-----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, QiCI+WX3FnxqMwBvBE8g5ZEKl8orNgwqsewlQ0KXoEfE6RE73B0fvaIG5wNxLkLy YY+KxeIEq32Ly+iYwZiwrg== 0001017062-98-002365.txt : 19981124 0001017062-98-002365.hdr.sgml : 19981124 ACCESSION NUMBER: 0001017062-98-002365 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981123 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-Q SEC ACT: SEC FILE NUMBER: 000-24363 FILM NUMBER: 98757719 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-Q 1 FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24363 Interplay Entertainment Corp. (Exact name of the registrant as specified in its charter) Delaware 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16815 Von Karman Avenue, Irvine, California 92606 (Address of principal executive offices) (949) 553-6655 (Registrant's telephone number, including area code) 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 [_] No [X] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date. Class Issued and Outstanding at November 20, 1998 ----- ------------------------------------------- Common Stock, $0.001 par value 18,236,329 INTERPLAY ENTERTAINMENT CORP. INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 Page Number ------ Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 3 Unaudited Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 1998 and 1997 4 Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) as of September 30, 1998 (unaudited) and December 31, 1997 5 Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 1998 and 1997 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II. Other Information Item 1. Legal Proceedings 31 Item 2. Exhibits and Reports on Form 8-K 31 Signatures 32 Exhibit Index 33 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements -------------------- INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data)
September 30, December 31, 1998 1997 ------------- ------------ (unaudited) ASSETS ------ Current Assets: Cash and cash equivalents $ 1,230 $ 1,536 Trade receivables, net of allowances of $11,455 and $14,461, at Sept. 30, 1998 and Dec. 31, 1997 respectively 45,294 34,684 Inventories 5,821 6,338 Prepaid licenses and royalties 18,078 12,628 Income taxes receivable -- 1,427 Deferred income taxes 7,477 7,792 Other 4,766 4,218 -------- -------- Total current assets 82,666 68,623 -------- -------- Property and Equipment, net 6,205 7,026 -------- -------- Other Assets 1,891 2,172 -------- -------- $ 90,762 $ 77,821 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current Liabilities: Accounts payable $ 23,838 $ 17,121 Accrued expenses and other expenses 19,772 22,549 Current portion of long-term debt 25,464 14,767 Income taxes payable 254 570 -------- -------- Total current liabilities 69,328 55,007 -------- -------- Long-Term Debt, net of current portion 205 23,387 -------- -------- Deferred Income Taxes 725 434 -------- -------- Minority Interest 178 260 -------- -------- Commitments and Contingencies Stockholders' Equity (Deficit): Preferred stock, $.001 par value-- Authorized--5,000,000 shares Issued and outstanding--none -- -- Common stock, $.001 par value-- Authorized 50,000,000 shares Issued and outstanding--18,236,329 and 10,951,828, respectively 18 11 Paid-in Capital 51,472 18,408 Retained earnings (accumulated deficit) (31,468) (19,877) Cumulative translation adjustment 304 191 -------- -------- Total stockholders' equity (deficit) 20,326 (1,267) -------- -------- $ 90,762 $ 77,821 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except share and per share data) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net revenues $ 24,504 $ 23,833 $ 106,225 $ 66,745 Cost of goods sold 19,141 14,153 58,653 41,602 ---------- ---------- ---------- ---------- Gross profit 5,363 9,680 47,572 25,143 ---------- ---------- ---------- ---------- Operating expenses: Marketing and sales 9,797 5,851 27,411 19,085 General and administrative 3,739 2,948 9,516 10,050 Product development 6,615 5,312 18,555 16,616 ---------- ---------- ---------- ---------- Total operating expenses 20,151 14,111 55,482 45,751 Operating loss (14,788) (4,431) (7,910) (20,608) Interest and other expense (811) (1,050) (3,673) (2,088) ---------- ---------- ---------- ---------- Loss before income taxes (15,599) (5,481) (11,583) (22,696) Provision (benefit) for income taxes (468) -- 8 (1,782) ---------- ---------- ---------- ---------- Net loss $ (15,131) $ (5,481) $ (11,591) $ (20,914) ========== ========== ========== ========== Net loss per share: Basic and diluted $ (0.83) $ (0.49) $ (0.85) $ (1.88) ========== ========== ========== ========== Weighted average number of common shares outstanding: Basic and diluted 18,230,673 11,130,422 13,591,820 11,125,795 ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (amounts in thousands, except share data)
Common Stock Retained Cumulative ------------------ Paid-in Earnings Translation Shares Amount Capital (Deficit) Adjustment Total ---------- ------ ------- --------- ----------- --------- Balance, December 31, 1997 10,951,828 $11 $18,408 $(19,877) $191 $ (1,267) Issuance of common stock 1,200 -- 10 -- -- 10 Compensation for stock options granted -- -- 76 -- -- 76 Net income -- -- -- 2,849 -- 2,849 Translation adjustment -- -- -- -- 1 1 ---------- --- ------- -------- ---- -------- Balance, March 31, 1998 (unaudited) 10,953,028 11 18,494 (17,028) 192 1,669 Issuance of common stock 5,000,000 5 24,673 -- -- 24,678 Compensation for stock options granted -- -- 42 -- -- 42 Exercise of warrants 2,272,417 2 8,581 -- -- 8,583 Net income -- -- -- 691 -- 691 Translation adjustment -- -- -- -- (1) (1) ---------- --- ------- -------- ---- -------- Balance, June 30, 1998 (unaudited) 18,225,445 18 51,790 (16,337) 191 35,662 Compensation for stock options granted -- -- 16 -- -- 16 Exercise of options 10,884 -- 5 -- -- 5 Common stock issuance costs -- -- (339) -- -- (339) Net income -- -- -- (15,131) -- (15,131) Translation adjustment -- -- -- -- 113 113 ---------- --- ------- -------- ---- -------- Balance, September 30, 1998 (unaudited) 18,236,329 $18 $51,472 $(31,468) $304 $ 20,326 ========== === ======= ======== ==== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited)
Nine Months Ended September 30, -------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net income (loss) $(11,591) $(20,914) Adjustments to reconcile net income (loss) to the cash provided by (used in) operating activities-- Depreciation and amortization 2,634 2,273 Noncash expense for stock options 134 230 Deferred income taxes 606 -- Minority interest in earnings (loss) of subsidiary (82) -- Changes in assets and liabilities: Trade receivables (10,605) 3,573 Inventories 517 2,466 Income taxes receivable 1,427 -- Other current assets (548) 250 Other assets (5) (1,094) Prepaid licenses and royalties (5,450) 2,066 Accounts payable 6,717 (6,052) Accrued expenses (2,777) 8,153 Income taxes payable (316) 243 -------- -------- Net cash used in operating activities (19,339) (8,806) -------- -------- Cash flows from investing activities: Purchase of property and equipment (1,527) (1,330) -------- -------- Net cash used in investing activities (1,527) (1,330) -------- -------- Cash flows from financing activities: Net borrowings on line of credit 1,956 6,084 Issuance of Subordinated Secured Promissory Notes and Warrants -- 1,573 Repayment of Subordinated Secured Promissory Notes and Warrants (6,072) -- Net proceeds from issuance of common stock 24,349 -- Other financing 214 204 -------- -------- Net cash provided by financing activities 20,447 7,861 -------- -------- Effect of exchange rate changes on cash and cash equivalents 113 -- -------- -------- Net decrease in cash and cash equivalents (306) (2,275) Cash and cash equivalents, beginning of year 1,536 3,135 -------- -------- Cash and cash equivalents, end of year $ 1,230 $ 860 ======== ======== Supplemental cash flow information: Cash paid during the period for: Interest $ 3,659 $ 2,294 ======== ======== Income taxes $ 3 $ -- ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Amounts and disclosures as of September 30, 1998 and 1997 and for each of the periods then ended are unaudited (amounts in thousands, except share and per share data) Note 1. Basis of Presentation The accompanying interim condensed consolidated financial statements of Interplay Entertainment Corp. and its subsidiaries (the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the eight month period ended December 31, 1997 included in the Final Prospectus dated June 19, 1998 which was part of the Company's Registration Statement on Form S-1 as amended (Registration Number 333-48473) as filed with the Securities and Exchange Commission. Reclassifications Certain reclassifications have been made to the prior year's financial statements to conform to classifications used in the current period. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" effective for fiscal years beginning after December 15, 1998, which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Effective January 1, 1998 the Company adopted SFAS No. 130. Comprehensive income for the Company would include the impact of foreign currency translation adjustments which were immaterial for the periods reported including the three month period ended September 30, 1998 for which the impact of foreign currency adjustments were $113,000. Revenue Recognition Revenues are recorded when products are delivered to customers in accordance with Statement of Position (SOP) 91-1, Software Revenue Recognition. For those agreements that provide the customers the right to multiple copies in exchange for guaranteed amounts, revenue is recognized at the delivery of the product master or the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. The Company is generally not contractually obligated to accept returns, except for defective product. However, the Company permits customers to return or exchange product and may provide price protection on products unsold by a customer. In accordance with SFAS No. 48, revenue is recorded net of allowance for estimated returns, exchanges, markdowns, price concessions, and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. The amount of reserves ultimately required could differ materially in the near term from the amounts included in the accompanying consolidated financial statements. Postcontract customer support provided by the Company is limited to telephone support. These costs are not material and are charged to expenses as incurred. 7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Amounts and disclosures as of September 30, 1998 and 1997 and for each of the periods then ended are unaudited (amounts in thousands, except share and per share data) Note 2. Prepaid Licenses and Royalties Prepaid licenses and royalties consist of payments for intellectual property rights, payments to celebrities and sports leagues and advanced royalty payments to outside developers. In addition, such costs include certain other outside production costs generally consisting of film cost and amounts paid for digitized motion data with alternative future uses. Payments to developers represent contractual advance payments made for future royalties. These payments are contingent upon the successful completion of milestones, which generally represent specific deliverables. Royalty advances are generally 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 title at a rate based upon the number of units shipped. Management evaluates the future realization of such costs quarterly and charges to cost of goods sold any amounts that management deems unlikely to be fully realized through future sales. Such costs are classified as current and noncurrent assets based upon estimated net product sales. Note 3. Inventories Inventories consist of the following:
September 30, December 31, 1998 1997 ------------- ------------ Packaged software $3,595 $4,171 CD-ROMs, cartridges, manuals, packaging and supplies 2,226 2,167 ------ ------ $5,821 $6,338 ====== ======
8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Amounts and disclosures as of September 30, 1998 and 1997 and for each of the periods then ended are unaudited (amounts in thousands, except share and per share data) Note 4. Long-Term Debt Long-term debt consists of the following:
September 30, December 31, 1998 1997 ------------- ------------ Subordinated Secured Promissory Notes $ - $ 14,655 Loan Agreement 25,202 23,246 Other 467 253 -------- -------- 25,669 38,154 Less--current portion (25,464) (14,767) -------- -------- $ 205 $ 23,387 ======== ========
Subordinated Secured Promissory Notes From October 1996 through February 1997, the Company issued $14,803 in Subordinated Secured Promissory Notes ("Notes") and nondetachable Warrants to purchase Common Stock, of which employees, officers, and directors of the Company held $2,600 of the total Notes outstanding. The principal amount of the Notes was $14,655 and the purchase price of the Warrants was $148. The amount paid for the Warrants approximates management's estimate of the fair market value of the Warrants at the date of issuance and is included in paid-in capital in the accompanying condensed consolidated balance sheets. The Notes provided for interest at a rate of 12.0 percent per year, payable quarterly, beginning May 1, 1997. Interest expense related to the Notes was $866 for the nine months ended September 30, 1998. Each Warrant holder had the right to purchase from the Company the number of shares of Common Stock equal to the investor's aggregate investment (including Notes and Warrants) divided by the product of 0.70 multiplied by (a) the initial public offering ("IPO") price per share or (b) in the event of a Sales Transaction, the fair market value per share as determined in the Sales Transaction. In accordance with the terms of the Notes, the Company requested that each holder elect to either convert the outstanding principal amount to Common Stock upon the closing of the IPO or receive full payment in cash from the proceeds of the IPO. At the IPO completion, the holders of approximately $8,748 of Notes and Warrants elected to exercise their Warrants by converting their Notes to Common Stock. Remaining Note holders with a balance of approximately $6,349 requested payment in cash inclusive of interest of $277 which amount of principal and interest was paid by the Company in July 1998. 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Amounts and disclosures as of September 30, 1998 and 1997 and for each of the periods then ended are unaudited (amounts in thousands, except share and per share data) Loan Agreement In June 1997, the Company entered into a Loan and Security Agreement (Loan Agreement) with a financial institution which was amended in February 1998. Borrowings under the Loan Agreement bear interest at LIBOR (5.72 percent at December 31, 1997 and 5.69 percent at September 30, 1998) plus 4.87 percent (10.59 percent at December 31, 1997 and 10.56 percent at September 30, 1998). The agreement provides for a line of credit based in part on qualified receivables and inventory. Borrowings under this Loan Agreement may be up to a maximum of $35,000 through August 30, 1998; $30,000 from August 31 to December 30, 1998; and $25,000 thereafter. Within the total credit limits, the Company may borrow up to $10,000 in excess of its borrowing base through August 1998 and up to $5,000 in excess of its borrowing base thereafter through December 30, 1998. The line of credit is secured by cash, accounts receivable and inventory and by a security interest in certain of the Company's assets and expires May 31, 1999. The line of credit became a current liability in June 1998. See Note 7. Note 5. Net Loss Per Share Basic net loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options and Common Stock Warrants using the treasury stock method. The following table summarizes the computation of Basic and Diluted net loss per share:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Basic EPS Computation: Net loss $ (15,131) $ (5,481) $ (11,591) $ (20,914) Weighted average common shares outstanding 18,230,673 11,130,422 13,591,820 11,125,795 Basic net loss per share $ (0.83) $ (0.49) $ (0.85) $ (1.88) Diluted EPS Computation: Net loss $ (15,131) $ (5,481) $ (11,591) $ (20,914) Adjustments to net loss -- $ -- $ -- $ -- ----------- ----------- ----------- ----------- Diluted net loss $ (15,131) $ (5,481) $ (11,591) $ (20,914) Weighted average common shares outstanding 18,230,673 11,130,422 13,591,820 11,125,795 Stock Options, Subordinated Notes and Warrants -- -- -- -- ----------- ----------- ----------- ----------- Diluted common shares outstanding 18,230,673 11,130,422 13,591,820 11,125,795 Diluted net loss per share $ (0.83) $ (0.49) $ (0.85) $ (1.88)
10 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Amounts and disclosures as of September 30, 1998 and 1997 and for each of the periods then ended are unaudited (amounts in thousands, except share and per share data) Note 6. Initial Public Offering The Company effected a registration with the Securities and Exchange Commission on Form S-1, Registration No. 333-48473 (the "Registration Statement"), whereby the Company registered up to 5,750,000 shares of its Common Stock. On June 18, 1998 the Registration Statement was declared effective by the Securities and Exchange Commission. On June 24, 1998, the Company completed its initial public offering of 5,000,000 shares of Common Stock, at $5.50 per share, that raised approximately $24,236, net of expenses of $3,264. In addition, in connection with the offering, 750,000 shares of Common Stock of the Company were sold by a selling stockholder at $5.50 per share, for which the company received no proceeds. An adjustment was made in the quarter ended September 30, 1998 for $339 in registration costs incurred in connection with the initial public offering in excess of costs recognized in the quarter ended June 30, 1998. Note 7. Subsequent Event In November 1998, the Company amended its line of credit with a financial institution to provide for a $37.5 million maximum credit limit through May 31, 1999, based in part on qualifying receivables and inventory. Within the total credit limit, the Company may borrow up to $14.0 million in excess of its borrowing base through May 31, 1999. Under the amended line of credit, the Company is required to deposit with the financial institution cash collateral of $1.0 million on each of February 15, March 15 and April 15, 1999, which will effectively reduce the total amounts available for borrowing under the line to $36.5 million as of February 15, 1999, $35.5 million as of March 15, 1999 and $34.5 million as of April 15, 1999. The amended line of credit also provides for a personal guarantee by the Company's Chairman and Chief Executive Officer, Brian Fargo, in the amount of $5.0 million secured by certain of Mr. Fargo's personal assets. As consideration for making such guarantee, Mr. Fargo is receiving warrants to purchase 400,000 shares of the Company's Common Stock (the "Warrants") at an exercise price of $3.00 per share. The Warrants have a three year term and include a cashless exercise provision but Mr. Fargo will not have registration rights with respect to the shares issuable upon exercise of the Warrants. In addition, the Warrants are not exercisable in the event the Company enters into an agreement to merge or combine the Company within six months after the issuance date of the Warrants. The shares issuable upon exercise of the Warrants are subject to the twelve month lockup agreement Mr. Fargo entered into in connection with the Company's initial public offering. In connection with the issuance of the Warrants, the Company is required to record an expense equal to the fair market value of the Warrants, which is estimated to be approximately $0.3 million, with such expense being amortized as additional debt cost over the term of the guarantee. In addition, the issuance of such Warrants by the Company may result in dilution to stockholders. The line of credit expires May 31, 1999. Based upon certain assumptions, including without limitation, the Company's ability to achieve anticipated operating results. The Company believes that it will be able to renew its line of credit or obtain alternate financing on reasonable terms. However, there can be no assurance that the assumptions relied on by the Company will prove correct or that the Company will be able to renew or replace its line of credit or obtain alternate financing on reasonable terms, if at all. The Company is currently in compliance with the terms of its line of credit. In November 1998, the Company entered into certain product license and distribution agreements which in the aggregate provide for the Company to receive approximately $9.7 million over the next ninety days. The Company believes that funds available under its line of credit, amounts to be received under various product license and distribution agreements and anticipated funds from operations, if any, will be sufficient to satisfy the Company's projected working capital and capital expenditure needs and debt obligations in the normal course of business at least through the expiration of its line on May 31, 1999. Based upon certain assumptions, including without limitation, the Company's ability to achieve anticipated operating results, the Company believes that it will be able to renew its line of credit or obtain alternate financing on reasonable terms. However, there can be no assurance that the assumptions relied on by the Comapny will prove correct or the Company will be able to renew or replace its line of credit on satisfactory terms, if at all. Further, and there can be no assurance that the Company will not be required to raise additional working capital through debt or equity financing during such period. If the Company is required to raise additional working capital, there can be no assurance that the Company will be able to raise such additional working capital on acceptable terms, if at all. The issuance of additional debt securities would likely result in significant additional interest expense, and the issuance of additional equity securities would likely result in material dilution to stockholders. In the event the Company is unable to renew its line of credit or raise additional working capital, further measures would be necessary including, without limitation, the sale or consolidation of certain operations, the delay, cancellation or scale back of product development and marketing programs and other actions. No assurance can be given that such measures would not materially adversely affect the Company's ability to develop and publish commercially viable titles and compete effectively in its markets, or that such measures would be sufficient to generate operating profits in fiscal 1998 and beyond or would not negatively impact the Company's operating results in future periods. Certain of such measures may require third party consents or approvals, including the Company's bank, and there can be no such assurance that such consents or approvals can be obtained. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- Cautionary Statement This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and such forward-looking statements are subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q except for historical information may be deemed to be forward- looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, as well as on certain assumptions. For example, any statements regarding future cash flow, financing activities, cost reduction measures, compliance with the Company's line of credit and an extension or replacement of such line are forward-looking statements and there can be no assurance that the Company will generate positive cash flow in the future or that the Company will be able to obtain financing on satisfactory terms, if at all, or that any cost reductions effected by the Company will be sufficient to offset any negative cash flow from operations or that the Company will remain in compliance with its line of credit or be able to renew or replace such line. Additional risks and uncertainties include possible delays in the completion of products, the possible lack of consumer appeal and acceptance of products released by the Company, fluctuations in demand, lost sales because of the rescheduling of products launched or orders delivered, that the Company's markets will continue to grow, that the Company's products will remain accepted within their respective markets, that competitive conditions within the Company's markets will not change materially or adversely, that the Company will retain key development and management personnel, that the Company's forecasts will accurately anticipate market demand, that there will be no material adverse change in the Company's operations or business. Additional factors that may affect future operating results are discussed in more detail in "Certain Factors that May Affect the Company's Business and Future Results," below as well as in the final Prospectus dated June 19, 1998 which is included in the Company's Registration Statement on Form S-1 as amended (Registration Number 333-48473) on file with the Securities and Exchange Commission. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements, and the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. In addition, risks, uncertainties and assumptions change as events or circumstances change. The Company disclaims any obligation to publicly release the results of any revisions to these forward- looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC or otherwise to revise or update any oral or written forward-looking statement that may be made from time to time by or on behalf of the Company. The information contained in this Form 10-Q is not a complete description of the Company's business or the risks associated with an investment in the Company. Readers are urged to carefully review and consider the various disclosures made by the Company in this Report and in the Company's 12 other filings with the SEC, including its Final Prospectus, that attempt to advise interested parties of certain risks, uncertainties and other factors that may affect the Company's business. General The Company commenced operations in 1983, and operated as an independent development studio until 1988, creating interactive entertainment software games for publishers such as Electronic Arts and Activision. In 1988, the Company began publishing software through an affiliate label relationship with Activision, pursuant to which Activision distributed the Company's software in North America. The Company began publishing and distributing its own interactive entertainment software for both PCs and video game consoles in 1992 and has continued to build its publishing and distribution infrastructure since that date. In addition to developing products through its internal product development group, the Company publishes titles developed by third party interactive entertainment software developers. The Company derives net revenues primarily from direct sales of interactive entertainment software for PCs and video game consoles to retailers and mass merchants, from indirect sales to software distributors in North America and internationally, from the distribution by the Company on an affiliate label basis of titles published by third parties, and from direct sales to end-users through the Company's catalogs and the Internet. The Company also derives royalty-based revenues from licensing arrangements, from the sale of products by third party distributors in international markets, and from OEM bundling transactions. The Company recognizes net revenues from the sale of its products upon shipment. Subject to certain limitations, the Company permits customers to obtain exchanges within certain specified periods and provides price protection on certain unsold merchandise. Net revenues from product sales are reflected after deducting an allowance for returns, markdowns and price protection. With respect to license agreements which provide customers the right to multiple copies in exchange for guaranteed amounts, net revenues are recognized upon delivery of the product master or the first copy as long as no other significant vendor obligations exist. Per copy royalties on sales which exceed the guarantee are recognized as earned. In order to expand the Company's distribution channels and engage in software development in overseas markets, in 1995 the Company established operations in the United Kingdom and in Japan. In July 1997, the Company initiated a licensing strategy in Japan and terminated its operations there. In January 1997, the Company formed a wholly owned subsidiary, Interplay OEM, Inc. ("Interplay OEM"), which had previously operated as a division of the Company. Interplay OEM distributes the Company's interactive entertainment software titles, as well as those of other software publishers, to computer hardware and peripheral device manufacturers for use in bundling arrangements. The Company also derives net revenues from the licensing of certain of its intellectual properties and certain of its products to third parties for distribution in markets through channels which are outside the Company's primary focus. The Company expects that OEM, royalty and licensing net revenues may decline, both in dollars and as a percentage of net revenues, as a larger proportion of OEM, royalty and licensing net revenues are generated from royalty-based licensing transactions, as opposed to the shipment of finished goods, and as the OEM channel of distribution becomes more competitive. Cost of goods sold related to PC and video games 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 represent third party licensing fees and royalties paid by the Company. Typically, cost of goods sold as a 13 percentage of net revenues for video game console products and affiliate label products are higher than cost of goods sold as a percentage of net revenues for PC based products due to the relatively higher manufacturing and royalty costs associated with these products. Also included in the cost of goods sold is the amortization of prepaid royalty and license fees paid to third party software developers. Prepaid royalties are expensed over a period of six months from initial shipment. The Company evaluates the likelihood of future realization of prepaid royalties quarterly, on a product by product basis, and charges cost of goods sold for any amounts that it deems unlikely to be realized through future product sales. Effective May 1, 1997, the Company changed its fiscal year end from April 30 to December 31. The Company's operating results have fluctuated significantly in the past and will likely fluctuate significantly in the future, both on a quarterly and an annual basis. A number of factors may cause or contribute to such fluctuations, and many of such factors are beyond the Company's control. There can be no assurance that the Company will be profitable in any particular period. It is likely that the Company's operating results in one or more future periods will fail to meet or exceed the expectations of security analysts or investors. Results of Operations The following table sets forth certain selected condensed consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------ ---------------------------------------------- 1998 1997 1998 1997 -------------------- ------------------- ----------------------- -------------------- % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues -------- -------- ------- -------- --------- -------- ------- --------- Net revenues $ 24,504 100.0% $23,833 100.0% $ 106,225 100.0% $ 66,745 100.0% Cost of goods sold 19,141 78.1% 14,153 59.4% 58,653 55.2% 41,602 62.3% Gross profit 5,363 21.9% 9,680 40.6% 47,572 44.8% 25,143 37.7% -------- -------- ------- -------- --------- -------- ------- --------- Operating expenses: Marketing and sales 9,797 40.0% 5,851 24.5% 27,411 25.8% 19,085 28.6% General and administrative 3,739 15.2% 2,948 12.4% 9,516 9.0% 10,050 15.1% Product development 6,615 27.0% 5,312 22.3% 18,555 17.4% 16,616 24.9% Total operating expenses 20,151 82.2% 14,111 59.2% 55,482 52.2% 45,751 68.6% -------- -------- ------- -------- --------- -------- ------- --------- Operating loss (14,788) (60.3%) (4,431) (18.6%) (7,910) (7.4%) (20,608) (30.9%) Interest and other expense (811) (3.3%) (1,050) (4.4%) (3,673) (3.5%) (2,088) (3.1%) -------- -------- ------- -------- --------- -------- ------- --------- Loss before income taxes (15,599) (63.6%) (5,481) (23.0%) (11,583) (10.9%) (22,696) (34.0%) Provision (benefit) for income taxes (468) (1.9%) -- 0.0% 8 0.0% (1,782) (2.7%) Net loss $(15,131) (61.7%) $(5,481) (23.0%) ($11,591) (10.9%) $(20,914) (31.3%) ======== ======== ======= ======== ========= ======== ======== ========= Net revenues by segment: North America $ 15,472 63.1% $15,694 65.8% $ 63,379 59.6% $ 32,730 49.0% International 7,035 28.7% 3,477 14.6% 28,337 26.7% 23,497 35.2% OEM, royalty and licensing 1,997 8.2% 4,662 19.6% 14,509 13.7% 10,518 15.8% -------- -------- ------- -------- --------- -------- ------- --------- $ 24,504 100.0% $23,833 100.0% $ 106,225 100.0% $ 66,745 100.0% ======== ======== ======= ======== ========= ======== ======== ========= Net revenues by platform: Personal computer $ 7,657 31.2% $16,295 68.3% $ 52,643 49.5% $ 42,235 63.2% Video game console 14,850 60.6% 2,876 12.1% 39,073 36.8% 13,992 21.0% OEM, royalty and licensing 1,997 8.2% 4,662 19.6% 14,509 13.7% 10,518 15.8% -------- -------- ------- -------- --------- -------- ------- --------- $ 24,504 100.0% $23,833 100.0% $ 106,225 100.0% $ 66,745 100.0% ======== ======== ======= ======== ========= ======== ======== =========
14 Net Revenues Net revenues for the three months ended September 30, 1998 increased 2.8% to $24.5 million from $23.8 million in the comparable 1997 quarter. North America net revenues decreased slightly to $15.5 million, or 63.1% of net revenues, from $15.7 million, or 65.8% of net revenues, in the 1997 quarter. International net revenues increased to $7.0 million, or 28.7% of net revenues, from $3.5 million, or 14.6% of net revenues in the 1997 quarter. OEM, royalty and licensing net revenues decreased to $2.0 million, or 8.2% of net revenues, in the 1998 quarter from $4.7 million, or 19.6% of net revenues, in the 1997 quarter. Net revenues for the nine months ended September 30, 1998 increased 59.2% to $106.2 million from $66.7 million in the comparable 1997 period. North America net revenues increased to $63.4 million, or 59.6% of net revenues from $32.7 million, or 49.0% of net revenues, in the 1997 period. International net revenues increased to $28.3 million, or 26.7% of net revenues, from $23.5 million, or 35.2% of net revenues, in the 1997 period. OEM, royalty and licensing net revenues increased to $14.5 million, or 13.7% of net revenues, in the 1998 period from $10.5 million, or 15.8% of net revenues, in the 1997 period. The moderate increase in net revenues for the three months ended September 30, 1998 was primarily due to increased title releases offset by a high level of product returns and markdowns. The increase in net revenues for the nine months ended September 30, 1998 was primarily due to increased title releases across multiple platforms and resulting increases in unit sales volume in the 1998 periods, including significant title releases, such as Caesars Palace II (PlayStation), Crime Killer (PlayStation), Die By The Sword (PC), Descent: Freespace The Great War (PC), Heart of Darkness (PlayStation), VR Sports Powerboat Racing (PC and PlayStation), Redneck Deer Huntin' (PC), Redneck Rides Again (PC), VR Baseball `99 (PlayStation), and Wild 9 (PlayStation). The increase in international net revenues was due primarily to increased sales in Europe offset in part by decreased sales in Asia. The Company expects that OEM, royalty and licensing net revenues may continue to decline, both in dollars and as a percentage of net revenues during the remainder of 1998 as a larger proportion of OEM, royalty and licensing net revenues are generated from royalty-based licensing transactions, as opposed to the shipment of finished goods, and as such distribution channels become more competitive. Cost of Goods Sold; Gross Margin Cost of goods sold increased 35.2% in the three months ended September 30, 1998 to $19.1 million, or 78.1% of net revenues, from $14.2 million, or 59.4% of net revenues in the comparable 1997 quarter. Gross margin decreased to 21.9% in the 1998 quarter from 40.6% in the 1997 quarter. Cost of goods sold increased 41.0% in the nine months ended September 30, 1998 to $58.7 million, or 55.2% of net revenues, from $41.6 million, or 62.3% of net revenues, in the comparable 1997 period. Gross margin increased to 44.8% in the 1998 period from 37.7% in the 1997 period. The decrease in gross margin during the three months ended September 30, 1998 was primarily a result of increased product returns and markdowns and the change in the product mix from higher margin PC titles to lower margin console titles. The increase in gross margin during the nine months ended September 30, 1998 was primarily attributable to increased sales of certain higher margin PC products during the period, offset in part by sales of video game console products, which generally have lower margins. The 1997 periods also included the effects of additional write-offs of prepaid royalties relating to titles or platform versions of titles which had been canceled or which were expected to achieve lower unit sales than were originally anticipated. 15 Operating Expenses Total operating expenses increased 42.8% to $20.2 million, or 82.2% of net revenues, in the three months ended September 30, 1998 from $14.1 million, or 59.2% of net revenues, for the comparable 1997 quarter. Total operating expenses increased 21.3% to $55.5 million, or 52.2% of net revenues, in the nine months ended September 30, 1998 from $45.8 million, or 68.6% of net revenues, for the comparable 1997 period. Marketing and Sales. Marketing and sales expenses primarily include advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services, fulfillment and other costs. Marketing and sales expenses increased 67.4% to $9.8 million, or 40.0% of net revenues, for the three months ended September 30, 1998 from $5.9 million, or 24.5% of net revenues for the comparable 1997 quarter and increased 43.6% to $27.4 million, or 25.8% of net revenues, for the nine months ended September 30, 1998 from $19.1 million, or 28.6% of net revenues, for the comparable 1997 period. The increases in absolute dollars were primarily attributable to increased advertising and other marketing costs associated with the increase in major titles launched and products sold during the 1998 period. The increase as a percentage of net revenues for the three months ended September 30, 1998 was primarily attributable to increased advertising and commissions on product releases in the U.S. and the European markets. The decrease as a percentage of net revenues for the nine months ended September 30, 1998 was primarily attributable to operating efficiencies achieved as a result of the increased net revenues base. The Company expects that in future periods marketing and sales expenses in future periods will increase in absolute dollars, but may vary as a percentage of net revenues. General and Administrative. General and administrative expenses primarily include administrative personnel expenses, facilities costs, professional expenses and other overhead charges. General and administrative expenses increased 26.8% to $3.7 million, or 15.2% of net revenues, in the three months ended September 30, 1998 from $2.9 million, or 12.4% of net revenues in the comparable 1997 quarter and decreased 5.3% to $9.5 million, or 9.0% of net revenues, in the nine months ended September 30, 1998 from $10.1 million, or 15.1% of net revenues, in the comparable 1997 period. The increase in both absolute dollars and as a percentage of net revenues in the three months ended September 30, 1998 was primarily due to increased operations costs and the provision for uncollectible amounts owed to the Company by Engage Games Online, which is majority owned by the Company's Chairman and Chief Executive Officer. The Company may in the future be required to make additional payments of approximately $0.5 million in the aggregate under an equipment lease to which the Company is a co-lessee with Engage, although the Company is attempting to mitigate this expense by using or subleasing a portion of the equipment. The decrease in absolute dollars in the nine months ended September 30, 1998 was primarily attributable to lower overhead costs offset in part by increased personnel and operations costs and facilities charges in North America and Europe in support of increased net revenues. The decrease as a percentage of net revenues in the nine months ended September 30, 1998 was primarily attributable to operating efficiencies gained as a result of an increased net revenues base. The Company expects that in future periods general and administrative expenses will increase in absolute dollars, but may vary as a percentage of net revenues. Product Development. Product development expenses, which primarily include personnel and support costs, are charged to operations in the period incurred. Product development expenses increased 24.5% to $6.6 million, or 27.0% of net revenues, in the three month period ended September 30, 1998 from $5.3 million, or 22.3% of net revenues, in the comparable 1997 quarter and increased 11.7% to $18.6 million, or 17.4% of net revenues, in the nine months ended September 30, 1998 from $16.6 million, or 24.9% of net revenues, in the comparable 1997 period. The increases in absolute dollars were primarily due to the increase in the number of products under development, offset in part by cost 16 efficiencies achieved as a result of the reorganization of the development process. The increase as a percentage of net revenues in the three months ended September 30, 1998 was primarily due to higher labor and operations costs combined with a less than expected increase in net revenues base. The decrease as a percentage of net revenues in the nine months ended September 30, 1998 primarily reflected cost savings and operating efficiencies gained as a result of increased net revenues. The Company expects that in future periods product development expenses will increase in absolute dollars, but may vary as a percentage of net revenues. Other Expense Other expense for the three- and nine-month periods ended September 30, 1998 primarily included interest expense on the Company's bank line of credit and Subordinated Secured Promissory Notes. Other expense decreased to $0.8 million in the three months ended September 30, 1998 from $1.1 million in the comparable 1997 quarter and increased to $3.7 million in the nine months ended September 30, 1998 from $2.1 million in the comparable 1997 period. The decrease in the three months ended September 30, 1998 was primarily due to decreased interest expense resulting from the repayment of the Subordinated Secured Promissory Notes and the reduction of the outstanding balance of the bank line of credit from the proceeds of the IPO in June 1998. The increase in the nine months ended September 30, 1998 was primarily due to increased borrowings under the Company's line of credit to support increased working capital requirements prior to completion of the IPO and interest on the Subordinated Secured Promissory Notes. Provision (Benefit) for Income Taxes The Company recorded a tax benefit of $0.5 million in the three months ended September 30, 1998, reversing the tax provision recorded earlier in the year based on net income. No tax benefit was recorded in the 1997 quarter due to the uncertainty of realization in future periods. The Company recorded a tax provision of $0.01 million in the nine months ended September 30, 1998, compared to a tax benefit of $1.8 million in the comparable 1997 period. Liquidity and Capital Resources The Company has funded its operations to date primarily through the use of bank lines of credit and equipment leases, through cash generated by the private sale of securities and from the proceeds from the initial public offering and from operations. As of September 30, 1998 the Company's principal sources of liquidity included cash and short term investments of approximately $1.2 million and the Company's bank line of credit bearing interest at the London Interbank Offered Rate plus 4.87% (10.56% as of September 30, 1998), expiring May 31, 1999. Under the terms of the bank line of credit as in effect on September 30, 1998, the Company had available borrowings and letters of credit up to $35.0 million through August 30, 1998, $30.0 million through December 30, 1998 and $25.0 million through May 31, 1999, based in part upon qualifying receivables and inventory. Within the overall credit limit, the line of credit as of September 30, 1998 also provided that the Company could borrow up to $10.0 million in excess of its borrowing base through August 30, 1998 and up to $5.0 million in excess of its borrowing base through December 30, 1998. As of September 30, 1998, the Company's balance on the bank line of credit was $25.2 million with stand by letters of credit outstanding totaling $4.6 million. In November 1998, the Company amended its line of credit to provide for a $37.5 million maximum credit limit through May 31, 1999, based in part upon qualifying receivables and inventory. Within the total credit limit, the Company may borrow up to $14.0 million in excess of its borrowing base through May 31, 1999. Under the amended line of credit, the Company is required to deposit with the financial institution cash collateral of $1.0 million on each of February 15, March 15 and April 15, 1999, which will effectively require the Company to reduce the total amounts outstanding under the line to $36.5 million as of February 15, 1999, $35.5 million as of March 15, 1999 and $34.5 million as of April 15, 1999. The amended line of credit also provides for a personal guarantee by the Company's Chairman and Chief Executive Officer, Brian Fargo, in the amount of $5 million secured by certain of Mr. Fargo's personal assets. As consideration for making such guarantee, Mr. Fargo is receiving Warrants to purchase 17 400,000 shares of the Company's Common Stock at an exercise price of $3.00 per share. The Warrants have a three year term and include a cashless exercise provision but Mr. Fargo will not have registration rights with respect to the shares issuable upon exercise of the Warrants. In addition, the Warrants are not exercisable in the event the Company enters into an agreement to merge or combine the Company within six months after the issuance date of the Warrants. The shares issuable upon exercise of the Warrants are subject to the twelve month lockup agreement Mr. Fargo entered into in connection with the Company's initial public offering. In connection with the issuance of the Warrants, the Company is required to record an expense equal to the fair market value of the Warrants, which is estimated to be approximately $0.3 million, with such expense being amortized as additional debt cost over the term of the guarantee. In addition, the issuance of such Warrants by the Company may result in dilution to stockholders. The line of credit expires May 31, 1999. Based upon certain assumptions, including without limitation, the Company's ability to achieve anticipated operation results the Company believes that it will be able to renew its line of credit or obtain alternate financing on reasonable terms. However, there can be no assurance that the assumptions relied on by the Company will prove correct or that the Company will be able to renew or replace its line of credit or obtain alternate financing on reasonable terms, if at all. The Company is currently in compliance with all terms of its credit agreement. The Company's primary capital needs have historically been to fund working capital requirements necessitated by its sales growth, the development and introduction of products and related technologies and the acquisition or lease of equipment and other assets used in the product development process. The Company's operating activities used cash of $19.3 million during the nine months ended September 30, 1998 and used $8.8 million during the nine months ended September 30, 1997. The cash used by operating activities in the nine months ended September 30, 1998 was primarily attributable to increased trade receivables and the net loss in the period, offset in part by an increase in accounts payable. Cash provided by financing activities of $20.4 million in the nine months ended September 30, 1998 resulted primarily from the proceeds from the Company's initial public offering and by additions to borrowings under the Company's bank line of credit. Cash provided by financing activities of $7.9 million in the nine months ended September 30, 1997 resulted primarily from borrowings under the Company's bank line of credit. On June 24, 1998 the Company completed its initial public offering of 5,000,000 shares of Common Stock at $5.50 per share which raised approximately $24.2 million, net of expenses. In connection with the offering, $8.7 million of Notes and Warrants were converted to Common Stock and $6.3 million were repaid in cash. Cash used in investing activities of $1.5 million in the nine months ended September 30, 1998 consisted of capital expenditures, primarily for office and computer equipment used in Company operations. Cash used in investing activities was $1.3 million in the nine months ended September 30, 1997 consisted of capital expenditures, primarily for office and computer equipment used in Company operations. The Company does not currently have any material commitments with respect to any capital expenditures. The Company used net cash in operations of $7.6 million, $19.3 million and $15.3 million, respectively, in the quarter ended September 30, 1998, the nine months ended September 30, 1998 and the eight months ended December 31, 1997. To provide liquidity, the Company has implemented certain measures including a reduction of personnel, a decrease in management compensation and the delay, cancellation or scale back of certain product development and marketing programs, among other actions. In addition, the Company increased its line of credit in November 1998 which line expires May 31, 1999. There can be no assurance that the Company's operating expenses or current obligations will not materially exceed cash flows available from the Company's operations in fiscal 1998 and beyond or that the increased line of credit will be sufficient to finance any negative cash flow from operations or that such line of credit will be renewed or replaced on reasonable terms, if at all. In addition, no assurance can be given that the measures heretofore effected will not materially adversely affect the Company's ability to develop and publish commercially viable titles, or that such measures, whether alone or in conjunction with increased net revenues, if any, will be sufficient to generate operating profits in fiscal 1998 and beyond. Certain of such measures may require third party consents or approvals, including the Company's financial institution, and there can be no such assurance that such consents or approvals can be obtained. 18 In November 1998, the Company entered into certain product license and distribution agreements which in the aggregate provide for the Company to receive approximately $9.7 million over the next ninety days. The Company believes that funds available under its line of credit, amounts to be received under various product license and distribution agreements and anticipated funds from operations will be sufficient to satisfy the Company's projected working capital and capital expenditure needs and debt obligations in the normal course of business at least through the expiration of its line on May 31, 1999. Based upon certain assumptions, including without limitation, the Company's ability to achieve anticipated operating results the Company believes that it will be able to renew its line of credit or obtain alternate financing on reasonable terms. However, there can be no assurance that the assumptions relied on by the Company will prove correct or that the Company will be able to renew or replace its line of credit on satisfactory terms, if at all. Further, there can be no assurance that the Company will not be required to raise additional working capital through debt or equity financing during such period. If the Company is required to raise additional working capital, there can be no assurance that the Company will be able to raise such additional working capital on acceptable terms, if at all. In the event the Company is unable to raise additional working capital, further measures would be necessary including, without limitation, the sale or consolidation of certain operations, the delay, cancellation or scale back of product development and marketing programs and other actions. No assurance can be given that such measures would not materially adversely affect the Company's ability to develop and publish commercially viable titles, or that such measures would be sufficient to generate operating profits in fiscal 1998 and beyond. Certain of such measures may require third party consents or approvals, including the Company's financial institution, and there can be no such assurance that such consents or approvals can be obtained. Year 2000 See "Year 2000 Issue" in "Certain Factors That May Affect the Company's Business and Future Results". Certain Factors That May Affect the Company's Business and Future Results In future periods the Company's business, financial condition and results of operations may be affected in a material and adverse manner by many factors, including, but not limited to, the following: Liquidity; Future Capital Requirements The Company used net cash in operations of $7.6 million, $19.3 million and $15.3 million, respectively, in the quarter ended September 30, 1998, the nine months ended September 30, 1998 and the eight months ended December 31, 1997. There can be no assurance that the Company will ever generate positive cash flow from operations. The Company's ability to fund its capital requirements out of available cash, its line of credit and cash generated from operations will depend on numerous factors, including the progress of the Company's product development programs, the rate of growth of the Company's business, and the commercial success of the Company's products. The Company may be required to seek additional funds through debt or equity financings, product licensing or distribution transactions or some other source of financing in order to provide sufficient working capital for the Company for fiscal 1998 and beyond. The issuance of additional equity securities by the Company could result in substantial dilution to stockholders. If the Company is required to raise additional working capital, there can be no assurance that the Company will be able to raise such additional working capital on acceptable terms, if at all. In the event the Company is unable to raise additional working capital, further cost reduction measures would be necessary including, without limitation, the sale or consolidation of certain operations, the delay, cancellation or scale back of product development and marketing programs and other actions. No assurance can be given that such measures would not materially adversely affect the Company's ability to develop and publish commercially viable titles, or that such measures would be sufficient to generate operating profits in fiscal 1998 and beyond. Certain of such measures may require third party approvals, including the Company's financial institution, and there can be no assurance that such consents or approvals can be obtained. Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality The Company's operating results have fluctuated significantly in the past and will likely fluctuate significantly in the future, both on a quarterly and an annual basis. A number of factors may cause or contribute to such fluctuations, and many of such factors are beyond the Company's control. Such factors include, but are not limited to, delays in shipment, demand for the Company's and its competitors' products, the size and rate of growth of the market for interactive entertainment software, changes in computing platforms, the number of new products and product enhancements released by the Company and its competitors during the period, changes in product mix, product returns, the timing of orders placed by distributors and dealers, delays in shipment, the timing of development and marketing expenditures, price competition and the level of the Company's international and OEM, royalty and licensing net revenues. The uncertainties associated with the interactive entertainment software development process, lengthy manufacturing lead times for Nintendo- compatible products, possible production delays, and the approval process for products compatible with the Sony Computer Entertainment, Nintendo and Sega video game consoles, as well as approvals required from other licensors, make it difficult to accurately predict the quarter in which shipments will occur. Because of 19 the limited number of products introduced by the Company in any particular quarter, a delay in the introduction of a product may materially adversely affect the Company's operating results for that quarter and may not be recaptured in subsequent quarters. A significant portion of the Company's operating expenses is relatively fixed, and planned expenditures are based primarily on sales forecasts. If net revenues do not meet the Company's expectations in any given quarter, operating results may be materially adversely affected. The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occurring during the year-end holiday buying season, followed by demand during the first calendar quarter. As a result, net revenues, gross profits and operating income for the Company have historically been highest during the fourth and the following first calendar quarters, and have declined from those levels in subsequent second and third calendar quarters. The failure or inability of the Company to introduce products on a timely basis to meet such seasonal increases in demand may have a material adverse effect on the Company's business, operating results and financial condition. The Company may over time become increasingly affected by the industry's seasonal patterns. Although the Company seeks to reduce the effect of such seasonal patterns on its business by distributing its product release dates more evenly throughout the year, there can be no assurance that such efforts will be successful. There can be no assurance that the Company will be profitable in any particular period given the uncertainties associated with software development, manufacturing, distribution and the impact of the industry's seasonal patterns on the Company's net revenues. As a result of the foregoing factors and the other factors discussed in "Certain Factors that May Affect the Company's Business and Future Results," it is likely that the Company's operating results in one or more future periods will fail to meet or exceed the expectations of securities analysts or investors. In such event, the trading price of the Common Stock would likely be materially adversely affected. Recent Losses The Company has experienced significant losses in recent periods, including losses of $11.6 million, $5.1 million, and $27.2 million, respectively, in the nine months ended September 30, 1998, in the eight months ended December 31, 1997, and in the Company's former fiscal year ended April 30, 1997. The losses for the nine months ended September 30, 1998 resulted primarily from delays in the completion of certain products, a higher than expected level of product returns and markdowns on products released during the quarter and in prior periods and lower than expected worldwide sales of Wild 9. There can be no assurance that the Company will not experience similar problems in current or future periods or that the Company will be able to generate sufficient net revenues or adequate working capital to attain or sustain profitability in the future. Dependence on New Product Introductions; Risk of Product Delays and Product Defects The Company's products typically have short life cycles, and the Company depends on the timely introduction of successful new products, including enhancements of or sequels to existing products and conversions of previously released products to additional platforms, to generate net revenues to fund operations and to replace declining net revenues from older products. In the Company's quarter ended September 30, 1998, the Company's results of operations were adversely affected by a number of factors, including delays in the completion of certain new products including Fallout 2. If in the future for any reason net revenues from new products were to fail to replace declining net revenues from existing products, the Company's business, operating results and financial condition could be materially adversely affected. The timing and success of new interactive entertainment software product releases remains unpredictable due to the complexity of product development, including the uncertainty associated with new technology. The development cycle of new products is difficult to predict but typically ranges from 12 to 24 months and another six to 12 months for the porting of a product to a 20 different technology platform. In the past, the Company has frequently experienced significant delays in the introduction of new products, including certain products currently under development. Because net revenues associated with the initial shipments of a new product generally constitute a high percentage of the total net revenues associated with a product, any delay in the introduction of, or the presence of a defect in, one or more new products expected in a period could have a material adverse effect on the ultimate success of such products and on the Company's business, operating results and financial condition. The costs of developing and marketing new interactive entertainment software have increased in recent years due to such factors as the increasing complexity and content of interactive entertainment software, increasing sophistication of hardware technology and consumer tastes and increasing costs of obtaining licenses for intellectual properties, and the Company expects this trend to continue. There can be no assurance that new products will be introduced on schedule, if at all, or that, if introduced, they will achieve significant market acceptance or generate significant net revenues. In addition, software products as complex as those offered by the Company may contain undetected errors when first introduced or when new versions are released. There can be no assurance that, despite testing by the Company, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could have a material adverse effect on the Company's business, operating results and financial condition. Uncertainty of Market Acceptance; Dependence on Hit Titles Consumer preferences for interactive entertainment software are continually changing and are extremely difficult to predict. Historically, few interactive entertainment software products have achieved sustained market acceptance. Rather, a limited number of releases have become "hits" and have accounted for a substantial portion of revenues in the industry. Further, publishers with a history of producing hit titles have enjoyed a significant marketing advantage because of their heightened brand recognition and consumer loyalty. The Company expects the importance of introducing hit titles to increase in the future. There can be no assurance that new products introduced by the Company will achieve significant market acceptance, that such acceptance, if achieved, will be sustainable for any significant period, or that product life cycles will be sufficient to permit the Company to recover development and other associated costs. Most of the Company's products have a relatively short life cycle and sell for a limited period of time after their initial release, usually less than one year. The Company believes that these trends will continue and that the Company's future revenue will continue to be dependent on the successful production of hit titles on a continuous basis. Because the Company introduces a relatively limited number of new products in a given period, the failure of one or more of such products to achieve market acceptance could have a material adverse effect on the Company's business, operating results and financial condition. Further, if market acceptance is not achieved, the Company could be forced to accept substantial product returns or grant significant markdown allowances to maintain its relationship with retailers and its access to distribution channels. For example, the Company had higher than expected product returns and markdowns in the quarter ended September 30, 1998 and there can be no assurance that higher than expected product returns and markdowns will not continue in the future. In the event that the Company is forced to accept significant product returns or grant significant markdown allowances, its business, operating results and financial condition could be materially adversely affected. Dependence on Third Party Software Developers The Company relies on third party interactive entertainment software developers for the development of a significant number of its interactive entertainment software products. As reputable and competent third party developers continue to be in high demand, there can be no assurance that third party software developers that have developed products for the Company in the past will continue to be available to develop products for the Company in the future. Many third party software developers have limited financial resources, which could expose the Company to the risk that such developers may go out 21 of business prior to completing a project. In addition, due to the limited control that the Company exercises over third party software developers, there can be no assurance that such developers will complete products for the Company on a timely basis or within acceptable quality standards, if at all. Increased competition for skilled third party software developers has required the Company to enter into agreements with licensors of intellectual property and developers of games that involved advance payments by the Company of royalties and guaranteed minimum royalty payments, and the Company expects to continue to enter into such arrangements. If the sales volumes of products subject to such arrangements are not sufficient to recover such royalty advances and guarantees, the Company would be required to write-off unrecovered portions of such payments, which could have a material adverse effect on its business, operating results and financial condition. Further, there can be no assurance that third party developers will not demand renegotiation of their arrangements with the Company. Rapidly Changing Technology; Platform Risks The interactive entertainment software industry is subject to rapid technological change. The introduction of new technologies, including operating systems such as Microsoft Windows 95 and 98, technologies that support multi- player games, new media formats such as on-line delivery and digital video disks ("DVDs") and as yet unreleased video game platforms could render the Company's current products or products in development obsolete or unmarketable. The Company must continually anticipate and assess the emergence of, and market acceptance of, new interactive entertainment software platforms well in advance of the time the platform is introduced to consumers. Because product development cycles are difficult to predict, the Company is required to make substantial product development and other investments in a particular platform well in advance of introduction of the platform. If the platforms for which the Company develops software are not released on a timely basis or do not attain significant market penetration, the Company's business, operating results and financial condition could be materially adversely affected. Alternatively, if the Company fails to develop products for a platform that does achieve significant market penetration, then the Company's business, operating results and financial condition could also be materially adversely affected. The emergence of new interactive entertainment software platforms and technologies and the increased popularity of new products and technologies may materially and adversely affect the demand for products based on older technologies. In this regard, the Company's results of operations in its former fiscal year ended April 30, 1997 were adversely affected by a sharp decline in the market for titles for the Macintosh and Sega Saturn platforms, which declines resulted in a high level of product returns and markdown allowances. The broad range of competing and incompatible emerging technologies may lead consumers to postpone buying decisions with respect to products until one or more of such technologies gain widespread acceptance. Such postponement could have a material adverse effect on the Company's business, operating results and financial condition. The Company is currently actively developing products for the Microsoft Windows 95 and 98, PlayStation(R) and Nintendo 64 platforms. The Company's success will depend in part on its ability to anticipate technological changes and to adapt its products to emerging game platforms. There can be no assurance that the Company will be able to anticipate future technological changes, to obtain licenses to develop products for those platforms on terms favorable to the Company or to create software for those new platforms, and any failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. Industry Competition; Competition for Shelf Space The interactive entertainment software industry is intensely competitive and is characterized by the frequent introduction of new interactive entertainment software platforms and software platforms. The Company's competitors vary in size from small companies to very large corporations with significantly greater financial, marketing and product development resources than those of the Company. Due to 22 these greater resources, certain of the Company's competitors are able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, sports and character properties and pay more to third party software developers than the Company. The Company believes that the principal competitive factors in the interactive entertainment software industry include product features, brand name recognition, access to distribution channels, quality, ease of use, price, marketing support and quality of customer service. The Company competes primarily with other publishers of PC and video game console interactive entertainment software. Significant competitors include Electronic Arts, GT Interactive Software Corp., Cendant Corporation, Activision, Inc., Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc., Acclaim Entertainment Inc., and Hasbro Inc. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo and Sega compete directly with the Company in the development of software titles for their respective platforms. Large diversified entertainment companies, such as The Walt Disney Company, many of which own substantial libraries of available content and have substantially greater financial resources than the Company, may decide to compete directly with the Company or to enter into exclusive relationships with competitors of the Company. The Company also believes that the overall growth in the use of the Internet and on- line services by consumers may pose a competitive threat if customers and potential customers spend less of their available home PC time using interactive entertainment software and more on the Internet and on-line services. Retailers of the Company's products typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer software producers, and in particular interactive entertainment software products, for high quality retail shelf space and promotional support from retailers. To the extent that the number of consumer software products and computer platforms increases, competition for shelf space may intensify and may require the Company to increase its marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. The Company's products constitute a relatively small percentage of any retailer's sale volume, and there can be no assurance that retailers will continue to purchase the Company's products or to provide the Company's products with adequate levels of shelf space and promotional support, and a prolonged failure in this regard may have a material adverse effect on the Company's business, operating results and financial condition. Dependence Upon Third Party Licenses Many of the Company's products, such as its Star Trek, Major League Baseball and Caesars Palace titles, are based on original ideas or intellectual properties licensed from third parties. There can be no assurance that the Company will be able to obtain new licenses, or renew existing licenses, on commercially reasonable terms, if at all. For example, Paramount has granted the Star Trek license to a third party upon the expiration of the Company's rights. Should the Company be unable to obtain licenses for the underlying content that it believes offers the greatest consumer appeal, the Company would either have to seek alternative, potentially less appealing licenses, or release the products without the desired underlying content, either of which events could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that acquired properties will enhance the market acceptance of the Company's products based on such properties, that the Company's new product offerings will generate net revenues in excess of their costs of development and marketing or minimum royalty obligations, or that net revenues from new product sales will meet or exceed net revenues from existing product sales. Dependence on Distribution Channels; Risk of Customer Business Failures; Product Returns 23 The Company currently sells its products directly through its own sales force to mass merchants, warehouse club stores, large computer and software specialty chains and through catalogs in the U.S. and Canada, as well as to certain distributors. Outside North America, the Company generally sells to third party distributors. The Company's sales are made primarily on a purchase order basis, without long-term agreements. The loss of, or significant reduction in sales to, any of the Company's principal retail customers or distributors could materially adversely affect the Company's business, operating results and financial condition. The distribution channels through which consumer software products are sold are characterized by continuous change, including consolidation, financial difficulties of certain distributors and retailers, and the emergence of new distributors and new retailers such as warehouse chains, mass merchants and computer superstores. As more consumers own PCs, the distribution channels for interactive entertainment software have changed are expected to continue to change. Mass merchants have become the most important distribution channels for retail sales of interactive entertainment software. A number of these mass merchants, including Wal-Mart, have entered into exclusive buying arrangements with other software developers or distributors, which arrangements prevent the Company from selling certain of its products directly to that mass merchant. If the number of mass merchants entering into exclusive buying arrangements with software distributors other than the Company were to increase, the Company's ability to sell to such merchants would be restricted to selling through the exclusive distributor. Because sales to distributors typically have a lower gross profit than sales to retailers, this would have the effect of lowering the Company's gross profit. In addition, this trend could increase the material adverse impact on the Company's business, operating results and financial condition. In addition, emerging methods of distribution, such as the Internet and on-line services, may become more important in the future, and it will be important for the Company to maintain access to these channels of distribution. There can be no assurance that the Company will maintain such access or that the Company's access will allow the Company to maintain its historical levels of sales volume. Distributors and retailers in the computer industry have from time to time experienced significant fluctuations in their businesses, and there have been a number of business failures among these entities. The insolvency or business failure of any significant distributor or retailer of the Company's products could have a material adverse effect on the Company's business, operating results and financial condition. Sales are typically made on unsecured credit, with terms that vary depending upon the customer and the nature of the product. Although the Company has obtained insolvency risk insurance to protect against any bankruptcy, insolvency or liquidation that may occur involving its customers, such insurance contains a significant deductible and a co-payment obligation, and the policy does not cover all instances of non-payment. In addition, while the Company maintains a reserve for uncollectible receivables, the actual reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Licenses from and Manufacturing by Hardware Companies The Company is required to obtain a license to develop and distribute software for each of the video game console platforms for which the Company develops products, including a separate license for each of North America, Japan and Europe. The Company has obtained licenses to develop software for the PlayStation in North America and Japan and is currently negotiating agreements covering additional territories. In addition, the Company has obtained a license to develop software for the Nintendo 64 in North America and is currently negotiating with Nintendo for licenses covering additional territories. There can be no assurance that the Company will be able to obtain licenses from hardware companies on acceptable terms or that any existing or future licenses will be renewed by the licensors. In addition, each of Sony Computer Entertainment, Nintendo and Sega have the right to approve the technical 24 functionality and content of the Company's products for such platform prior to distribution. Due to the nature of the approval process, the Company must make significant product development expenditures on a particular product prior to the time it seeks such approvals. The inability of the Company to obtain such approvals could have a material adverse effect on the Company's business, operating results and financial condition. Hardware companies such as Sony Computer Entertainment, Nintendo and Sega may impose upon their licensees a restrictive selection and product approval process, such that licensees are restricted in the number of titles that will be approved for distribution on the particular platform. While the Company has prepared its future product release plans taking this competitive approval process into consideration, if the Company has incorrectly predicted the impact of this restrictive approval process, and as a result the Company fails to obtain approvals for all products in the Company's development plans, such failure could have a material adverse effect on the Company's business, operating results and financial condition. The Company depends upon Sony Computer Entertainment and Nintendo for the manufacture of the Company's products that are compatible with their respective video game consoles. As a result, Sony and Nintendo have the ability to raise prices for supplying such products at any time and effectively control the timing of the Company's release of new titles for those platforms. PlayStation products consist of CD-ROMs and are typically delivered by Sony Computer Entertainment within a relatively short lead time. Manufacturers of Nintendo and other video game cartridges typically deliver software to the Company within 45 to 60 days after receipt of a purchase order. If the Company experiences unanticipated delays in the delivery of video game console products from Sony Computer Entertainment or Nintendo, or if actual retailer and consumer demand for its interactive entertainment software differs from that forecast by the Company, its business, operating results and financial condition could be materially adversely affected. Dependence on Key Personnel The Company's success depends to a significant extent on the continued service of it key product design, development, sales, marketing and management personnel, and in particular on the leadership, strategic vision and industry reputation of its founder and Chief Executive Officer, Brian Fargo. The Company's future success will also depend upon the Company's ability to continue to attract, motivate and retain highly qualified employees and contractors, particularly key software design and development personnel. Competition for highly skilled employees is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Specifically, the Company may experience increased costs in order to attract and retain skilled employees. The Company's failure to retain the services of Brian Fargo or its other key personnel or to attract and retain additional qualified employees could have a material adverse effect on the Company's business, operating results and financial condition. Risks Associated with International Operations; Currency Fluctuations International net revenues accounted for 26.7% and 28.7% of the Company's total net revenues in the nine months ended September 30, 1998 and the three months ended September 30, 1998, respectively. The Company intends to continue to expand its direct and indirect sales, marketing and product localization activities worldwide. Such expansion will require significant management time and attention and financial resources in order to develop improved international sales and support channels. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for its products. International sales and operations are subject to a number of inherent risks, including the impact of possible recessionary environments in economies outside the U.S., the time and financial costs associated with translating and localizing products for foreign markets, longer accounts receivable collection periods and greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, difficulties and costs of staffing and managing foreign 25 operations, and political and economic instability. For example, the Company has recently experienced difficulties selling products in certain Asian countries as a result of economic instability in such countries, and there can be no assurance that such difficulties will not continue or occur in other countries in the future. There can be no assurance that the foregoing factors will not have a material adverse effect on the Company's future international net revenues and, consequently, on the Company's business, operating results and financial condition. The Company currently does not engage in currency hedging activities. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse effect on net revenues from international sales and licensing, and thus on the Company's business, operating results and financial condition. Risks Associated with New European Currency On January 1, 1999, eleven of the fifteen member countries of the European Union ("Participating Countries") are scheduled to establish fixed conversion rates between their existing sovereign currencies and a new European currency, the "euro". The euro will be adopted by the Participating Countries as the common legal currency on that date. A significant portion of the Company's sales are made to Participating Countries and consequently, the Company anticipates that the euro conversion will, among other things, create technical challenges to adapt information technology and other systems to accommodate euro- denominated transactions and limit the Company's ability to charge different prices for its producers in different markets. While the Company anticipates that the conversion will not cause material disruption of its business, there can be no assurance that the conversion will not have a material effect on the Company's business or financial condition. Management of Growth The Company has in the past undergone a period of rapid growth that has placed a significant strain on the Company's financial, management and other resources. The Company's ability to manage its growth effectively, should it continue, will require it to continue to improve its operational, financial and management information systems and to attract, train, motivate, manage and retain key employees. If the Company's executives are unable to manage growth effectively, the Company's business, operating results and financial condition could be materially adversely affected. Protection of Proprietary Rights The Company regards its software as proprietary and relies on a combination of copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect its proprietary rights. The Company owns or licenses various copyrights and trademarks. While the Company provides "shrinkwrap" license agreements or limitations on use with its software, the enforceability of such agreements or limitations is uncertain. The Company is aware that unauthorized copying occurs within the computer software industry, and if a significantly greater amount of unauthorized copying of the Company's interactive entertainment software products were to occur, the Company's operating results could be materially adversely affected. While the Company does not copy protect its products, it does not provide source code to third parties unless they have signed nondisclosure agreements with respect thereto. The Company relies on existing copyright laws to prevent unauthorized distribution of its software. Existing copyright laws afford only limited protection. Policing unauthorized use of the Company's products is difficult, and software piracy can be expected to be a persistent problem, especially in certain international markets. Further, the laws of certain countries in which the Company's products are or may be distributed either do not protect the Company's products and intellectual property rights to the same extent as the laws of the U.S. or are weakly enforced. Legal protection of the Company's rights may be ineffective in such counties, and as the Company leverages its software products using emerging technologies, such as the Internet and on-line services, the ability of the Company to protect its intellectual property rights, and to avoid infringing the intellectual property rights of others, becomes 26 more difficult. There can be no assurance that existing intellectual property laws will provide adequate protection to the Company's products in connection with such emerging technologies. As the number of interactive entertainment software products in the industry increases and the features and content of these products further overlap, software developers may increasingly become subject to infringement claims. Although the Company makes reasonable efforts to ensure that its products do not violate the intellectual property rights of others, there can be no assurance that claims of infringement will not be made. Any such claims, with or without merit, can be time consuming and expensive to defend. From time to time, the Company has received communications from third parties of such parties. There can be no assurance that existing or future infringement claims against the Company will not result in costly litigation or require the Company to license the intellectual property rights of third parties, either of which could have a material adverse effect on the Company's business, operating results and financial condition. Entertainment Software Rating System; Governmental Restrictions Legislation is periodically introduced at the state and federal levels in the U.S. and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. Such a system would include procedures with which interactive entertainment software publishers would be expected to comply by identifying particular products within defined rating categories and communicating such ratings to consumers through appropriate package labeling and through advertising and marketing presentations consistent with each products' rating. In addition, many foreign countries have laws which permit governmental entities to censor the content of certain works, including interactive entertainment software. In certain instances, the Company may be required to modify its products to comply with the requirements of such governmental entities, which could delay the release of those products in such countries. Such delays could have a material adverse effect on the Company's business, operating results and financial condition. While the Company currently voluntarily submits its products to industry-created review boards and publishes their ratings on its game packaging, the Company believes that mandatory government-run integrative entertainment software products rating systems eventually will be adopted in many countries which represent significant markets or potential markets for the Company. Due to the uncertainties inherent in the implementation of such a rating system, confusion in the marketplace may occur, and the Company is unable to predict what effect, if any, such a rating system would have on the Company's business. In addition to such regulations, certain retailers have in the past declined to stock certain of the Company's products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date such actions have not had a material adverse effect on the Company's business, operating results or financial condition, there can be no assurance that similar actions by the Company's distributors or retailers in the future would not have a material adverse effect on the Company's business, operating results and financial condition. Development of Internet/On-Line Services or Products The Company seeks to establish an on-line presence by creating and supporting sites on the Internet. The Company's future plans envision conducting and supporting on-line product offerings through these sites or others. The ability of the Company to successfully establish an on-line presence and to offer on- line products will depend on several factors that are outside the Company's control, including the emergence of a robust on-line industry and infrastructure and the development and implementation of technological advancements to the Internet to increase bandwidth and the speed of responsiveness to the point that will allow the Company to conduct and support on-line product offerings. Because global commerce and the exchange of information on the Internet and other similar open, wide area networks are relatively new and evolving, there can be no assurance that a viable 27 commercial marketplace on the Internet will emerge from the developing industry infrastructure, that the appropriate complementary products for providing and carrying Internet traffic and commerce will be developed, that the Company will be able to create or develop a sustainable or profitable on-line presence or that the Company will be able to generate any significant revenue from On-Line product offerings in the near future, it at all. If the Internet does not become a viable commercial marketplace, or if such development occurs but is insufficient to meet the Company's needs or if such development is delayed beyond the point where the Company plans to have established an On-Line service, the Company's business, operating results and financial condition could be materially adversely affected. Year 2000 Issue Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. Therefore, they do not properly recognize a year that begins with "20" rather than "19". Others do not correctly process "leap year" dates. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can correctly process data related to the Year 2000 and beyond. The Company relies on its systems and applications in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll modules), customer services, networks and telecommunications systems equipment and end products. The Company also relies, directly and indirectly, on external systems of suppliers for the management and control of product development and of business enterprises such as developers, customers, suppliers, creditors, financial organizations, and governmental entities, both domestic and international, for accurate exchange of data. The Company could be affected through disruptions in the operation of the enterprises with which the Company interacts or from general widespread problems or an economic crisis resulting from noncompliant Year 2000 systems. Despite the Company's efforts to address the Year 2000 impact on its internal systems and business operations, there can be no assurance that such impact will not result in a material disruption of its business or have a material adverse effect on the Company's business, operating results and financial condition. The Company is currently in the process of assessing the potential impact of the Year 2000 issue on its business and the related foreseeable expenses that may be incurred in attempting to remedy such impact. The Company is employing a combination of internal resources and outside consultants to evaluate and address Year 2000 issues. The Company's Year 2000 plan includes (i) conducting an evaluation of the Company's computer based systems, facilities and products (and those of significant dealers, vendors and other third parties with which the Company does business) to determine their Year 2000 compliance, (ii) coordinating the replacement and/or upgrade of non-compliant systems, as necessary, and (iii) developing and overseeing the implementation of all of the initiatives in the Company's Year 2000 compliance plan. For example, the Company is in the process of upgrading its internal accounting software and expects such upgrade to be complete prior to the Year 2000. Although the Company has identified certain systems and applications that are not Year 2000 compliant and the Company is in the process of upgrading its software to address the Year 2000 issue, there can be no assurance that such upgrades will be completed on a timely basis at reasonable costs, or that such upgrades will be able to anticipate all of the problems triggered by the actual impact of the Year 2000. In addition, the inability of any internal system to achieve Year 2000 compliance could result in material disruption to the Company's operations. With respect to customers, developers, suppliers and other enterprises upon which the Company relies, even where assurances are received from such third parties, there remains a risk that failure of systems and applications of such third parties could have a material adverse effect on the Company. The Company is currently assessing its products for Year 2000 compliance and anticipates such assessment to be complete prior to the Year 2000. The Company expects to correct and make available through its customer service organization upgrades or patches for those of its products that are found not to be Year 2000 compliant. However, there can be no assurance that any of the Company's products are or will be Year 2000 compliant or that the Company will complete any upgrades or patches which may 28 be necessary. The failure of any of the Company's products to achieve Year 2000 compliance would result in increased warranty costs, customer satisfaction issues, potential lawsuits and other material costs and liabilities. In addition, if the computer systems on which the consumers use the Company's products are not Year 2000 compliant, such non compliance could adversely affect the consumers ability to use such products. The Company believes that it will substantially complete the implementation of its Year 2000 plan prior to the commencement of the Year 2000. However, if the Company does not complete its Year 2000 plan prior to the commencement of the Year 2000, or if the Company fails to identify and remediate all critical Year 2000 problems or if major suppliers, developers or customers experience material Year 2000 problems, the Company's results of operations or financial condition could be materially adversely effected. The Company's current estimate is that the costs associated with the Year 2000 issue should not have a material adverse effect on the results of operations or financial position of the Company in any given year. The Company has not yet developed Year 2000 non-compliance contingency plans, but will consider the need for such plans upon completion of the Year 2000 compliance assessments. The foregoing statements are based upon management's best estimates at the present time, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. There can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the nature and amount of programming required to upgrade or replace each of the affected programs, the rate and magnitude of related labor and consulting costs and the success of the Company's external customers, developers and suppliers in addressing the Year 2000 issue. The Company's evaluation is ongoing and it expects that new and different information will become available to it as the evaluation continues. Consequently, there can be no assurance that all material elements will be Year 2000 compliant in time. Risks Associated with Acquisitions As part of its strategy to enhance distribution and product development capabilities, the Company intends to review potential acquisitions of complementary businesses, products and technologies. Some of these acquisitions could be material in size and scope. While the Company will continue to search for appropriate acquisition opportunities, there can be no assurance that the Company will be successful in identifying suitable acquisition opportunities. If any potential acquisition opportunity is identified, there can be no assurance that the Company will consummate such acquisition, and if such acquisition does occur, there can be no assurance that it will be successful in enhancing the Company's business or will be accretive to the Company's earnings. As the interactive entertainment software industry continues to consolidate, the Company may face increased competition for acquisition opportunities, which may inhibit its ability to complete suitable transactions or increase the cost thereof. Future acquisitions could also divert substantial management time, could result in short term reductions in earnings or special transaction or other charges and may be difficult to integrate with existing operations or assets. The Company may, in the future, issue additional shares of Common Stock in connection with one or more acquisitions, which may dilute its stockholders, including investors in the IPO. Additionally, with respect to future acquisitions, the Company's stockholders may not have an opportunity to review the financial statements of the entity being acquired or to vote on such acquisitions. Control by Directors and Officers 29 The Company's directors and officers and Universal Studios, Inc. ("Universal"), which currently has two representatives on the Company's Board of Directors, in the aggregate, beneficially own approximately 58.4% of the Company's outstanding Common Stock (excluding outstanding options). These stockholders, if acting together, would be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of directors (subject to the cumulative voting rights of the Company's stockholders) and the approval of mergers or other business combination transactions. Such concentration of ownership could discourage or prevent a change in control of the Company. Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions The Company's Certificate of Incorporation and Bylaws, as well as Delaware corporate law, contain certain provisions that could have the effect of delaying, deferring or preventing a change in control of the Company and could materially adversely affect the prevailing market price of the Common Stock. Certain of such provisions impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. Stock Price Volatility The trading price of the Company's Common Stock has been and could continue to be subject to wide fluctuations in response to quarter to quarter variations in results of operations, announcements of new products by the Company or its competitors, product development or release schedule, general conditions in the computer, software, entertainment, media or electronics industries, changes in earnings estimates or buy/sell recommendations by analysts, investor perceptions and expectations regarding the products, plans and strategic position of the Company, its competitors and its customers, or other events or factors. In addition, the public stock markets have experienced extreme price and trading volume volatility, particularly in high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. 30 PART II. Other Information Item 1. Legal Proceedings ----------------- 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 such routine claims will not have a material adverse effect on the Company's business, financial condition or results of operations. Item 2. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits - The following exhibits are filed as part of this report: -------- Exhibit Number Exhibit Title Page ------- ------------- ---- 10.1 Fourth Amendment to Von Karman Corporate Center Office Building Lease, dated July 29, 1998, between the Company and Arden Realty Finance IV, L.L.C., as successor-in-interest to Aetna Life Insurance Company of Illinois. _____ 10.2 Schedules 8 through 10 to the Master Equipment Lease between Brentwood Credit Corporation and the Company dated March 28, 1996, filed as Exhibit 10.20 to the Registration Statement on Form S-1, File No. 333-48473. _____ 27.1 Financial data schedule for the nine month period ended September 30, 1998. _____ (b) Reports on Form 8-K ------------------- A Report on Form 8-K was filed by the Company on October 2, 1998 reporting that on September 25, 1998, the Company announced that it had accepted the resignation of David Dukes as a director of the Company. 31 SIGNATURES Pursuant to the requirements 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. INTERPLAY ENTERTAINMENT CORP. Date: November 23, 1998 By: /s/ James C. Wilson ------------------- James C. Wilson, Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 32 EXHIBIT INDEX Exhibit Number Exhibit Title Page - ------- ------------- ---- 10.1 Fourth Amendment to Von Karman Corporate Center Office Building Lease, dated July 29, 1998, between the Company and Arden Realty Finance IV, L.L.C., as successor-in-interest to Aetna Life Insurance Company of Illinois. _____ 10.2 Schedules 8 through 10 to the Master Equipment Lease between Brentwood Credit Corporation and the Company, dated March 28, 1996, filed as Exhibit 10.20 to the Registration Statement on Form S-1, File No. 333-48473. _____ 27.1 Financial data schedule for the nine month period ended September 30, 1998. _____ 33 EX-10.1 2 4TH AMENDMENT TO OFFICE BUILDING LEASE EXHIBIT 10.1 FOURTH AMENDMENT TO LEASE ------------------------- (VON KARMAN CORPORATE CENTER) THIS FOURTH AMENDMENT TO LEASE ("Fourth Amendment") is made and entered into as of the 29th day of July, 1998, by and between ARDEN REALTY FINANCE IV, L.L.C., a Delaware limited liability company ("Landlord") and INTERPLAY ENTERTAINMENT CORP., a Delaware corporation, as successor-in-interest to Interplay Productions ("Tenant"). R E C I T A L S : ---------------- A. AETNA LIFE INSURANCE COMPANY OF ILLINOIS, an Illinois corporation ("Original Landlord") and INTERPLAY PRODUCTIONS, a California corporation ("Interplay Productions") entered into that certain Office Building Lease dated as of September 8, 1995 (the "Original Lease") as amended by that certain First Amendment to Lease dated as of December 1, 1995 by and between Original Landlord and Interplay Productions ("First Amendment"), that certain Second Amendment to Lease dated as of January 5, 1996 by and between Original Landlord and Interplay Productions ("Second Amendment") and that certain Third Amendment to Lease dated as of June 30, 1997 by and between THE STANDARD FIRE INSURANCE COMPANY, a Connecticut corporation, as successor to Original Landlord ("Standard Fire") and Interplay Productions whereby Original Landlord and Standard Fire leased to Interplay Productions and Interplay Productions leased from Original Landlord and Standard Fire certain office space located in those certain buildings located and addressed at 16845 Von Karman Avenue ("Building Three"), 16815 Von Karman Avenue ("Building Four") and 16795 Von Karman Avenue ("Building Five") in Irvine, California (collectively, the "Buildings"). The Original Lease, as amended by the First Amendment, the Second Amendment and the Third Amendment may be referred to herein as the "Lease." Landlord is the successor-in-interest to Standard Fire and Tenant is the successor-in-interest to Interplay Productions. B. By this Fourth Amendment, Landlord and Tenant desire to relocate portions of the Existing Premises and to otherwise modify the Lease as provided herein. C. Unless otherwise defined herein, capitalized terms as used herein shall have the same meanings as given thereto in the Original Lease. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: A G R E E M E N T : ------------------ 1. The Existing Premises. Landlord and Tenant hereby agree that pursuant --------------------- to the Lease, Landlord currently leases to Tenant and Tenant currently leases from Landlord (i) that certain space on the second (2nd) floor of Building Three containing 23,456 rentable square feet as outlined on Exhibit "A" to the Second Amendment (the "Building Three Space"), (ii) all of Building Four consisting of 50,379 rentable square feet (the "Building Four Space") and (iii) the entire second (2nd) floor of Building Five consisting of 27,490 rentable square feet as shown on Exhibit "A-II" to the Original Lease (the "Building Five Space"), for a total of 101,325 rentable square feet (collectively, the "Existing Premises"). 2. Phase 1 Relocation. That certain portion of the Building Three Space ------------------ consisting of a total of approximately 11,977 rentable square feet as shown on the floor plan attached hereto as Exhibit "A-1" may be referred to herein as the "Phase 1 Surrender Space." That certain portion of the Building Four Space located on the ground floor of Building Four and consisting of 8,275 rentable square feet as outlined on Exhibit "A-2" may be referred to herein as the "Building Initials: -------- -------- Four Improvement Space." Tenant shall construct improvements within the Building Four Improvement Space pursuant to the Tenant Work Letter attached hereto as Exhibit "B" and made a part hereof. Tenant agrees to vacate the Phase 1 Surrender Space and to surrender possession of the Phase 1 Surrender Space to Landlord in accordance with Section 11(a) of the Original Lease on or before the date ("Phase 1 Surrender Date") which is the earlier of (i) Substantial Completion of the Improvements in the Building Four Improvement Space, or (ii) September 30, 1998. Upon the Phase 1 Surrender Date, Tenant shall have no further rights to occupy the Phase 1 Surrender Space and the Lease shall terminate as to the Phase 1 Surrender Space upon the Phase 1 Surrender Date, except that Tenant's obligation to pay Monthly Base Rent and Operating Expense payments for the Phase 1 Surrender Space shall continue beyond the Phase 1 Surrender Date until December 31, 1998. Tenant acknowledges that from and after the Phase 1 Surrender Date, Landlord shall be entitled to market the Phase 1 Surrender Space to a third party and that Tenant shall not be entitled to share in any rental proceeds received by Landlord in connection with the leasing of such space, nor shall Tenant be required to share in any expenses of obtaining such third party tenant(s). 3. Phase 2 Relocation. That certain space on the ground floor of ------------------ Building Five consisting of approximately 8,000 rentable square feet (the exact number of rentable square feet to be determined in good faith by Landlord and Tenant in accordance with the Standard Method for Measuring Floor Area in Office Buildings ANSI/BOMA Z65.1-1996, and which may be increased upon request of Tenant prior to the existing tenant's vacation of such space) consisting of the portion of Suite 100 of Building Five as such portion is reasonably designated by Landlord and reasonably approved by Tenant on or before the date the existing tenant vacates such space, with such designation to be made in a manner which maintains the remaining portion of Suite 100 in a reasonably leasable condition, may be referred to herein as the "Expansion Space." Upon the date the existing tenant of the Expansion Space vacates such space, Tenant shall renovate the Improvements therein pursuant to the Tenant Work Letter attached hereto as Exhibit "B." Upon the date ("Phase 2 Effective Date") which is the earlier of (i) the date Tenant commences business operations from the Expansion Space, or (ii) the date which is sixty (60) days after the date that the existing tenant vacates the Expansion Space (which sixty (60) day period shall be subject to extension pursuant to Section 5.2 of Exhibit "B" for any Landlord Delays), Tenant shall lease from Landlord and Landlord shall lease to Tenant the Expansion Space and Tenant shall vacate and surrender the remaining Building Three Space to Landlord in accordance with Section 11(a) of the Original Lease and the Lease shall terminate as to the remaining Building Three Space. Accordingly, effective upon the later of (1) January 1, 1999, or (2) the Phase 2 Effective Date, the Existing Premises shall be modified to consist of the Building Four Space, the Building Five Space, and the Expansion Space for a total of approximately 85,869 rentable square feet (subject to adjustment upon determination of the exact number of rentable square feet of the Expansion Space, and which total space may be collectively referred to herein as the "New Premises"). If Tenant fails to vacate the Phase 1 Surrender Space on or before the Phase 1 Surrender Date, or if Tenant fails to vacate the remaining Building Three Space on or before the Phase 2 Effective Date, the provisions of Section 11(b) of the Original Lease shall apply to the space which is the subject of such holdover at Landlord's sole discretion. 4. Rent. ---- 4.1 Monthly Base Rent. Subject to the last sentence of this Section ----------------- 4.1 below, Tenant's obligation to pay Monthly Base Rent shall remain unchanged until the Phase 2 Effective Date. However, effective as of the Phase 2 Effective Date, Monthly Base Rent for the New Premises shall be as follow:
Monthly Base Rent Per Period Monthly Base Rent* Rentable Square Foot ------ ------------------ -------------------- Phase 2 Effective Date - $111,629.70 $1.30 6/14/2001 6/15/2001 - 12/14/2003 $115,923.15 $1.35 12/15/2003 - 6/14/2006 $128,803.50 $1.50
Initials: -------- -------- -2- *Subject to adjustment upon determination of the exact number of rentable square feet of the Expansion Space. Notwithstanding the foregoing provisions of this Section 4.1, Landlord and Tenant acknowledge that the foregoing chart assumes that the Phase 2 Effective Date shall occur on January 1, 1999. If, however, (i) the Phase 2 Effective Date occurs prior to January 1, 1999, then in addition to the Monthly Base Rent specified in this chart above, during the period from the Phase 2 Effective Date through and including December 31, 1998, Monthly Base Rent shall be increased by Fifteen Thousand Five Hundred Seventy and 10/100 Dollars ($15,570.10) per month (i.e., $1.30 per rentable square foot of the Phase 1 Surrender Space) and (ii) the Phase 2 Effective Date occurs after January 1, 1999, then Monthly Base Rent payable by Tenant from January 1, 1999 through and including the day immediately preceding the Phase 2 Effective Date shall be reduced by Fifteen Thousand Five Hundred Seventy and 10/100 Dollars ($15,570.10) per month. 4.2 Additional Monthly Base Rent. In addition to the then Monthly ---------------------------- Base Rent payable by Tenant pursuant to Section 4.1 above, (i) effective as of the first day of the calendar month after Landlord has notified Tenant that Landlord has funded fifty percent (50%) of the Building Four Allowance, and continuing for a total of sixty (60) consecutive calendar months, Monthly Base Rent shall be increased by the amount calculated to fully amortize the Building Four Allowance utilized by Tenant over said sixty (60) month period, based upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of twelve percent (12%) per annum, and (ii) effective as of the first day of the calendar month after Landlord has notified Tenant that Landlord has funded fifty percent (50%) of the Expansion Space Allowance, and continuing for a total of sixty (60) consecutive calendar months, Monthly Base Rent shall increase by the amount calculated to fully amortize the Expansion Space Allowance utilized by Tenant over said sixty (60) month period, based upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of twelve percent (12%) per annum. 5. Tenant's Percentage Share and Base Year. Notwithstanding anything to --------------------------------------- the contrary in the Lease, effective upon the Phase 2 Effective Date, Tenant's Percentage shall be reduced to nineteen point zero two percent (19.02%), subject to adjustment upon determination of the exact number of rentable square feet of the Expansion Space. The Base Year shall remain the calendar year 1996 throughout the Term of Tenant's Lease (as amended by this Fourth Amendment). 6. Tenant Improvements. Tenant Improvements in the Building Four ------------------- Improvement Space and in the Expansion Space shall be installed and constructed in accordance with the terms of the Tenant Work Letter attached hereto as Exhibit "B" and made a part hereof. 7. Parking. Effective as of the Phase 2 Effective Date and continuing ------- throughout the Term of Tenant's Lease (as amended by this Fourth Amendment) the number of unreserved parking passes which Tenant is entitled to use shall be reduced to three hundred forty-three (343), which number shall be adjusted upon determination of the exact number of rentable square feet of the Expansion Space so that the total number of unreserved parking passes to which Tenant is entitled shall be four (4) per 1,000 rentable square feet of the New Premises. Tenant's use of such parking passes shall be in accordance with, and subject to, all provisions of Section 32 of the Original Lease and the Rules and Regulations regarding parking contained in Exhibit "H" to the Original Lease. 8. Expansion Rights. Sections 2(e), 2(g), 3(b)(ii), 3(b)(iii), and ---------------- 3(b)(iv) of the Original Lease are hereby deleted and shall be of no force or effect. In lieu thereof, Landlord hereby grants to Tenant a right of first offer with respect to all of Building Three, the remaining space in Building Five and all of that certain building located and addressed at 16775 Von Karman Avenue ("Building Six") (collectively, the "First Offer Space"). Notwithstanding the foregoing (i) such first offer right of Tenant shall commence only following the expiration or earlier termination of any then existing lease pertaining to the First Offer Space (collectively, the "Superior Leases"), including any renewal or extension of such existing lease, whether or not such renewal or extension is pursuant to an express written provision in such lease, and regardless of whether any such renewal or extension is consummated pursuant to a lease amendment or a new lease, and (ii) such first offer right shall be subordinate and secondary to all rights of Initials: -------- -------- -3- expansion, first refusal, first offer or similar rights granted as of the date of this Fourth Amendment to I T with respect to Suite 150 in Building 6 (the rights described in items (i) and (ii), above to be known collectively as "Superior Rights"). Tenant's right of first offer shall be on the terms and conditions set forth in this Section 8. 8.1 Procedure for Offer. With respect to First Offer Space which is ------------------- occupied, Landlord shall notify Tenant (the "First Offer Notice") from time to time when Landlord determines that Landlord shall commence the marketing of any First Offer Space because such space shall become available for lease to third parties, where no holder of a Superior Right desires to lease such space. With respect to First Offer Space which is vacant, Landlord shall deliver the First Offer Notice to Tenant when Landlord receives a proposal or request for proposal for such space which Landlord would seriously consider. In either case, the First Offer Notice shall describe the space so offered to Tenant and shall set forth Landlord's proposed economic terms and conditions applicable to Tenant's lease of such space (collectively, the "Economic Terms") including, without limitation, monthly base rent, any contribution by Landlord to the cost of renovation of leasehold improvements and the term of Tenant's lease of such space. Landlord's determination of the Economic Terms shall be based upon the then-current market rate for similarly situated space in Irvine, California. Notwithstanding the foregoing, Landlord's obligation to deliver the First Offer Notice shall not apply after June 14, 2005 unless Tenant has extended the term of the Lease (as amended by this Fourth Amendment) pursuant to Section 3(c) of the Original Lease (as modified by Section 9 below). 8.2 Procedure for Acceptance. If Tenant wishes to exercise Tenant's ------------------------ right of first offer with respect to the space described in the First Offer Notice, then within five (5) business days after delivery of the First Offer Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to exercise its right of first offer with respect to the entire space described in the First Offer Notice. If concurrently with Tenant's exercise of the first offer right, Tenant notifies Landlord that it does not accept the Economic Terms set forth in the First Offer Notice, Landlord and Tenant shall, for a period of fifteen (15) days after Tenant's exercise, negotiate in good faith to reach agreement as to such Economic Terms. If Tenant does not so notify Landlord that it does not accept the Economic Terms set forth in the First Offer Notice concurrently with Tenant's exercise of the first offer right, the Economic Terms shall be as set forth in the First Offer Notice. In addition, if Tenant does not exercise its right of first offer within the five (5) business day period, or, if Tenant exercises its first offer right but timely objects to Landlord's determination of the Economic Terms and if Landlord and Tenant are unable to reach agreement on such Economic Terms within said fifteen (15) day period, then Landlord shall be free to lease the space described in the First Offer Notice to anyone to whom Landlord desires on any terms Landlord desires ; provided, however, that if Landlord intends to enter into a lease upon Economic Terms which are more favorable to a third (3rd) party tenant than those Economic Terms proposed by Landlord in the First Offer Notice, Landlord shall first deliver written notice to Tenant ("Second Chance Notice") providing Tenant with the opportunity to lease the First Offer Space on such more favorable Economic Terms. Tenant's failure to elect to lease the First Offer Space upon such more favorable Economic Terms by written notice to Landlord within three (3) business days after Tenant's receipt of such Second Chance Notice from Landlord shall be deemed to constitute Tenant's election not to lease such space upon such more favorable Economic Terms, in which case Landlord shall be entitled to lease such space to any third (3rd) party on terms no more favorable to the third (3rd) party than those set forth in the Second Chance Notice. If Landlord leases any First Offer Space to a third (3rd) party tenant (subject to the terms and conditions of this Article 8 above), and if such third party lease terminates or expires during the period that Tenant's right of first offer remains in effect (as specified in the last sentence of Section 8.1 above), the process described in this Article 8 shall repeat. Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its right of first offer, if at all, with respect to all of the space offered by Landlord to Tenant at any particular time, and Tenant may not elect to lease only a portion thereof. 8.3 Lease of First Offer Space. If Tenant timely exercises Tenant's -------------------------- right to lease the First Offer Space as set forth herein, Landlord and Tenant shall execute an amendment adding such First Offer Space to the Lease upon the same non-economic terms and conditions as applicable to the New Premises, and the economic terms and conditions as provided in this Initials: -------- -------- -4- Section 8. Tenant shall commence payment of rent for the First Offer Space and the Lease Term of the First Offer Space shall commence upon the date of delivery of such space to Tenant. 8.4 No Defaults. The rights contained in this Section 8 shall be ----------- personal to the Tenant named in the first grammatical paragraph of this Fourth Amendment ("Referenced Tenant"), and may only be exercised by the Referenced Tenant or any "Affiliated Assignee" (and not any other assignee, sublessee or other transferee). The term "Affiliated Assignee" shall mean any assignee of Tenant's entire interest in the Lease (as amended by this Fourth Amendment) where such assignment is a "Permitted Transfer" (as that term is defined in Section 24(c) of the Original Lease). Tenant shall not have the right to lease First Offer Space as provided in this Section 8 if, as of the date of the First Offer Notice, or, at Landlord's option, as of the scheduled date of delivery of such First Offer Space to Tenant, Tenant is in default under the Lease (as amended by this Fourth Amendment). 9. Extension Option. Tenant shall be entitled to extend the term of the ---------------- Lease (as amended by this Fourth Amendment) for a period of five (5) years in accordance with, and subject to the terms and conditions of Section 3(c) of the Original Lease; provided, however, the words "and specifying the length of the extension" shall be deleted from the end of the second (2nd) sentence of Section 3(c) of the Original Lease. 10. Notice of Lease Term Dates. Landlord may deliver to Tenant a -------------------------- commencement letter in a form substantially similar to that attached hereto as Exhibit "C" and made a part hereof at any time after the Phase 2 Effective Date. Tenant agrees to execute and return to Landlord said commencement letter within five (5) days after Tenant's receipt thereof. 11. Brokers. Each party represents and warrants to the other that no ------- broker, agent or finder negotiated or was instrumental in negotiating or consummating this Fourth Amendment. Each party further agrees to defend, indemnify and hold harmless the other party from and against any claim for commission or finder's fee by any entity who claims or alleges that they were retained or engaged by the first party or at the request of such party in connection with this Fourth Amendment. 12. Defaults. Tenant hereby represents and warrants to Landlord that, as -------- of the date of this Fourth Amendment, Tenant is in full compliance with all terms, covenants and conditions of the Lease and that there are no breaches or defaults under the Lease by Landlord or Tenant, and that Tenant knows of no events or circumstances which, given the passage of time, would constitute a default under the Lease by either Landlord or Tenant. 13. Signing Authority. Concurrently with Tenant's execution of this ----------------- Fourth Amendment, Tenant shall provide to Landlord a copy of a resolution of the Board of Directors of Tenant authorizing the execution of this Fourth Amendment on behalf of such corporation, which copy of resolution shall be duly certified by the secretary or an assistant secretary of the corporation to be a true copy of a resolution duly adopted by the Board of Directors of said corporation and shall be in the form of Exhibit "D" or in some other form reasonably acceptable to Landlord. 14. Assignment and Subletting. The parties hereby agree that Section ------------------------- 24(b) of the Original Lease shall not apply so long as Tenant is a publicly-held corporation. 15. No Further Modification. Except as set forth in this Fourth ----------------------- Amendment, all of the terms and provisions of the Lease shall apply and shall remain unmodified and in full force and effect and all references to the "Lease" shall refer to the Lease as amended by this Fourth Amendment. Initials: -------- -------- -5- IN WITNESS WHEREOF, this Fourth Amendment has been executed as of the day and year first above written. "Landlord": ARDEN REALTY FINANCE IV, L.L.C., a Delaware limited liability company By: /s/ VICTOR J. COLEMAN ------------------------------------ Victor J. Coleman Its: President and COO By: ------------------------------------ Its: ------------------------------------ "Tenant": INTERPLAY ENTERTAINMENT CORPORATION, a Delaware corporation By: /s/ CHRIS KILPATRICK ------------------------------------ Print Name: Chris Kilpatrick ----------------------------- Its: President ----------------------------- By: /s/ JAMES C. WILSON ------------------------------------ Print Name: James C. Wilson ----------------------------- Its: Chief Financial Officer ----------------------------- Initials: -------- -------- -6- EXHIBIT "A-1" ------------- OUTLINE OF PHASE 1 SURRENDER SPACE ---------------------------------- [DIAGRAM OF SURRENDER SPACE] EXHIBIT "A-1" - Page 1 Initials: -------- -------- -7- EXHIBIT "A-2" ------------- OUTLINE OF BUILDING FOUR IMPROVEMENT SPACE ------------------------------------------ [DIAGRAM OF BUILDING FOUR IMPROVEMENT SPACE] EXHIBIT "A-2" - Page 1 Initials: _________ _________ EXHIBIT "B" ----------- TENANT WORK LETTER ------------------ This Tenant Work Letter shall set forth the terms and conditions relating to the renovation of the tenant improvements in the Building Four Improvement Space and the Expansion Space. The Building Four Improvement Space and the Expansion Space may be collectively referred to herein as the "Improvement Space." This Tenant Work Letter is essentially organized chronologically and addresses the issues of the renovation of the Improvement Space, in sequence, as such issues will arise. SECTION 1 --------- LANDLORD'S INITIAL CONSTRUCTION IN THE IMPROVEMENT SPACE -------------------------------------------------------- Landlord has constructed, at its sole cost and expense, the base, shell and core (i) of the Improvement Space, and (ii) of the floor of the Building on which the Improvement Space is located (collectively, the "Base, Shell and Core"). Tenant has inspected and hereby approves the condition of the Base, Shell and Core and the Improvement Space, and agrees that the Base, Shell and Core and the Improvement Space shall be delivered to Tenant in their current "as-is" condition. The improvements to be renovated in the Improvement Space shall be designed and constructed pursuant to this Tenant Work Letter. SECTION 2 --------- IMPROVEMENTS ------------ 2.1 Improvement Allowance. Tenant shall be entitled to a one-time --------------------- improvement allowance (the "Improvement Allowance ") in the amount of Fifteen Dollars ($15.00) per rentable square foot of the Building Four Improvement Space (the "Building Four Allowance") and Ten Dollars ($10.00) per rentable square foot of the Expansion Space (the "Expansion Space Allowance") for the costs relating to the initial design and construction of Tenant's improvements which are permanently affixed to the applicable Improvement Space (the "Improvements"). In no event shall Tenant be entitled to utilize any portion of the Building Four Allowance for the improvement of any space other than the Building Four Improvement Space and in no event shall Tenant be entitled to utilize any portion of the Expansion Space Allowance for the improvement of any space other than the Expansion Space. In addition, in no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter in a total amount which exceeds the Improvement Allowance and in no event shall Tenant be entitled to any credit for any unused portion of the Improvement Allowance not used by Tenant by the date which is three (3) months after the Phase 2 Effective Date. 2.2 Disbursement of the Improvement Allowance. Except as otherwise set ----------------------------------------- forth in this Tenant Work Letter, the Improvement Allowance shall be disbursed by Landlord pursuant to this Section 2.2 for costs related to the construction of the Improvements and for the following items and costs (collectively, the "Improvement Allowance Items "): (i) payment of the fees of the "Architect" and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter, and payment of the fees incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's consultants in connection with the preparation and review of the "Construction Drawings," as that term is defined in Section 3.1 of this Tenant Work Letter; (ii) the cost of permits, construction supervision fees; (iii) the cost of any changes in the Base, Shell and Core required by the Construction Drawings; and (iv) the cost of any changes to the Construction Drawings or Improvements required by applicable building codes (the "Code"). During the construction of the Improvements, Landlord shall make monthly disbursements of the Improvement Allowance for Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows. EXHIBIT "B" - Page 1 Initials: _________ _________ 2.2.1 Monthly Disbursements. On or before the first day of each --------------------- calendar month, during the construction of the Improvements (or such other date as Landlord may designate), Tenant shall deliver to Landlord: (i) a request for payment of the "Contractor," as that term is defined in Section 4.1 of this Tenant Work Letter, approved by Tenant, in a form to be provided by Landlord, showing the schedule, by trade, of percentage of completion of the Improvements in the applicable Improvement Space, detailing the portion of the work completed and the portion not completed; (ii) invoices from all of "Tenant's Agents," as that term is defined in Section 4.2 of this Tenant Work Letter, for labor rendered and materials delivered to the applicable Improvement Space; (iii) executed mechanic's lien releases from all of Tenant's Agents which shall comply with the appropriate provisions, as reasonably determined by Landlord, of California Civil Code Section 3262(d); and (iv) all other information reasonably requested by Landlord. Tenant's request for payment shall be deemed Tenant's acceptance and approval of the work furnished and/or the materials supplied as set forth in Tenant's payment request. Within thirty (30) days thereafter, Landlord shall deliver a check to Tenant in payment of the lesser of: (A) the amounts so requested by Tenant, as set forth in this Section 2.2.1, above, less a ten percent (10%) retention (the aggregate amount of such retentions to be known as the "Final Retention"), and (B) the balance of any remaining available portion of the Improvement Allowance (not including the Final Retention), provided that Landlord does not dispute any request for payment based on non- compliance of any work with the "Approved Working Drawings," as that term is defined in Section 3.4 below, or due to any substandard work. Landlord's payment of such amounts shall not be deemed Landlord's approval or acceptance of the work furnished or materials supplied as set forth in Tenant's payment request. 2.2.2. Final Retention. Subject to the provisions of this Tenant --------------- Work Letter, a check for the Final Retention payable to Tenant shall be delivered by Landlord to Tenant following the completion of construction of the applicable Improvement Space, within thirty (30) days after (i) Tenant delivers to Landlord properly executed mechanics lien releases in compliance with both California Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section 3262(d)(4), and (ii) Architect delivers to Landlord a certificate, in a form reasonably acceptable to Landlord, certifying that the construction of the Improvements in the applicable Improvement Space has been substantially completed. However, if Landlord determines that substandard work exists which adversely effects the mechanical, electrical, plumbing, heating, ventilating and air conditioning, life-safety or other systems of the Building, the curtain wall of the Building, the structure or exterior appearance of the Building, or any other tenant's use of such other tenant's leased premises in the Building, Landlord shall be entitled to withhold the Final Retention until the Contractor corrects such items to Landlord's reasonable satisfaction. 2.2.3 Other Terms. Landlord shall only be obligated to make ----------- disbursements from the Improvement Allowance to the extent costs are incurred by Tenant for Improvement Allowance Items. All Improvement Allowance Items for which the Improvement Allowance has been made available shall be deemed Landlord's property. 2.3 Standard Tenant Improvement Package. Landlord has established ----------------------------------- specifications (the "Specifications ") for the Building standard components to be used in the construction of the Improvements in the Improvement Space (collectively, the "Standard Improvement Package"), which Specifications are available upon request. The quality of Improvements shall be equal to or of greater quality than the quality of the Specifications, provided that Landlord may, at Landlord's option, require the Improvements to comply with certain Specifications. SECTION 3 --------- CONSTRUCTION DRAWINGS --------------------- 3.1 Selection of Architect/Construction Drawings. The procedures -------------------------------------------- described in this Section 3 and in Section 4 below shall apply separately with respect to the improvement of the Building Four Improvement Space and the Expansion Space (i.e., separate Construction Drawings shall be prepared for each such space). Tenant shall retain an architect/space planner designated by Tenant and reasonably approved by Landlord (the "Architect ") to prepare the "Construction Drawings," as that term is defined in this Section 3.1. Tenant shall also retain the engineering consultants designated by Tenant and reasonably approved by Landlord (the EXHIBIT "B" - Page 2 Initials: _________ _________ "Engineers") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC and lifesafety work of the Tenant Improvements. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "Construction Drawings." All Construction Drawings shall comply with the drawing format and specifications as reasonably determined by Landlord, and shall be subject to Landlord's reasonable approval. Tenant and Architect shall verify, in the field, the dimensions and conditions as shown on the relevant portions of the base building plans, and Tenant and Architect shall be solely responsible for the same, and Landlord shall have no responsibility in connection therewith. Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's review of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters. Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord's space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings. 3.2 Final Space Plan. Tenant and the Architect shall prepare the final ---------------- space plan for Improvements in the applicable Improvement Space (collectively, the "Final Space Plan"), which Final Space Plan shall include a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein, and shall deliver the Final Space Plan to Landlord for Landlord's approval, which approval shall not be unreasonably withheld or delayed. Landlord shall approve or disapprove any draft of the Final Space Plan within five (5) business days after Landlord receipt thereof. 3.3 Final Working Drawings. Tenant, the Architect and the Engineers shall ---------------------- complete the architectural and engineering drawings for the applicable Improvement Space, and the final architectural working drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the "Final Working Drawings") and shall submit the same to Landlord for Landlord's approval, which approval shall not be unreasonably withheld or delayed. Landlord shall approve or disapprove any draft of the Final Working Drawings within five (5) business days after Landlord receipt thereof. 3.4 Permits. The Final Working Drawings shall be approved by Landlord ------- (the "Approved Working Drawings") prior to the commencement of the construction of the Improvements. Tenant shall cause the Architect to immediately submit the Approved Working Drawings to the appropriate municipal authorities for all applicable building permits necessary to allow "Contractor," as that term is defined in Section 4.1, below, to commence and fully complete the construction of the Improvements (the "Permits"). No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. 3.5 Time Deadlines. Tenant shall use commercially reasonable efforts and -------------- good faith due diligence to cooperate with the Architect, the Engineers, and Landlord to complete all phases of the Construction Drawings and the permitting process and to receive the permits as soon as commercially practicable after the execution of the Fourth Amendment, and, in that regard, shall meet with Landlord on a scheduled basis to be determined by Landlord, to discuss Tenant's progress in connection with the same. SECTION 4 --------- CONSTRUCTION OF THE IMPROVEMENTS -------------------------------- 4.1 Contractor. The contractor which shall construct the Improvements ---------- shall be a contractor designated by Tenant and approved by Landlord, such approval not to be unreasonably withheld or delayed. The contractor selected may be referred to herein as the "Contractor". 4.2 Tenant's Agents. All subcontractors, laborers, materialmen, and --------------- suppliers used by the Tenant (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as "Tenant's Agents") must be approved in writing by Landlord, which EXHIBIT "B" - Page 3 Initials: _________ _________ approval shall not be unreasonably withheld or delayed. If Landlord does not approve any of the Tenant's proposed subcontractors, laborers, materialmen or suppliers, the Tenant shall submit other proposed subcontractors, laborers, materialmen or suppliers for Landlord's written approval. Notwithstanding the foregoing, the Tenant shall be required to utilize subcontractors approved by Landlord for any mechanical, electrical, plumbing, life-safety, sprinkler, structural and air-balancing work. 4.3 Construction of Improvements by Contractor. ------------------------------------------ Tenant shall independently retain, in accordance with Section 4.1 above, the Contractor to construct the Improvements in accordance with the Approved Working Drawings. Should the cost related to the construction of the Improvements and the Improvement Allowance Items exceed the Building Four Allowance or the Expansion Space Allowance (as applicable) Tenant shall be responsible for such excess. 4.4 Indemnification & Insurance. --------------------------- 4.4.1 Indemnity. Tenant's indemnity of Landlord as set forth in --------- Section 18.5 of the Original Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant or Tenant's Agents. 4.4.2 Requirements of Tenant's Agents. Each of Tenant's Agents shall ------------------------------- guarantee to Tenant and for the benefit of Landlord that the portion of the Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. All such warranties or guarantees as to materials or workmanship of or with respect to the Improvements shall be contained in the contract or subcontract and shall be written such that such guarantees or warranties shall inure to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment or other assurances which may be necessary to effect such right of direct enforcement. 4.4.3 Insurance Requirements. ---------------------- 4.4.3.1 General Coverages. All of Tenant's Agents shall carry ----------------- worker's compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in Article 19 of the Original Lease. 4.4.3.2 Special Coverages. Tenant shall carry "Builder's All ----------------- Risk" insurance in an amount approved by Landlord covering the construction of the Improvements, and such other insurance as Landlord may reasonably require. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord. 4.4.3.3 General Terms. Certificates for all insurance carried ------------- pursuant to this Section 4.4.3.3 shall be delivered to Landlord before the commencement of construction of the Improvements and before the Contractor's equipment is moved onto the site. In the event that the Improvements are damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant's sole cost and expense. SECTION 5 --------- COMPLETION OF THE IMPROVEMENTS ------------------------------ 5.1 Substantial Completion. For purposes of this Fourth Amendment, ---------------------- "Substantial Completion" of the Improvements in an Improvement Space shall occur upon the completion of construction of the Improvements in the applicable Improvement Space pursuant to the Approved Working Drawings, with the exception of any punch list items. 5.2 Landlord Delays. The sixty (60) day period specified in Section 3(ii) --------------- of the Fourth Amendment shall be extended by one (1) day for each day that Tenant is delayed in the EXHIBIT "B" - Page 4 Initials: _________ _________ Substantial Completion of the Improvements in the Expansion Space as the result of a "Landlord Delay." The term "Landlord Delay" shall mean an actual delay in the Substantial Completion of the Improvements in the Expansion Space which is caused by (i) the failure of Landlord to provide authorizations or approvals within the time periods set forth in this Tenant Work Letter, (ii) the failure by Landlord to pay the Expansion Space Allowance within the time periods specified in this Tenant Work Letter, or (iii) Landlord's failure to provide Tenant with possession of the Expansion Space for the purpose of constructing the Improvements therein after the Final Working Drawings have been approved by Landlord and Tenant has received all necessary governmental permits and approvals. Notwithstanding anything to the contrary contained herein, no Landlord Delay shall be deemed to have occurred until and unless Tenant has given Landlord written notice that an act or omission on the part of Landlord is about to occur or has occurred which will cause a delay in the Substantial Completion of the Improvements in the Expansion Space and Landlord has failed to cure such delay within one (1) business day after Landlord's receipt of such notice, in which case the number of days of delay after such notice shall be deemed a Landlord Delay to the extent such delay actually delays the Substantial Completion of the Improvements in the Expansion Space. SECTION 6 --------- MISCELLANEOUS ------------- 6.1 Tenant's Representative. Tenant has designated Steven "Chuck" Camps ----------------------- as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter. 6.2 Landlord's Representative. Prior to commencement of construction of ------------------------- Improvements, Landlord shall designate a representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter. 6.3 Time of the Essence in This Tenant Work Letter. Unless otherwise ---------------------------------------------- indicated, all references herein to a "number of days" shall mean and refer to calendar days. 6.4 Construction During Term. Tenant acknowledges that construction of ------------------------ the Improvements in the Building Four Improvement Space shall be conducted during the Term of Tenant's lease of such space and that Tenant shall not be entitled to any abatement of rent nor shall Tenant be deemed to be constructively evicted from such space as a result of such construction or as a result of any inconveniences associated with such construction. EXHIBIT "B" - Page 5 Initials: _________ _________ EXHIBIT "C" ----------- NOTICE OF LEASE TERM DATES -------------------------- TO: ______________________________________ DATE: ________________, 199_ ______________________________________ ______________________________________ Attention: ___________________________ RE: Fourth Amendment dated ________________, 1998 between ARDEN REALTY FINANCE IV, L.L.C., a Delaware limited liability company ("Landlord"), and INTERPLAY ENTERTAINMENT CORP., a Delaware corporation ("Tenant"), concerning Suite ____ (the "Expansion Space"), located at 16795 Von Karman Avenue, Irvine, California. Dear Mr. [or Ms.] ____________: In accordance with the Fourth Amendment, Landlord wishes to advise and/or confirm the following: 1. That the Tenant is in possession of the Expansion Space and acknowledges that under the provisions of the Fourth Amendment, the Phase 2 Effective Date has occurred as of ________________, 199_ and Tenant's lease of such space shall expire on June 14, 2006. 2. The exact number of rentable square feet within the Expansion Space is _________ square feet. 3. Tenant's Percentage, as adjusted based upon the number of rentable square feet within the Expansion Space, is _______%. AGREED AND ACCEPTED: TENANT: INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: ______________________________________ Print Name: _______________________________ Its: _________________________________ By: ______________________________________ Print Name: _______________________________ Its: _________________________________ EXHIBIT "C" - Page 1 Initials: _________ _________ EXHIBIT "D" ----------- CERTIFIED COPY OF BOARD OF DIRECTORS RESOLUTIONS OF INTERPLAY ENTERTAINMENT CORP. ----------------------------- The undersigned, being the duly elected Corporate Secretary of Interplay Entertainment Corp., a Delaware corporation ("Corporation"), hereby certifies that the following is a true, full and correct copy of the resolutions adopted by the Corporation by unanimous written consent in lieu of a special meeting of its Board of Directors, and that said resolutions have not been amended or revoked as of the date hereof. RESOLVED, that the Corporation, is hereby authorized to execute, deliver and fully perform that certain document entitled Fourth Amendment to Lease ("Amendment") by and between the Corporation and Arden Realty Finance IV, L.L.C., a Delaware limited liability company, for the lease of space at Von Karman Corporate Center, Irvine, California. RESOLVED FURTHER, that the Corporation is hereby authorized and directed to make, execute and deliver any and all, consents, certificates, documents, instruments, amendments, confirmations, guarantees, papers or writings as may be required in connection with or in furtherance of the Amendment (collectively with the Amendment, the "Documents") or any transactions described therein, and to do any and all other acts necessary or desirable to effectuate the foregoing resolution. RESOLVED FURTHER, that the following officers acting together: _______________ as _____________ and ____________ as _______________ are authorized to execute and deliver the Documents on behalf of the Corporation, together with any other documents and/or instruments evidencing or ancillary to the Documents, and in such forms and on such terms as such officer(s) shall approve, the execution thereof to be conclusive evidence of such approval and to execute and deliver on behalf of the Corporation all other documents necessary to effectuate said transaction in conformance with these resolutions. Date: _____________, 199_ _______________________________________ __________________, Corporate Secretary EXHIBIT "D" - Page 1 Initials: _________ _________ EX-10.2 3 MASTER EQUIPMENT LEASE SCHEDULES 8-10 EXHIBIT 10.2 BRENTWOOD CREDIT CORPORATION SCHEDULE NO. 08 TO MASTER EQUIPMENT LEASE NO. IPI-1000-100 DATED March 28, 1996 LESSEE Interplay Entertainment Corp. Equipment Data: - --------------- QUANTITY TYPE MODEL DESCRIPTION - -------- ---- ----- ----------- See attached for breakdown of equipment. Location of Equipment: 16815 Von Karman Avenue - ---------------------- Irvine, CA 92606 Term of Schedule: 24 months commencing on the first day of the month following - ----------------- the date that Seller certifies that the Equipment is in good working order and made ready for use. If Equipment is installed, the Commencement Date is the first day of the month following the date the delivery and acceptance document is executed. Interim rent: Will be an amount equal to 1/30 of the rental payment multiplied - ------------- by the number of days elapsed between the above seller certification date or, if installed, execution of this schedule and the first day of the following month, or the first day of an otherwise specified month (Commencement Date). Rental Payments: $5,215.00 per month in advance plus applicable taxes. - ---------------- Brentwood Credit Corporation, Lessor, hereby agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and rent from Lessor the Equipment listed above, for the term and rental payments specified, all subject to the terms and conditions set forth in such equipment lease. Lessor: BRENTWOOD CREDIT Lessee: INTERPLAY ENTERTAINMENT CORPORATION CORP. By: /s/ MICHAEL J. BUDZINSKI By: /s/ STEVEN "CHUCK" CAMPS ------------------------------ --------------------------------- Title: Chief Financial Officer Title: Chief Operating Officer --------------------------- ------------------------------ Date: 9/30/98 Date: 9-27-98 ---------------------------- ------------------------------- 1620 26th Street, Suite 290-S 16815 Von Karman Avenue Santa Monica, CA 90404 Irvine, CA 92606 [LETTERHEAD OF BRENTWOOD CREDIT] INTERPLAY ENTERTAINMENT CORP. SCHEDULE 08 TO MASTER LEASE IPI-1000-100 EQUIPMENT ATTACHMENT PAGE 1 OF 1 QTY EQUIPMENT DESCRIPTION - --- --------------------- THOMSON BROADCAST ----------------- 1 B3152-N NTSC Digital Betacam Recorder A.P.B. with Advanced Control Panel (DVWA500/1) 1 B3450-505 NTSC decoder input board (BKDW-505) 1 B3450110 Rack Mounting Adapter 1 Shipping NETWORK CATALYST INC. --------------------- 3 3C93012 3Com SSII Switch 9300 - 12 Ports 1000Base SX 7 3C39036 3Com SSII Switch 3900 - 36 Ports 10/100BASE TX 1 PORT 1000Base SX 6 3C39001 3Com SSII Switch 3900 - 1000Base SX Module 1 3C985-SX-5PK 3Com Gig Ethernet Server NIC - 5 Pack 1 3C81400 Transcend Ent Mgr '97 for Windows NT [LETTERHEAD OF BRENTWOOD CREDIT] Rider No.: 01 To Schedule No.: 08 To Master Equipment Lease No.: IPI-1000-100 Lessee: Interplay Entertainment Corp. PURCHASE OPTION So long as no Event of Default (or an occurrence that would constitute an Event of Default with the giving of notice or the lapse of time or both) shall have occurred and be continuing, the Lessee shall have the option, on at least 90 days' prior written notice to the Lessor, to purchase all (but not less than all) items of Equipment then subject hereto on the date of expiration of the Term for a purchase price equal to the Fair Market Value (as defined below) of such item of Equipment on such date. If such notice shall be given, the Lessor shall sell and the Lessee shall purchase each item on such date for its Fair Market Value. Upon payment by the Lessee of the purchase price for each item of Equipment, the Lessor shall execute and deliver to or at the direction of the Lessee a bill of sale therefor on an "As-is, Where-Is" basis and without any representation or warranty, except that such item of Equipment is free and clear of all claims, liens, security interests and other encumbrances in favor of the Lessor or of any person claiming through or under the Lessor. The Lessee shall pay or cause to be paid all sales and use taxes payable in connection with such sale to it of any such item of Equipment and all unpaid property taxes thereto assessed or levied against such item of Equipment and attributable to the period prior to such expiration. "Fair Market Value" for purposes of the purchase option is defined as the purchase price that would be obtained in a retail market in an arms-length transaction as of the end of the Extended Term between informed and willing buyers and sellers under no compulsion to buy or sell. In the event Lessor and Lessee cannot agree upon the purchase price, such amount shall be determined by an independent appraiser selected by Lessor and satisfactory to Lessee. The cost of such appraisal shall be paid equally by Lessor and Lessee. BRENTWOOD CREDIT CORPORATION Date: 9/30/98 By: /s/ MICHAEL J. BUDZINSKI ------------------------ -------------------------------------- Title: Chief Financial Officer ----------------------------------- INTERPLAY ENTERTAINMENT CORP. DATE: 9/30/98 By: /s/ STEVEN "CHUCK" CAMPS ------------------------ -------------------------------------- Title: Chief Operating Officer ----------------------------------- BRENTWOOD CREDIT CORPORATION SCHEDULE NO. 09 TO MASTER EQUIPMENT LEASE NO. IPI-1000-100 DATED March 28, 1996 LESSEE Interplay Entertainment Corp. Equipment Data: - --------------- QUANTITY TYPE MODEL DESCRIPTION - -------- ---- ----- ----------- See attached for breakdown of equipment. Location of Equipment: 16815 Von Karman Avenue - ---------------------- Irvine, CA 92606 Term of Schedule: 24 months commencing on the first day of the month following - ----------------- the date that Seller certifies that the Equipment is in good working order and made ready for use. If Equipment is installed, the Commencement Date is the first day of the month following the date the delivery and acceptance document is executed. Interim rent: Will be an amount equal to 1/30 of the rental payment multiplied - ------------- by the number of days elapsed between the above seller certification date or, if installed, execution of this schedule and the first day of the following month, or the first day of an otherwise specified month (Commencement Date). Rental Payments: $4,985.00 per month in advance plus applicable taxes. - ---------------- Brentwood Credit Corporation, Lessor, hereby agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and rent from Lessor the Equipment listed above, for the term and rental payments specified, all subject to the terms and conditions set forth in such equipment lease. Lessor: BRENTWOOD CREDIT Lessee: INTERPLAY ENTERTAINMENT CORPORATION CORP. By: /s/ MALCOLM LEE By: /s/ STEVEN "CHUCK" CAMPS -------------------------- --------------------------- Title: President Title: Chief Operating Officer ----------------------- ------------------------ Date: 9/4/98 Date: 8/30/98 ------------------------- -------------------------- 1620 26th Street, Suite 290-S 16815 Von Karman Avenue Santa Monica, CA 90404 Irvine, CA 92606 [LETTERHEAD OF BRENTWOOD CREDIT] INTERPLAY ENTERTAINMENT CORP. SCHEDULE 09 TO MASTER LEASE IPI-1000-100 EQUIPMENT ATTACHMENT PAGE 1 OF 2 QTY EQUIPMENT DESCRIPTION - --- --------------------- Carrera Computers, Inc. - Quote #17014 -------------------------------------- 10 RM/SL/533LX 19" Slimline Rackmount Chassis, EV56 LX M/B, Alpha 533Mhz CPU, 2 MB cache, 300W P/S, and HDFD 20 SD16X72-60 16X72 128MB 3.3 Volt 10ns SDRAM-DIMMS (256MB RAM Per Workstation) 10 VDSP2D PCI Video Card w/2MB DRAM 10 2GU16 Seagate Barracuda 2GB, 8 Bit ULTRA SCSI Hard Drive 10 CD24XIDE 24X IDE Toshiba CD-ROM 10 ITI-4140 Intraserver Ultra SCSI Controller & 10/100 Ethernet for Linux, NT & UNIX 10 RM/ATX/S Set of 2ea. 24" Rackmount slides for ATX 19" chasis 1 KBD/MSE3 Keyboard 101 and Logitech 3 Button Mouse 1 MISC Black Box 12 port K/V/M switch w/10 cables 10 NT 4.0 WK Windows NT 4.0 Workstation - Single User 1 MISC 43" Rack to house slimlines 1 R&R Warranty-2yrs-CabrioJet repaired/replaced in 48 hrs if RMA's returned to Carrera FedEx next day MTI Technology Corporation - Quote #174 32 ------------------------------------------ 1 ATL P1000-2-700 ATL P1000 Library 30 Cartridges with (2) DLT 7000 Fast Wide Diff, Maintenance is for one year, Includes Mounting Hardware and SCSI3 Cables 1 P1000-C4MK-20 ATL P1000 DLT tape IV Media Kit -(20) DL Tape IV data cartridges -(1) DL Tape cleaning cartridge -(20) cleaning cartridge barcode labels 30 day warranty INTERPLAY ENTERTAINMENT CORP. SCHEDULE 09 TO MASTER LEASE IPI-1000-100 EQUIPMENT ATTACHMENT PAGE 2 OF 2 QTY EQUIPMENT DESCRIPTION - --- --------------------- MTI Technology Corporation - Quote # 174 34 ------------------------------------------- 1 Gl32R-UWD Gladiator 3200 Chassis with 120/220 AC Power - Active/active redundant controllers - Active/passive redundant config available - Multiple, simultaneous RAID levels 0.1, 0+1 and 5 - Supports up to 64MB cache - Differential Ultra-SCSI host interface - 2-16 SCA disk drives of 2.1GB, 4.29GB or 9.1GB cap - Array capacities from 4.2GB to 145.6GB - Hot-swappable disk drives - Redundant hot-swappable power supplies - Redundant hot-swappable fans - Phone Home 24x7 Service Program - 1 year on-site warranty Each GL32R-UWD is configured with the following options: 1 +GL32-RCD-32 Add-on Dual RAID Ctrls. active/active config w/32MB 1 +GL32R-EXP -(R) drive expansion chassis w/(2) 300 watt, 1 +DAS9KIT-4/4 RAID Software kit, CLI on 4MM, GUI on 4MM 9 +NP379FPL Filler panel, 83/93/MT83SRRM series (SA-379) 7 1820F-LVD-32 Disk Canister 18.2GB 7200 RPM, 3.5" FH LVD 1 year on-site warranty 4 M68-M68/12 SCSI I/O Interface Cable - 12ft SCSI interface cable - Mini-68p SCSI III male to Mini-68p SCSI III male 1 year return-to-factory warranty [LETTERHEAD OF BRENTWOOD CREDIT] Rider No.: 01 To Schedule No.: 09 To Master Equipment Lease No.: IPI-1000-100 Lessee: INTERPLAY ENTERTAINMENT CORP. PURCHASE OPTION So long as no Event of Default (or an occurrence that would constitute an Event of Default with the giving of notice or the lapse of time or both) shall have occurred and be continuing, the Lessee shall have the option, on at least 90 days' prior written notice to the Lessor, to purchase all (but not less than all) items of Equipment then subject hereto on the date of expiration of the Term for a purchase price equal to the Fair Market Value (as defined below) of such item of Equipment on such date. If such notice shall be given, the Lessor shall sell and the Lessee shall purchase each item on such date for its Fair Market Value. Upon payment by the Lessee of the purchase price for each item of Equipment, the Lessor shall execute and deliver to or at the direction of the Lessee a bill of sale therefor on an "As-is, Where-Is" basis and without any representation or warranty, except that such item of Equipment is free and clear of all claims, liens, security interests and other encumbrances in favor of the Lessor or of any person claiming through or under the Lessor. The Lessee shall pay or cause to be paid all sales and use taxes payable in connection with such sale to it of any such item of Equipment and all unpaid property taxes thereto assessed or levied against such item of Equipment and attributable to the period prior to such expiration. "Fair Market Value" for purposes of the purchase option is defined as the purchase price that would be obtained in a retail market in an arms-length transaction as of the end of the Extended Term between informed and willing buyers and sellers under no compulsion to buy or sell. In the event Lessor and Lessee cannot agree upon the purchase price, such amount shall be determined by an independent appraiser selected by Lessor and satisfactory to Lessee. The cost of such appraisal shall be paid equally by Lessor and Lessee. BRENTWOOD CREDIT CORPORATION Date: 9/4/98 By: /s/ MALCOLM LEE ------ -------------------------- Title: President ----------------------- INTERPLAY ENTERTAINMENT CORP. DATE: 8/30/98 BY: /s/ STEVEN "CHUCK" CAMPS ------- -------------------------- Title: Chief Operating Officer ----------------------- BRENTWOOD CREDIT CORPORATION SCHEDULE NO. 010 TO MASTER EQUIPMENT LEASE NO. IPI-1000-100 DATED March 28, 1996 LESSEE Interplay Entertainment Corp. Equipment Data: - --------------- QUANTITY TYPE MODEL DESCRIPTION - -------- ---- ----- ----------- See attached for breakdown of equipment. Location of Equipment: 16815 Von Karman Avenue - ---------------------- Irvine, CA 92606 Term of Schedule: 24 months commencing on the first day of the month following - ----------------- the date that Seller certifies that the Equipment is in good working order and made ready for use. If Equipment is installed, the Commencement Date is the first day of the month following the date the delivery and acceptance document is executed. Interim rent: Will be an amount equal to 1/30 of the rental payment multiplied - ------------- by the number of days elapsed between the above seller certification date or, if installed, execution of this schedule and the first day of the following month, or the first day of an otherwise specified month (Commencement Date). Rental Payments: $6,000.00 per month in advance plus applicable taxes. - ---------------- Brentwood Credit Corporation, Lessor, hereby agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and rent from Lessor the Equipment listed above, for the term and rental payments specified, all subject to the terms and conditions set forth in such equipment lease. Lessor: BRENTWOOD CREDIT Lessee: INTERPLAY ENTERTAINMENT CORPORATION CORP. By: /s/ MALCOLM LEE By: /s/ STEVEN "CHUCK" CAMPS -------------------------- --------------------------- Title: President Title: Chief Operating Officer ----------------------- ------------------------ Date: 9/4/98 Date: 8/30/98 ------------------------- -------------------------- 1620 26th Street, Suite 290-S 16815 Von Karman Avenue Santa Monica, CA 90404 Irvine, CA 92606 [LETTERHEAD OF BRENTWOOD CREDIT] INTERPLAY ENTERTAINMENT CORP. SCHEDULE 010 TO MASTER LEASE IPI-1000-100 EQUIPMENT ATTACHMENT PAGE 1 OF 1 QTY EQUIPMENT DESCRIPTION - --- --------------------- FORMERLY SCHEDULE 05 Euphonix -------- 1 Euphonix Digital Control Studio System - a 72 fader Mix Controller frame, fitted with 56 faders - One Audio Tower - System Power Supply: 120VAC/60Hz - Support Computer with Color Graphics Display - V.2 MixView Software, Operation Manual & user software license - Patchbay: 8 x 96 jack connectorized patchrows - Cabling: Mix controller to Machine Room = 15m, Patch Bay = 10m - Upper and lower faders have access to 6 stereo buses and ST1, ST2 - One Digital Studio Controller 3 ES108A-1/Chan Cables (2m/7ft) for 24 Channels of Dynamics FORMERLY SCHEDULE 06 Plexus Data Inc. ---------------- 1 - MAST9500 Inteligent RAID Subsystem 7 - Ultra Wide 7200rpm HDD (includes 1 hotspare) 7 - MAST 9500 Drive Shuttles 1 - CMD Wide Bridge Controller 1 - Management Board for CMD 1 - 68pin to 68pin External SCSI Cable PLEXUS DATA INC. ---------------- 3 - MAST9500 Inteligent RAID Subsystems 23 - Ultra Wide 7200rpm HDD (includes 2 hotspare) 23 - MAST9500 Drive Shuttles 2 - CMD Wide Bridge Controller 3 - Management Board for CMD 3 - 68pin to 68pin External SCSI Cable [LETTERHEAD OF BRENTWOOD CREDIT] Rider No.: 01 To Schedule No.: 010 To Master Equipment Lease No.: IPI-1000-100 Lessee: Interplay Entertainment Corp. PURCHASE OPTION So long as no Event of Default (or an occurrence that would constitute an Event of Default with the giving of notice or the lapse of time or both) shall have occurred and be continuing, the Lessee shall have the option, on at least 90 days' prior written notice to the Lessor, to purchase all (but not less than all) items of Equipment then subject hereto on the date of expiration of the Term for a purchase price equal to the Fair Market Value (as defined below) of such item of Equipment on such date. If such notice shall be given, the Lessor shall sell and the Lessee shall purchase each item on such date for its Fair Market Value. Upon payment by the Lessee of the purchase price for each item of Equipment, the Lessor shall execute and deliver to or at the direction of the Lessee a bill of sale therefor on an "As-is, Where-Is" basis and without any representation or warranty, except that such item of Equipment is free and clear of all claims, liens, security interests and other encumbrances in favor of the Lessor or of any person claiming through or under the Lessor. The Lessee shall pay or cause to be paid all sales and use taxes payable in connection with such sale to it of any such item of Equipment and all unpaid property taxes thereto assessed or levied against such item of Equipment and attributable to the period prior to such expiration. "Fair Market Value" for purposes of the purchase option is defined as the purchase price that would be obtained in a retail market in an arms-length transaction as of the end of the Extended Term between informed and willing buyers and sellers under no compulsion to buy or sell. In the event Lessor and Lessee cannot agree upon the purchase price, such amount shall be determined by an independent appraiser selected by Lessor and satisfactory to Lessee. The cost of such appraisal shall be paid equally by Lessor and Lessee. BRENTWOOD CREDIT CORPORATION Date: 9-4-98 By: /s/ MALCOLM LEE ------------ --------------------------- Title: President ------------------------ INTERPLAY ENTERTAINMENT CORP. DATE: 8/30/98 BY: /s/ STEVEN "CHUCK" CAMPS ------------ --------------------------- TITLE: Chief Operating Officer ------------------------ [LETTERHEAD OF BRENTWOOD CREDIT] Rider No.: 02 To Schedule No.: 010 To Equipment Lease No.: IPI-1000-100 Lessee: Interplay Entertainment Corp. Cancellation to Schedule 05 and 06 to Master Lease IPI-1000-100 dated March 28, 1996 between Interplay Productions, Inc., as Lessee, and Brentwood Credit Corporation, as Lessor In consideration of Lessee executing and accepting Schedule 010 to Master Lease IPI-1000-100, commencing September 1, 1998, Lessor agrees to terminate the lease term and rental obligations effective August 31, 1998 for Schedules 05 and 06 to Master Lease IPI-1000-100, provided no Event of Default has occurred and is continuing. Lessor: Lessee: BRENTWOOD CREDIT CORPORATION INTERPLAY ENTERTAINMENT CORP. By: /s/ MALCOLM LEE By: /s/ STEVEN "CHUCK" CAMPS ------------------------- ---------------------------- Title: President Title: Chief Operating Officer ---------------------- ------------------------- Date: 9-4-98 Date: 8-30-98 ----------------------- -------------------------- NOTICE OF ASSIGNMENT AND LESSEE'S ACKNOWLEDGMENT Date: August 26, 1998 To: Interplay Entertainment Corp. 16815 Von Karmen Avenue Irvine, CA 92606 Please be advised that BRENTWOOD CREDIT CORPORATION ("Lessor") has assigned to Norwest Equipment Finance, Inc. ("Lender") all rights of Lessor in those certain Schedules (the "Assigned Schedules") (which Assigned Schedules are listed in Exhibit A hereto) to the Master Equipment Lease No. IPI-1000-100 between you, as Lessee and Brentwood Credit Corporation, as Lessor, dated March 28, 1996 (the "Lease"), including all rights to receive the lease payments for the Assigned Schedules payable by you commencing on the dates set forth on Exhibit A and continuing up to and including the dates set forth on Exhibit A and all other sums which may become due and payable from you to Lessor under the Assigned Schedules and the Lease as it relates to the Assigned Schedules. Lessor agrees to remain responsible for the performance of all duties and obligations of the Lessor under the Lease and Assigned Schedules. Except as otherwise directed by Lender, please pay any and all rents and any other amounts payable by you under the Assigned Schedules directly to Lender at the following address: Norwest Equipment Finance, Inc. 733 Marquette Avenue, Suite 300 Minneapolis, MN 55402 Please acknowledge this assignment in the space provided below: Lessor: BRENTWOOD CREDIT CORPORATION By: /s/ MALCOLM LEE --------------- Title: President --------------- The undersigned acknowledges receipt of the foregoing Notice of Assignment and in consideration of the financing extended by Lender to Lessor and benefits derived therefrom the undersigned agrees: (1) to be bound by the provisions of the Lease, the Assigned Schedules (copies of the Lease and the Assigned Schedules are attached hereto) and the foregoing Notice of Assignment; (2) that the undersigned has received no notice of any other assignments or claims relating to the Assigned Schedules and has no reason to refuse to make payments of rents and other proceeds due thereunder and under the Lease (to the extent it relates to the Assigned Schedules) to Lender; (3) not to amend, terminate or assign the Lease (to the extent it relates to the Assigned Schedules) or any of the Assigned Schedules or substitute the equipment subject to any of the Assigned Schedules without prior written consent of Lender;(4) that there are no defaults or event that with the passage of time, giving of notice or both would become a default under the Lease or any of the Assigned Schedules and that the Lease and the Assigned Schedules as executed are binding and legally enforceable against the undersigned in accordance with their terms; (5) to make payments to Lender until instructed to do otherwise by Lender and such payments are unconditional and absolute without any set-off or deduction whatsoever, notwithstanding any defect in, damage to or requisition of any of the equipment leased under any of the Assigned Schedules, or any other similar or dissimilar event, or any defense, set-off, counterclaim or recoupment arising out of any claim the undersigned may have against Lessor, it being understood that the undersigned retains the right to assert any such claim in a separate action against Lessor; (6) the Lessee has no right, title or interest in such equipment except as provided under the Lease and the Assigned Schedules; (7) only the Lender shall have the power to give any consents, waivers or approvals or make any requests under or with respect to the Lease (to the extent it relates to the Assigned Schedules); (8) if any default occurs under the Lease (to the extent it relates to the Assigned Schedules), Lender may exercise all remedies available thereunder in place of Lessor; and (9) Lessor shall have the right to disclose to Lender the business relationship between Lessor and Lessee and any information relating to Lessee which is possessed by Lessor. The undersigned further acknowledges that Lender has not assumed any duties of Lessor under the Lease or any of the Assigned Schedules and has made no representations or warranties whatsoever as to the Lease, the Assigned Schedules or any of the leased equipment. Lessee: INTERPLAY ENTERTAINMENT CORP. By: /s/ STEVEN "CHUCK" CAMPS ------------------------ Title: Chief Operating Officer ------------------------ [LETTERHEAD OF BRENTWOOD CREDIT] Brentwood Credit Exhibit A to the Notice of Assignment and Lessee's Acknowledgment Date: AUGUST 26, 1998 Lessee: INTERPLAY ENTERTAINMENT CORP.
Assigned Schedule Schedule Monthly Assigned Number Start & End Date Rental Payments Start & End Date - ------ ---------------- ------ -------- ---------------- 09 09/01/98 - 08/31/2000 $4,985.00 23 10/01/98 - 08/01/2000 010 09/01/98 - 08/31/2000 $6,000.00 23 10/01/98 - 08/01/2000
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,230 0 56,749 11,455 5,821 82,666 15,510 9,305 90,762 69,328 0 0 0 18 0 90,762 106,225 106,225 58,653 55,482 3,673 0 3,596 (11,583) (8) (11,591) 0 0 0 (11,591) (0.85) (0.85)
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