to any of the Licensed Products and on or inside any Packaging for the Licensed Product, and all instructional manuals, liners, inserts, trade dress and other user information to be inserted into the Packaging. 1.25 "Product Information" means any information owned or licensed by Publisher relating in any way to Licensed Products, including but not limited to demos, videos, hints and tips, artwork, depictions of Licensed Product cover art and videotaped interviews. 1.26 "Product Proposal" shall have the meaning set forth in Section 5.2.1 hereto. 1.27 "Product Software" means any software including audio and video material developed by a Licensed Publisher or Licensed Developer, which, either by itself or combined with Product Software or other licensees, when integrated with software provided by SCEA or an Affiliate of SCEA, creates Executable Software. It is understood that Product Software contains no proprietary information of Sony or any other rights of SCEA. 1.28 "Publisher Intellectual Property Rights" means those intellectual property rights, including but not limited to patents and other patent rights, copyrights, trademarks, service marks, trade names, trade dress, mask work rights, utility model rights, trade secret rights, technical information, know- how, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the universe, which pertain to Product Software, Product Information, Printed Materials, Advertising Materials or other right of Publisher required to necessary under this INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 2 Agreement. 1.29 "Purchase Order" means a written purchase order processed in accordance with the terms of Section 6.2.2 hereto, the Manufacturing Specifications or other terms provided separately by SCEA or a Designated Manufacturing Facility to Publisher. 1.30 "SCEA Demo Disc" means any demonstration disc developed and distributed by SCEA. 1.31 "SCEA Established Third Party Demo Disc Programs" means (i) any consumer or trade demonstration disc program specified in the SourceBook 2, and (ii) any other third party demo disc program established by SCEA for Licensed Publishers. 1.32 "SCEA Intellectual Property Rights" means those intellectual property rights, including but not limited to patents and other patent rights, copyrights, trademarks, service marks, trade names, trade dress, mask work rights, utility model rights, trade secret rights, technical information, know- how, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the proprietary or intellectual property right throughout the universe, which are required to ensure compatibility with the System or which pertain to the Licensed Trademarks. 1.33 "SCEA Product Code" means the product identification number assigned to each Licensed Product, which shall consist of separate product identification numbers for multiple disc sets (i.e., SLUS-xxxxx). This SCEA Product Code is used on the Packaging and PlayStation Disc relating to each Licensed Product, as well as on most communications between SCEA and Publisher as a mode of Identifying the Licensed Product other that by title. 1.34 "Sony Materials" means any data, object code, source code, firmware, documentation (or any part(s) of any of the foregoing), related to the System, selected in the sole judgment of SCEA, which are provided or supplied by SCEA or an Affiliate or SCEA to Publisher or any Licensed Developer and/or other Licensed Publisher. For purposes of this Agreement, Sony Materials shall not include any hardware portions of the Development Tools, but shall include firmware in such hardware. 1.35 "SourceBook 2" means the PlayStation 2 SourceBook (or any other reference guide containing information similar to the SourceBook 2 but designated with a different name) prepared by SCEA, which is provided separately to Publisher. The SourceBook 2 is designed to serve as the first point of reference by Publisher in every phase of the development, approval, manufacture and marketing of Licensed Products. 1.36 "Standard Rebate" shall mean [*]. 1.37 "Third Party Demo Disc" means any demo disc developed and marketed by a Licensed Publisher, which complies with the terms of an SCEA Established Third Party Demo Disc Program. 1.38 "Unit" means an individual copy of a Licensed Product title regardless of the number of PlayStation 2 Format Discs constituting such Licensed Product Title. 1.39 "Wholesale Price" or "WSP" shall mean the greater of (i) the first published price of the Licensed Product offered to retailers by Publisher as evidenced by a sell sheet or price list issued by Publisher, or (ii) the actual price paid by retailers upon the first commercial shipment of a Licensed Product without offsets, rebates or deductions from invoices of any kind. 2. License. 2.1 License Grant. SCEA grants to Publisher, and Publisher hereby ------------- accepts, for the term of this Agreement, within the Licensed Territory, under SCEA Intellectual Property Rights owned, controlled or licensed by SCEA, a non- exclusive, non-transferable license, without the right to sublicense (except as specifically provided herein), to publish Licensed Products using Sony Materials, which right shall be limited to the following rights and other rights set forth in, and in accordance with the terms of the LPA: (i) to produce or develop Licensed Products and to enter into agreements with Licensed Developers and other third parties to develop Licensed Products; (ii) to have such Licensed Products manufactured; (iii) to market, distribute and sell such Licensed Products and to authorize others to do so; (iv) to use the Licensed Trademarks strictly and only in connection with the development, manufacturing, marketing, packaging, advertising and promotion of the Licensed Products, and subject to SCEA's right of approval as provided herein; (v) to sublicense to end users the right to use the Licensed Products for noncommercial purposes in conjunction with the System only, and not with other devices or for public performance. 2.2 Separate PlayStation Agreements. Unless specifically set forth in ------------------------------- this Agreement, all terms used herein are specific to the System and the third party licensing program related thereto and not to the original PlayStation game console or third party licensing program related thereto. Licenses relating to the original PlayStation game console are subject to separate agreements with SCEA, and any license of rights to INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 3 Publisher under such separate agreements shall not confer on Publisher any rights under the System and vice versa. 3. Development of Licensed Products. 3.1 Right to Develop. This LPA grants Publisher the right to develop ---------------- Licensed Products. It also gives Publisher the right to purchase and/or license Development Tools, as is appropriate, from SCEA or its designated agent, pursuant to a separate Development System Agreement with SCEA, to assist in such development. In developing Executable Software (or portions thereof), Publisher and its agents shall fully comply in all respects with any and all technical specifications which may from time to time be issued by SCEA. In the event that Publisher used third party tools to develop Executable Software, Publisher shall be responsible for ensuring that it has obtained appropriate licenses for such use. 3.2 Development by Third Parties. Except as otherwise set forth herein, ---------------------------- Publisher shall not provide Sony Materials or SCEA's Confidential Information to any third party. Publisher shall be responsible for determining that third parties meet the criteria set forth herein. Publisher may contract with a third party for development of Licensed Products, provided that such third party is: (i) a Licensed Publisher, (ii) a Licensed Developer, or (iii) an SCEA-authorized subcontractor in compliance with the provisions of Section 16.6. Publisher shall notify SCEA in writing of the identity of any such third party within thirty (30) days of entering into an agreement or other arrangement with the third party. 4. Limitations on Licenses; Reservation of Rights. 4.1 Reverse Engineering Prohibited. Other than as expressly permitted by ------------------------------ SCEA in writing, Publisher shall not directly or indirectly disassemble, decrypt, electronically scan, peel semiconductor components, decompile, or otherwise reverse engineer in any manner or attempt to reverse engineer or derive source code from, all or any portion of the Sony Materials. , or permit, assist or encourage any third party to do so. Other than as expressly permitted by SCEA in writing, Publisher shall not use, modify, reproduce, sublicense, distribute, create derivative works from, or otherwise provide to third parties, the Sony Materials, in whole or in part, other than as expressly permitted by SCEA in writing, Publisher shall not use, modify, reproduce, sublicense, distribute, create derivative works from , or otherwise provide to third parties, the Sony Materials, in whole or in part, other than as expressly permitted by SCEA. SCEA shall permit Publisher to study the performance, design and operation of the Development Tolls solely for the limited purposes of developing and testing Publisher's software applications, or to build tools to assist Publisher with the development and testing of software applications for Licensed Products. Any tools developed or derived by Publisher resulting from the study of the performance, design or operation of the Development Tools shall be considered as derivative products of the Sony Materials for copyright purposes, but may be treated as trade secrets of Publisher. In no event shall Publisher patent any tools created, developed or derived from Sony Materials. Publisher shall not make available to any third party any tools developed or derived from the study of the Development Tools without the express written permission of SCEA. Use of such tools shall be strictly limited to the creation or testing of Licensed Products and any other use, direct or indirect of such tools is strictly prohibited. Publisher shall be required in all cases to pay royalties in accordance with Section 8 hereto to SCEA on any of Publisher's products utilizing any Sony Materials or derivative works made therefrom. Moreover, Publisher shall bear all risks arising from incompatibility of its Licensed Product and the System resulting from use of Publisher-created tools. The burden of proof under this Section shall be on Publisher, and SCEA reserves the right to require Publisher to furnish evidence satisfactory to SCEA that Publisher has complied with this Section. 4.2 Reservation of SCEA's Rights. ---------------------------- 4.2.1 Limitation of Rights to Licenses Granted. The licenses granted ---------------------------------------- in this Agreement extend only to the publication, development, manufacture, marketing, distribution and sale of Licensed Products for use on the System, in such formats as may be designated by SCEA. Without limiting the generality of the foregoing and except as otherwise provided herein, Publisher shall not distribute or transmit the Executable Software or the Licensed Products via electronic means or any other means now know or hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwave and/or radio waves, or over a network of computers or other devices. Notwithstanding this limitation, Publisher may electronically transmit Executable Software from site to site, or from machine to machine over a computer network, for the sole purpose of facilitating development; provided that no right of retransmission shall attach to any such transmission, and provided further that Publisher shall use reasonable security measures customary within the high technology industry to reduce the risk of unauthorized interception or retransmission of such transmissions. This Agreement does not grant any right or license, under any SCEA Intellectual Property Rights or otherwise, except as expressly provided herein, and no other right or license is to be implied by or inferred from any provision of this Agreement or the conduct of the parties hereunder. INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 4 4.2.2 Other Use of Sony Materials and SCEA Intellectual Property ---------------------------------------------------------- Rights. Publisher shall not make use of any Sony Materials or any SCEA - ------ Intellectual Property Rights (or any portion thereof) except as authorized by and in compliance with the provisions of this Agreement. Publisher shall not use the Executable Software, Sony Materials or SCEA's Confidential Information in connection with the development of any software for any emulator or other computer hardware or software system. No right, license or privilege has been granted to Publisher hereunder concerning the development of any collateral product or other use or purpose of any kind whatsoever which displays or depicts any of the Licensed Trademarks. The rights set forth in Section 2.1(v) hereto are limited to the right to sublicense such right to end users for non- commercial use; any public performance relating to the Licensed Product or the System is prohibited unless expressly authorized in writing by SCEA. 4.3 Reservation of Publisher's Rights. Separate and apart from Sony --------------------------------- Materials and other rights licensed to Publisher by SCEA hereunder, as between Publisher and SCEA, Publisher retains all rights, title and interest in and to the Product Software, and the Product Proposals and Product Information related thereto, including without limitation Publisher Intellectual Property Rights therein, as well as Publisher's right sin any source code and other underlying material such as artwork and music related thereto and any names used as titles for Licensed Products and other trademarks used by Publisher. Nothing in this Agreement shall be construed to restrict the right of Publisher to develop, distribute or transmit products incorporating the Product Software and such underlying material (separate and apart from the Sony Materials) for any hardware platform or service other than the System, or to use Printed Materials or Advertising Materials approved by SCEA as provided herein (provided that such Printed Materials and/or Advertising Materials do not contain any Licensed Trademarks) as Publisher determines for such other platforms. SCEA shall not do or cause to be done any act or thing in any way impairing or tending to impair or dilute any of Publisher's right, title or interests hereunder. Notwithstanding the foregoing, Publisher shall not distribute or transmit Product Software which is intended to be used with the System via electronic means or any other means now know ore hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwave and/or radio waves, or over a network of computers or other devices, except as otherwise permitted in Section 4.2.1 hereto. 4.4 Additions to and Deletions from Licensed Territory. SCEA may, from -------------------------------------------------- time to time, add one or more countries to the Licensed Territory by providing written notice of such addition to Publisher. SCEA shall also have the right to delete, and intends to delete any countries from the Licensed Territory if, in SCEA's reasonable judgment, the laws or enforcement or such laws in such countries do not protect SCEA Intellectual Property Rights. In the event a country is deleted from the Licensed Territory, SCEA shall deliver to Publisher a notice stating the number of days within which Publisher shall cease distributing Licensed Products, and retrieve any Development Tools located, in any such deleted country. Publisher shall cease distributing Licensed Products, and retrieve any Development Tools, directly or through subcontractors, by the end of the period stated in such notice. 4.5 SourceBook 2 Requirement. Publisher shall be required to comply with ------------------------ all the provisions of the SourceBook 2, including without limitation the Technical Requirements Checklist therein, when published, or within a commercially reasonable time following its publication to incorporate such provision, as if such provisions were set forth in this Agreement. 5. Quality Standards for the Licensed Products. 5.1 Quality Assurance Generally. The Licensed Products (and all portions --------------------------- thereof) and Publisher's use of any Licensed Trademarks shall be subject to SCEA's prior written approval, which shall not be unreasonably withhold or delayed and which shall be within SCEA's sole discretion as to acceptable standards of quality. SCEA shall have the right at any stage of the development of a Licensed Product to review such Licensed Product to ensure that it meets SCEA's quality assurance standards. All Licensed Products will be developed to substantially utilize the particular capabilities of the System's proprietary hardware, software and graphics. No approval by SCEA of any element or stage of development of any Licensed Product shall be deemed an approval of any other element or stage of such Licensed Product, nor shall any such approval be deemed to constitute a waiver of any of SCEA's right sunder this Agreement. In addition, SCEA's approval of any element or any stage of development of any Licensed Product shall not release Publisher from any of its representations and warranties in Section 9.2 hereunder. 5.2 Product Proposals. ----------------- 5.2.1 Submissions of Product Proposal. Publisher shall submit to ------------------------------- SCEA for SCEA's written approval or disapproval, which shall not be unreasonably withheld or delayed, a written proposal the "Product Proposal"). Such Product Proposal must contain all INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 5 information specified in the SourceBook 2, as well as any additional information that SCEA may deem to be useful in evaluating the proposed Licensed Product. 5.2.2 Approval of Product Proposal. After SCEA's review of ---------------------------- Publisher's Product Proposal, Publisher will receive written notice from SCEA of the status of the Product Proposal, which may range from "Approved" to "Not Approved". Such conditions shall have the meanings ascribed to them in the SourceBook 2, and may be changed from time to time by SCEA. If a Product Proposal is "Not Approved", then neither Publisher nor any other Licensed Developer or Licensed Publisher may re-submit such Product Proposal without significant, substantive revisions. SCEA shall have no obligation to approve any Product Proposal submitted by Publisher. Any development conducted by or at the direction of Publisher and any legal commitment relating to development work shall be at Publisher's own financial and commercial risk. Publisher shall not construe approval of a Product Proposal as a commitment by SCEA to grant final approval of such Licensed Product. Nothing herein shall restrict SCEA from commercially exploiting any coincidentally similar concept(s) and/or product(s), which have been independently developed by SCEA, an Affiliate of SCEA or any third party. 5.2.3 Changes to Product Proposal. Publisher shall notify SCEA --------------------------- promptly in writing in the event of any material proposed change in any portion of the Product Proposal. SCEA's approval of a Product Proposal shall not obligate Publisher to continue with development or production of the proposed Licensed Product, provided that Publisher must immediately notify SCEA in writing if it discontinues, cancels or otherwise delays past the original scheduled delivery date the development of any proposed Licensed Product. In the event that Publisher licenses a proposed Licensed Product from another Licensed Publisher or a Licensed Developer, it shall immediately notify SCEA of such change and must re-submit such Licensed Product to SCEA for approval in accordance with the provisions of Section 5.2.1 above. 5.3 Work-in-Progress. ---------------- 5.3.1 Submission and Review of Work-in-Progress. SCEA shall require ----------------------------------------- Publisher to submit to SCEA work-in-progress on Licensed Products at certain intervals throughout their development and, upon written notice to Publisher, at any time during the development process. Upon approval of the Product Proposal, Publisher must, within the time frame indicated in the approval letter, communicate with SCEA and mutually agree on a framework for the review of such Licensed Product throughout the development process ("Review Process"). Once the Review Process ahs begun, Publisher shall be responsible for submitting work-in-process to SCEA in accordance with such Review Process. Failure to submit work-in-progress in accordance with any stage of the Review Process may, at SCEA's discretion, result in revocation of approval of such Product Proposal. 5.3.2 Approval of Work in Progress. SCEA shall have the right to ---------------------------- approve, reject or require additional information with respect to each stage of the Review Process. SCEA shall specify in writing the reasons for any such rejection or request for additional information and shall state what corrections and/or improvements are necessary. If any stage of the Review Process is not provided to SCEA or is not successfully met after a reasonable sure period agreed to between SCEA and Publisher, SCEA shall have the right to revoke the approval of Publisher's Product Proposal. 5.3.3 Cancellation or Delay; Conditions of Approval. Licensed --------------------------------------------- Products which are canceled by Publisher or are late in meeting the final Executable Software delivery date by more than three (3) months (without agreeing with SCEA on a modified final delivery date) shall be subject to the termination provisions set forth in Section 14.3 hereto. In addition, failure to make changes required by SCEA to the Licensed Product at any stage of the review process, or making material changes to the Licensed Product without SCEA's approval, may subject Publisher to the termination provisions set forth in Section 14.3 hereto. 5.4 Approval of Executable Software. On or before the date specified in ------------------------------- the Product Proposal or as determined by SCEA pursuant to the Review Process, Publisher shall deliver to SCEA for its inspection and evaluation, a final version of the Executable Software for the Proposed Licensed Product. SCEA will evaluate such Executable Software and notify Publisher in writing of its approval or disapproval, which shall not be unreasonably withheld or delayed. If such Executable Software is disapproved, SCEA shall specify in writing the reasons for such disapproval and state what corrections improvements are necessary. After making the necessary corrections and improvements, Publisher shall submit a new version of such Executable Software for SCEA's approval. SCEA shall have the right to disapprove Executable Software if it fails to comply with SCEA's corrections or improvements or one or more conditions as set forth in the SourceBook 2 with no obligation to review all elements of any version of Executable Software. All final versions of Executable Software shall be submitted in the format prescribed by SCEA and shall include such number of Master Discs as SCEA may require from time to time. Publisher hereby (i) warrants that all final versions of Executable Software are INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 6 fully tested; (ii) shall use its best efforts to ensure such Executable Software is fully debugged prior to submission to SCEA; and (iii) warrants that all versions of Executable Software comply or will comply with standards set forth in the SourceBook 2 or other documentation provided by SCEA to Publisher. In addition, prior to manufacture of Executable Software, Publisher must sign an accountability form stating that (x) Publisher approves the release of such Executable Software for manufacture in its current form and (y) Publisher shall be fully responsible for any problems related to such Executable Software. 5.5 Printed Materials. ----------------- 5.5.1 Compliance with Guidelines. For each proposed Licensed -------------------------- Product, Publisher shall be responsible, at Publisher's expense, for creating and developing Printed Materials. All Printed Materials shall comply with the Guidelines, which may be amended from time to time, provided that Publisher shall, except as otherwise provided herein, only be required to implement amended Guidelines in subsequent orders of Printed Materials and shall not be required to recall or destroy previously manufactured Printed Materials, unless such Printed Materials do not comply with the original requirements in the Guidelines or unless explicitly required to do so in writing by SCEA. 5.5.2 Submission and Approval of Printed Materials. No later than -------------------------------------------- submission of final Executable Software for a proposed Licensed Product, Publisher shall also deliver to SCEA, for review and evaluation, the proposed final Printed Materials and a form of limited warranty for the proposed Licensed Product. Failure to meet any scheduled release dates for a Licensed Product is solely the risk and responsibility of Publisher, and SCEA assumes no responsibility for Publisher failing to meet such scheduled release dates due to this submission process. The quality of such Printed Materials shall be of the same quality as that associated with our commercially available high quality software products. If any of the Printed Materials are disapproved, SCEA shall specify the reasons for such disapproval and state what corrections are necessary. SCEA shall have no liability to Publisher for costs incurred or irrevocably committed to by Publisher for production of Printed Materials that are disapproved by SCEA. After making he necessary corrections to any disapproved Printed Materials, Publisher must submit new Printed Materials for approval by SCEA. SCEA shall not unreasonable withhold or delay its review of Printed Materials. 5.6 Advertising Materials. --------------------- 5.6.1 Submission and Approval of Advertising Materials. Pre- ------------------------------------------------ production samples of all Advertising Materials shall be submitted by Publisher to SCEA, at Publisher's expense, prior to any actual production, use or distribution of any such items by Publisher or on its behalf. SCEA shall evaluate and approve such Advertising Materials, which approval shall not be unreasonably withheld or delayed, as to the following standards: (i) the content, quality, and style of the overall advertisement; (ii) the quality, style, appearance and usage or any Licensed Trademarks; (iii) appropriate references of any required notices; and (iv) appropriate compliance with the Guidelines. If any of the Advertising Materials are disapproved, SCEA shall specify the reasons for such disapproval and state what corrections are necessary. SCEA may require Publisher to immediately withdraw and reprint any Advertising Materials that have been published but have not received the written approval of SCEA. SCEA shall have no liability to Publisher for costs incurred or irrevocably committed to by Publisher for production of Advertising Materials that are disapproved by SCEA. For each Licensed Product, Publisher shall be required to deliver to SCEA an accountability form stating that all Advertising Materials for such Licensed Product comply or will comply with the Guidelines for use of the Licensed Trademarks. After making the necessary corrections to any disapproved Advertising Materials, Publisher must submit new proposed Advertising Materials for approval by SCEA. 5.6.2 Failure to Comply; Three Strikes Program. Publishers who fail ---------------------------------------- to obtain SCEA's approval of advertising Materials prior to broadcast or publication shall be subject to the provisions of the "Three Strikes" program outlined in the SourceBook 2. Failure to obtainer SCEA's approval of Advertising Materials could result in termination of this LPA or termination of approval of the Licensed Product, or could subject Publisher to the provisions of Section 14.4 hereto. Failure to meet any scheduled release dates for Advertising Materials is solely the risk and responsibility of Publisher, and SCEA assumes no responsibility for Publisher failing to meet such scheduled release dates due to approval requirements as set forth in this Section. 5.6.3 SCEA Materials. Subject in each instance to the prior written -------------- approval of SCEA, Publisher may use advertising materials owned by SCEA pertaining to the System or to the Licensed Trademarks on such Advertising Materials as may, in Publisher's judgment, promote the sale of Licensed Product. 5.7 Rating Requirements. If required by SCEA or any governmental entity, ------------------- Publisher shall submit each Licensed Product to a consumer advisory ratings system designated by SCEA and/or such governmental entity for INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 7 the purpose of obtaining rating code(s) for each Licensed Product. Any and all costs and expenses incurred in connection with obtaining such rating code(s) shall be borne solely by Publisher. Any required consumer advisory rating code(s) procured hereby shall be displayed on the Licensed Product and in the associated Printed Materials and Advertising Materials, at Publisher's cost and expense, in accordance with the SourceBook 2 or other documentation provided by SCEA to Publisher. 5.8 Publisher's Additional Quality Assurance Obligations. If at any time ---------------------------------------------------- or times subsequent to the approval of Executable Software and Printed Materials, SCEA identifies any material defects (such materiality to be determined by SCEA in its sole discretion) with respect to the Licensed Product, or in the event that SCEA identifies any improper use of its Licensed Trademarks or Sony Materials with respect to the Licensed Product, or any such material defects or improper use are brought to the attention of SCEA, Publisher shall, at not cost to SCEA, promptly correct any such material defects, or improper use of Licensed Trademarks or Sony Materials, to SCEA's commercially reasonable satisfaction, which may include, if necessary in SCEA's judgment, the recall and re-release of such Licensed Product. In the event any Units of Licensed Products create any risk of loss or damage to any property or injury to any person, Publisher shall immediately take effective steps, at Publisher's sole liability and expense, to recall and/or to remove such defective Unites from any affected channels of distribution, provided , however, that if Publisher is not acting as the distributor and/or seller for the Licensed Products, its obligation hereunder shall be to use its best efforts to arrange removal of such Licensed Product from channels of distribution. Publisher shall provide all end-user support for the Licensed Products and SCEA expressly disclaims any obligation to provide end-user support on Publisher's Licensed Products. 6. Manufacture of the Licensed Products. 6.1 Manufacture of Units. Upon approval of Executable Software and -------------------- associated Printed Materials pursuant to Section 5, and subject to Sections 6.1.2, 6.1.3 and 6.1.4 below, the Designated Manufacturing Facility will, in accordance with the terms and conditions set forth in this Section 6, and at Publisher's expense (a) manufacture PlayStation 2 Format Discs for Publisher; (b) manufacture Publisher's Packaging and/or Printed Materials; and/or (c) assemble the PlayStation 2 Format Discs with the Printed Materials and the Packaging. Publisher shall comply with all Manufacturing Specifications related to the particular terms set forth herein. SCEA reserves the right to insert or require the Publisher to insert certain Printed Materials relating to the System or Licensed Trademarks into each unit. 6.1.1 Manufacture of PlayStation 2 Format Discs. ----------------------------------------- 6.1.1.1 Designated Manufacturing Facilities. To insure ----------------------------------- compatibility of the PlayStation 2 Format Discs with the System, consistent quality of the Licensed Product and incorporation of anti-piracy security systems, SCEA shall designate and license a Designated Manufacturing Facility to reproduce PlayStation 2 Format Discs. Publisher shall purchase all of its requirements for PlayStation 2 Format Discs from such Designated Manufacturing Facility during the term of the Agreement. Any Designated Manufacturing Facility shall be a third party beneficiary of this Agreement. 6.1.1.2 Creation of Master CD-ROM or DVD-ROM. Pursuant to ------------------------------------ Section 5.4 in connection with final testing of Executable Software, Publisher shall provide SCEA with the number of Master Discs specified in the SourceBook 2. A Designated Manufacturing Facility shall create from one of the fully approved Master Discs provided by Publisher the original master CD-ROM or DVD- ROM, from which all other copies of the Licensed Product are to be replicated. Publisher shall be responsible for the costs, as determined by the Designated Manufacturing Facility, of producing such original master. In order to insure against loss or damage to the copies of the Executable Software furnished to SCEA, Publisher will retain duplicates of all Master Discs, and neither SCEA no any Designated Manufacturing Facility shall be liable for loss of or damage to any Master Discs or Executable Software. 6.1.2 Manufacture of Printed Materials. -------------------------------- 6.1.2.1 Manufacture by Designated Manufacturing Facility. If ------------------------------------------------ publisher elects to obtain Printed Materials from a Designated Manufacturing Facility, Publisher shall deliver all SCEA-approved Printed Materials to that Designated Manufacturing Facility, at Publisher's sole risk and expense, and the Designated Manufacturing Facility will manufacture such Printed Materials in accordance with this Section 6. In order to insure against loss or damage to the copies of the Printed Materials furnished to SCEA, Publisher will retain duplicates of all Printed Materials, and neither SCEA nor any Designated Manufacturing Facility shall be liable for loss or damage to any such Printed Materials. 6.1.2.2 Manufacture by Alternate Source. Subject to SCEA's ------------------------------- approval as provided in Section 5.5.2 hereto and in this Section, Publisher may elect to be responsible for manufacturing its own Printed Materials (other than any Artwork which may be placed directly upon INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 8 the PlayStation Disc, which Publisher will supply to the Designated Manufacturing Facility for placement), at Publisher's sole risk and expense. Prior to production of each order, Publisher shall be required to supply SCEA with samples of any printed Materials not produced or supplied by a Designated Manufacturing Facility, at no charge to SCEA or Designated Manufacturing Facility, for SCEA's approval with respect to the quality thereof. SCEA shall have the right to disapprove any Printed Materials that do not comply with the Manufacturing Specifications. Manufacturing Specifications for Printed Materials shall be comparable to manufacturing specifications applied by SCEA to its own software products for the System. If Publisher elects to supply its own Printed Materials, neither SCEA nor any Designated Manufacturing Facility shall be responsible for any delays arising from use of Publisher's own Printed Materials. 6.1.3 Manufacture of Packaging. ------------------------ 6.1.3.1 Manufacture by Designated Manufacturing Facility. To ------------------------------------------------ ensure consistent quality of the Licensed Products, SCEA may designate and license a Designated Manufacturing Facility to reproduce proprietary Packaging for the System. If SCEA creates Proprietary Packaging, then Publisher shall purchase all of its requirements for such proprietary Packaging from a Designated Manufacturing Facility during the term of the Agreement, and the Designated Manufacturing Facility will manufacture such Packaging in accordance with this Section 6. 6.1.3.2 Manufacture by Alternate Source. If SCEA elects to use ------------------------------- standard, non-proprietary Packaging for the System, then Publisher may elect to be responsible for manufacturing its own Packaging (other than any proprietary labels and any portion of a container containing Licensed Trademarks, which Publisher must purchase form a Designated Manufacturing Facility). Publisher shall assume all responsibility for the creation f such Packaging at Publisher's sole risk and expense. Publisher shall be responsible for encoding and printing proprietary edge labels provided by a Designated Manufacturing Facility with information reasonable specified by SCEA from time to time and will apply such labels to each Unite of he Licensed Product as reasonably specified by SCEA. Prior to production of each order, Publisher shall be required to supply SCEA with samples of any Packaging not produced or supplied by a Designated Manufacturing Facility, for SCEA's approval with respect to the quality thereof. SCEA shall have the right to disapprove any Packaging that does not comply with the Manufacturing Specifications. Manufacturing Specifications for Packaging shall be comparable to manufacturing specifications applied by SCEA to its own software products of the System. If Publisher procures Packaging from an alternate source, then it must also procure assembly services from an alternate source. If Publisher elects to supply its own Packaging, neither SCEA nor any Designated Manufacturing Facility shall be responsible for any delays arising from use of Publisher's own Packaging. 6.1.4 Assembly Services. Publisher may either procure assembly ----------------- services from a Designated Manufacturing Facility or from an alternate source. If Publisher elects to be responsible for assembling the Licensed Products, then the Designated Manufacturing Facility shall ship the component parts of the Licensed Product to a destination provi8ded by Publisher, at Publisher's sole risk and expense. SCEA shall have the right to inspect any assembly facilities utilized by Publisher in order to determine if the component parts of the Licensed Products are being assembled in accordance with SCEA's quality standards. SCEA may require that Publisher recall any Licensed Products that do not contain proprietary labels or other materials component parts or that otherwise fail to comply with the Manufacturing Specifications. If Publisher elects to use alternate assembly facilities, neither SCEA nor any Designated Manufacturing Facility shall be responsible for any delays or missing component parts arising from use of alternate assembly facilities. 6.2 Price, Payment and Terms. ------------------------ 6.2.1 Price. The applicable price for manufacture of any Units of ----- Licensed Products ordered hereunder shall be provided to Publisher by the Designated Manufacturing Facility. Purchase shall be subject to the terms an conditions set out in any purchase order form supplied to Publisher by the Designated Manufacturing Facility. 6.2.2 Orders. Publisher shall issue to a Designated Manufacturing ------ Facility a written Purchase Order(s) in the form set forth and containing the information required in the Manufacturing Specifications, with a copy to SCEA. All orders shall be subject to approval by SCEA, which shall not be unreasonably withhold or delayed. Purchase orders issued by Publisher to a Designated Manufacturing Facility for each Licensed Product approved by SCEA shall be non- cancelable and be subject to the order requirements of the Designated Manufacturing Facility. 6.2.3 Payment Terms. Purchase Orders will be invoiced as soon as ------------- reasonably practical after receipt, and such invoice will include both manufacturing price and royalties payable pursuant to Section 8.1 or 8.2 hereto for each Unit of Licensed Products ordered. Each invoice will be payable either on a cash-in-advance basis or pursuant to INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 9 a letter of credit, or, at SCEA's sole discretion, on credit terms. Terms for cash-in-advance and letter of credit payments shall be as set forth in the SourceBook 2. All amounts hereunder shall be payable in United States dollars. All associated banking charges with respect to payments of manufacturing costs and royalties shall be borne solely by Publisher. 6.2.3.1 Credit Terms. SCEA may at its sole discretion extend ------------ credit terms and limits to Publisher. SCEA may also revoke such credit terms and limits at its sole discretion. If Publisher qualifies for credit terms, then orders will be invoiced upon shipment of Licensed Products and each invoice will be payable within thirty (30) days of the date of the invoice. Any overdue sums shall bear interest at the rate of one and one-half (1- 1/2%) percent per month, or such lower rate as may be the maximum rate permitted under applicable law, from the date when payment first became due to and including eh date of payment thereof. Publisher shall be additionally liable for all costs and expenses of collection, including without limitation, reasonable fees for attorneys and court costs. 6.2.3.2 General Terms. No deduction may be made from ------------- remittances unless an approved credit memo has been issued by a Designated Manufacturing Facility. Neither SCEA nor a Designated Manufacturing Facility shall be responsible for shortage or breakage with respect to any order if component parts and/or assembly services are obtained from alternate sources. Each shipment to Publisher shall constitute a separate sale, whether said shipment be whole or partial fulfillment of any order. Nothing in this Agreement shall excuse or be construed as a waiver of Publisher's obligation to timely provide any and all payments owed to SCEA and Designated Manufacturing Facility. 6.3 Delivery of Licensed Products. Neither SCEA nor any Designated ----------------------------- Manufacturing Facility shall have an obligation to store completed Unites of Licensed Products. Publisher may either specify a mode of delivery or allow Designated Manufacturing Facility to select a mode of delivery. 6.4 Ownership of Master Discs. Due to the proprietary nature of the ------------------------- mastering-process, neither SCEA nor a Designated Manufacturing Facility shall under any circumstances release any original master CD-ROM, Master Discs or other in-process materials to Publisher. All such materials shall be and remain the sole property of SCEA or Designated Manufacturing Facility. Notwithstanding the foregoing, Publisher Intellectual Property Rights contained in Product Software that is contained in such in-process materials is, as between SCEA and Publisher, the sole and exclusive property of Publisher or its licensors (other than SCEA an/or its affiliates). 7. Marketing and Distribution. 7.1 Marketing Generally. In accordance with the provisions of this ------------------- Agreement and at no expense to SCEA, Publisher shall, and shall direct its distributors to, diligently market, sell and distribute the Licensed Products, and shall use commercially reasonable efforts to stimulate demand for such Licensed Products in the Licensed Territory and to supply any resulting demand. Publisher shall use its reasonable best efforts to protect the Licensed Products from and against illegal reproduction and/or copying by end users or by any other persons or entities. 7.2 Samples. Publisher shall provide to SCEA, at no additional cost, for ------- SCEA's internal use, five hundred and four (504) sample copies of each Licensed Product. Publisher shall pay any manufacturing costs to the Designated Manufacturing Facility in accordance with Section 6.2, but shall not be obligated to pay royalties, in connection with such sample Units. In the even that Publisher assembles any Licensed Product using an alternate source, Publisher shall be responsible for shipping such sample Unites to SCEA at Publisher's cost and expense. SCEA shall not directly or indirectly resell any such sample copies of the Licensed Products without Publisher's prior written consent. SCEA may give sample copies to its employees, provided that it uses its reasonable efforts to ensure that such copies are not sold into the retain market. In addition, subject to availability, Publisher shall sell to SCEA additional quantities of Licensed Products a the Wholesale Price for such Licensed Product. Any changes to SCEA's policy regarding sample Unites shall be set forth in the SourceBook2. 7.3 Marketing Programs of SCEA. From time to time, SCEA may invite -------------------------- Publisher to participate in promotional or advertising opportunities that may feature one or more Licensed Products from one or more Licensed Publishers. Participation shall be voluntary and subject to terms to be determined at the time of the opportunity. In the even Publisher elects to participate, all materials submitted by Publisher to SCEA shall be submitted subject to Section 10.2 hereunder and delivery of such materials to SCEA shall constitute acceptance by Publisher of the terms of the offer. Moreover, SCEA may use the Generic Line on all multi-product marketing materials, unless otherwise agreed in writing. 7.4 Demonstration Disc Programs. SCEA may, from time to time, provide --------------------------- opportunities for Publisher to participate in SCEA Demo Disc Programs. In addition, SCEA may, from time to time, grant to Publisher the right INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 10 to create Third Party Demo Discs pursuant to SCEA Established Third Party Demo Disc Programs. The specifications with respect to the approval, creation, manufacture, marketing, distribution and sale of any such demo disc programs shall be set forth in the SourceBook 2 or in other documentation to be provided by SCEA to Publisher. Except as otherwise specifically set forth herein, in the SourceBook 2 or in other documentation, Third Party Demo Discs shall be considered "Licensed Products" and shall be subject in all respects to the terms and conditions of this Agreement pertaining to Licensed Products. In addition, the following procedures shall also apply to SCEA Demo Discs and Third Party Demo Discs: 7.4.1 SCEA Demo Discs. --------------- 7.4.1.1 License. SCEA may, but shall not be obligated to, ------- invite Licensed Publishers to participate in any SCEA Demo Disc program. Participation by Publisher in an SCEA Demo Disc program shall be optional. If Publisher elects to participate in an SCEA Demo Disc Program and provides Product Information to SCEA in connection thereto, Publisher shall thereby grant to SCEA a royalty-free license during the term of this Agreement in the Licensed Territory to manufacture, use, sell, distribute, market, advertise and otherwise promote Publisher's Product Information as part of such SCEA Demo Disc program. In addition, Publisher shall grant SCEA the right to feature Publisher and Licensed Product names in SCEA Demo Disc Advertising Materials and to use copies of screen displays generated by the code, representative video samples or other Product Information in such SCEA Demo Disc Advertising Materials. All decisions relating to the selection of first and third party Product Information and all other aspects of SCEA Demo Discs shall be in the sole discretion of SCEA. 7.4.1.2 Submission and Approval of Product Information. Upon ---------------------------------------------- receipt of written notice that SCEA has tentatively chosen Publisher's Product Information for inclusion in the SCEA Demo Disc, Publisher shall deliver to SCEA such requested Product Information by no later than the deadline set forth in such notice. Separate notice will be sent for each SCEA Demo Disc, and Publisher must sign each notice prior to inclusion in such SCEA demo Disc. Publisher shall include its own Legal Copy on the title screen or elsewhere in the Product Information submitted to SCEA. SCEA shall only provide the Generic Line on the SCEA Demo Disc title screen and packaging. Publisher's Product Information shall comply with SCEA's technical specifications provided to Publisher. SCEA reserves the right to review and test the Product Information provided and request revisions prior to inclusion on the SCEA Demo Disc. If SCEA requests changes to the Product Information and Publisher elects to continue to participate in such Demo Disc, Publisher shall make such changes as soon as possible after receipt of written notice of such requested changes from SCEA, but not later than the deadline for receipt of Product Information. Failure to make such changes and provide the modified Product Information to SCEA by the deadline shall result in the Product Information being removed from the SCEA Demo Disc. Costs associated with preparation of Product Information supplied to SCEA shall be borne solely by Publisher. Except as otherwise provided in this Section, SCEA shall not edit or modify Product Information provided to SCEA by Publisher without Publisher's consent, not to be unreasonably withheld. SCEA shall have the right to use subcontractors to assist in the development of any SCEA Demo Disc. With respect to Product Information provided by Publisher in demo form, the demo delivered to SCEA shall not constitute the complete Licensed Product and shall be, at a minimum, an amount sufficient to demonstrate the Licensed Product's core features and value, without providing too much information so as to give consumers a disincentive to purchase the complete Licensed Product. 7.4.1.3 No Obligations to Publish. Acceptance of Product ------------------------- Information for test and review shall not be deemed confirmation that SCEA shall include the Product Information on an SCEA Demo Disc, nor shall it constitute approval of any other element of the Licensed Product. SCEA reserves the right to choose from products submitted from other Licensed Publisher and first party products to determine the products to be included in SCEA Demo Discs, and Publisher's Licensed Products will not be guaranteed prominence or preferential treatment on any SCEA Demo Disc. Nothing herein shall be construed as creating an obligation of SCEA to publish Product Information submitted by Publisher in any SCEA Demo Disc, nor shall SCEA be obligated to publish, advertise or promote any SCEA Demo Disc. 7.4.1.4 SCEA Demo Discs Sold at Retail. Publisher is aware and ------------------------------ acknowledges that certain SCEA Demo Discs may be distributed and sold by SCEA in the retain market. If Publisher elects to participate in any SCEA Demo Disc program which is sold in the retain market as notified by SCEA to Publisher, Publisher acknowledges prior to participation in any such SCEA Demo Disc that it is aware of no limitations regarding Product Information provide to SCEA pursuant to the terms of this Agreement which would in any way restrict SCEA's ability to distribute or sell such SCEA Demo Disc at retail, nor does Publisher or its licensors (other than SCEA and/or its affiliates) have any anticipation of receiving any compensation from such retain sales. In the event that SCEA institutes a SCEA Demo Disc in which a fee and/or royalty is charged to Publisher, SCEA and Publisher will enter into a separate agreement regarding INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 11 such SCEA Demo Disc. 7.4.2 Third Party Demo Discs. ---------------------- 7.4.2.1 License. Publisher may participate in any SCEA ------- Established Third Party Demos Disc Program. Publisher shall notify SCEA of its intention to participate in any such program, and upon receipt of such notice, SCEA shall grant to Publisher the right and license to use Licensed Products in Third Party Demo Discs and to use, distribute, market, advertise and otherwise promote (and, if permitted in accordance with the terms of any SCEA Established Third Party Program or otherwise permitted by SCEA, to sell) such Third Party Demo Discs in accordance with the SourceBook 2, which may be modified from time to time at the sole discretion of SCEA. Unless separately agreed in writing with SCEA, Third Party Demo Discs shall not be used, distributed, promoted, bundled or sold in conjunction with other products. In addition, SCEA hereby consents to the use of the Licensed Trademarks in connection with Third Party Demo Discs, subject to the approval procedures set forth in this Agreement. If any SCEA Established Third Party Demo Disc Program is specified by SCEA to be for promotional use only and not for resale, and such Third Party Demo Disc is subsequently discovered to be for sale, Publisher's right to produce Third Party Demo Discs shall thereupon be automatically revoked, and SCEA shall have the right to terminate any related Third Party Demo Discs in accordance with the terms of Section 14.3 or 14.4 hereto. 7.4.2.2 Submission and Approval of Third Party Demo Discs. ------------------------------------------------- Publisher shall deliver to SCEA, for SCEA's prior approval, a final version of each Third Party Demo Disc in a format prescribed by SCEA. Such Third Party Demo Disc shall comply with all requirements provided to Publisher by SCEA in the SourceBook 2 or otherwise. In addition, SCEA shall evaluate the Third Party Demo Disc in accordance with the approval provisions for Executable Software and Printed Materials set forth in Section s 5.4 and 5.5, respectively. Furthermore, Publisher shall obtain the approval of SCEA in connection with any Advertising Materials relating to the Third Party Demo Discs in accordance with the approval provisions set forth in Section 5.6. Costs associated with Third Party Demo Discs shall be borne solely by Publisher. No approval by SCEA of any element of any Third Party Demo Disc shall be deemed an approval of any other element thereto, nor does any such approval constitute final approval of the related Licensed Product. Unless otherwise permitted by SCEA, Publisher shall clearly and conspicuously state on all Third Party Demo Disc Packaging and Printed Materials that the Third Party Demo Disc is for promotional purposes only and not for resale. 7.4.2.3 Manufacture and Royalty of Third Party Demo Discs. ------------------------------------------------- Publisher shall comply with all Manufacturing Specifications with respect to the manufacture and payment of manufacturing costs of Third Party Demo Discs, and Publisher shall also comply with all terms and conditions of Section 6 hereto. No costs incurred in the development, manufacture, licensing, production, marketing and/or distribution (and if permitted by SCEA, sale) of the Third Party Demo Disc shall be deducted from any amounts payable to SCEA hereunder. Royalties on Third Party Demo Discs shall be as provided in Section 8.2. 7.5 Contests and Sweepstakes of Publisher. SCEA acknowledges that, from ------------------------------------- time to time, Publisher may conduct contests and sweepstakes to promote Licensed Products. SCEA shall permit Publisher to include contests or sweepstakes materials in Printed Materials and Advertising Materials, subject to compliance with the approval provisions of Section 5.5 and 5.6 hereunder, compliance with the provisions of Section 9.2 and 10.2 hereunder, and subject to the following additional terms and conditions: (i) Publisher represents that it has retained the services of a fulfillment house to administer the contest or sweepstakes and if it has not retained the services of a fulfillment house, Publisher represents and warrants that it has the expertise to conduct such contests or sweepstakes, and in any event, Publisher shall assume full responsibility for all aspects of such contest or sweepstakes; (ii) Publisher warrants that each contest, sweepstakes, and promotion, comply with local, state and federal laws or regulations; (iii) Publisher represents and warrants that it has obtained the consent of all holders of intellectual property rights required to be obtained in connection with each contest or sweepstakes including, but not limited to, the consent of any holder of copyrights or trademarks relating to any Advertising Materials publicizing the contest or sweepstakes, or the prizes being awarded to winners of the contest or sweepstakes; and (iv) Publisher shall make available to SCEA all contest and sweepstakes material prior to publication in accordance with the approval process set forth in Section 5.5 or 5.6. Approval by SCEA of contest or sweepstakes materials for use in the Printed Materials or Advertising Materials (or any use of the System or Licensed Products as prizes in such contest or sweepstakes) shall not constitute an endorsement by SCEA of such contest or sweepstakes, nor shall such acceptance be construed as SCEA having INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSES PUBLISHER AGREEMENT CONFIDENTIAL - ---------------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 12 reviewed and approved such materials for compliance with any federal or state law, statute, regulations, order or the like, which shall be Publisher's sole responsibility. 7.6 PlayStation Website. All Licensed Publishers shall be required to ------------------- provide Product Information for a web page for each of its Licensed Products for display on the PlayStation promotional website, or other website or websites as may be operated by SCEA from time to time in connection with the promotion of the PlayStation brand. Specifications for Product Information for such web pages shall be as provided in the SourceBook 2. Publisher shall provide SCEA with such Product Information for each Licensed Product upon submission of Printed materials to SCEA for approval in accordance with Section 5.5.2 hereto. Publisher shall also provide updates to such web page in a timely manner as required by SCEA in updates to the SourceBook 2. 7.7 Distribution. ------------ 7.7.1 Distribution Channels. Publisher may use such distribution --------------------- channels as Publisher deems appropriate, including the use of third party distributors, resellers, dealers and sales representatives. In the event that Publisher elects to have one of its Licensed Products distributed and sold by another Licensed Publisher, Publisher must provide SCEA with advance written notice of such election, the name of the Licensed Publisher and any additional information requested by SCEA regarding the nature of the distribution services provided by such Licensed Publisher prior to manufacture of such Licensed Product. 7.7.2 Limitations on Distribution. Notwithstanding any other --------------------------- provisions in this Agreement, Publisher shall not, directly or indirectly, solicit orders from or sell any Units of the licensed Products to any person or entity outside of the Licensed territory. In addition, Publisher shall not directly or indirectly solicit orders for or sell any Units of the Licensed Products in any situation where Publisher knows or reasonably should know that such Licensed Products may be exported or resold outside of the Licensed Territory. 8. Royalties. 8.1 Applicable Royalties on Licensed Products. ----------------------------------------- 8.1.1 Initial Orders. Publisher shall pay SCEA, either directly -------------- or through its designee, a per title royalty in United States dollars for each Unit of the Licensed Products manufactured based on the initial [*] of the Licensed Product, as follows:
- --------------------------------------------------- Wholesale Price Per Title Royalty - --------------------------------------------------- Band 1 [*] [*] Band 2 [*] [*] Band 3 [*] [*] Band 4 [*] [*] Band 5 [*] [*] - ---------------------------------------------------
In absence of satisfactory evidence to support the WSE, the royalty rate that shall apply will be [*] per Unit. 8.1.2 Reorders and Other Programs. Royalties on additional --------------------------- orders to manufacture a specific Licensed Product shall be the royalty determined by the initial [*] as reported by Publisher for that Licensed Product regardless of the [*] of the Licensed Product at the time or reorder, except in the event that the [*] increases for such Licensed Product, in which case the royalty shall be adjusted upwards to reflect the higher [*]. Licensed Products qualifying for SCEA's "Greatest Hits" programs or other programs offered by SCEA shall be subject to the royalties applicable for such programs. Publisher acknowledges that as of the date of execution of this Agreement no "Greatest Hits" program exists for the PlayStation 2 Third Party licensing program. 8.2 Third Party Demo Disc Program Royalties: Publisher shall pay SCEA a --------------------------------------- per Unit royalties in United States dollars of [*] for each Third Party Demo Disc Unit manufactured. The quantity of Units ordered shall comply with the terms of such SCEA Established Third Party Demo Disc Program. 8.3 Payment. Payment of royalties under Sections 8.1 and 8.2 shall be ------- made to SCEA through it Designated Manufacturing Facility concurrent with the placement of an order to manufacture Licensed Product and payment of manufacturing costs in accordance with the terms and conditions set forth in Sections 6.2.3, Unless otherwise agreed in writing with SCEA. At the time of placing an order to manufacture a Licensed Product, Publisher shall submit to SCEA an accurate accounting statement setting out the number of units of Licensed Product to be manufactured, projected initial wholesale price, applicable royalty, and total amount due SCEA. In addition, Publisher shall submit to SCEA prior to placing the initial order for each Licensed Product a separate certification, in the form provided by SCEA in the SourceBook 2, signed by officers or Publisher that certifies that he Wholesale Price provided to SCEA is accurate and attaching such documentation supporting the WSP as requested by SCEA. Payment shall be made prior to manufacture INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 13 unless SCEA has agreed to extend credit terms to Publisher in writing pursuant to Section 6.2.3.3. Nothing herein shall be construed as requiring SCEA to extend credit terms to Publisher. The accounting statement sue hereunder shall be subject to the audit and accounting provisions set forth in paragraph 16.2 below. No costs incurred in the development, manufacture, marketing, sale and/or distribution of the Licensed Products shall be deducted from any royalties payable to SCEA hereunder. Similarly, there shall be no deduction from the royalties otherwise owed to SCEA hereunder as a result of any uncollectible accounts owed to Publisher, or for any credits, discounts, allowances or returns which Publisher may credit or otherwise grant to any third party customer of any Units of the Licensed Products, or for any taxes, fees, assessments or expenses of any kind which may be incurred by Publisher in connection with the sale or distribution of any Units of the licensed Products or arising with respect to the payment of royalties hereunder. In addition to the royalty payments provided to SCEA hereunder, Publisher shall be solely responsible for and bear any cost relating to any withholding taxes or other such assessments which may be imposed by any governmental authority with respect to the royalties paid to SCEA hereunder; provided, however, that SCEA shall not manufacture Licensed Products outside of the United States without the prior consent of Publisher. Publisher shall provide SCEA with official tax receipts or other such documentary evidence issued by the applicable tax authorities sufficient to substantiate that any such taxes or assessments shave in fact been paid. 8.4 Rebate Programs. Publisher shall be eligible to participate in one of --------------- three rebate programs offered by SCEA: the Standard Rebate program, the Level 1 Rebate program, or the Level 2 Rebate program. If Publisher qualifies for such rebates as set forth herein, rebates shall be credit to Publisher's accounts as provided below:
- ------------------------------------------------------------------ Units Ordered Standard Level 1 Level 2 - ------------------------------------------------------------------ [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------
8.4.1 Standard Rebate Program. All Publishers qualify for the ----------------------- Standard Rebate program. Rebates will be offered on an individual title basis. Rebates will be given to any individual Licensed Product that exceeds the above numbers or Units during the first year after first commercial shipment of such Licensed Product. The rebate in effect at the end of such year for the Licensed Product will remain in effect for as long as Publisher continues to sell such Licensed Product, but Publisher will not receive further rebates if sales of such Licensed Product hit additional thresholds as specified above after such year. The Standard Rebate may not be used in conjunction whit a Third Party Demo Disc program or any promotional program of SCEA, with Licensed Products that qualify for any "Greatest Hits" program of SCEA or with Licensed Products that qualify for the Brand 1 Royalty. 8.4.2 Level 1 Rebate Program: To be eligible for the Level 1 Rebate ---------------------- program, Publisher mush ship over [*] Units of certain Licensed Product in a single Fiscal Year. Level 1 Rebates shall be credited to Publisher on an individual title basis. Other terms of the Level 1 Rebate are as follows: (i) Only Publisher's titles (as determined below) that meet the following conditions shall count toward [*] Unit threshold: Publisher must order at least [*] Unites of the Licensed Product both within the first year of commercial release of such Licensed Product and during the qualifying Fiscal Year. (ii) Any Licensed Products, including "Greatest Hits" titles and products for the original PlayStation game console, but excluding all demo discs, shall count toward the [*] Unit threshold (provided they meet the conditions set forth in Section 8.4.2(i) above). For purposes of determining Level 1 Rebate thresholds and the conditions set forth in Section 8.4.2(i), full priced Licensed Products and "Greatest Hits" Licensed Products shall be considered separate Licensed Products, with separate Unite minimums and release dates. (iii) Level 1 Rebates shall apply only to Licensed Products (not including "Greatest Hits" titles, Licensed Products qualifying for the Band 1 royalty and products for the original PlayStation game console) ordered in the Fiscal Year following the Fiscal Year in which [*] Unit threshold is met. Units of Licensed Products that qualified Publisher for inclusion in the Level 1 Rebate program in the previous Fiscal Year shall not be entitled to receive the Level 1 Rebate. (iv) Publisher must re-qualify for the Level 1 Rebate INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 14 Program each Fiscal Year. If a Publisher fails to re-qualify for any Fiscal year, then the Standard Rebate shall apply in such Fiscal year. The Fiscal Year for which a Publisher may qualify for the Level 1 Rebate shall be the Fiscal year ending March 31, 2000, and if the Publisher qualifies for the Level 1 Rebate, it will apply to Licensed Products ordered in the Fiscal Year commencing April 1, 2000. (v) Licensed Products eligible for the Level 1 Rebate program shall not be eligible for Standard Rebates, and Level 1 Rebates shall supersede Standard Rebates with respect to any individual Licensed Product. If a Licensed Product qualifies for the Standard Rebate in one Fiscal year, and Publisher qualifies for the level 1 Rebate in the next Fiscal year, Units of such Licensed Product ordered in the next Fiscal year will receive the Level 1 Rebate commencing on April 1 of the next Fiscal Year going forward, but such Level 1 Rebate will not be credited retroactively to Unites of the Licensed Product ordered in the previous Fiscal year. For example, Publisher orders [*] Units of Product X in Fiscal Year 2001, receiving a Standard Rebate of [*]. Publisher qualifies of the Level 1 Rebate in Fiscal Year 2002. Publisher will receive the Level 1 Rebate of [*] commencing with Units ordered on April 1, 2001, but will not receive a retroactive credit for Units ordered prior to April 1, 2001. When Publisher reaches the [*] Unit threshold, it will receive a retroactive credit of [*] on all Level 1 Rebate Units ordered, as well as a retroactive credit of [*] on Standard Rebate Units ordered in the previous Fiscal Year, and Publisher will receive the Level 1 Rebate of [*] going forward. 8.4.3 Level 2 Rebate Program: To be eligible for the Level 2 Rebate ---------------------- Program, Publisher must ship over [*] Units of certain Licensed Products in and Fiscal Year. Level 2 Rebates shall be credited to Publisher on an individual title basis. Other terms of the Level 2 Rebate are as follows: (i) Only Publisher's titles (as determined below) that meet the following conditions shall count toward [*] Unit threshold: Publisher must order at least [*] Units of the Licensed Product both within the first year or commercial release of such Licensed Product and during the qualifying Fiscal Year. (ii) Any Licensed Products, including "Greatest Hits" titles and products for the original PlayStation game console, but excluding all demo discs, shall count toward the [*] Unit threshold (provided they meet the conditions set forth in Section 8.4.3(i) above). For purposes of determining Level 2 Rebate thresholds and the conditions set forth in Section 8.4.2(i), full priced Licensed Products and "Greatest Hits" Licensed Products shall be considered separate Licensed products, with separate Unit minimums and release dates. (iii) Level 2 Rebates shall apply only to Licensed Products (not including "Greatest Hits" titles, Licensed Products qualifying for the Band 1 royalty and products of the original PlayStation game console) ordered in the Fiscal Year following the Fiscal Year in which the [*] Unit threshold is met. Units of Licensed Products that qualified Publisher for inclusion in the Level 2 Rebate program in the previous Fiscal Year shall not be entitled to receive the Level 2 Rebate. (iv) Publisher must re-qualify for the Level 2 Rebate Program each Fiscal Year. If Publisher fails to re-qualify for any Fiscal Year then the Standard Rebate or Level 1 Rebate, as the case may be, shall apply in such Fiscal Year. The first Fiscal Year for which a Publisher may qualify for the Level 2 Rebate shall be the Fiscal Year ending March 31, 2000, and if the Publisher qualifies for the Level 2 Rebate, it will apply to Licensed Products ordered in the Fiscal year commencing April 1, 2000. (v) Licensed Products eligible for the Level 2 Rebate program shall not be eligible for Standard Rebates or Level 1 Rebates, and Level 2 Rebates shall supersede Standard Rebates and Level 1 Rebates with respect to any individual Licensed Product. If a Licensed Product qualifies for the Standard Rebate or Level 1 Rebate in one Fiscal Year, and Publisher qualifies for the Level 2 Rebate in the next Fiscal yea, Units of such Licensed Product ordered in the next Fiscal year will receive the Level 2 Rebate going forward, but such Level 2 Rebate will not be credited retroactively to Units of the Licensed Product ordered in the previous Fiscal Year. See Section 8.4.2(v) for an example. 8.5 Calculation and Use of Rebates. Rebate percentages for all rebate ------------------------------ programs shall be credited against royalties owed SCEA and shall have no other monetary value. All rebates, whether under the Standard Rebate, Level 1 Rebate or Level 2 Rebate Programs shall be issued by SCEA as a credit to Publisher for use against future royalty payments. It is Publisher's responsibility to inform SCEA when it reaches any rebate threshold. In no event shall Publisher take a deduction off royalties owed SCEA or deduction off an invoice payable to SCEA on current production unless and until SCEA issues a credit to Publisher in writing or unless otherwise agreed in writing. From time to time SCEA may allow Publisher to use credits in other manners on terms and conditions to be determined by SCEA. Publisher may use rebate credits to procure Development Tools. Units of Licensed Products shall be considered "ordered" when Units first begin to ship from a Designated Manufacturing Facility. 8.6 Rebate Credits. Subject to Sections 8.4.2(v) and -------------- INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 15 8.4.3(v), all rebate programs are retroactive, such that Publisher receives a credit for each rebate percentage against previous Units when it reaches the Unit threshold for the next rebate percentage. SCEA shall credit Publisher's account with respect to retroactive rebates as follows: (A) if Publisher's initial order for a Licensed Product is less than any rebate threshold provided above, then SCEA shall retroactively credit Publisher's account sixty (60) days following the date that Publisher notifies SCEA that orders of a Licensed Product exceed any rebate threshold, subject to SCEA's right to confirm such information; and (B) if Publisher's initial order for a Licensed Product reaches or exceeds any rebate threshold provided above, then Publisher may credit the rebate amount set forth above as a separate line item on the Purchase Order with respect to such Licensed Product, subject to SCEA's confirmation right. 9. Representations and Warranties. 9.1 Representations and Warranties of SCEA. SCEA represents and warrants -------------------------------------- solely for the benefit of Publisher that SCEA has the right, power and authority to enter into this Agreement and to fully perform its obligations hereunder. 9.2 Representations and Warranties of Publisher. Publisher represents and ------------------------------------------- warrants that: (i) There is no threatened or pending action, suit, claim or proceeding alleging that the use by Publisher of all or any part of the Product Software, Product Proposals, Product Information, Printed Materials, Advertising Materials or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed products infringes or otherwise violates any Intellectual Property Right or other right or interest of any kind whatsoever of any third party, or otherwise contesting any right, title or interest of Publisher in or to the Product Software, Product Proposals, Product Information, Printed Materials, Advertising Materials or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the licensed Products; (ii) The Product Software, Product Proposals, Product Information, Printed Materials and Advertising Materials and their contemplated use under this Agreement do not and shall not infringe any person's or entity's rights including without limitation, patents, copyrights, (including rights in a joint work), trademarks, trade dress, trade secret, right of publicity, privacy, performance, moral rights, literary rights and any other third party right; (iii) Publisher has the right, poser and authority to enter into this Agreement to grant SCEA the rights granted hereunder and to fully perform its obligation hereunder; (iv) The making of this Agreement by Publisher does not violate any separate agreement, rights or obligations existing between Publisher and any other person or entity, and throughout the term of this Agreement, Publisher shall not make any separate agreement with any person or entity that is inconsistent with any of the provisions of this Agreement; (v) Publisher has not sold, assigned, leased, licensed or in any other way disposed of or encumbered the rights granted to Publisher hereunder, and Publisher will not sell, assign, lease, license or in any other way dispose of or encumber any of such rights except as expressly permitted hereunder or as consented to by SCEA in writing; (vi) Publisher has obtained the consent of all holders of intellectual property right required to be obtained in connection with use of any Product Information by SCEA as licensed hereunder, and Product Information when provided to SCEA in accordance with the terms of this Agreement may be published, marketed, distributed and sold by SCEA in accordance with the terms and conditions of this Agreement and without SCEA incurring any royalty, residual, union, guild or other fees; (vii) Publisher shall not make any representation or give any warranty to any person or entity expressly or implicitly on SCEA's behalf, or to the effect that the Licensed Products are connected in any was with SCEA (other than that the Executable Software and/or Licensed Products have been developed, marketed, sold and/or distributed under license from SCEA); (viii) In the event that Executable Software is delivered to other Licensed Publishers or Licensed Developers by Publisher in source code form, Publisher will take all precautions consistent with the protection of valuable trade secrets by companies in high technology industries to ensure the confidentiality of such source code; (ix) The Executable Software and any Product Information delivered to SCEA shall be in a commercially acceptable form, free of significant bugs, defects, time bombs or viruses which could disrupt, delay, destroy the Executable Software or System or render either of them less than fully useful, and shall be fully compatible with the System and any peripherals listed on the Printed Materials as compatible with the Licensed Product; (x) Each of the Licensed Products, Executable Software, Printed Materials and Advertising Materials shall be developed, marketed, sold and distributed by or at the direction of Publisher in an ethical manner and in full INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 16 compliance with all applicable federal, state, provincial, local and foreign laws and any regulations and standards promulgated thereunder (including but not limited to federal and state lottery laws as currently interpreted and enforced) and will not contain any obscene or defamatory matter. (xi) Publisher's policies and practices with respect to the development, marketing, sale, and/or distribution or the Licensed Products shall in no manner reflect adversely upon the name, reputation or goodwill of SCEA; (xii) Publisher has, or will contract with a Licensed Developer for, the technical expertise and resources necessary to fulfill its obligations under this Agreement; and (xiii) Publisher shall make no false, misleading or inconsistent representations or claims with respect to any Licensed Products, the System or SCEA. 10. Indemnities; Limited Liability. 10.1 Indemnification by SCEA. SCEA shall indemnify and hold Publisher ----------------------- harmless from and against any and all third party claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim which result from or are in connection with a breach of any of the representations or warranties provided by SCEA herein; provided, however, that Publisher shall give prompt written notice to SCEA of the assertion of any such claim, and provided, further, that SCEA shall have the right to select counsel and control the defense and settlement thereof. SCEA shall have the exclusive right, at its discretion, to commence and prosecute at its own expense any lawsuit or to take such other action with respect to such matters as shall be deemed appropriate by SCEA. Publisher shall provide SCEA, at no expense to Publisher, reasonable assistance and cooperation concerning any such matter; and Publisher shall not agree to the settlement of any such claim, action or proceeding without SCEA's prior written consent. 10.2 Indemnification By Publisher. Publisher shall indemnify and hold ---------------------------- SCEA harmless from and against any and all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim, which result from or are in connection with (i) a breach o any of the provisions of this Agreement; or (ii) infringement of a third party's intellectual property rights by Publisher; or (iii) any claims of or in connection with any personal or bodily injury (including death) or property damage, by whomever such claim is made, arising out of, in whole or in part, the development, marketing, sale, distribution and/or use of any of the Licensed Products (or any portions thereof) unless due directly to the breach of SCEA in performing any of the specific duties and/or providing any of the specific services required of it hereunder; or (iv) any federal, state or foreign civil or criminal actions relating to the development, marketing, sale and/or distribution of Licensed Products. SCEA shall give prompt written notice to Publisher of the assertion of any such indemnified claim, and, with respect to third party claims, actions or proceedings against SCEA, SCEA shall have the right to select counsel for SCEA and reasonably control the defense and/or settlement thereof. Subject to the above, Publisher shall have the right, at its discretion, to select its own counsel, to commence and prosecute at its own expense any lawsuit, to reasonably control the defense and/or settlement thereof or to take such other action with respect to claims, actions or proceedings by or against Publisher. SCEA shall retain the right to approve any settlement. SCEA shall provide Publisher, at no expense to SCEA, reasonable assistance and cooperation concerning any such matter; and SCEA shall not agree to the settlement of any such claim, action or proceeding (other than third party claims, actions or proceedings against SCEA) without Publisher's prior written consent. 10.3 LIMITATION OF LIABILITY. ----------------------- 10.3.1 LIMITATION OF SCEA'S LIABILITY. IN NO EVENT SHALL SCEA OR ------------------------------ OTHER SONY AFFILIATES AND THEIR SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE FOR LOSS OF PROFITS, OR ANY SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF, RELATING TO OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT BY SCEA, THE MANUFACTURE OF THE LICENSED PRODUCTS AND THE USE OF THE LICENSED PRODUCTS, EXECUTABLE SOFTWARE AND/OR THE SYSTEM BY PUBLISHER OR ANY END-USER, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE. IN NO EVEN SHALL SCEA'S LIABILITY ARISING UNDER, RELATING TO OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT OT INDIRECT DAMAGES, AND INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER SECTION 10.1 HERETO, INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 17 EXCEED THE TOTAL AMOUNT PAID BY PUBLISHER TO SCEA UNDER THIS AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER SCEA NOR ANY SONY AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY OR LIABILITY, OR ANY KIND TO PUBLISHER OR TO ANY THIRD PARTIES WITH RESPECT TO THE QUALITY, OPERATION AND/OR PERFORMANCE OF ANY PORTION OF THE SONY MATERIALS, THE SYSTEM OR ANY LICENSED PRODUCT. 10.3.2 LIMITATION OF PUBLISHER'S LIABILITY. IN NO EVENT SHALL ----------------------------------- PUBLISHER OR ITS AFFILIATED COMPANIES AND THEIR SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE TO SCEA FOR ANY LOSS OF PROFITS, OR ANY SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF, RELATED TO OR IN CONNECTION WITH (i) THIS AGREEMENT OR (ii) THE USE OR DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT OF ANY CODE PROVIDED BY SCEA, IN WHOLE OR IN PART, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE, PROVIDED THAT SUCH LIMITATIONS SHALL NOT APPLY TO DAMAGES RESULTING FROM PUBLISHER'S BREACH OF SECTIONS 4, 10.2, 11 OR 13 OF THIS AGREEMENT, AND PROVIDED FURTHER THAT SUCH LIMITATIONS SHALL NOT APPLY TO AMOUNTS WHICH PUBLISHER MAY BE REQUIRED TO PAY TO THIRD PARTIES UNDER SECTIONS 10.2 OR 16.10. 10.4 DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH ---------------------- HEREIN, NEITHER SCEA NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES PUBLISHER RECEIVE, ANDY REPRESENTATIONS OR WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, REGARDING THE SONY MATERIALS, SCEA'S CONFIDENTIAL INFORMATION THE SYSTEM, THE UNITS OF The LICENSED PRODUCTS MANUFACTURED HEREUNDER AND/OR PUBLISHER'S PRODUCT INFORMATION INCLUDED ON SCEA DEMO DISCS. SCEA SHALL NOT BE LIABLE FOR ANY INJURY, LOSS OR DAMAGE, DIRECT, INDIRECT OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE ANY UNITS AND/OR ANY SOFTWARE ERRORS AND/OR "BUGS" IN PUBLISHER'S PRODUCT INFORMATION WHICH MAY B REPRODUCED ON SCEA DEMO DISCS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SCEA ND ITS AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION, REGARDING THE SONY MATERIALS, SCEA'S CONFIDENTIAL INFORMATION, LICENSED PRODUCTS, SCEA DEMO DISCS AND THE SYSTEM. ANY WARRANTY AGAINST INFRINGEMENT THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER COMPARABLE STATUE IS EXPRESSLY DISCLAIMED. 11. SCEA Intellectual Property Rights. 11.1 Licensed Trademark. The Licensed Trademarks and the goodwill ------------------ associated therewith are and shall be the exclusive property of SCEA or Affiliates of SCEA. Nothing herein shall give Publisher any right, title or interest in or to any of the Licensed Trademarks or any other trademarks of SCEA, other than the non-exclusive licensed provided herein. Publisher shall not do or cause to be done any act or thing in any way impairing or tending to impair or dilute any of SCEA's rights, title or interest in or to any of the Licensed Trademarks or any other trademarks of SCEA, nor shall Publisher register any trademark in its own name or in the name of any other person or entity, or obtain right to employ Internet domain name or addresses, which are similar to or are likely to be confused with any of the Licensed Trademarks or any other trademarks of SCEA. 11.2 License of Sony Materials and Systems. All rights with respect to ------------------------------------- the Sony Materials and System, including without limitation , all of SCEA Intellectual Property Rights therein, are and shall be the exclusive property of SCEA or Affiliates of SCEA. Nothing herein shall five Publisher any right, title or interest in or to the Sony Materials or the System (or any portion thereof), other than the non-exclusive license provided herein. Publisher shall not do or cause to be done any act or thing in any way impairing or tending to impair any of SCEA's rights, title or interests in or to the Sony Materials or the System (or any portion thereof). 12. Infringement of SCEA Intellectual Property Rights By Third Parties. In the event that Publisher discovers or otherwise becomes INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 18 aware that any of the SCEA Intellectual Property Rights have been or are being infringed upon by any third party, then Publisher shall promptly notify SCEA. SCEA shall have the sole right, in its discretion, to institute and prosecute lawsuits against third parties for such infringement of SCEA Intellectual Property Rights. Any lawsuit shall be prosecuted solely at the cost and expense of SCEA and all sums recovered in any such lawsuits, whether by judgment, settlement or otherwise shall belong solely to SCEA. Upon request of SCEA, Publisher shall execute all papers, testify on all matters and otherwise cooperate in every way necessary and desirable for the prosecution of any such lawsuit. SCEA shall reimburse Publisher for the reasonable expenses incurred as a result of such cooperation, but unless authorized by other provision of this Agreement, not costs and expenses attributable to the conduct of a cross-claim or third part action. 13. Confidentiality. 13.1 SCEA's Confidential Information. ------------------------------- 13.1.1 Definition of SCEA's Confidential Information. "SCEA's --------------------------------------------- Confidential Information" shall mean: (i) the System, Sony Materials and Development Tools; (ii) other documents and materials developed, owned, licensed or under the control of Sony, including all processes, data, hardware, software, inventions, trade secrets, ideas, creations, improvements, designs, discoveries, developments, research and know-how, including without limitation the SourceBook 2 and SCEA Intellectual Property Rights relating to the System, Sony Materials or Development Tools; and (iii) information and documents regarding SCEA's finances, business, marketing and technical plans, business methods and production plans. SCEA's Confidential Information may consist of information in any medium, whether oral, printed, in machine-readable form or otherwise, including information apprised to Publisher and reduced to tangible or written form at anytime during the term of this Agreement. In addition, the existence of a relationship between Publisher and SCEA for the purposes set forth herein shall be deemed to be SCEA's Confidential Information unless otherwise agreed to in writing by the parties or until publicly announced by SCEA. 13.1.2 Term of Protection of SCEA's Confidential Information. The ----------------------------------------------------- term for the protection of SCEA's Confidential Information shall commence on the Effective Date first above written and shall continue in full force and effect as long as any of SCEA's Confidential Information continues to be maintained as confidential and proprietary by SCEA and/or Sony. During such term, Publisher shall, pursuant to Section 13.1.3 below, safeguard and hold in trust and confidence and not disclose or use (except for the purposes herein specified) any and all of SCEA's Confidential Information. 13.1.3 Preservation of SCEA's Confidential Information. Publisher ----------------------------------------------- shall, with respect to SCEA's Confidential Information: (i) not disclose SCEA's Confidential Information to any person or entity; other than those employees or directors of the Publisher whose duties justify a "need-to-know" and who have executed a confidentiality agreement in which such employees or directors have agreed not to disclose and to hold confidential all confidential information and materials (inclusive of those of third parties) which may be disclosed to them or to which they may have access during the course of their duties. At SCEA's request, Publisher shall provide SCEA with a copy of such confidentiality agreement between Publisher and its employees or directors, and shall also provide SCEA with a list of employee and director signatories. Publisher shall not disclose any of SCEA's Confidential Information to third parties, including without limitation to consultants or agents. Any employees or directors who obtain access to SCEA's Confidential Information shall be advised by Publisher of the confidential nature of SCEA's Confidential Information, and Publisher shall be responsible for any breach of this Agreement by its employees or directors. (ii) take all measures necessary to safeguard SCEA's Confidential Information in order to avoid disclosure, publication, or dissemination, using as high a degree of care and scrutiny, but a least reasonable care, as is consistent with the protection of valuable trade secrets by companies in high technology industries. (iii) ensure that all written materials relating to containing SCEA's Confidential Information be maintained in a restricted access area and plainly marked to indicate the secret and confidential nature thereof. (iv) at SCEA's request, return promptly to SCEA any and all portions of SCEA's Confidential Information, together with all copies thereof. (v) not use, modify, reproduce, sublicense, copy, distribute, create derivative works from, or otherwise provide to third parties, SCEA's Confidential Information, or any portion thereof, except as provided herein, nor shall INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 19 Publisher remove any proprietary legend set forth on or contained within any of SCEA's Confidential Information. 13.1.4 Exceptions. The foregoing restrictions shall not apply to any ---------- portion of SCEA's Confidential Information which: (i) was previously know to Publisher without restriction on disclosure or use, as proven by written documentation of Publisher; or (ii) is or legitimately becomes part of the public domain through no fault of Publisher or its employees; or (iii) is independently developed by Publisher's employees who have not had access to SCEA's Confidential Information, as proven by written documentation of Publisher; or (iv) is required to be disclosed by administrative or judicial action; provided that Publisher must attempt to maintain the confidentiality of SCEA's Confidential Information by asserting in such action the restrictions set forth in this Agreement, and, immediately after receiving notice of such action or any notice of any threatened action, Publisher must notify SCEA to give SCEA the maximum opportunity to seek any other legal remedies to maintain such SCEA's confidential Information in confidence as herein provided; or (v) is approved for release by written authorization of SCEA. 13.1.5 No Obligation to License. Disclosure of SCEA's Confidential ------------------------ Information to Publisher shall not constitute any option, grant or license from SCEA to Publisher under any patent or other SCEA Intellectual Property Rights now or hereinafter held by SCEA. The disclosure by SCEA to Publisher of SCEA's Confidential Information hereunder shall not result in any obligation on the part of SCEA to approve any materials of Publisher hereunder or otherwise, nor shall such disclosure by SCEA give Publisher any right to, directly or indirectly, develop, manufacture or sell any product derived from or which uses any of SCEA's Confidential Information, other than as expressly set forth in this Agreement. 13.1.6 Publisher's Obligations Upon Unauthorized Disclosure. If at ---------------------------------------------------- any time Publisher becomes aware of any unauthorized duplication, access, use, possession or knowledge of any SCEA's Confidential Information, it shall notify SCEA as soon as reasonably practicable, and shall promptly act to recover any such information and prevent further breach of the confidentiality obligations herein. Publisher shall provide any and all reasonable assistance to SCEA to protect SCEA's proprietary rights in any of SCEA's Confidential Information that it or its employees or permitted subcontractors may have directly or indirectly disclosed or made available, and that may be duplicated, accessed, used, possessed or known in a manner or for a purpose not expressly authorized by this Agreement, including but not limited to enforcement of confidentiality agreements, commencement and prosecution in good faith (alone or with the disclosing party) or legal action, and reimbursement for all reasonable attorney's fees, costs and expenses incurred by SCEA to protect its proprietary rights in SCEA's Confidential Information. Publisher shall take all steps requested by SCEA to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of SCEA's Confidential Information. In addition, SCEA shall have the right to pursue any actions at law or in equity, including without limitation the remedies set forth in Section 16.10 hereto. 13.2 Publisher's Confidential Information. ------------------------------------ 13.2.1 Definition of Publisher's Confidential Information. -------------------------------------------------- "Publisher's Confidential Information" shall mean: (i) any Product Software as provided by SCEA pursuant to this Agreement and all documentation and information relating thereto, including Product Proposals. Printed Materials and Advertising Materials (other than documentation and information intended for use by and release to end users, the general public or the trade); (ii) other documents and materials developed, owned, licensed or under the control of Publisher, including all processed, data, hardware, software, inventions, trade secrets, ideas, creations, improvements, designs, discoveries, developments, research and know how; and (iii) information and documents regarding Publisher's finances, business, marketing and technical plans, business methods and production plans. Publisher's Confidential Information may consist of information in any medium, whether oral, printed, in machine-readable form or otherwise, including information apprised to SCEA and reduced to tangible or written form at any time during the term of this Agreement. 13.2.2 Term of Protection of Publisher's Confidential Information. ---------------------------------------------------------- The term for the protection of Publisher's Confidential Information shall commence on the Effective Date first above written and shall continue in full force and effect as long as any of Publisher's Confidential Information continues to be maintained as confidential and proprietary by Publisher. INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - -------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 20 13.2.3 Preservation of Confidential Information of Publisher. ----------------------------------------------------- SCEA shall, with respect to Publisher's Confidential Information: (i) hold all Publisher's Confidential Information in confidence, and shall take all reasonable steps to preserve the confidentiality of Publisher's Confidential Information, and to prevent it from falling into the public domain or into the possession of persons other than those persons to whom disclosure is authorized hereunder. (ii) not disclose Publisher's Confidential information to any person other than an SCEA employee or subcontractor who needs to know or have access to such Confidential Information for the purposes of this Agreement, and only to the extent necessary for such purposes. (iii) ensure that all written materials relating to or containing Publisher's Confidential Information be maintained in a secure area and plainly marked to indicate the secret and confidential nature thereof. (iv) at Publisher's request, return promptly to Publisher any and all portions of Publisher's Confidential Information, together with all copies thereof. (v) not use Publisher's Confidential Information, or any portion thereof, except as provided herein, nor shall SCEA remove any proprietary legend set forth on or contained within any of Publisher's Confidential Information. 13.2.4 Exceptions. The foregoing restrictions will not apply to any ---------- portion of Publisher's Confidential Information which: (i) was previously know to SCEA without restriction on disclosure or use, as proven by written documentation of SCEA; or (ii) is or legitimately becomes part of information in the public domain through no fault of SCEA, its employees or its subcontractors; or (iii) is independently developed by SCEA's employees or affiliates who have not had access to Publisher's Confidential Information, as proven by written documentation of SCEA; or (iv) is required to be disclosed by administrative or judicial action; provided that SCEA attempt to maintain the confidentiality of Publisher's Confidential Information by asserting in such action the restrictions set forth in this Agreement, and immediately after receiving notice of such action, notified Publisher of such action to give Publisher the opportunity to seek any other legal remedies to maintain such Publisher's Confidential Information in confidence as herein provided; or (v) is approved for release by written authorization of Publisher. 13.2.5 SCEA's Obligation Upon Unauthorized Disclosure. If at any time ---------------------------------------------- SCEA becomes aware of any unauthorized duplication, access, use, possession or knowledge of any of Publisher's Confidential Information, it shall notify Publisher as soon as is reasonably practicable. SCEA shall provide nay and all reasonable assistance to Publisher to protect Publisher's proprietary right in any of Publisher's Confidential Information that it or its employees or permitted subcontractors may have directly or indirectly disclosed or made available and that may be duplicated, accessed, used, possessed or known in a manner or for a purpose not expressly authorized by this Agreement including but not limited to enforcement of confidentiality agreements, commencement and prosecution in good faith (alone or with the disclosing party) of legal action, and reimbursement for all reasonable attorney's fees, costs and expenses incurred by Publisher to protect it proprietary rights in Publisher's Confidential Information. SCEA shall take all reasonable steps requested by Publisher to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of Publisher's Confidential Information. 13.3 Confidentiality Agreement. The terms and conditions of this ------------------------- Agreement shall be treated as SCEA's Confidential Information and Publisher's Confidential Information; provided that each party may disclose the terms and conditions of this Agreement: (i) to legal counsel; (ii) in confidence, to accountants, banks and financing sources and their advisors; (iii) in confidence, in connection with the enforcement of this Agreement or rights arising under or relating to this Agreement; and (iv) if required, in the opinion of counsel, to file publicly or otherwise disclose the terms of this Agreement under applicable federal and/or state securities or other laws, the disclosing party shall be required to promptly notify the other party such that the other party has a reasonable opportunity to contest or limit the scope of such required disclosure, and the disclosing party shall request, and shall use its best efforts to obtain, confidential treatment for such sections of this Agreement as the other INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 21 party may designate. 14. Term and Termination. 14.1 Effective Date; Term. This Agreement shall not be binding on the -------------------- parties until it has been signed by each party, in which event it shall be effective from the Effective date until March 31, 2003, unless earlier terminated pursuant to Section 14.2. The term shall be automatically extended for additional on-year terms thereafter, unless either party provides the other with written notice of its election not to so extend on or before January 31 of the applicable year. Notwithstanding the foregoing the term for the protection of SCEA's Confidential Information and Publisher's Confidential Information shall be as set forth in Sections 13.1.2 and 13.2.2 respectively. 14.2 Termination by SCEA. SCEA shall have the right to terminate this ------------------- Agreement immediately, by providing written notice of such election to Publisher, upon the occurrence of any of the following: (i) If Publisher breaches (A) any of its obligation hereunder; or (B) any other agreement entered into between SCEA or Affiliates of SCEA and Publisher. (ii) The liquidation or dissolution of Publisher or a statement of intent by Publisher to no longer exercise any of the rights granted by SCEA to Publisher hereunder. (iii) If during the term of this Agreement, a controlling interest in Publisher or in an entity which directly or indirectly has a controlling interest in Publisher is transferred to a party that (A) is in breach of any agreement with SCEA or an Affiliate of SCEA; (B) directly or indirectly holds or acquires a controlling interest in a third party which develops any interactive device or product which is directly or indirectly competitive with the System; or (C) is in litigation with SCEA or Affiliates or SCEA concerning any proprietary technology, trade secrets or other SCEA Intellectual Property Rights or SCEA's Confidential Information. As used in this Section 14.2, "controlling interest" means, with respect to any form of entity, sufficient power to control the decisions of such entity. (iv) If during the term of this Agreement, Publisher or an entity that directly or indirectly has a controlling interest in Publisher enters into a business relationship with a third party with whom Publisher materially contributes to develop core components to an interactive device or product which is directly or indirectly competitive with the System. Publisher shall immediately notify SCEA in writing in the event that any of the events or circumstances specified in this Section occur. 14.3 Product-by-Product Termination by SCEA. In addition to the events of -------------------------------------- termination described in Section 14.2, above, SCEA, at its option, shall be entitled to terminate, on a product-by-product basis, the licenses and related rights herein granted t Publisher in the event that (a) Publisher fails to notify SCEA promptly in writing of any material change to any materials previously approved by SCEA in accordance with Section 5 or Section 6.1 hereto, and such breach is not corrected or cured within (30) days after receipt of written notice of such breach; (b) Publisher uses a third party that fails to comply with the requirements of Section 3 in connection with the development of any Licensed Product; (c) any third party with whom Publisher has contracted for the development of Executable Software breaches any of its material obligation to SCEA pursuant to such third party's agreement with SCEA with respect to such Licensed Product; or (d) Publisher cancels a Licensed Product or fails to provide SCEA in accordance with the provision of Section 5 above, with the final version of the Executable Software for any Licensed Product within three (3) months of the scheduled release date according to the Product Proposal (unless a modified final delivery date has been agreed to by the parties), or fails to provide work in progress to SCEA in strict accordance with the Review Process in Section 5.3. 14.4 Options of SCEA in Lieu of Termination. As alternatives to -------------------------------------- terminating this Agreement or a particular Licensed Product as set forth in Sections 14.2 and 14.3 above, SCEA may, at its option and upon written notice to Publisher, take the following actions in lieu of terminating this Agreement. In the event that SCEA elects either of these options, Publisher may terminate this Agreement upon written notice to SCEA rather than allowing SCEA to exercise these options. Election of these options by SCEA shall not constitute a waiver of or compromise with respect to any of SCEA's rights under this Agreement and SCEA may elect to terminate this Agreement with respect to any breach. 14.4.1 Suspension of Agreement. SCEA may suspend this Agreement, entirely ----------------------- or with respect to a particular Licensed Product or program, for a set period of time which shall be specified in writing to Publisher upon the occurrence of any breach of this Agreement. 14.4.2 Liquidated Damages. Whereas a minor breach of any of the events ------------------ set out below may not warrant termination of this Agreement, but will cause SCEA damages in amounts difficult to quantify, SCEA may require Publisher to pay liquidated damages of Twenty Thousand Dollars ($20,000) per event as follows: INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 22 (i) Failure to submit Advertising Materials to SCEA for approval (including any required resubmissions); (ii) Broadcasting or publishing Advertising Materials without receiving the final approval or consent of SCEA; (iii) Failure to make SCEA's requested revisions to Advertising Materials; or (iv) Failure to comply with the SourceBook 2, Manufacturing Specifications or Guidelines which relates in any way to use of Licensed Trademarks. Liquidated damages shall be invoiced separately or on Publisher's next invoice for Licensed Products. SCEA reserves the right to terminate this Agreement for breach in lieu of seeking liquidated damages or in the event that liquidated damages are unpaid. 14.5 No Refunds. In the event of termination of this Agreement in ---------- accordance with any of the provision of Sections 14.2 through 14.4 above, no portion of any payments of any kind whatsoever previously provided to SCEA hereunder shall be owned or be repayable to Publisher. 15. Effects of Expiration or Termination. 15.1 Inventory Statement. Within thirty (30) days of the date of ------------------- expiration or the effective date of termination with respect to any or all Licensed Product o r this Agreement, Publisher shall provide SCEA with an itemized statement, certified to be accurate by an officer of Publisher, specifying the number of unsold Units of the Licensed Products as to which such termination applies, on a title-by-title basis, which remain in its inventory and/or under its control at the time of expiration or the effective date of termination. SCEA shall be entitled to conduct at its expense a physical inspection of Publisher's inventory and work in process upon reasonable written notice during normal business hours in order to ascertain or verify such inventory and inventory statement. 15.2 Reversion of Rights. Upon expiration or termination and subject to ------------------- Section 15.3 below, the licenses and related rights herein granted to Publisher shall immediately revert to SCEA, and Publisher shall cease from any further use of SCEA's Confidential Information, Licensed Trademarks and Sony Materials and any SCEA Intellectual Property Rights therein, and, subject to the provisions of Section 15.3 below, Publisher shall have no further right to continue the development, publication, manufacture, marketing, sale or distribution of any Units of the Licensed Products, or to continue to use any Licensed Trademarks; provided, however, that for a period of one year after termination, and subject to all the terms o Section 13, and provided this Agreement is not terminated due to a breach or default of Publisher, Publisher may retain such portions of Sony Materials and SCEA's Confidential Information as SCEA in its sole discretion agrees are required to support end users of Licensed Products by must return these materials at the end of such one year period. Upon expiration or termination, the licenses and related rights herein granted to SCEA by Publisher shall immediately revert to Publisher, and SCEA shall cease from any further use of Product Information and any Publisher Intellectual Property Rights therein; provided that SCEA may continue the manufacture, marketing, sale or distribution of any SCEA Demo Discs containing Publisher's Product Information which Publisher had approved prior to termination. 15.3 Disposal of Unsold Units. Provided that this Agreement is not ------------------------ terminated due to a breach or default of Publisher, Publisher may, upon expiration or termination of this Agreement, sell off existing inventories of Licensed Products, on a non-exclusive basis, for a period of ninety (90) days from the date of expiration or termination of this Agreement, and provided such inventories have not been manufactured solely or principally for sale during such period. Subsequent to the expiration f such ninety (90) day period, or in the event this Agreement is terminated as a result of any breach or default of Publisher, any and all Units of the Licensed Products remaining in Publisher's inventory shall be destroyed by Publisher within five (5) business days of such expiration or termination. Within five (5) business days after such destruction, Publisher shall provide SCEA with an itemized statement, certified to be accurate by an officer of Publisher, indicating the number of Units of the Licensed Products which have been destroyed (on a title-by-title basis), the location and date of such destruction and the disposition of the remains of such destroyed materials. 15.4 Return of Sony Materials and Confidential Information. Upon the ----------------------------------------------------- expiration or earlier termination of this Agreement, Publisher shall immediately deliver to SCEA, or if and to the extent requested by SCEA destroy, all Sony Materials and any and all copies thereof, and Publisher and SCEA shall, upon the request of the other party, immediately deliver to the other party, or if and to the extent requested by such party destroy, all Confidential Information of the other party, including any and all copies thereof, which the other party previously furnished to it in furtherance of this Agreement. Within five (5) working days after any such destruction, Publisher and/or SCEA, as appropriate, shall provide the other party with an affidavit of destruction and an itemized statement, each certified to be accurate by an officer of Publisher, indicating the number of copies and/or units of the Sony Materials and/or Confidential Information which have been destroyed, the INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 23 location and date of such destruction and the disposition of the remains of such destroyed materials. In the event that Publisher fails to return the Sony Materials or Confidential Information and SCEA must resort to legal means (including without limitation any use of attorneys) to recover the Sony Materials or Confidential Information or the value thereof, all costs, including SCEA's reasonable attorney's fees, shall be borne by Publisher, and SCEA may, in addition to SCEA's other remedies, withhold such amounts from any payment otherwise due from SCEA and Publisher. 15.5 Extension of this Agreement; Termination Without Prejudice. SCEA ---------------------------------------------------------- shall be under no obligation to extend this Agreement notwithstanding any action taken by either of the parties prior to the expiration of this Agreement. Upon the expiration of this Agreement, neither party shall be liable to the other for any damages (whether direct, indirect, consequential or incidental, and including, without limitation, any expenditures, loss or profits or prospective profits) sustained or arising out of or alleged to have been sustained or to have arisen out of such expiration. The expiration or termination of this Agreement shall be without prejudice to any rights or remedies which one party may otherwise have against the other party, and shall not excuse either party from any such expiration or termination. 16. Miscellaneous Provisions. 16.1 Notices. All notices or other communications required or desired to ------- be sent to either of the parties shall be in writing and shall be sent by registered or certified mail, postage prepaid, or sent by recognized international courier service, telegram or facsimile, with charges prepaid. The address for all notices or other communications required to be sent to SCEA or Publisher, respectively, shall be the mailing address stated in the preamble hereof, or such other address as may by provided by written notice from one party to the other on a least ten (10) days' prior written notice. Any such notice shall be effective upon the date of actual or tendered deliver, as confirmed by the sending party. 16.2 Audit Provisions. Publisher shall keep full, complete, and accurate ---------------- books of account and records covering all transactions relating to this Agreement. Publisher shall preserve such books of account, records, documents, and materials for a period of twenty-four (24) months after the expiration or earlier termination of this Agreement. Acceptance by SCEA of an accounting statement, purchase order, or payment hereunder will not preclude SCEA from challenging or questioning the accuracy thereof at a later time. In the event that SCEA reasonably believes that the Wholesale Price provided by Publisher with respect to any Licensed is not accurate, SCEA shall be entitled to request additional documentation from Publisher to support the listed Wholesale Price for such Licensed Product. In addition, during the Term and for a period of two (2) years thereafter and upon the giving of reasonable written notice to Publisher, representatives of SCEA shall have access to, and the right to make copies and summaries of, such portions of all of Publisher's books an records as pertain to the Licensed Products and any payments due or credits received hereunder. In the event that such inspection reveals an under-reporting of any payment due to SCEA, Publisher shall immediately pay SCEA such amount. In the event that any audit conducted by SCEA reveals that Publisher has under-reported any payment due to SCEA hereunder by five percent (5%) or more for that audit period, then in addition to the payment of the appropriate amount due to SCEA, Publisher shall reimburse SCEA for all reasonable audit costs for that audit and any and all collection costs to recover the unpaid amount. 16.3 Force Majeure. Neither SCEA nor Publisher shall be liable for any ------------- loss or damage or be deemed to be in breach of this Agreement if its failure to perform or failure to cure any of its obligations under this Agreement results from any event or circumstance beyond its reasonable control, including, without limitation, any natural disaster, fire, flood, earthquake or other Act of God; shortage of equipment, materials, supplies or transportation facilities; strike or other industrial dispute; war or rebellion; shutdown or delay in power, telephone or other essential service due to the failure of computer or communications equipment or otherwise; provided, however, that the party interfered with gives the other party written notice thereof promptly, and, in any event, within fifteen (15) business days of discovery of any such Force Majeure condition. If notice of the existence of any Force Majeure conditions is provided within such period, the time for performance or cure shall be extended for a period equal to the duration of the Force Majeure event or circumstance described in such notice, except that any such cause shall not excuse the payment of any sums owed to SCEA prior to, during or after any such Force Majeure condition. In the event that the Force Majeure condition continues for more than sixty (60) days, SCEA may terminate this Agreement for cause by providing written notice to Publisher to such effect. 16.4 No Agency, Partnership, or Joint Venture. The relationship between ---------------------------------------- SCEA and Publisher, respectively, is that of licensor and licensee. Both parties are independent contractors and are not the legal representative, agent, joint venturer, partner or employee of the other party for any purpose whatsoever. Neither party has any right or authority to assume or create any obligations of any kind or to make any representations or warranty on behalf of the other party, whether express or INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 24 implied, or to bind the other party in any respect whatsoever. 16.5 Assignment. SCEA has entered into this Agreement based upon the ---------- particular reputation, capabilities and experience of Publisher and its officers, directors and employees. Accordingly, Publisher may not assign this Agreement or any of its right hereunder, nor delegate or otherwise transfer any of its obligations hereunder, to any third party unless the prior written consent of SCEA shall first be obtained. This Agreement shall not be assigned in contravention of Section 14.2 (iii). Any attempt or purported assignment, delegation or other such transfer, directly or indirectly, without the required consent of SCEA shall be void. Subject to the foregoing, this Agreement shall inure to the benefit of the parties and their respective successors and permitted assigns (other than under the conditions set forth in Section 14.2 (iii). SCEA shall have the right to assign any and all of its rights and obligations hereunder to any Sony affiliates(s). 16.6 Subcontractors. Publisher shall not sell, assign, delegate, -------------- subcontract, sublicense or otherwise transfer or encumber all or any portion of the licenses herein granted without the prior written approval of SCEA, provided, however, that Publisher may retain those subcontractors who provide services which do not require access to Sony Materials or SCEA's Confidential Information without such prior approval. Publisher may retain those subcontractor(s) to assist with the development, publication and marketing of Licensed Products (or portions thereof) which have signed (i) an LPA or LDA with SCEA (the "PlayStation 2 Agreement") in full force and effect throughout the term of such development and marketing; or (ii) an SCEA-approved subcontractor agreement ("Subcontractor Agreement"); and SCEA has approved such subcontractor in writing, which approval shall be in SCEA's sole discretion. Such Subcontractor Agreement shall provide that SCEA is a third-party beneficiary of such Subcontractor Agreement and has the full right to bring any actions against such subcontractors to comply in all respects with the terms and conditions of this Agreement. Publisher shall provide a copy of any such Subcontractor Agreement to SCEA prior to and following execution thereof. Publisher shall not disclose to any subcontractor any of SCEA's Confidential information, including, without limitation, any Sony Materials, unless and until either a PlayStation 2 Agreement or a Subcontractor Agreement has been executed and approved by SCEA. Notwithstanding any consent which may be granted by SCEA for Publisher to employ any such permitted subcontractor(s), or any such separate agreement(s) that may be entered into by Publisher with any such permitted subcontractor, Publisher shall remain fully liable for its compliance with all of the provision of this Agreement and for the compliance of any and all permitted subcontractors with the provisions of any agreements entered into by such subcontractors in accordance with this Section. Publisher shall use its best efforts to cause its subcontractors retained in furtherance of this Agreement to comply in all respects with the terms and conditions of this Agreement, and hereby unconditionally guarantees all obligations of its subcontractors. SCEA may subcontract any of its right or obligations hereunder. 16.7 Compliance with Applicable Laws. The parties shall at all times ------------------------------- comply with all applicable regulations and orders of their respective countries and other controlling jurisdictions and all conventions and treaties to which their countries are a part or relating to or in any way affecting this Agreement and the performance by the parties of this Agreement. Each party, at its own expense shall negotiate and obtain any approval, license or permit required in the performance of its obligations, and shall declare, record or take such steps to render this Agreement binding, including without limitation, the recording of this Agreement with any appropriate governmental authorities (if required). 16.8 Governing Law; Consent to Jurisdiction. This Agreement shall be -------------------------------------- governed by and interpreted in accordance with the laws of the State of California, excluding that body of law related to choice of laws, and of the United States of America. Any action or proceeding brought to enforce the terms of this Agreement or to adjudicate any dispute arising hereunder shall be brought in the Superior Court of the County of San Mateo, State of California or the United States District Court for the Northern District of California. Each of the parties hereby submits itself to the exclusive jurisdiction and venue of such courts for purposes of any such action and agrees that any service of process may be effected by delivery of the summons in the manner provided in the delivery of notices set forth in Section 16.1 above. In addition, each party hereby waives the right to a jury trial in any action or proceeding related to this Agreement. 16.9 Legal Costs and Expenses. In the event it is necessary for either ------------------------ party to retain the services of an attorney or attorneys to enforce the terms of this Agreement or to file or defend any action arising out of this Agreement, then the prevailing party in any such action shall be entitled, in addition to any other rights an remedies available to it at law or in equity to recover from the other party its reasonable fees for attorneys and expert witnesses, plus such court costs and expenses as may be fixed by any court of competent jurisdiction. The term "prevailing party" for the purposes of this Section shall include a defendant who has by motion, judgment, verdict or dismissal by the court, successfully defended against any claim that has been asserted against it. INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 25 16.10 Remedies. Unless expressly set forth to the contrary, either -------- party's election of any remedies provided for in this Agreement shall not be exclusive of any other remedies, and all such remedies shall be deemed to be cumulative. Any breach of Sections 3, 4, 5, 6.1, 11 and 13 of this Agreement would cause significant and irreparable harm to SCEA, the extend of which would be difficult to ascertain. Accordingly, in addition to any other remedies including without limitation equitable relief to which SCEA may be entitled, in the even of a breach by Publisher or any of its employees or permitted subcontractors or any such Sections of this Agreement, SCEA shall be entitled to the immediate issuance without bond of ex parte injunctive relief or, if a bond is required under applicable law, on the posting of a bond in an amount not to exceed $50,000, enjoining any breach or threatened breach or any or all of such provisions. IN addition, if Publisher fails to comply with any of its obligations as set forth herein, SCEA shall be entitled to an accounting and repayment of all forms of compensation, commissions, remuneration or benefits which Publisher directly or indirectly realizes as a result of or arising in connection with any such failure to comply. Such remedy shall be in addition to an not in limitation of any injunctive relief or other remedies to which SCEA may be entitled under this Agreement or otherwise at law or in equity. In addition, Publisher shall indemnify SCEA for all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and all reasonable related costs) which SCEA may sustain or incur as a result of any breach under this Agreement. 16.11 Severability. In the event that any provision of this Agreement (or ------------ portions thereof) is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or portion thereof) shall be enforced to the extent possible consistent with the stated intention of the parties, or, if incapable of such enforcement, shall be deemed to be deleted from this Agreement, while the remainder of this Agreement shall continue in full force and remain in effect according to its stated terms and conditions. 16.12 Sections Surviving Expiration or Termination. The following -------------------------------------------- sections shall survive the expiration or earlier termination of this Agreement for any reason: 4, 5.8, 6.2, 8, 9, 10, 11, 13, 14.5, 15, and 16. 16.13 Waiver. No failure or delay by either party in exercising any ------ right, power or remedy under this Agreement shall operate as a waiver of such right, power or remedy. No Waiver of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. Any waiver by either party of any provision of this Agreement shall not be construed as a waiver of any other provision of this Agreement, nor shall such waiver operate or be construed as a waiver of such provision respecting any future event or circumstance. 16.14 Modification and Amendment. No modification or amendment of any --------------------------- provision of this Agreement shall be effective unless in writing and signed by both of the parties. Notwithstanding the foregoing, SCEA reserves the right to modify the SourceBook 2 from time to time upon reasonable notice to Publisher. 16.15 Headings. The section headings used in this Agreement are intended -------- primarily for reference and shall not by themselves determine the construction or interpretation of this Agreement or any portion thereof. 16.16 Integration. This Agreement together with the SourceBook 2, ----------- constitutes the entire agreement between SCEA and Publisher and supersedes all prior or contemporaneous agreements, proposals, understandings and communications between SCEA and Publisher, whether oral or written, with respect to the subject matter hereof including any PlayStation 2 Confidentiality and Nondisclosure Agreement and Materials Loan Agreement between SCEA and Publisher. 16.17 Counterparts. This Agreement may be executed in counterparts, each ------------ of which shall be deemed an original, and together shall constitute one and the same instrument. 16.18 Construction. This Agreement shall be fairly interpreted in ------------ accordance with its terms and without any strict construction in favor of or against either of the parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first written above. SONY COMPUTER ENTERTAINMENT AMERICA INC. INTERPLAY ENTERTAINMENT CORP. By: /s/ BRIAN FARGO By: ----------------------------- ------------------------------ By: ------------------------------ Phil Harrison Vice President Third Party Relations and Research and Development May 15, 2000 NOT VALID AGREEMENT UNTIL EXECUTED BY BOTH PARTIES INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 26 Print Name: Brian Fargo ----------------------------- Title: Chief Executive Officer ---------------------------------- Date: May 9, 2000 ----------------------------------- INTERPLAY ENTERTAINMENT CORP.-IP PS2 LICENSED PUBLISHER AGREEMENT CONFIDENTIAL - ----------------------- *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 27 EX-10.45 8 dex1045.txt COMPUTER GAME LICENSE AGREEMENT EXHIBIT 10.45 COMPUTER GAME LICENSE AGREEMENT This Computer Game License Agreement ("AGREEMENT") is made and entered into by and between TSR, Inc., a Wisconsin corporation having a principal place of business at 201 Sheridan Springs Road, Lake Geneva, WI 53147 ("TSR") and Interplay, a California corporation having a principle place of business at 17922 Fitch Avenue, Irvine, CA 92714 ("LICENSEE"). The following will set forth our mutual understanding and agreement with respect to the grant of rights by TSR to LICENSEE to develop, manufacture, distribute, promote, and sell products using the copyrights, trademarks, trade names and other intellectual property listed in Schedule A ("LICENSED PROPERTY"). 1. Grant of License. Subject to and in accordance with all of the terms and conditions of this AGREEMENT, TSR grants LICENSEE a license during the TERM to develop, manufacture, distribute, promote; and sell the products identified in Schedule B ("LICENSED PRODUCTS") using the LICENSED PROPERTY through wholesale and retail channels (but not, without TSR's prior written consent, by way of premiums Or giveaways or in connection with the sale or promotion of any other products) in the countries identified in Schedule C ("TERRITORY"). This license is non-exclusive except as may be designated in Schedules A, B, and C. Material, products, and countries may be added to or deleted from the LICENSED PROPERTY, LICENSED PRODUCTS, and TERRITORY, respectively, by mutual agreement of the parties in writing. TSR may delete material, products, and countries from the LICENSED PROPERTY, LICENSED PRODUCTS, and TERRITORY, respectively, at any time if required by court order or otherwise in all countries other than those in North America and Europe and in Japan and Australia. If any deletion occurs pursuant to the foregoing sentence, TSR and LICENSEE agree to negotiate in good faith a modification to the advance and royalty payments described herein. 2. Sublicensing. LICENSEE may enter into sublicenses provided that. Each sublicense: (1) includes provisions for the protection of TSR's copyrights, trademarks, and goodwill equivalent to the terms of Paragraphs 6-9, 17-18, 20-24, 26-27, and 34, of this AGREEMENT; (2) terminates immediately upon the expiration or earlier termination of this AGREEMENT; and (3) prohibits the sublicensee from itself sublicensinq any rights. LICENSEE will promptly provide TSR with one (1) fully-executed original of each sublicense entered into. Any LICENSED PRODUCTS produced or sold under a sublicense are subject to all terms and conditions of this AGREEMENT and LICENSEE will take best efforts to ensure compliance therewith. _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 3. Best efforts. LICENSEE agrees to use its best efforts to actively, aggressively and effectively develop, manufacture, promote to the consumer and to the trade, distribute and sell the LICENSED PRODUCTS in the TERRITORY. LICENSEE will bear all costs in connection with those activities. 4. Prior activity. To the extent LICENSEE has engaged in any activity with respect to the LICENSED PROPERTY relating to the LICENSED PRODUCTS prior to the execution of this AGREEMENT, all such activity will be governed by the terms, and subject to the conditions of this AGREEMENT. 5. Development. LICENSEE has the sole responsibility and obligation for the cost of development, manufacturing, packaging, distribution, promotion and sale of the LICENSED PRODUCTS. "Cost of development" includes, without limitation, the cost of artwork, photography and related art services, from concept stage to final product, whether such materials and services are furnished directly by LICENSEE or by TSR at LICENSEE's expense. TSR may, at its option, loan materials to LICENSEE free of charge. LICENSEE will promptly return such loaned materials to TSR in their original condition when they are no longer needed by LICENSEE. 6. Approvals. (a) In order to assure that the quality of all LICENSED PRODUCTS, packaging, promotional material, or other use of the LICENSED PROPERTY is consonant with, and does not reflect adversely upon, the goodwill of the LICENSED PROPERTY and TSR. LICENSEE will consult with TSR during the development of each LICENSED PRODUCT and will obtain TSR's prior approval, such approval not to be unreasonably withheld, of each use of the LICENSED PROPERTY prior to release or distribution. LICENSEE will not change the text or contents of any approved use of the LICENSED PROPERTY without obtaining TSR's prior approval. TSR has sole right to grant or withhold its approval of any use of the LICENSED PROPERTY and may take into consideration such esthetics and other considerations as TSR deems appropriate. TSR and LICENSEE will adhere to the following approval procedures: (i) LICENSEE will provide a sample of the material, design and artwork for each LICENSED PRODUCT and its packaging for TSR's approval and any other information requested by TSR concerning the LICENSED PRODUCT at the following four stages (as appropriate for _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. each LICENSED PRODUCT) and will not proceed beyond each stage until it has received TSR's approval: * concept; * preliminary design; * final design; * pre-production sample; and * production sample. (ii) LICENSEE will provide samples of any advertisements, point- of-sale, or other promotional material for TSR's approval and will not publish distribute or otherwise use the material until it has received TSR's approval. (iii) All samples will be provided by LICENSEE without cost to TSR. LICENSEE will submit English translations of all samples containing text not in the English language. (iv) TSR will notify LICENSEE of its approval or disapproval of each sample in writing within ten (10) business days after TSR receives the sample and any requested additional information from LICENSEE, or such longer period of time as the parties may agree. If TSR does not approve or disapprove of a sample within eight (8) business days after TSR receives the sample, LICENSEE may request approval or disapproval by facsimile, and, if TSR does not thereafter approve or disapprove of the sample within two (2) business days, the sample will be deemed approved. If TSR disapproves of any sample, TSR will inform LICENSEE in writing of the reasons for its disapproval. (v) All samples and other communication relating to this approval procedure will be directed to the persons designated by each party in Schedule J (the "DESIGNATED PERSON" and "ALTERNATE PERSON"). The persons so designated may be changed by the respective party upon written notice to the other party. 7. Recall of Unapproved Material. If LICENSED PRODUCTS or other materials using the LICENSED PROPERTY are distributed to third parties in violation of this AGREEMENT, LICENSEE will use its best efforts to promptly withdraw and withhold such LICENSED PRODUCTS or other materials from further distribution and to recover the LICENSED _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. PRODUCTS or materials that have already been distributed. LICENSEE is not, however, obligated to retrieve any such LICENSED PRODUCTS or other material already in the possession of ultimate consumers. 8. Complaints. LICENSEE will diligently address all legitimate complaints brought to its attention regarding the LICENSED PRODUCTS. LICENSEE will advise of any category of recurring complaint and of any complaint which LICENSEE believe might result in legal or administrative action against LICENSEE or TSR. 9. Compliance with Laws. LICENSEE will comply with all sovereign, state and any other local laws, regulations and rules, including without limitation all trademark, patent and copyright laws of the United States and of any foreign country or countries in the TERRITORY applicable to the subject matter of this AGREEMENT other than the registration of intellectual property rights, and LICENSEE will bear all costs associated with its compliance with such laws, regulations, and rules. 10. Advance. Upon execution of this AGREEMENT and as otherwise provided in Schedule E, LICENSEE will pay TSR as advances against royalties the amounts set forth in Schedule E ("ADVANCES"). ADVANCES for each LICENSED PRODUCT are deductible against royalties for that LICENSED PRODUCT only and are non- refundable in all circumstances. The foregoing will not be interpreted as limiting any action for damages in the event TSR is in default of its representations or obligations hereunder. 11. Royalties. LICENSEE will pay TSR the ROYALTIES provided in Schedule H of LICENSEE's income from LICENSED PRODUCTS. [*] LICENSEE may establish a reserve for returns of not more than [*] of products sold which reserve will be liquidated each quarter and may deduct any credit for actual returns from the royalty payment for [*] in which the returns were accepted. "On-line Charges" means the amount received by LICENSEE for use of the on-line system in connection with the LICENSED PRODUCTS. "Sublicense Revenues" means all monies actually received by Interplay pursuant to a sublicense, including any advances received for sublicenses. 12. Payment of Royalties. Within [*] of the end of [*], LICENSEE will: (1) send to TSR by facsimile or first class or air mail a royalty statement in the form of Exhibit A showing the complete computations made in calculating royalties for that [*]; and (2) wire transfer to an account designated by TSR or send by first class or air mail the royalty payment for [*]. If no sales of LICENSED PRODUCTS are made in [*], LICENSEE will inform TSR of such fact in writing within [*] _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. of the end of [*]. All payments will be made in United States currency. Any payment not made when due will bear interest from its due date to the date of payment at [*], or at such lower rate of interest as may be required by law. Such interest is in addition to, and not in lieu of, any other remedy to which TSR is entitled. LICENSEE will give such further explanatory details of sales and the computation of royalties or other payments as TSR may reasonably request. 13. Tax Treatment. Whenever possible, LICENSEE will take the necessary steps to secure exemption from any obligation to withhold amounts for taxes payable by TSR to any governmental body in the TERRITORY, and TSR will cooperate with LICENSEE in such endeavor. If such endeavor is not successful, LICENSEE may deduct the amount paid by LICENSEE in taxes charged directly against TSR and in TSR's name PROVIDED that LICENSEE provides TSR with original documentation of such payment. All other taxes payable in the TERRITORY are LICENSEE's sole responsibility and will be paid entirely by LICENSEE. 14. Records. LICENSEE will maintain accurate and complete books and records relating to the manufacture, distribution, and sale of the LICENSED PRODUCTS during the TERM and for [*] thereafter. During this period, TSR's Certified Public Accountant ("CPA") may, during regular business hours and on [*] written notice to LICENSEE, examine and make extracts or copies of LICENSEE's books and records to determine the accuracy of the statements furnished to TSR. LICENSEE will cooperate and assist TSR's CPA in understanding LICENSEE's books and records. LICENSEE will promptly pay any deficiency plus interest as set forth in Paragraph 12. LICENSEE will pay the cost of the examination if the deficiency is [*] of the royalty payment or greater. 15. Minimum Guarantee. If the actual royalty earned and received by TSR during the ORIGINAL TERM, the 1ST OPTION TERM or the 2ND OPTION TERM is less than the sums provided therefore in Schedule F ("MINIMUM GUARANTEES"), LICENSEE will pay TSR the difference between the actual royalty earned and the MINIMUM GUARANTEE for that TERM within [*] of the end of the TERM. 16. Marketing Date. LICENSEE will release its first LICENSED PRODUCT by the date specified in Schedule a ("MARKETING DATE"). If LICENSEE does not comply with this provision TSR may terminate this AGREEMENT and retain all payments made to TSR as of the date of termination, it being understood and agreed that such payments constitute liquidated damages and not a penalty. _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 17. Samples. Promptly upon the start-up of LICENSEE's initial production run, LICENSEEE will furnish to TSR without cost [*] samples of each LICENSED PRODUCT including any packaging, labels, hang-tags, catalogs, advertising, or other promotional material. Annually on the anniversary date of this AGREEMENT during the TERM, LICENSEE will furnish to TSR without cost [*] samples from recent production of each LICENSED PRODUCT including any packaging, labels, hang-tags, catalogs, advertising, or other promotional material. TSR may purchase from LICENSEE at LICENSEE's lowest selling price such royalty-free units of any LICENSED PRODUCT as TSR may request for sale in TSR's mail order catalog business or for other use. The amounts due to LICENSEE from TSR for such purchases may be deducted from any royalties owed to TSR by LICENSEE. 18. Ownership of Related Works. LICENSEE acknowledges and agrees that, except for development tools, all works developed by LICENSEE for use in connection with the LICENSED PRODUCTS, including without limitation video and computer game play elements, cluebooks, artwork, packaging, advertisements , text and translations ("RELATED. WORKS"), works of, and as associated by the public With the LICENSED PROPERTY. Game play elements means the audiovisual display of the computer and video games, including without limitation, game play, rules, symbols, designs, likenesses, sound- and visual representations. LICENSEE will have exclusive ownership of the copyright in all development tools and RELATED WORKS. LICENSEE agrees that, if it chooses to register its copyrights in any of the RELATED WORKS; it will register the RELATED WORKS as derivative works of the LICENSED PROPERTy. LICENSEE also agrees that it will not use the RELATED- WORKs either during or after the TERM of this AGREEMENT, Except under license or approval from TSR. 19. New Trademarks. LICENSEEE wi1l not use any new trademark (not originally owned by TSR or LICENSEE) in-connection with the LICENSED PRODUCTS without TSR's prior -written approval. Any such new trademark will become a part of the LICENSED PROPERTY and belong entirely to TSR, and LICENSEE's use of the trademark will inure to TSR's benefit. If a new trademark is used in the United States, Canada, United Kingdom, France, Germany, Japan, or Australia, TSR will register the mark in that country at TSR's expense. LICENSEE may request that TSR register a new trademark in any other country, in which event LICENSEE and TSR will share equally the cost of registration. TSR will conduct and pay for the cost of any necessary trademark searches of new trademarks in the United States, Canada, United Kingdom, France, Germany, Japan, and Australia. LICENSEE will conduct and pay for the cost of any necessary trademark searches of new trademarks in any other _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. country. Each party will promptly provide a copy of any trademark searches of new trademarks conducted by that party to the other. party. TSR will not use any new trademarks, either during or after the TERM of this AGREEMENT, except in connection with a license to, or approval by, LICENSEE. 20. Reservation of Rights. All rights not specifically granted herein are reserved to TSR, including without limitation the right to fully exploit in and out of the TERRITORY and during and after the TERM TSR's trademarks, trade names and copyrights. Nothing in this AGREEMENT will prevent TSR during the ORIGINAL TERM or OPTION TERM from preparing for, or holding discussions and arriving at agreements with any third parties regarding, the exploitation of TSR's rights in the LICENSED PROPERTY in connection with the LICENSED PRODUCTS so long as there are no commercial sales of a product in derogation of LICENSEE's exclusive license under this AGREEMENT during the TERM. 21. Trademark and Copyright Registration. LICENSEE will cooperate with TSR's prosecution or renewal of any U.S. or foreign trademark registration in connection with the LICENSED PROPERTY, including without limitation providing copies of invoices or receipts showing sales by LICENSEE of the LICENSED PRODUCTS and executing any appropriate documents. TSR will reimburse LICENSEE (or, upon request, pay in advance) for any reasonable out-of-pocket expenses over and above LICENSEE's normal operating costs, provided LICENSEE supplies receipts for all expenses twenty-five dollars ($25.00) or greater. 22. Trademark and Copyright Ownership. LICENSEE will cooperate with TSR in protecting- all rights in and to the LICENSED PROPERTY, including without limitation trademarks and copyrights. Each of the LICENSED PRODUCTS, and all packaging, labels, hang-tags, catalogs, advertising, or other promotional material relating thereto will bear the proper CREDIT specified in Schedule I, which may be amended by TSR in its reasonable discretion. LICENSEE may use its house mark or other pre-existing trademarks or trade names ("LICENSEE'S trademarks") in connection with the LICENSED PRODUCTS provided that LICENSEE's trademarks do not appear more conspicuously than TSR's trademarks. LICENSEE agrees to use the LICENSED PROPERTY only in the manner and form specified by TSR. LICENSEE does not acquire hereby any property rights in or to the LICENSED PROPERTY. LICENSEE will not register for LICENSEE's benefit any LICENSED PROPERTY or any trademark or trade name that is confusingly similar to any LICENSED PROPERTY as prohibited by applicable law. LICENSEE agrees that it will not, during the TERM or thereafter, directly or indirectly, contest the validity of the LICENSED PROPERTY or this _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. AGREEMENT. LICENSEE will, at TSR's request, execute any documents necessary to confirm TSR's ownership of the LICENSED PROPERTY in any country in the TERRITORY. TSR warrants, and LICENSEE acknowledges, TSR's ownership of or right to license the LICENSED PROPERTY and LICENSEE will not do or permit to be done any act that would impair the rights of TSR to the LICENSED PROPERTY. All use of the LICENSED PROPERTY inures to the benefit of TSR. 23. Trademark and copyright Protection. LICENSEE will promptly notify TSR of all infringements or violations of any of TSR's rights in the LICENSED PROPERTY and will cooperate with TSR in the prosecution of any legal action for infringement. If TSR prosecutes a legal action for infringement, TSR will bear all costs and will reimburse LICENSEE (or, upon request, pay in advance) for any reasonable out-of-pocket expenses over and above LICENSEE's normal operating costs incurred by LICENSEE in cooperating with TSR, provided LICENSEE supplies receipts for all expenses twenty-five dollars ($25.00) or greater. TSR has sole right, power, and authority to pursue any infringement or violation that it deems necessary or appropriate, and TSR is under no obligation to handle the infringement or violation to the satisfaction of LICENSEE. In the event that TSR advises LICENSEE that TSR will not participate in such legal action and that there is no objection to LICENSEE prosecuting such action, then LICENSEE shall be free to prosecute such action upon receiving express written permission and any directions from TSR's authorized legal counsel, pay all costs and expenses and receive all recoveries and awards; provided, however that TSR will always be free to subsequently join in any pending action and recoveries and awards will be divided between the parties according to their contribution to costs and expenses. 24. Promotional Activities with Third Parties. LICeNSEE will not engage in any promotional activity for the LICENSED PRODuCTs involving any third-Party or third-party products without obtaining TSR's prior written consent, which consent will not be unreasonably withheld. 25. Term. The license granted herein will be effective and expire as of the dates specified in Schedule D, unless renewed or sooner terminated in accordance with the provisions of this AGREEMENT. Upon the expiration or termination of the TERM for any reason and any applicable sell-off period, all royalties accrued to TSR will become immediately due and payable. Furthermore, all rights licensed to LICENSEE will immediately revert to TSR and LICENSEE will immediately cease all use or exploitation of the LICENSED PROPERTY (except _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. LICENSEE's sell-off rights, if any), including without limitation the manufacture, distribution, sale or promotion of the LICENSED PRODUCTS. LICENSEE acknowledges and agrees that if LICENSEE continues to use or exploit the LICENSED PROPERTY, TSR will be immediately and irreparable harmed and that TSR will be entitled to injunctive relief to stop such use or exploitation. 26. Bankruptcy. In the event that: (1) LICENSEE files a petition in bankruptcy; (2) LICENSEE is adjudicated bankrupt; (3) a petition in bankruptcy is filed against LICENSEE; (4) LICENSEE becomes insolvent or makes an assignment for the benefit of creditors; (5) LICENSEE discontinues its business relating to the LICENSED PRODUCTS; or (6) a receiver is appointed for LICENSEE or LICENSEE's business, TSR may, upon written notice to LICENSEE, terminate this AGREEMENT. In this event, neither LICENSEE nor LICENSEE's receivers, representatives, trustees, agents, administrators, successors or assigns have any right to sell any LICENSED PRODUCTS or otherwise exploit the LICENSED PROPERTY. 27. Breach. Except as may be otherwise provided in this AGREEMENT, if LICENSEE breaches any material obligations of this AGREEMENT, TSR may, in addition to exercising any of TSR's other rights, terminate the AGREEMENT upon thirty (30) days written notice to LICENSEE. Such termination will become effective immediately at the end of such thirty (30) day period unless LICENSEE completely remedies the breach within that period. Notwithstanding the foregoing, if LICENSEE breaches the approval provisions (Paragraph 6) or payment of royalties provisions (Paragraph 12) of this AGREEMENT [*] during any [*] regardless of whether the breaches have been cured or waived, TSR may give LICENSEE written warning and, if LICENSEE breaches such provisions again during the [*] TSR may terminate this AGREEMENT immediately by written notice to LICENSEE. 28. Survival. The expiration or termination of this AGREEMENT will only bring to an end the license granted to LICENSEE herein. All other provisions of this AGREEMENT will remain in effect, including without limitation all monetary obligations of LICENSEE. The expiration or termination of this AGREEMENT will not constitute a waiver by either party of any right of action for breach of this AGREEMENT and any such right of action will survive expiration or termination of this AGREEMENT. 29. Expiration and Sell-Off. Upon the expiration but not the termination of the AGREEMENT, and provided that LICENSEE has fully _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. performed and continues to fully perform all of LICENSEE's obligations hereunder, LICENSEE may, upon written notice thirty (30) days prior to expiration have the non-exclusive right to sell- (but not to manufacture) any finished units -of LICENSED PRODUCTS then in LICENSEE's possession for a period of six (6) months after expiration. 30. Riqht to Purchase Inventory. Upon expiration or termination of the AGREEMENT (including the sell-off period if applicable) TSR may purchase all or any part of: (l) LICENSEE's then existing LICENSED PRODUCTS at the lower of LICENSEE's actual manufacturing cost or sell-off price for each LICENSED PRODUCT; and (2) LICENSEE's promotional materials for the LICENSED PRODUCTS at the LICENSEE's actual cost for such materials. If TSR does not elect to purchase all of LICENSEE's inventory, promotional materials or production materials, TSR may: (1) designate a charity to receive all or part of the items; or (2) direct LICENSEE to immediately destroy the remaining items and furnish TSR with a certificate of destruction certified by an officer of LICENSEE's company. 31. Remaindering. LICENSEE will not remainder any LICENSED PRODUCT (i.e., sell at a price below LICENSEE's manufacturing cost therefor) less than twelve (12) months after the product's launch without TSR's prior express written approval in each instance. Before remaindering any products, LICENSEE will first offer TSR the right to buy all or any part of such LICENSED PRODUCTS at the lowest price and upon the terms LICENSEE has offered to remainder the products to third parties. 32. confidentiality. The parties each agree that during the TERM of this AGREEMENT, they may receive information regarding the other party's affairs which the disclosing party considers to be confidential. Each party receiving such confidential information agrees not to disclose it to any third party except to its own employees and agents and only as necessary to perform its obligations or exercise its rights under this AGREEMENT. This Paragraph is not applicable to any information which: (i) the receiving party is authorized in writing by the disclosing party to disclose; (ii) is generally known in the trade or becomes part of the public domain in the trade through no fault of the receiving party; (iii) is disclosed by the disclosing party to others without restrictions on subsequent disclosure; (iv) is provided to the receiving party by a third-party not under any confidentiality obligation with regard thereto; or (v) is required by law to be disclosed. 33. Licensor's warranty. TSR warrants that it owns all _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. rights in the LICENSED PROPERTY and has the right to license the LICENSED PROPERTY. TSR will indemnify and hold harmless LICENSEE and LICENSEE's officers, directors, agents and employees against any claims or causes of action alleging that the LICENSED PROPERTY infringes the rights of any third party. LICENSEE will give prompt notice to TSR in writing of any such claim or cause of action. TSR may, at its option, conduct the defense of any such cause of action and LICENSEE will cooperate fully with TSR in such defense 34. Licensee's Warranty. LICENSEE warrants and represents that LICENSEE has the right and the authority to enter into this AGREEMENT. Licensee also warrants and represents that the Licensed Products are in all respects safe and non- injurious and that assuming that TSR owns all rights in the Licensed PROPERTY, they do not violate the rights of any third-party. LICENSEE agrees to hold harmless and indemnify TSR against any and all claims of liability in connection with the LICENSED PRODUCTS other than allegations that the LICENSED PROPERTY infringes the rights of a third party), including without limitation alleged trademark, copyright or patent infringement or defect in any LICENSED PRODUCT. 35. Liability Insurance. LICENSEE will obtain and maintain, at its own expense, during the TERM (including any sell-off period if applicable) and for [*] thereafter Comprehensive General Liability Insurance coverage (including Product Liability/Completed Operations and Blanket Contractual Liability) written by an insurance company acceptable to TSR in an amount not less than [*] per occurrence Personal Injury and Property Damage combined single limit (the "Insurance Policy"). The Insurance Policy will name TSR and its officers, directors, agents, and employees as additional insured parties and will require the insurer to undertake their defense in any covered claim. The Insurance Policy will require the insurer to give TSR at least thirty (30) days prior written notice of any modification, cancellation, or lapse of the policy. Within thirty (30) days after execution of this AGREEMENT or ten (10) business days prior to the distribution of any LICENSED PRODUCTS, whichever is earlier, LICENSEE will provide TSR with a fully paid Certificate of Insurance (or such other evidence of coverage as is acceptable to TSR) which shows that the Insurance Policy meets each of the above requirements. If LICENSEE fails to furnish such proof of insurance or if the insurance is modified, cancelled or allowed to lapse, TSR may, in addition to any other available remedies including termination of this AGREEMENT, obtain insurance coverage and bill LICENSEE for the premium cost. LICENSEE will pay such premium cost to TSR within ten _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. (10) business days after receiving TSR's bill. 36. Force Majeure. Any delay in or failure of the performance of either party is excused only if and to the extent it is caused by occurrences beyond the party's control, including without limitation, acts of God, fire or flood, governmental regulations, policies or actions, or any labor, material transportation or utility shortage or curtailment. If any of these should occur, the party whose performance will be effected will immediately notify the other party in writing, explain how the party's performance may be affected, and give its best estimate of the how long it will be affected. The affected party will endeavor with due diligence to mitigate the effects on its performance. 37. Notices, Royalty statements and Payments. All notices will be in writing and will be hand delivered, mailed first class or airmail, or transmitted by wire to the appropriate party at the address set forth in Schedule J directed to the attention of the DESIGNATED PERSON. Notices will be effective: (1) if hand delivered, upon delivery; (2) if mailed first class or airmail, five (5) business days after deposit; and (3) if transmitted by wire, upon transmittal. All payments to TSR will be made payable to "TSR, Inc." mailed first class or airmail with the royalty statement to TSR to the PAYMENT PERSON and address set forth in Schedule K. 38. Binding Effect. This AGREEMENT will be binding upon and inure to the benefit of TSR's successors and assigns. This AGREEMENT will be binding upon and inure to the benefit of LICENSEE'S successors, but not LICENSEE's assigns except to an entity succeeding to all or substantially all of LICENSEE's business. This AGREEMENT is not assignable or delegable or sub-licensable by LICENSEE without TSR's prior written consent and any attempt to do so is null and void and of no force or effect. 39. Relationship of Parties. This AGREEMENT does not constitute a partnership, joint venture or any other agency relationship or employment relationship between the parties. 40. Entire Understanding. This AGREEMENT sets forth the entire agreement and understanding between the parties relating the subject matter hereof and supersedes all prior agreements and understandings, written or oral, relating to the subject matter hereof. This AGREEMENT cannot be modified, amended, changed or extended orally. No waiver by any party of any term of this AGREEMENT, whether by conduct or otherwise, will be deemed a _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. continuing waiver of the same or any other term of this AGREEMENT. 41. Authorizations. All officers and individuals executing this AGREEMENT and other documents on behalf of each party certify and warrant that they have the capacity to do so. 42. Headings. The headings of this AGREEMENT are inserted only for convenience and will not be construed as a part of this AGREEMENT. When appropriate in this AGREEMENT, references to the singular will be read to include the plural and vice versa, and pronouns will be read to include the corresponding masculine, feminine, or neuter forms. 43. Governing Law. This AGREEMENT will be construed and governed by the laws of the State of Wisconsin applicable to agreements made and to be performed entirely in Wisconsin, U.S.A. without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Wisconsin or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Wisconsin. Any provision of this AGREEMENT which is invalid, illegal or unenforceable in any jurisdiction will, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without in any manner affecting the remaining provisions hereof in any jurisdiction or rendering that or any other provision of this AGREEMENT invalid, illegal, or unenforceable in any other jurisdiction. 44. Legal Action. The parties submit exclusively to the personal jurisdiction of the federal district court for the Eastern District of Wisconsin, U.S.A. and the state court of Walworth County, Wisconsin, U.S.A. and agree that such courts are a convenient forum for resolution of all disputes regarding this AGREEMENT. The parties agree to accept service of process during and after the TERM by mail (for LICENSOR, attention Chris Kilpatrick) or any other method provided by Wisconsin law. Each party agrees that if so served it will not object to the manner of service or the personal jurisdiction of the court regarding any dispute relating to the AGREEMENT that is within the court's subject matter jurisdiction. In the event that legal action is instituted between the parties hereto in connection with this AGREEMENT, each party will be entitled to recover from the losing party interest on any monetary award and its costs and expenses of litigation, including without limitation court costs and reasonable attorneys' fees, as to that part of the legal action for which it prevails. Interest on any money judgement will accrue from the date _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. the damages were sustained and will be at the interest rate provided in Paragraph 12 of this AGREEMENT unless a different rate of interest is required by law. The parties indicate their understanding and agreement with all of the foregoing by signing and dating this document in the space provided below. ACCEPTED AND AGREED: TSR: LICENSEE: TSR, Interplay Productions, Inc. By: /s/ Willard Martens By: /s/ Brian Fargo Name: Willard Martens Name: Brian Fargo Title: Chief Operating Officer Title: President Date: 8/8/94 Date: 8/1/94 _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. DATED: TSR, INC. COMPUTER GAME LICENSE AGREEMENT SCHEDULES ANNEXED TO THE FOLLOWING AGREEMENT These Schedules are incorporated into and made a part of the Computer Game License Agreement of the same date between TSR, Inc. and the Licensee identified below: LICENSEE: Interplay Productions, Inc. 17922 Fitch Avenue Irvine, CA 92714 SCHEDULE A: LICENSED PROPERTY: An exclusive license to use the "PLANESCAPE" and "FORGOTTEN REALMS" trademarks and all copyrighted materials, including but not limited to, characters, locations and monsters, that are unique to TSR's "PLANESCAPE" and "FORGOTTEN REALMS" fantasy worlds. A non-exclusive license to use, solely in connection with LICENSED PRODUCTS bearing the "PLANESCAPE" or "FORGOTTEN REALMS" trademarks, the trademarks and copyrighted materials associated with, but not unique to, the "PLANESCAPE" and "FORGOTTEN REALMS" fantasy worlds, including without limitation, the "ADVANCED DUNGEONS & DRAGONS," "AD&D," TSR," and "TSR Logo" trademarks. SCHEDULE B: LICENSED PRODUCTS: Computer and video fantasy role-playing games for all personal computer and video game platforms known or unknown, including without limitation, coin operated, cable, on-line, satellite and other electronic transmission systems. Cluebooks and "900" telephone numbers containing hints, clues, diagrams, maps or other material to assist players for said computer and video games. This license is exclusive only as to computer and video games _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. bearing the "PLANESCAPE" or "FORGOTTEN REALMS" trademarks, and cluebooks and "900" telephone numbers for said computer and video games. Nothing in this AGREEMENT will prevent TSR from fully exploiting in any other manner its rights in the LICENSED PROPERTY. SCHEDULE C: TERRITORY: Worldwide SCHEDULE D: TERM: Commencing upon the date of the last party to sign the AGREEMENT; expiring four (4) years and: six (6) months from the date of commencement. (The period from commencement to such expiration is called the "ORIGINAL TERM"). LICENSEE, at its option, and provided that LICENSEE is in compliance, and continues to comply, with the AGREEMENT, may extend the term for two (2) additional two (2) year periods (the "lST OPTION TERM" and "2ND OPTION TERM," respectively) upon written notice and payment of required advance to TSR at least one (1) year prior to the expiration of the: (1) ORIGINAL TERM to accept the 1ST OPTION TERM; and (2) the 1ST OPTION TERM to accept the 2ND OPTION TERM. SCHEDULE E: ADVANCES: [*] due upon execution. For each game title initially released for play on on-line, cable, satellite, or other electronic transmission systems ("Electronic Product"), [*] upon such initial release and [*] upon any subsequent release of said game title other than as an Electronic For each game title initially released other than as an Electronic Product, [*] upon such initial release. If LICENSEE has not paid TSR at least [*] in additional advances (over and above the advance due upon execution) [*] after the date of _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. commencement, the difference between the amount of additional advances paid by LICENSEE and [*]. [*] due upon notification by LICENSEE that it will exercise the 1ST OPTION TERM. [*] due upon notification by LICENSEE that it will exercise the 2ND OPTION TERM. [*] per cluebook title due upon initial shipment of that title. SCHEDULE F: MINIMUM GUARANTEE: [*] for the ORIGINAL TERM. [*] for the 1ST OPTION TERM. [*] for the 2ND OPTION TERM. SCHEDULE G: MARKETING DATE: [*] after commencement of the AGREEMENT. SCHEDULE H: ROYALTIES: Product Type Royalty Personal computer and [*] coin operated On-line, cable, satellite or other electronid transmission system [*] Home video game cartridges [*] Cluebooks [*] Currently unknown platforms not belonging in any of the _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. above categories Negotiated in good faith Sublicensing Royalty On-line games [*] Products other than on-line games developed by LICENSEE [*] Products other than on-line games developed by SUBLICENSEE (where LICENSEE does not take a substantial role in the development of a product) [*] SCHEDULE I: CREDIT: Trademark and copyright notice: [list all trademarks used] are trademarks of TSR, Inc. Used by Interplay Productions, Inc. under license from TSR, Inc. SCHEDULE J: NOTICES AND APPROVAL: TSR: LICENSEE: TSR, Inc. Interplay Productions, Inc. P.O. Box 756 17922 Fitch Avenue 201 Sheridan Springs Road Irvine, CA 92714 Lake Geneva, WI 53147 DESIGNATED PERSON: Marlene Vail DESIGNATED PERSON: Chuck Camps ALTERNATE PERSON: Debra Poutsch ALTERNATE PERSON: Phil Adam SCHEDULE K: PAYMENTS: TSR, Inc. P.O. Box 756 201 Sheridan Springs Road Lake Geneva, WI 53147 _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. PAYMENT PERSON: Marlene D. Vail _____________ * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. EX-10.46 9 dex1046.txt 1ST AMEND TO COMPUTER GAME LICENSE AGMT EXHIBIT 10.46 FIRST AMENDMENT TO COMPUTER GAME LICENSE AGREEMENT BETWEEN TSR, INC. AND INTERPLAY PRODUCTIONS, INC. DATED AUGUST 8, 1994 TSR, Inc. and Interplay Productions, Inc. hereby agree to amend the Schedules annexed to the License Agreement dated August 8, 1994 in certain respects. Henceforth the Schedules are as follows: DATED: August 8, 1994 TSR, INC. COMPUTER GAME LICENSE AGREEMENT SCHEDULES ANNEXED TO THE FOLLOWING AGREEMENT These Schedules are incorporated into and made a part of the Computer Game License Agreement of the same date between TSR, Inc. and the Licensee identified below: LICENSEE: Interplay Productions, Inc. 17922 Fitch Avenue Irvine, CA 92714 SCHEDULE A: LICENSED PROPERTY: An exclusive license to use the "PLANESCAPE" and "FORGOTTEN REALMS" trademarks and all copyrighted materials, including but not limited to, characters, locations and monsters, that are unique to TSR's "PLANESCAPE" and "FORGOTTEN REALMS" fantasy worlds. A non-exclusive license to use, solely in connection with LICENSED PRODUCTS bearing the "PLANESCAPE" or "FORGOTTEN REALMS" trademarks, the trademarks and copyrighted materials associated with, but not unique to, the "PLANESCAPE" and "FORGOTTEN REALMS" fantasy worlds, including without limitation, the "ADVANCED DUNGEONS & DRAGONS," "AD&D," "TSR," and "TSR Logo" trademarks. An exclusive sublicense to use any computer code for the presently existing NEVERWINTER NIGHTS game the copyright for which is owned by Strategic Simulations, Inc. only for so long as the existing NEVERWINTER NIGHTS game continues to be made available on the America Online network and only for the purpose of continuing the existing NEVERWINTER NIGHTS game. This license specifically excludes any other use of said computer code and in particular any use of the computer code in any modifications of or sequels to the existing NEVERWINTER NIGHTS game. This license also specifically excludes any computer code owned by any other party, including without limitation America Online, Inc. * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. SCHEDULE B: LICENSED PRODUCTS: Computer and video fantasy role-playing games for all personal computer and video game platforms known or unknown, including without limitation, coin- operated, cable, on-line, satellite and other electronic transmission systems. Cluebooks and "900" telephone numbers containing hints, clues, diagrams, maps or other material to assist players for said computer and video games. This license is exclusive only as to computer and video games bearing the "PLANESCAPE" or "FORGOTTEN REALMS" trademarks, and cluebooks and "900" telephone numbers for said computer and video games. Nothing in this AGREEMENT will prevent TSR from fully exploiting in any other manner its rights in the LICENSED PROPERTY. SCHEDULE C: TERRITORY: Worldwide SCHEDULE D: TERM: Commencing upon the date of the last party to sign the AGREEMENT; expiring four (4) years and six (6) months from the date of commencement. (The period from commencement to such expiration is called the "ORIGINAL TERM"). LICENSEE, at its option, and provided that LICENSEE is in compliance, and continues to comply, with the AGREEMENT, may extend the term for two (2) additional two (2) year periods (the "1st OPTION TERM" and "2ND OPTION TERM," respectively) upon written notice and payment of required advance to TSR at least one (1) year prior to the expiration of the: (1) ORIGINAL TERM to accept the 1st OPTION TERM; and (2) the 1ST OPTION TERM to accept the 2ND OPTION TERM. SCHEDULE E: ADVANCES: [*] due upon execution. For each game title initially released for play on on-line, cable, satellite, or other electronic transmission systems ("Electronic Product"), [*] upon such initial release and [*] upon any subsequent release of said game title other than as an Electronic Product. For title initially released other than as an Electronic Product, [*] upon such initial release. If LICENSEE has not paid TSR at least [*] in additional advances (over and above the advance due upon execution) [*] after the date of commencement, the difference between the amount of additional advances paid by LICENSEE and [*]. [*] due upon notification by LICENSEE that it will exercise the 1ST OPTION TERM. * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. [*] due upon notification by LICENSEE that it will exercise the 2ND OPTION TERM. [*] per cluebook title due upon initial shipment of that title. SCHEDULE F: MINIMUM GUARANTEE: [*] for the ORIGINAL TERM. [*] for the 1ST OPTION TERM. [*] for the 2ND OPTION TERM. SCHEDULE G: MARKETING DATE: [*] after commencement of the AGREEMENT. SCHEDULE H: ROYALTIES: Product Type Royalty Personal computer and coin operated [*] On-line, cable, satellite or other electronic [*] transmission system Home video game cartridges [*] Cluebooks [*] Currently unknown platforms not belonging in Negotiated in good faith any of the above categories Sublicensing Royalty On-line games other than the existing game [*] NEVERWINTER NIGHTS Existing NEVERWINTER NIGHTS game (excluding any [*] sequels) Products other than on-line games developed by [*] LICENSEE Products other than on-line games developed by [*] SUBLICENSEE (where LICENSEE does not take a substantial role in the development of a product) * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. SCHEDULE I: CREDIT: Trademark and copyright notice: [list all trademarks used] are trademarks of TSR, Inc. Used by Interplay Productions, Inc. under license from TSR, Inc. SCHEDULE J: NOTICES AND APPROVAL: TSR: LICENSEE: TSR, Inc. Interplay Productions, Inc. P.O. Box 756 17922 Fitch Avenue 201 Sheridan Springs Road Irvine, CA 92714 Lake Geneva, WI 53147 DESIGNATED PERSON: Marlene Vail DESIGNATED PERSON: Chuck Camps ALTERNATE PERSON: Debra Poutsch ALTERNATE PERSON: Phil Adam SCHEDULE K: PAYMENTS: TSR, Inc. P.O. Box 756 201 Sheridan Springs Road Lake Geneva, WI 53147 PAYMENT PERSON: Marlene D. Vail All other terms of the Computer Game License Agreement remain in full force and effect. The parties indicate their understanding and agreement with all of the foregoing by signing and dating this document in the space provided below. ACCEPTED AND AGREED: TSR: LICENSEE: TSR, Inc. Interplay Productions, Inc. By: /Willard Martens/ By: /Chris Kilpatrick/ Name: Willard D. Martens Name: Chris Kilpatrick Title: Chief Operating Officer Title: President Date: Effective August 1, 1996 Date: Effective August 1, 1996 * Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. EX-10.47 10 dex1047.txt 2ND AMEND TO LICENSE AGREEMENT EXHIBIT 10.47 SECOND AMENDMENT TO LICENSE AGREEMENT BETWEEN TSR, INC AND INTERPLAY PRODUCTIONS This Second Amendment To License Agreement is made effective this 8th day of March, 1998, by and between Interplay Entertainment Corp., as successor in interest to and doing business as, Interplay Productions, 16815 Von Karman Avenue, Irvine, California, a Delaware corporation ("Licensee") and TSR, Inc., 1801 Lind Avenue SW, Renton, Washington, a Wisconsin corporation ("Licensor"). WHEREAS, Licensor and Licensee entered into a certain License Agreement date as August 8, 1994 as amended (the "License Agreement"); and WHEREAS, Licensor and Licensee mutually wish to further amend the License Agreement as provided below; NOW THEREFORE, in exchange for mutual covenants set forth herein and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The License Agreement is hereby amended by inserting a new Schedule E: SCHEDULE E: ADVANCES: [*] due upon execution, which has been paid. For each game title initially released for play on on-line, cable, satellite, or other electronic transmission systems ("Electronic Product"), [*] upon such initial release and [*] upon any subsequent release of said game title other than as an Electronic Product. For each game title initially released other than as an Electronic Product, [*] upon such initial release. If LICENSEE has not paid TSR at least [*] in additional advances (over and above the advance due upon execution) [*] after the date of commencement, the difference between the amount of additional advances paid by LICENSEE and [*]. [*] due as follows upon notification LICENSEE that it will exercise the 1st OPTION TERM: [*]; [*]; [*]. [*] due upon notification by LICENSEE that it will exercise the 2nd OPTION TERM. [*] due upon notification by LICENSEE that it will exercise the 3RD OPTION TERM. [*] per clue book title due upon initial shipment of that title. *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 2. The License Agreement is hereby amended by inserting a new Schedule F: SCHEDULE F: MINIMUM GUARANTEE: [*] for the ORIGINAL TERM. The actual royalty earned and received by TSR during the entire first calendar quarter of 1999 shall be applied toward the MINIMUM GUARANTEE for the ORIGINAL TERM. [*] for the 1ST OPTION TERM. Only the actual royalty earned and received by TSR during the 1ST OPTION TERM minus the royalty amount from the commencement of the 1ST OPTION TERM to the end of first calendar quarter of 1999 shall be applied toward the MINIMUM GUARANTEE for the 1ST OPTION TERM. For the 2ND OPTION TERM, the MINIMUM GUARANTEE shall be based upon LICENSEE's election of the LICENSED PROPERTY and shall be as follows: [*] for the BALDUR'S GATE game(s); [*] for the NEVERWINTER NIGHTS game(s); and [*] for the TORMENT game(s). For the 3RD OPTION TERM, the MINIMUM GUARANTEE shall be based upon LICENSEE's election of the LICENSED PROPERTY and shall be as follows: [*] for the BALDUR'S GATE game(s); [*] for the NEVERWINTER NIGHTS game(s); and [*] for the TORMENT game(s). 3. The License Agreement is hereby amended by inserting a new Schedule A: SCHEDULE A: LICENSED PROPERTY: For the ORIGINAL TERM, LICENSED PROPERTY shall mean the following: An exclusive license to use the PLANESCAPE and FORGOTTEN REALMS trademarks and all copyrighted materials, including but not limited to, characters, locations and monsters, that are unique to TSR's PLANESCAPE and FORGOTTEN REALMS fantasy worlds. A non-exclusive license to use, solely in connection with LICENSED PRODUCTS bearing the PLANESCAPE or FORGOTTEN REALMS trademarks, the trademarks and copyrighted materials associated with, but not unique to, the PLANESCAPE and FORGOTTEN REALMS fantasy worlds, including without limitation, the ADVANCED DUNGEONS & DRAGONS, AD&D, TSR, and TSR Logo trademark. An exclusive sublicense to use any computer code for the presently existing NEVERWINTER NIGHTS game the copyright for which is owned by Strategic *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Simulations, Inc. only for so long as the existing NEVERWINTER NIGHTS game continues to be made available on the America Online network and only for the purpose of continuing the existing NEVERWINTER NIGHTS game. This license specifically excludes any other use of said computer code and in particular any use of the computer code in any modifications of or sequels to the existing NEVERWINTER NIGHTS game. This license also specifically excludes any computer code owned by any other party, including without limitation America Online, Inc. For 1ST OPTION TERM, the term LICENSED PROPERTY shall mean the following: An exclusive license to use BALDUR'S GATE as the title of a retail PC and/or home video game product and sequels; TORMENT as the title of a retail PC and/or home video game product and sequels; and NEVERWINTER NIGHTS as the title of a retail PC and/or home video game product, with subtitle to be mutually agreed upon. A non-exclusive license to use, solely in connection with LICENSED PRODUCTS bearing the BALDUR'S GATE, TORMENT, or NEVERWINTER NIGHTS trademarks, the trademarks and copyrighted materials associated with, but not unique to, the PLANESCAPE and FORGOTTEN REALMS fantasy worlds, including without limitation, the ADVANCED DUNGEONS & DRAGONS, AD&D, TSR, and TSR Logo trademark; provided, however, that Licensee's rights shall be exclusive with respect to computer software games primarily located in the Baldur's Gate and Neverwinter areas of the Forgotten Realms world. For purposes of clarification, Licensor may develop, manufacture, distribute, promote, license, and sell (and authorize any third party to do so) computer software games based in the Forgotten Realms world allowing players to venture into the Baldur's Gate or Neverw inter areas. Licensor shall not develop, manufacture, distribute, promote, license, or sell (nor authorize any third party to do so) any computer software game primarily located, based or focused in the Baldur's Gate or Neverwinter areas. For 2ND OPTION TERM and 3RD OPTION TERM, the term LICENSED PROPERTY shall mean the following: Upon written notification to TSR as set forth in Advances and Terms, the choice of an exclusive license to use BALDUR'S GATE as the title of a retail PC and/or home video game product and sequels; TORMENT as the title of a retail PC and/or home video game product and sequels; or NEVERWINTER NIGHTS as the title of a retail PC and/or home video game product with subtitle to be mutually agreed upon. All rights to the titles not selected by LICENSEE shall expire at the end of the applicable Term and revert to TSR. Consistent with the titles selected, a non-exclusive license to use, solely in connection with LICENSED PRODUCTS bearing the HALDUR'S GATE, TORMENT, or NEVERWINTER NIGHTS trademarks, the trademarks and copyrighted materials associated with, but not unique to, the PLANESCAPE and FORGOTTEN REALMS fantasy worlds, including without limitation, the ADVANCED DUNGEONS & DRAGONS, AD&D, TSR, and TSR Logo trademark; provided, however, that *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Licensee's rights shall be exclusive with respect to computer software games primarily located in the Baldur's Gate and Neverwinter areas of the Forgotten Realms world. For purposes of clarification, Licensor may develop, manufacture, distribute, promote, license, and sell (and authorize any third party to do so) computer software games based in the Forgotten Realms world allowing players to venture into the Baldur's Gate or Neverwinter areas. Licensor shall not develop, manufacture, distribute, promote, license, or sell (nor authorize any third party to do so) any computer software game primarily located, based or focused in the Baldur's Gate or Neverwinter areas. 4. The License Agreement is hereby amended by inserting a new Schedule B: SCHEDULE B: LICENSED PRODUCTS: Computer and video fantasy role-playing games for all personal computer and video game platforms known or unknown, including without limitation, coin- operated, cable, on-line, satellite and other electronic transmission Systems. For 1ST OPTION TERM, 2ND OPTION TERM, and 3RD OPTION TERM, the term LICENSED PRODUCTS shall be mean the following: Retail PC and/or home video game products which may include the ability for the consumer to utilize the retail game product to play the game via modem and over a local area network and shall include the right of Licensee to use, execute, transmit, perform and display the Licensed Product via an online network to enable users to play the Licensed Product free of charge (e.g. a "Battle.net" type network). Clue book and "900" telephone numbers containing hints, clues, diagrams, maps or other material to assist players for said computer and video games. Nothing in this Agreement will prevent TSR from flilly exploiting in any other manner its rights in the LICENSED PROPERTY. 5. The License Agreement is hereby amended by inserting a new Schedule D: SCHEDULE D: TERMS: Commencing upon the date of the last party to sign the AGREEMENT; expiring four (4) years and six (6) months from the date of commencement. (The file period from commencement to such expiration is called the "ORIGINAL TERM"). LICENSEE, at its option, and provided that LICENSEE is in compliance, and continues to comply with the AGREEMENT, may extend the term for three (3) additional two (2) year periods (the "1 ST OPTION TERM", "2ND OPTION TERM," and "3RD OPTION TERM," respectively) upon written notice and payment of required Advance to TSR at least one (1) year prior to the expiration of: (1) the ORIGINAL TERM to accept the 1ST OPTION TERM; (2) the 1ST OPTION TERM to accept the 2ND OPTION TERM; and (3) the 2ND OPTION TERM to accept the 3RD OPTION TERM. Notwithstanding the foregoing, *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. LICENSOR acknowledges that LICENSEE has provided timely notice to accept the 1ST OPTION TERM and shall make payment as set forth in Section 1 herein. Notwithstanding anything contained herein to the contrary, LICENSEE's rights to manufacture, distribute, promote, and sell each LICENSED PRODUCT released during the ORIGINAL TERM or any OEON TERM (if applicable) shall extend beyond the ORIGINAL TERM or any OPTION TERM (if applicable) for the Active Life of the LICENSED PRODUCT. "Active Life" shall mean the longer of: (i) two (2) years from the first commercial release of the LICENSED PRODUCT, or (ii) until such time as LICENSEE has failed to pay at least [*] in Royalties of the LICENSED PRODUCT in the previous calendar year but in no event shall the Active Life extend any right to manufacture, distribute, promote, or sell any new version or improvement to any LICENSED PRODUCT nor shall the Active Life extend the time to manufacture, distribute, promote, or sell any LICENSED PRODUCT beyond February 8, 2007. For purposes of the definition of the term Active Life, Royalties of the LICENSED PRODUCT shall only be considered paid if LICENSEE receives and reports as part of Net Sales an amount not less than [*] per stand alone unit; provided, however, LICENSED PRODUCT Royalties may be derived from other unit sales of LICENSED PRODUCT only if LICENSEE provides LICENSOR with a written request and details of such a sales program (e.g. OEM or compilations) and receives written approval from LICENSOR for the sales program. 6. The License Agreement is hereby amended by adding to EXHIBIT H (ROYALTIES): Advertising derived from on-line play of LICENSED PRODUCT [*] *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. IN WITNESS WHEREOF, the parties have executed this Second Amendment To License Agreement by their duly authorized officers as of the date first set forth above. Upon expiration of the Agreement, the parties will negotiate additional renewal terms in good faith. LICENSOR: LICENSEE: TSR, INC. INTERPLAY ENTERTAINMENT CORP. By: /Emily Arons/ By: /Christopher Kilpatrick/ Emily Arons Name: Christopher Kilpatrick V.P. Consumer Products Title: President *Portions omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. EX-23.1 11 dex231.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-KA, into Interplay Entertainment Corp.'s previously filed Registration Statements File Nos. 333-50254 and 333-60583 on Form S-8. /s/ Arthur Andersen LLP August 28, 2001 Orange County, California -----END PRIVACY-ENHANCED MESSAGE-----