-----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, NcPpLp15thY6qFaOmWeXJas5tT8DNygQMKzxl+gaslsB7KW+HQoKkQQDmb6SRzsR kK8AUtUHA2EDZvZYsfG2Yg== 0001017062-99-001460.txt : 19990817 0001017062-99-001460.hdr.sgml : 19990817 ACCESSION NUMBER: 0001017062-99-001460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99690201 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 QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 1999 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 June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24363 Interplay Entertainment Corp. (Exact name of the registrant as specified in its charter) Delaware 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16815 Von Karman Avenue, Irvine, California 92606 (Address of principal executive offices) (949) 553-6655 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Issued and Outstanding at August 6, 1999 ----- ---------------------------------------- Common Stock, $0.001 par value 22,770,712 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q JUNE 30, 1999 TABLE OF CONTENTS ______________
Page Number ----------------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three and Six Months ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 31 Part II. Other Information Item 1. Legal Proceedings 32 Item 2. Changes in Securities and Use of Proceeds 32 Item 3. Defaults Upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 Signatures 33
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, ASSETS 1999 1998 ------ ----------- ------------ (Unaudited) Current Assets: (Dollars in thousands) Cash and cash equivalents $ 738 $ 614 Restricted cash 2,536 - Trade receivables, net of allowances of $15,011 and $18,431, respectively 33,116 36,407 Inventories 8,612 6,303 Prepaid licenses and royalties 19,922 18,128 Deferred income taxes 4,000 5,358 Other 1,068 685 -------- -------- Total current assets 69,992 67,495 Property and Equipment, net 4,856 5,679 Other Assets 1,597 1,792 -------- -------- $ 76,445 $ 74,966 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current Liabilities: Accounts payable $ 21,445 $ 23,403 Accrued liabilities 19,613 22,300 Current portion of long-term debt 29,955 24,521 Income taxes payable 254 254 -------- -------- Total current liabilities 71,267 70,478 Long-Term Debt, net of current portion 6,852 130 Deferred Income Taxes - 22 Minority Interest 124 143 Commitments and Contingencies (Note 4) Stockholders' Equity (Deficit): Preferred stock, no par value, authorized 5,000,000 shares; issued and outstanding, none - - Common stock, $.001 par value, authorized 50,000,000 shares; issued and outstanding 22,770,712 shares as of June 30, 1999 and 18,292,431 shares as of December 31, 1998 23 18 Paid-in capital 61,198 51,918 Retained earnings (accumulated deficit) (63,309) (48,097) Accumulated comprehensive income adjustments 290 354 -------- -------- Total stockholders' equity (deficit) (1,798) 4,193 -------- -------- $ 76,445 $ 74,966 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (Dollars in thousands, except per share amounts) Net revenues $ 29,430 $ 40,725 $ 50,982 $ 81,721 Cost of goods sold 17,616 20,291 30,135 39,512 ----------- ----------- ----------- ----------- Gross profit 11,814 20,434 20,847 42,209 Operating expenses: Marketing and sales 6,895 9,025 14,409 17,614 General and administrative 3,158 2,922 6,177 5,777 Product development 5,010 6,121 10,400 11,940 Other 1,123 - 1,633 - ----------- ----------- ----------- ----------- Total operating expenses 16,186 18,068 32,619 35,331 ----------- ----------- ----------- ----------- Operating income (loss) (4,372) 2,366 (11,772) 6,878 Other income (expense): Interest income 43 - 44 6 Interest expense (952) (1,440) (1,766) (2,786) Other (268) (4) (346) (82) ----------- ----------- ----------- ----------- Total other income (expense) (1,177) (1,444) (2,068) (2,862) Income (loss) before provision for income taxes (5,549) 922 (13,840) 4,016 Provision for income taxes 1,372 231 1,372 476 ----------- ----------- ----------- ----------- Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540 ========== =========== =========== =========== Net income (loss) per share: Basic $ (0.33) $ 0.06 $ (0.77) $ 0.32 ========== =========== =========== =========== Diluted $ (0.33) $ 0.06 $ (0.77) $ 0.29 ========== =========== =========== =========== Weighted average number of common shares outstanding: Basic 20,932,509 11,512,445 19,817,123 11,233,950 =========== =========== =========== =========== Diluted 20,932,509 12,276,408 19,817,123 14,181,155 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ---------------------------------------- 1999 1998 ---------- --------- Cash flows from operating activities: (Dollars in thousands) Net income (loss) $ (15,212) $ 3,540 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 1,517 1,699 Noncash expense for stock options 20 - Deferred income taxes 1,336 2 Minority interest in loss of subsidiary (19) (7) Changes in assets and liabilities: Trade receivables 3,291 (13,398) Inventories (2,309) 802 Income taxes receivable - 1,427 Other current assets (383) (319) Other assets 409 - Prepaid licenses and royalties (1,794) (2,923) Accounts payable (1,958) 1,260 Accrued liabilities (2,687) (4,581) Income taxes payable - 717 ---------- --------- Net cash used in operating activities (17,789) (11,781) Cash flows from investing activities: Purchase of property and equipment (908) (937) ---------- --------- Net cash used in investing activities (908) (937) Cash flows from financing activities: Net (repayments) borrowings on line of credit 5,480 (13,134) Net proceeds from issuance of common stock 9,257 24,871 Proceeds from exercise of stock options 8 - Additions to restricted cash (2,536) - Net proceeds from issuance of notes payable 6,676 - ---------- --------- Net cash provided by financing activities 18,885 11,737 ---------- --------- Effect of exchange rate changes on cash and cash equivalents (64) - ---------- --------- Net increase (decrease) in cash and cash equivalents 124 (981) Cash and cash equivalents, beginning of period 614 1,536 ---------- --------- Cash and cash equivalents, end of period $ 738 $ 555 ========== ========= Supplemental cash flow information: Cash paid for: Interest $ 1,756 $ 2,875 Income taxes - - ========== ========= Supplemental disclosures of noncash transactions: Issuance of common stock in exchange for development of intellectual properties $ 1,000 - Issuance of note payable in exchage for put rights 1,000 - Issuance of note payable in lieu of common stock 1,052 - ========== =======================
The accompanying notes are an integral part of these consolidated financial statements. 5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The accompanying interim consolidated financial statements of Interplay Entertainment Corp. and its subsidiaries (the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) 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 and Rule 10-01 of Regulation S-X. 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998 as filed with the Securities and Exchange Commission. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the prior period's financial statements to conform to classifications used in the current period. Restricted Cash Restricted cash represents cash collateral deposits made in accordance with the Company's amended Loan and Security Agreement (see Note 3). Restricted cash earns interest at the bank's prime rate (7.75 percent at June 30, 1999) less three percent, or 4.75 percent at June 30, 1999. Revenue Recognition Revenues are recorded when products are delivered to customers in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition. On agreements that provide the customers the right to multiple copies in exchange for guaranteed amounts, revenue is recognized for the guaranteed amounts 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 an allowance for estimated returns, exchanges, markdowns, price concessions, and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. The amount of reserves ultimately required could differ materially in the near term from the amounts included in the accompanying consolidated financial statements. Postcontract customer support provided by the Company is limited to telephone support. These expenses are not material and are charged to operations as incurred. 6 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Factors Affecting Future Performance For the six months ended June 30, 1999, the Company incurred a net loss of $15.2 million and used cash in operating activities of $17.8 million. Partially because of these losses, the Company's liquidity deteriorated during the period ended June 30, 1999. At June 30, 1999, the Company had negative working capital of $1.3 million. To provide working capital to support the Company's future operations, the Company took several actions during the period, including extending the expiration of its line of credit to January 1, 2000, in connection with which the Company's Chief Executive Officer personally guaranteed $5 million of the Company's obligations under such line of credit. Further, in March 1999, the Company entered into a Stock Purchase Agreement with an investor which provided for the issuance of 2.5 million shares of the Company's Common Stock for $10 million (See Note 5), and in July 1999, the Company entered into an agreement for a $25 million equity transaction with the same investor (See Note 11). The Company believes that funds available under its line of credit, funds received and to be received from the sale of equity securities, 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 of credit on January 1, 2000 (see Note 3). In addition to the risks related to the Company's liquidity discussed above, the Company also faces numerous other risks associated with its industry. These risks include dependence on new product introductions, product completion and release delays, rapidly changing technology, intense competition, dependence on distribution channels and risk of customer returns. Certain additional risks are discussed on pages 20-30 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999. The Company's consolidated financial statements have been presented on the basis that it is a going concern. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities or any other adjustments that might result should the Company be unable to continue as a going concern. A valuation allowance is provided for the deferred tax asset when it is estimated to be more likely than not that a portion of the deferred tax asset will not be realized. Primarily as a result of the factors discussed above, during the three months ended June 30, 1999, the Company increased the valuation allowance provided for its deferred tax asset by $1.4 million. Additional increases to the valuation allowance could be required in future periods. Note 2. Inventories Inventories consist of the following:
June 30, December 31, 1999 1998 ---------- ----------- (Dollars in thousands) Packaged software $ 6,710 $ 4,070 CD-ROMs, cartridges, manuals, packaging and supplies 1,902 2,233 ------- ------- $ 8,612 $ 6,303 ======= =======
7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3. Long-Term Debt Long-term debt consists of the following:
June 30, December 31, 1999 1998 ----------- ------------- (Dollars in thousands) Loan Agreement $ 29,955 $ 24,475 Convertible Loans (See Note 5) 6,052 $ - Other 800 176 -------- -------- 36,807 24,651 Less--current portion (29,955) (24,521) ------- -------- $ 6,852 $ 130 ======== ========
Loan Agreement Borrowings under the Loan and Security Agreement ("Loan Agreement") bear interest at LIBOR (5.22 percent at June 30, 1999 and 5.62 percent at December 31, 1998) plus 4.87 percent (10.09 percent at June 30, 1999 and 10.49 percent at December 31, 1998). In March 1999 and in July 1999, the Company amended its line of credit under the Loan Agreement with a financial institution to extend its current line of credit through January 1, 2000 and thereafter, based on qualifying receivables and inventory. Under the terms of the Amendment the $37.5 million maximum credit line will continue through November 29, 1999, with a reduction to $30 million through December 30, 1999 and $25 million thereafter. Within the total credit limit, the Company may borrow up to $14 million in excess of its borrowing base through August 16, 1999, $10 million in excess through September 29, 1999, $7 million through November 29, 1999 and $5 million in excess thereafter. Under the amended line of credit the Company was required to place a cash collateral deposit of $2.5 million by April 15, 1999. In addition, the Company is required to maintain certain borrowing limitations beginning July 30, 1999 where actual borrowings are limited to $35 million with various month end limitations, generally decreasing to $25 million at December 31, 1999 and the $5 million personal guarantee by the Company's Chairman and Chief Executive Officer will remain in place throughout the term. All other terms and conditions remain in full force and effect. The Company is currently in compliance with the terms of the Loan Agreement. Note 4. Commitments and Contingencies In April 1999, the Company was named as one of many defendants in a multi- party civil action that was filed in the Western District of Kentucky, alleging that the Company, along with the other media industry defendants, contributed to the unlawful actions of a convicted felon. The Company believes that this civil action is without merit and will vigorously defend its position. Note 5. Stockholders' Equity In March 1999, the Company entered into a Stock Purchase Agreement with an investor which provides for the issuance of 2.5 million shares of the Company's Common Stock for $10 million. Under the terms of the Stock Purchase Agreement up to 2.5 million additional shares of the Company's common stock may be issued without additional consideration based on the average closing share price per share of the Company's Common Stock as of certain specified future dates; provided, however, the investor will not be issued a total number of shares equaling or exceeding 20 percent of the Company's current outstanding Common Stock without the approval of the Company's stockholders (See Note 11). Pursuant to the terms and conditions of the Stock Purchase Agreement on June 30, 1999, the Company issued an additional 1,161,771 million shares of its Common Stock to the investor without any additional consideration and is seeking stockholder approval to issue an additional 430,301 shares . Until the Company obtains stockholder approval, the Company has issued the investor a promissory note in the amount of approximately $1 million which may be exchanged for 430,301 shares of the Company's Common Stock in the event stockholder approval is obtained. The note matures on January 1, 2000 and bears interest at 10 percent. The 8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS final recalculation date will be on August 20, 1999 which could result in the issuance or redemption of the Company's Common Stock to or by the investor. In May 1999, the Company signed a letter of intent to sell additional shares of Common Stock to the same investor which would give the investor a controlling interest in the Company. As a condition of the letter of intent, the investor deposited $5 million with the Company in exchange for a note payable. The note payable has an interest rate of 6 percent from the date of the letter of intent if the transactions contemplated by the letter of intent are not consummated on or before August 31, 1999. In July 1999, a definitive agreement to consummate these transactions was signed with the investor which is subject to standard conditions, including stockholders approval anticipated to be obtained at the scheduled August 24, 1999 stockholders meeting. As consideration for the extension of a $5 million personal guarantee by the Company's Chairman and Chief Executive Officer (the "Chairman") under the Company's Loan Agreement (See Note 3), the Company agreed to assume the obligation of the Chairman under an agreement between the Chairman and the Company's former President, pursuant to which the Chairman granted certain put rights to the former President with respect to the 271,528 common stock options held by the former President. The Company recorded compensation expense of approximately $0.7 million through December 31, 1998 related to these options and interest expense of $0.1 million for the three months ended June 30, 1999, in connection with the assumption of the put right, and an additional $0.2 million will be amortized as interest expense over the remaining term of the Loan Agreement. During the three months ended June 30, 1999, the Company issued 271,528 shares of Common Stock for the exercise of the former President's stock options in conjunction with an Agreement and General Release executed with the former President. The Company guaranteed the former President $1 million for the options with periodic payments through January 2000. On the due dates of the payments, the Company has the option to either request that the former president sell shares on the open market or the Company may purchase the shares from the former president and retire them. In April 1999, the Company entered into a multi-product development agreement with a developer which provides for the delivery of ten titles to the Company during 1999 in exchange for $0.5 million paid in cash installments and the issuance of 484,848 shares of the Company's Common Stock. The shares of Common Stock will be restricted as to registration rights until such products are delivered and accepted by the Company. The arrangement also includes certain penalties to the developer in the event of noncompliance and the terms and conditions are subject to the approval by the Company's underwriters and lenders, if necessary. Note 6. Other Operating Expenses The Company recorded an asset valuation, restructuring charge and severance expense of $0.6 and $1.1 million during the three and six months ended June 30, 1999, respectively, in connection with the reductions in the Company's European operations. In addition, the Company recorded severance expense of $ 0.5 million for the departure of the Company's former president during the three months ended June 30, 1999. 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 7. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options. The following table sets forth the computation of basic and diluted net income (loss) per share:
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ BASIC (Dollars in thousands, except per share amounts) Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540 Average common shares outstanding 20,932,509 11,512,445 19,817,123 11,233,950 ------------ ------------ ------------ ------------ Net income (loss) per common share - basic $ (0.33) $ 0.06 $ (0.77) $ 0.32 ============ ============ ============ ============ DILUTED Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540 Adjustments to net income - - - 502 ------------ ------------ ------------ ------------ Diluted net income (loss) $ (6,921) $ 691 $ (15,212) $ 4,042 Average common shares outstanding 20,932,509 11,512,445 19,817,123 11,233,950 Stock option adjustment - 763,963 - 2,947,205 ------------ ------------ ------------ ------------ Average common shares and equivalents outstanding 20,932,509 12,276,408 19,817,123 14,181,155 ------------ ------------ ------------ ------------ Net income (loss) per common share - diluted $ (0.33) $ 0.06 $ (0.77) $ 0.29 ============ ============ ============ ============
Options and warrants to purchase 2,323,580 shares of common stock and 484,848 shares of restricted common stock at June 30, 1999 were not included in the computation of diluted earnings per share as the effect would be antidilutive. The weighted average exercise price of the outstanding options and warrants at June 30, 1999 and 1998 was $3.84 and $4.75, respectively. Note 8. Comprehensive Income (Loss) Comprehensive income (loss) consists of the following:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------ --------------------------- 1999 1998 1999 1998 ---------- --------- ---------- ---------- (Dollars in thousands) Net income (loss) $ (6,921) $ 691 $ (15,212) $ 3,540 Other comprehensive income (loss), net of income taxes: Foreign currency translation adjustments (42) (1) (64) - -------- -------- --------- -------- Other comprehensive income (loss) (42) (1) (64) - -------- -------- --------- -------- Total comprehensive income (loss) $ (6,963) $ 690 $ (15,276) $ 3,540 ======== ======== ========= ========
During the three and six months ended June 30, 1999, the Company had a pre-tax decrease in foreign currency translation adjustments of $32,000 and $56,000 , respectively, compared to a pre-tax decrease of $1,000 and zero for the comparable periods of 1998. 10 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 9. Distribution, Publishing and Investment in Affiliate Distribution and Publishing Agreements In February 1999, the Company signed an International Distribution Agreement with Virgin Interactive Entertainment Limited ("Virgin") which provides for the exclusive distribution of substantially all of the Company's products in Europe, CIS, Africa and the Middle East for a seven year period, cancelable under certain conditions, subject to termination penalties and costs. Under the Agreement, the Company pays Virgin a monthly overhead fee and a distribution fee based on net sales, subject to a minimum annual payment, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on behalf of the Company. In connection with this arrangement the Company paid $0.6 million in distribution fees and $1.3 million in overhead fees to Virgin for the three months ended June 30, 1999 and paid $1.0 million in distribution fees and $1.8 million in overhead fees for the six months ended June 30, 1999. The Company has also executed a Product Publishing Agreement with Virgin which provides the Company with an exclusive license to publish and distribute substantially all of Virgin's products within North America, Latin America and South America for a royalty based on net sales. During the three and six months ended June 30, 1999, the Company did not distribute any of Virgin's products. In April 1999, the Company entered into an exclusive North American distribution agreement with an investor which provides for the distribution of eight titles on multiple platforms for a two year period. Under the terms of the arrangement, the Company will receive a distribution fee for all orders shipped and will provide certain services including marketing, order processing, billings and collections. During the three months ended June 30, 1999, the company recognized revenue of $0.1 million for performing distribution services on behalf of the investor. In June 1999, the Company executed Publishing agreements with Titus Interactive S.A. ("Titus") for two titles. As a result of these agreements, the Company recognized revenue of $2.2 million for delivery of these titles to Titus. Investment in Affiliate In connection with the International Distribution Agreement and Product Publishing Agreement, the Company has also executed an Operating Agreement with Virgin which, among other terms and conditions, provides the Company with a 43.9 percent equity interest in VIE Acquisition Group LLC ("VIE"), the parent entity of Virgin under which the Company was obligated to make a cash payment of $9,000 . However, the Company is not obligated to make any future contributions to the working capital of Virgin other than the monthly overhead fee discussed above. In addition, two members of the management of Interplay Productions Limited, the Company's United Kingdom subsidiary, have acquired a 6.0 percent interest in VIE. The Company accounts for its investment in VIE in accordance with the equity method of accounting. The Company did not recognize any material income or loss in connection with it's investment in VIE for the three and six months ended June 30, 1999. 11 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 10. Segment and Geographical Information The Company operates in three principal business segments. Information about the Company's operations in the United States and foreign areas is as follows:
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ------------------------------ 1999 1998 1999 1998 ---------- ---------- ------------ ---------- Net revenues: (Dollars in thousands) United States $ 28,813 $ 32,770 $ 41,075 $ 64,015 United Kingdom 617 7,955 9,907 17,706 -------- -------- ---------- -------- Consolidated net revenues $ 29,430 $ 40,725 $ 50,982 $ 81,721 ======== ======== ========== ======== Operating income (loss): United States $ (2,340) $ 3,117 $ (9,206) $ 4,596 United Kingdom (2,032) (751) (2,566) 2,282 -------- -------- ---------- -------- Consolidated (loss) income from operations $ (4,372) $ 2,366 $ (11,772) $ 6,878 ======== ======== ========== ======== Expenditures made for the acquisition of long-lived assets: United States $ 615 $ 348 $ 908 $ 695 United Kingdom - 124 - 242 -------- -------- ---------- -------- Total expenditures for long-lived assets $ 615 $ 472 $ 908 $ 937 ======== ======== ========== ========
Net revenues were made to geographic regions as follows:
Three Months Ended June 30, Six Months Ended June 30, ----------------------------------------------------- ---------------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------------- ---------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent ----------- ------------ ------------ ------------ ---------- ------------ ----------- ------------- (Dollars in thousands) North America $ 15,599 53.0 % $ 26,244 64.4 % $ 24,343 47.8 % $ 47,907 58.6 % Europe 5,047 17.1 7,562 18.6 13,066 25.6 16,886 20.7 Rest of World 1,466 5.0 1,442 3.5 3,330 6.5 4,416 5.4 OEM, royalty and licensing 7,318 24.9 5,477 13.5 10,243 20.1 12,512 15.3 -------- --------- -------- --------- -------- -------- -------- -------- $ 29,430 100.0 % $ 40,725 100.0 % $ 50,982 100.0 % $ 81,721 100.0 % ======== ========= ======== ========= ======== ======== ======== ======== Net investments in long-lived assets by geographic regions are as follows: June 30, December 31, 1999 1998 ------------------------------- -------------------------------- Amount Percent Amount Percent ----------- ---------- ---------- ---------- (Dollars in thousands) North America $ 6,185 97.0 % $ 6,621 89.6 % Europe 125 2.0 723 9.8 Rest of World - - - - OEM, royalty and licensing 64 1.0 44 0.6 ------- -------- ------- ---------- $ 6,374 100.0 % $ 7,388 100.0 % ======= ======== ======= ==========
12 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 11. Subsequent Events Pending Change in Control In May 1999, the Company signed a letter of intent with Titus pursuant to which Titus loaned the Company $5 million (See Note 3), and the Company and Titus agreed to negotiate certain additional transactions. In July 1999, the Company and Titus entered into the agreements contemplated by the letter of intent pursuant to which Titus will make a strategic equity investment of $25 million in the Company, purchasing 6.25 million shares of Common Stock at a purchase price of $4 per share. The transaction is subject to standard conditions, including the approval of the Company's stockholders, and is expected to close in September 1999 following approval by the Company's stockholders at the scheduled stockholders meeting scheduled for August 24, 1999. The Stock Purchase Agreement is based upon the letter of intent between the Company and Titus dated May 12, 1999 and follows Titus' $10 million equity investment in the Company in March 1999. As part of the agreement, Titus has an option to purchase all of the shares of the Company's Common Stock held by Universal Studios, Inc. ("Universal") which was granted to Titus by Universal in connection with the March 1999 transaction. In addition, as a condition to Titus' obligations under the Stock Purchase Agreement, the Company's chairman and chief executive officer, will exchange 2 million shares of the Company's Common Stock held by him for shares of Titus Common Stock. Following these transactions, Titus is expected to hold approximately 57 percent of the outstanding Common Stock of the Company, resulting in a change of control of the Company in favor of Titus. Upon the closing of the transaction, the Company, Titus and the Company's chairman and chief executive officer will enter into a Stockholder Agreement providing for certain voting agreements, rights of first refusal, tag-along rights, approval rights of Titus with respect to certain actions by the Company, and certain other matters. In addition, Titus and certain of its major shareholders will enter into an Exchange Agreement implementing the exchange of shares referenced above and providing for certain lock-up provisions and put rights with respect to such shares. The Company will also enter into three-year employment agreements with Brian Fargo, the Company's chairman and chief executive officer, and Herve Caen, Titus' chairman and chief executive officer, pursuant to which they will be employed as chief executive officer and president, respectively, of the Company. The Company and Titus will also negotiate a distribution agreement pursuant to which the Company or a jointly owned entity would distribute substantially all of Titus' console titles in North America. Pursuant to the Stock Purchase Agreement, the Company will file a registration statement covering the shares of the Company's Common Stock issued to Titus in connection with the two equity transactions. Upon closing of the transaction, two members of Titus' management will join the Company's board of directors replacing two former designees of Universal who resigned from the board in anticipation of the purchase by Titus of Universal's stock in the Company. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement The information contained in this Form 10-Q is intended to update the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-K. 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, failure of the Company's markets to 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 "Factors Affecting Future Performance," below as well as the Company's Annual Report on Form 10-K 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. 14 Results of Operations The following table sets forth certain selected 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 Six Months Ended June 30, June 30, ------------------------------------------------------------------------------------------- 1999 1998 1999 1998 --------------------- -------------------- ----------------------- --------------------- % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues -------- -------- -------- ------- --------- -------- -------- -------- (Dollars in thousands) Net revenues $29,430 100.0% $40,725 100.0% $ 50,982 100.0% $81,721 100.0% Cost of goods sold 17,616 59.9% 20,291 49.8% 30,135 59.1% 39,512 48.3% -------- ------- -------- ------- --------- ------ -------- ------- Gross profit 11,814 40.1% 20,434 50.2% 20,847 40.9% 42,209 51.7% -------- ------- -------- ------- --------- ------ -------- ------- Operating expenses: Marketing and sales 6,895 23.4% 9,025 22.2% 14,409 28.3% 17,614 21.6% General and administrative 3,158 10.7% 2,922 7.2% 6,177 12.1% 5,777 7.1% Product development 5,010 17.0% 6,121 15.0% 10,400 20.4% 11,940 14.6% Other 1,123 3.8% - 0.0% 1,633 3.2% - 0.0% -------- ------- -------- ------- --------- ------ -------- ------- Total operating expenses 16,186 54.9% 18,068 44.4% 32,619 64.0% 35,331 43.3% -------- ------- -------- ------- --------- ------ -------- ------- Operating income (loss) (4,372) -14.8% 2,366 5.8% (11,772) -23.1% 6,878 8.4% Other income (expense) (1,177) -4.0% (1,444) -3.5% (2,068) -4.1% (2,862) -3.5% -------- ------- -------- ------- --------- ------ -------- ------- Income (loss) before income taxes (5,549) -18.8% 922 2.3% (13,840) -27.2% 4,016 4.9% Provision for income taxes 1,372 4.7% 231 0.6% 1,372 2.7% 476 0.6% -------- ------- -------- ------- --------- ------ -------- ------- Net income (loss) $(6,921) -23.5% $ 691 1.7% $(15,212) -29.9% $ 3,540 4.3% ======== ======= ======== ======= ========= ====== ======== ======= Net revenues by geographic region: North America $15,599 53.0% $26,244 64.4% $ 24,343 47.8% $47,907 58.6% International 6,513 22.1% 9,004 22.1% 16,396 32.1% 21,302 26.1% OEM, royalty and licensing 7,318 24.9% 5,477 13.5% 10,243 20.1% 12,512 15.3% Net revenues by platform: Personal computer $19,237 65.3% $23,969 58.8% $ 32,999 64.7% $44,986 55.1% Video game console 2,875 9.8% 11,279 27.7% 7,740 15.2% 24,223 29.6%
Net Revenues Net revenues for the three months ended June 30, 1999 decreased 27.7 percent to $29.4 million from $40.7 million in the comparable 1998 quarter. North America net revenues decreased to $15.6 million, or 53 percent of net revenues, from $26.2 million, or 64.4 percent of net revenues, in the 1998 quarter. International net revenues decreased to $6.5 million, or 22.1 percent of net revenues, from $9.0 million, or 22.1 percent of net revenues in the 1998 quarter. OEM, royalty and licensing net revenues increased 33.6 percent to $7.3 million, or 24.9 percent of net revenues, in the 1999 quarter from $5.5 million, or 13.5 percent of net revenues, in the 1998 quarter. Net revenues for the six months ended June 30, 1999 decreased 37.6 percent to $51.0 million from $81.7 million in the comparable 1998 period. North America net revenues decreased to $24.3 million, or 47.7 percent of net revenues, from $47.9 million, or 58.6 percent of net revenues, in the 1998 period. International net revenues decreased to $16.4 million, or 32.1 percent of net revenues, from $21.3 million, or 26.1 percent of net revenues in the 1998 period. OEM, royalty and licensing net revenues decreased to $10.2 million, or 20.1 percent of net revenues, in the 1999 period from $12.5 million, or 15.3 percent of net revenues, in the 1998 period. The decrease in North America and International net revenues for the three months ended June 30, 1999 was primarily due to decreased major title releases, lower initial ship-ins on new titles and higher reserves for product returns and markdowns, which was partially offset by increases in OEM, royalty and licensing revenues. For the six months ended June 30, 1999, the decrease in North America and International net revenues was primarily due to decreased major title releases, lower initial ship-ins on new titles, lower licensing and royalty revenues and higher reserves for product returns and markdowns as well as a high level of product returns. 15 Cost of Goods Sold; Gross Margin Cost of goods sold decreased 13.2 percent in the three months ended June 30, 1999 to $17.6 million, or 59.9 percent of net revenues, from $20.3 million, or 49.8 percent of net revenues in the comparable 1998 quarter. Gross margin decreased to 40.1 percent in the 1999 quarter from 50.2 percent in the 1998 quarter. Cost of goods sold decreased 23.7 percent in the six months ended June 30, 1999 to $30.1 million, or 59.1 percent of net revenues, from $39.5 million, or 48.3 percent of net revenues in the comparable 1998 period. Gross margin decreased to 40.9 percent in the 1999 period from 51.7 percent in the 1998 period. The decrease in gross margin during the three months ended June 30, 1999 and the six months ended June 30, 1999 was primarily a result of a lower net revenue base than in the 1998 period. The 1999 periods also included the effects of additional write-offs of prepaid royalties relating to titles or platform versions of titles which had been canceled, and a higher percentage of externally developed titles as well as higher royalty rates on such titles. Additionally, gross margin was affected by the distribution of certain titles by others on behalf of the Company. Operating Expenses Total operating expenses decreased 10.4 percent to $16.2 million, or 54.9 percent of net revenues, in the three months ended June 30, 1999 from $18.1 million, or 44.4 percent of net revenues, for the comparable 1998 quarter. Total operating expenses decreased 7.7 percent to $32.6 million, or 64 percent of net revenues, in the six months ended June 30, 1999 from $35.3 million, or 43.3 percent of net revenues, for the comparable 1998 period. Marketing and Sales. Marketing and sales expenses primarily include advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other costs. Marketing and sales expenses decreased 23.6 percent to $6.9 million, or 23.4 percent of net revenues, for the three months ended June 30, 1999 from $9.0 million, or 22.2 percent of net revenues for the comparable 1998 quarter and decreased 18.2 percent to $14.4 million, or 28.3 percent of net revenues, for the six months ended June 30, 1999 from $17.6 million, or 21.6 percent of net revenues for the comparable 1998 period. The decreases in absolute dollars were primarily attributable to decreased advertising and other marketing costs associated with the decrease in major titles launched and products sold during the 1999 period, as well as a reduction of personnel as a result of International Distribution Agreement entered into in February 1999 between the Company and Virgin Interactive Entertainment Limited ("Virgin"), offset in part by increased marketing development funds in the U.S. market. The increases as a percentage of net revenues were primarily attributable to a lower net revenues base than the 1998 period. The Company expects that in future periods marketing and sales expenses 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 8.1 percent to $3.2 million, or 10.7 percent of net revenues, in the three months ended June 30, 1999 from $2.9 million, or 7.2 percent of net revenues in the comparable 1998 quarter and increased 6.9 percent to $6.2 million, or 12.1 percent of net revenues, for the six months ended June 30, 1999 from $5.8 million, or 7.1 percent of net revenues for the comparable 1998 period. The Company recorded bad debt expense of $1 million during the three months ended June 30, 1999 in response to the deteriorating financial condition of a few of the Company's larger customers. Excluding the provision for bad debt expense, the Company's general and administrative expense decreased 26.1 and 10.4 percent for the three and six months ended June 30, 1999, respectively. This decrease is primarily due to the reorganization of the Company's European operations. The Company may in the future be required to make additional payments of approximately $0.2 million in the aggregate under a lease of equipment originally utilized by Engage. The Company is attempting to mitigate this potential expense by using or subleasing a portion of the equipment. 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 decreased 18.2 percent to $5.0 million, or 17 percent of net revenues, in the three month period ended June 30, 1999 from $6.1 million, or 15 percent of net revenues, in the comparable 1998 quarter and decreased 12.9 percent to $10.4 million, or 20.4 percent of net revenues, for the six months ended June 30, 1999 from $11.9 million, or 14.6 percent of net revenues for the comparable 1998 period. The decreases in absolute dollars were primarily due to decreased labor and overhead costs as a result of personnel reductions. The increases as a percentage of net revenues were due to a lower net 16 revenue base than in the 1998 period. 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 Operating Expense. Other operating expenses are primarily one-time expenses associated with the operations of the Company. Other operating expenses of $1.1 million and $1.6 million for the three and six months ended June 30, 1999, respectively, were primarily due to the anticipated asset valuation and restructuring charge in connection with the Company's reductions in its European operations. In addition, the Company recorded severance expense for the departure of the Company's former president during the six months ended June 30, 1999. Other Expense Other expense for the three month and six month periods ended June 30, 1999 primarily included interest expense on the Company's line of credit. Other expense decreased to $1.2 million in the three months ended June 30, 1999 from $1.4 million in the comparable 1998 quarter and decreased to $2.1 million in the six months ended June 30, 1999 from $2.9 million in the comparable 1998 period. The decreases were 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 line of credit from the proceeds of the IPO in June 1998, $9.8 million related to distribution and other advances on future products and $10 million related to a Stock Purchase Agreement with an investor for 2.5 million shares of the Company's Common Stock. Provision (Benefit) for Income Taxes The Company recorded a tax provision of $1.4 million in the three months ended June 30, 1999 compared to $0.2 million in the three months ended June 30, 1998 and recorded a tax provision of $1.4 million in the six months ended June 30, 1999 compared to $0.5 million in the six months ended June 30, 1998. The tax provision recorded during 1999 represents an increase of the valuation allowance on the deferred tax asset due to the uncertainty of realization of the deferred tax asset in future periods. Liquidity and Capital Resources The Company has funded its operations to date primarily through the use of lines of credit and equipment leases, through cash generated by the private sale of securities, from the proceeds from the initial public offering and from operations. As of June 30, 1999 the Company's principal sources of liquidity included cash and short term investments of approximately $0.7 million and the Company's line of credit bearing interest at the London Interbank Offered Rate plus 4.87 percent (10.09 percent as of June 30, 1999), expiring January 1, 2000. Under the terms of the line of credit as in effect on June 30, 1999, the Company had maximum availability for borrowings and letters of credit up to $37.5 million through November 29, 1999, $30 million through December 30, 1999 and $25 million thereafter, based in part upon qualifying receivables and inventory. Within the overall credit limit, the line of credit as of June 30, 1999 also provided that the Company could borrow up to $14 million in excess of its borrowing base through August 16, 1999, $10 million in excess through September 29, 1999, $7 million through November 29, 1999 and up to $5 million in excess of its borrowing base thereafter. Under the line of credit the Company was required to place a cash collateral deposit of $2.5 million by April 15, 1999. As amended, the Company is additionally required to maintain certain borrowing limitations beginning August 16, 1999 where actual borrowings are limited to $35 million with various month end limitations, generally decreasing to $25 million at December 31, 1999 and the $5 million personal guarantee by the Company's Chairman and Chief Executive Officer will remain in place throughout the term. All other terms and conditions remain in full force and effect. The Company is currently in compliance with the terms of the Loan Agreement. As of June 30, 1999, the Company's balance on the line of credit was $30 million with no stand by letters of credit outstanding. Based upon certain assumptions, including without limitation, the Company's ability to achieve anticipated operating results, and the completion of the proposed transactions with Titus under the July 1999 agreement discussed below or other potential debt or equity financing, 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. In March 1999, the Company obtained equity financing by selling 2.5 million shares of its Common Stock to Titus for $10 million. The purchase price of such transaction was recalculated on June 30, 1999, and will be recalculated again on August 20, 1999, based upon the per share price of the Company's common stock at certain future dates. As a consequence of the first such recalculation, Titus was issued approximately 1.2 million additional shares by the Company pursuant to such transaction. An additional 0.4 million shares would have been issued, but they would have resulted in an aggregate ownership by Titus of 20 percent or greater of the outstanding Common 17 Stock of the Company, and, in accordance with NASDAQ Stock Market rules, the Company must obtain the approval of its stockholders for such issuance. The Company is in the process of obtaining such approval from it's stockholders. Since such approval has not been obtained yet, the Company issued Titus a promissory note for approximately $1 million, the principal amount equal to the value of the shares in excess of 20 percent of the Company's outstanding Common Stock to which Titus would otherwise be entitled, with interest at a rate of 10 percent. There can be no assurance that the Company will obtain the approval of its stockholders for any additional issuance, and that the Company will not redeem the promissory note for the additional shares of the Company's Common Stock to Titus as set forth above. In May 1999, the Company and Titus signed a letter of intent under the terms of which Titus loaned the Company $5 million, and contemplates a strategic equity investment by Titus of $25 million, subject to the entering into of definitive agreements concerning such transaction by the Company and Titus. In July 1999, the Company and Titus entered into such agreements subject to the standard conditions, including stockholder approval. There can be no assurance that the transactions contemplated by the definitive agreements, including the additional equity investment by Titus, will be consummated. 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 $17.8 million and $11.8 million during the six months ended June 30, 1999 and 1998, respectively. The cash used by operating activities in the six months ended June 30, 1999 was primarily attributable to the net loss incurred and decreases in accounts payable and accrued liabilities as well as increases in inventories and prepaid licenses and royalties. Cash provided by financing activities of $18.9 million in the six months ended June 30, 1999 resulted primarily from the issuance of Common Stock to an investor, debt issued to the same investor and borrowings on the line of credit, which were partially offset by restricted cash deposits to the Company's lender. Cash provided by financing activities of $11.7 million in the six months ended June 30, 1998 resulted primarily from the proceeds from the Company's initial public offering offset in part by repayments on the Company's line of credit. Cash used in investing activities of $0.9 million during the six months ended June 30, 1999 and 1998 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. To provide liquidity, the Company implemented certain measures during the fourth quarter of 1998 and the first half of 1999, 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 entered into two Stock Purchase agreements with Titus. The first Stock Purchase Agreement was consummated in March 1999, and the second Stock Purchase Agreement was entered into in July 1999. If the second Stock Purchase Agreement is consummated, Titus will own approximately 57% of the Company's outstanding Common Stock, resulting in a change of control of the Company in favor of Titus. 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 1999 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 1999 and beyond. 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. 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. The Company believes that funds available under its line of credit, amounts to be received under various product license and distribution agreements, anticipated funds from operations, and the proceeds from planned debt or equity financings 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 of credit on January 1, 2000. Based upon certain assumptions, including without limitation, the Company's ability to achieve 18 anticipated operating results and the completion of the proposed transactions with Titus under the July 1999 agreements or other potential debt or equity financings, 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 complete the transaction with Titus or other potential debt or equity financings 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 1999 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 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 non-compliant 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) Assessment: 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) Remediation: Coordinating the replacement and/or upgrade of non-compliant systems, as necessary, and (iii) Test and Implement: 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 completed prior to the completion of the 3rd quarter in 1999. 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 end of the 3rd quarter in 1999. However, there can be no assurance that any of the Company's products are or will be Year 2000 compliant. 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 19 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 completion of the 3rd quarter in 1999. 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 has estimated that the total cost of Year 2000 compliance will be less than $0.5 million, $0.3 million of which had been spent. The costs of compliance have been included in the Company's 1999 budget. The Company currently does not have a formal contingency plan in the event that an area of its operations does not become Year 2000 compliant. The Company will consider adopting a formal plan upon completion of the Year 2000 assessment or if, pending such completion, it becomes more evident that there will be an area of non-compliance in its systems or at a critical third party. 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. FACTORS AFFECTING FUTURE PERFORMANCE Future operating results of the Company depend upon many factors and are subject to various risks and uncertainties. Some of the risks and uncertainties which may cause the Company's operating results to vary from anticipated results or which may materially and adversely affect its operating results are as follows: Liquidity; Future Capital Requirements The Company used net cash in operations of $17.8 million and $11.8 million, respectively, in the six months ended June 30, 1999 and 1998. 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. The issuance of additional equity securities by the Company could result in substantial dilution to stockholders. In July 1999, the Company entered into a stock purchase agreement with Titus pursuant to which Titus will purchase 6.25 million shares of the Company's Common Stock for $25 million. This stock sale is subject to the fulfillment of certain conditions, including approval by the Company's stockholder's, which will be solicited at a meeting to be held on August 24, 1999. There can be no assurance that such stockholder approval will be obtained, and that the sale of stock to Titus will occur. In the event the stock sale to Titus does not occur, the Company may be required to raise additional working capital from alternative sources. 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 publish commercially viable titles, or that such measures would be sufficient to generate operating profits. 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. 20 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 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Performance," 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. Significant Recent Losses The Company has experienced significant net losses in recent periods, including a loss of $15.2 million and $28.2 million for the six months ended June 30, 1999 and the year ended December 31, 1998, respectively. These losses 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 year and lower than expected worldwide sales of certain releases, as well as from operating expense levels that were high relative to the Company's revenue level. 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, or bring its costs into line with revenues, so as to attain or sustain profitability in the future. Dependence on New Product Introductions; Risk of Product Delays and Product Defects 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. 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 21 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 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 three months ended June 30, 1999 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. Potential for Control by Titus Titus currently owns approximately 16.2 percent of the Company's outstanding Common Stock, and may be issued additional shares based upon the Company's stock price at certain future dates, further increasing its ownership in the Company in addition to any other potential increases in ownership. Titus also holds an option to purchase the 4,658,216 shares of the Common Stock currently held by Universal, which would increase its ownership percentage to approximately 36.6 percent. If the transactions contemplated by the agreements entered into by the Company and Titus, among others, in July 1999 are consummated, Titus would own approximately 57 percent of the Common Stock of the Company, resulting in a change in control of the Company in favor of Titus. In connection with such change in control, Titus' president and chief executive officer, Herve Caen, would become the president of the Company, and assume substantial authority for the Company's operations. The effect of such a change in control and the resulting addition of Mr. Caen as president on the Company is uncertain, and there can be no assurance that such a change in control would not have a material adverse effect on the Company's business, operating results or financial condition. 22 Continued Listing on the NASDAQ National Market The Company's Common Stock is currently quoted on the NASDAQ National Market under the symbol "IPLY." For continued inclusion on the NASDAQ National Market, a company must meet certain tests, such as a minimum bid price of $1.00 and net tangible assets of at least $4.0 million. In the event that the Company fails to satisfy the listing standards on a continuous basis, the Company's Common Stock may be removed from listing on the NASDAQ National Market. If the Company's Common Stock is delisted from the NASDAQ National Market, trading of the Company's Common Stock, if any, would be conducted in the over-the-counter market in the so-called "pink sheets" or, if available, the NASD's "Electronic Bulletin Board." In such event, investors could find it more difficult to dispose of, or to obtain accurate quotations as to the value of, the Company's Common Stock and the trading price per share would most likely be reduced as a result. Consummation of the transaction agreed to in July 1999, by the Company and Titus (See Note 11 of the Notes to Unaudited Consolidated Financial Statements) should assist the Company in continuing to meet the listing standards of the NASDAQ National Market. Distribution Agreement In February 1999, in connection with the Company's acquisition of a 43.9 percent membership interest in Virgin's parent entity, the Company signed an International Distribution Agreement with Virgin. Under this Agreement, the Company appointed Virgin as the exclusive distribution for substantially all of the Company's products in Europe, CIS, Africa and the Middle East, subject to certain reserved rights, for a seven year period. Because of the exclusive nature of the Agreement, if Virgin were to experience problems with its business, or were to fail to perform as expected, the Company's business, operating results and financial condition could be materially and adversely affected. In connection with this Agreement, Virgin hired the Company's European sales and marketing personnel, and the Company pays Virgin a distribution fee for its marketing and distribution of the Company's products, subject to a minimum amount, as well as a fixed overhead fee, subject to reduction in certain events. Because of the minimum distribution fee, in the event the Company's European sales are lower than expected, the Company may effectively pay a higher distribution fee on the units sold, which could have a material adverse effect on the Company's business, operating results and financial condition. In addition, due to the fixed nature of the overhead fee, the Company will not be able to reduce its European sales and marketing expenses in response to downturns in the Company's sales in Europe, which could have a material adverse effect on the Company's business, operating results and financial condition. 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 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 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 23 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. 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 98, Sony PlayStation and Nintendo 64 platforms, as well as for the Sega Dreamcast platform scheduled for release in September 1999. 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 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., Mattel, Activision, Inc., Microsoft Corporation, LucasArts Entertainment Company, Midway Games Inc., Acclaim Entertainment Inc., Havas Interactive and Hasbro Inc. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo and Sega compete directly with the Company in the development of software titles for their respective platforms. Large diversified entertainment companies, such as The Walt Disney Company, many of which own substantial libraries of available content and have substantially greater financial resources than the Company, may decide to compete directly with the Company or to enter into exclusive relationships with competitors of the Company. The Company also believes that the overall growth in the use of the Internet and on-line services by consumers may pose a competitive threat if customers and potential customers spend less of their available 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 24 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 on Distribution Channels; Risk of Customer Business Failures; Product Returns 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 and 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. The Company is exposed to the risk of product returns and markdown allowances with respect to its distributors and retailers. The Company allows distributors and retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms, and also offers a 90-day limited warranty to its end users that its products will be free from manufacturing defects. In addition, the Company provides markdown allowances to its customers to manage its customers' inventory levels in the distribution channel. Although the Company maintains a reserve for returns and markdown allowances, and although the Company's agreements with certain of its customers place certain limits on product returns and markdown allowances, the Company could be forced to accept substantial product returns and provide markdown allowances to maintain its relationships with retailers and its access to distribution channels. Product return and markdown allowances that exceed the Company's reserves could have a material adverse effect on the Company's business, operating results and financial condition. In this regard, the Company's results of operations for the three months ended June 30, 1999 were adversely affected by a higher than expected level of product returns and markdown allowances and consequently reduced net revenues. There can be no assurance that the Company will not continue to experience such high levels of product returns and markdown allowances in future periods, which could have a material adverse effect on the Company's business, operating results and financial condition. 25 Dilution; Shares Eligible for Future Sale In March 1999, the Company entered into a Stock Purchase Agreement with Titus Interactive S.A. ("Titus"), pursuant to which Titus purchased from the Company 2.5 million shares of the Company's Common Stock for an aggregate purchase price of $10 million. Pursuant to such Agreement, the Company may become obligated to issue additional shares of Common Stock to Titus without additional consideration in certain events (see Note 5 to the Company's Consolidated Financial Statements) and on June 30, 1999, the Company issued approximately 1.2 million shares per the terms of the agreement. There will be a final recalculation on August 20, 1999 which could result in the issuance or redemption of the Company's Common Stock to or by the investor In addition, the Company has agreed to register all of the unregistered shares held by Titus for resale under the Securities Act of 1933, as amended. Such registration could temporarily impair the Company's ability to raise capital through the sale of its equity securities, and, if such registered shares are sold, could have a material adverse effect on the market price of the Company's Common Stock. In May 1999, the Company signed a letter of intent with Titus pursuant to which Titus loaned the Company $5 million, and the Company and Titus negotiated certain additional transactions. In July 1999, certain of the agreements contemplated by the letter of intent were entered into, in connection with which Titus will make a strategic equity investment of $25 million in the Company, purchasing 6.25 million shares of Common Stock at a purchase price of $4 per share, subject to standard conditions including approval by the Company's stockholders. As part of the agreements, Titus' chairman and chief executive officer will become president of the Company. The agreements also contemplate the swap by the Company's chairman and chief executive officer of 2 million personal shares of Interplay Common Stock for an agreed upon number of Titus shares. If the transactions are consummated, Titus will own approximately 57 percent of the Company's outstanding Common Stock, resulting in a change of control of the Company in favor of Titus. Dependence Upon Third Party Licenses Many of the Company's products, such as its Star Trek, Major League Baseball and Caesar's 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 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 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, Europe and Australia and is currently negotiating with Nintendo for licenses covering additional territories. With the new Sega Dreamcast video game system shipping in the United States and Europe in Fall 1999, the Company is currently negotiating agreements to develop software for this new platform. 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, Sony Computer Entertainment, Nintendo and Sega each have the right to approve the technical functionality and content of the Company's products for such platform prior to distribution. Due to the nature of the approval process, 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. 26 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, Nintendo and Sega for the manufacture of the Company's products that are compatible with their respective video game consoles. As a result, Sony, Nintendo and Sega have the ability to raise prices for supplying such products at any time and effectively control the timing of the Company's release of new titles for those platforms. PlayStation and Dreamcast products consist of CD-ROMs and are typically delivered by Sony Computer Entertainment and Sega, respectively, within a relatively short lead time. Manufacturers of Nintendo and other video game cartridges typically deliver software to 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 its 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 22.1 percent of the Company's total net revenues for the three months ended June 30, 1999 and 1998, and 32.1 percent and 26.1 percent of the Company's total net revenues for the six months ended June 30, 1999 and 1998, respectively. Additionally, in February 1999, the Company entered into an International Distribution Agreement with Virgin for the exclusive distribution of its products in selected international territories. 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 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. 27 Risks Associated with New European Currency On January 1, 1999, eleven of the fifteen member countries of the European Union ("Participating Countries") established fixed conversion rates between their existing sovereign currencies and a new European currency, the "euro". The euro was adopted by the Participating Countries as the common legal currency on that date. A significant portion of the Company's sales are made to Participating Countries and consequently, the Company anticipates that the euro conversion will, among other things, create technical challenges to adapt information technology and other systems to accommodate euro-denominated transactions and limit the Company's ability to charge different prices for its producers in different markets. While the Company 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. Protection of Proprietary Rights The Company regards its software as proprietary and relies on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect its proprietary rights. The Company owns or licenses various copyrights and trademarks, and holds the rights to one patent application related to the software engine for its Messiah title. 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 generally 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 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 28 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. Control by Directors and Officers The Company's directors and executive officers beneficially own, in the aggregate, approximately 27.9 percent of the Company's outstanding Common Stock. These stockholders, if acting together with Universal Studios, Inc. ("Universal") and Titus, see "Potential for Control by Titus", 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. Year 2000 Compliance 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. 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. 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 29 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 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. 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 transactions 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 be dilutive to its stockholders. 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. 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 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any derivative financial instruments as of June 30, 1999. Further, the Company is not exposed to interest rate risk as the Company's revolving line of credit agreement has a variable interest rate. Therefore, the fair value of these instruments are not affected by changes in market interest rates, but do affect the Company's future earnings and cash flows. The Company believes that the market risk arising from holdings of its financial instruments is not material. 31 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. In April 1999, the Company was named as one of many defendants in a multi-party civil action that was filed in the Western District of Kentucky, alleging that the Company, along with the other media industry defendants, contributed to the unlawful actions of a convicted felon. The Company believes that this civil action is without merit and will vigorously defend its position. Item 2. Changes in Securities and Use of Proceeds On June 30, 1999, the Company issued 1,161,771 shares of the Company's Common Stock to Titus Interactive S.A., a French corporation under the terms of the Stock Purchase Agreement signed in March 1999. On April 30, 1999, the Company issued 484,848 shares of the Company's Common Stock to RuneCraft Limited. Such shares were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - The following exhibits are filed as part of this report:
Exhibit Number Exhibit Title ------ ------------- 10.1 Stock Purchase Agreement dated July 20, 1999, by and among the Company, Titus and Brian Fargo. 10.2 Exchange Agreement dated July 20, 1999 by and among Titus, Brian Fargo, Herve Caen and Eric Caen. 27.1 Financial data schedule for the three month period ended June 30, 1999.
(b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K, dated May 12, 1999. The Company signed a letter of intent with Titus Interactive SA ("Titus") pursuant to which Titus will loan the Company $5 million and the Company and Titus will negotiate certain additional transactions, including the purchase of 6.25 million shares of the Company's Common Stock by Titus at a purchase price of $4 per share. 32 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: August 12, 1999 By: /s/ BRIAN FARGO ----------------------- Brian Fargo, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: August 12, 1999 By: /s/ MANUEL MARRERO -------------------- Manuel Marrero, Chief Financial Officer (Principal Financial and Accounting Officer) 33 EX-10.1 2 STOCK PURCHASE AGREEMENT DATED JULY 20, 1999 EXHIBIT 10.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INTERPLAY ENTERTAINMENT CORP. ------------------------------------ STOCK PURCHASE AGREEMENT ------------------------------------ 6,250,000 SHARES OF COMMON STOCK Dated as of July 20, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- 1. Authorization Of Investor Stock........................................... 1 2. Sale And Purchase Of Investor Stock....................................... 1 3. Closing; Termination...................................................... 2 3.1 Closing............................................................. 2 3.2 Termination......................................................... 2 4. Register Of Investor Stock; Restrictions On Transfer Of Securities; Removal Of Restrictions On Transfer Of Investor Stock............... 2 4.1 Register Of Investor Stock.......................................... 2 4.2 Restrictions On Transfer............................................ 3 4.3 Removal Of Transfer Restrictions.................................... 4 5. Representations And Warranties By The Company............................. 4 5.1 Organization, Standing, Etc......................................... 5 5.2 Qualification....................................................... 5 5.3 Capital Stock....................................................... 5 5.4 Investor Stock...................................................... 6 5.5 Indebtedness For Borrowed Money..................................... 6 5.6 Shareholder List.................................................... 6 5.7 Corporate Acts And Proceedings...................................... 7 5.8 Compliance With Laws And Other Instruments.......................... 7 5.9 Binding Obligations................................................. 7 5.10 Securities Laws.................................................... 7 5.11 No Brokers Or Finders.............................................. 8 5.12 Financial Statements............................................... 8 5.13 Changes............................................................ 8 5.14 Material Agreements Of The Company................................. 9 5.15 Employees.......................................................... 9 5.16 Tax Returns And Audits............................................. 9 5.17 Patents And Other Intangible Assets................................ 10 5.18 Employment Benefit Plans; Erisa.................................... 11 5.19 Title To Property And Encumbrances; Leases......................... 11 5.20 Condition Of Properties............................................ 12 5.21 Insurance Coverage................................................. 12 5.22 Litigation......................................................... 12
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Page ---- 5.23 Registration Rights............................................... 12 5.24 Licenses.......................................................... 12 5.25 Interested Party Transactions..................................... 13 5.26 Minute Books...................................................... 13 5.27 Computer Software................................................. 13 5.28 Interplay Web Site And Systems.................................... 13 5.29 Product Returns................................................... 14 5.30 Disclosure........................................................ 14 6. Representations And Warranties Of Investor............................... 14 6.1 Organization, Standing, Etc........................................ 14 6.2 Corporate Acts And Proceedings..................................... 14 6.3 Compliance With Laws And Other Instruments......................... 14 6.4 Binding Obligations................................................ 14 6.5 No Brokers Or Finders.............................................. 15 7. Conditions Of Parties' Obligations....................................... 15 7.1 Conditions Of Investor's Obligations At The Closing................ 15 (a) No Errors, Etc................................................. 15 (b) Compliance With Agreement...................................... 15 (c) No Default..................................................... 15 (d) Certificate Of Company......................................... 15 (e) Opinion Of The Company's Counsel............................... 15 (f) Qualification Under State Securities Laws...................... 15 (g) Supporting Documents........................................... 15 (h) Proceedings And Documents...................................... 16 (i) Employment Agreements.......................................... 16 (j) Lender's Consent............................................... 16 (k) Waiver Of Existing Rights Agreement............................ 16 (l) Government And Other Consents.................................. 16 (m) Stockholder Agreement.......................................... 16 (n) Exchange Agreement............................................. 17 (o) Termination Of Shareholders' Agreement......................... 17 (p) Operating Plan................................................. 17 (q) Universal Option............................................... 17 7.2 Conditions Of Company's Obligations................................ 17 8. Covenants Of The Company And Fargo....................................... 17 8.1 Maintain Insurance................................................. 17
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Page ---- 8.2 Compliance With Initial Purchase Agreement........................................ 17 8.3 Compliance With Section 7......................................................... 17 8.4 Use Of Proceeds................................................................... 18 8.5 Exclusivity....................................................................... 18 8.6 Restriction On Transfer Of Fargo's Common Stock................................... 18 8.7 Fargo Voting Covenant............................................................. 18 8.8 HSR Filing........................................................................ 18 8.9 Development Of Extended Operating Plan............................................ 18 8.10 Maintenance of Distribution Agreements; Negotiations for Distribution Agreement............................................................ 19 9. Covenants Of Investor................................................................... 19 9.1 Compliance With Legal Requirements................................................ 19 9.2 Additional Financing.............................................................. 19 9.3 Compliance With Initial Purchase Agreement........................................ 19 9.4 Maintenance of Distribution Arrangements; Negotiations For Distribution Agreement............................................................ 19 10. Registration Of Investor Stock.......................................................... 20 10.1 Required Registration............................................................ 20 10.2 Registration Procedures.......................................................... 20 10.3 Expenses......................................................................... 21 10.4 Indemnification.................................................................. 22 10.5 Reporting Requirements Under The Exchange Act.................................... 23 10.6 Investor Information............................................................. 24 10.7 Transferability Of Registration Rights........................................... 24 10.8 Suspension Of Registration Obligations In Initial Purchase Agreement; Reinstatement Of Registration Obligations In Event Of Termination............................................................. 24 11. Enforcement............................................................................. 24 11.1 Survival Of Representations And Warranties....................................... 24 11.2 Indemnification.................................................................. 24 11.3 Injunctive Relief................................................................ 27 11.4 No Implied Waiver................................................................ 27 12. Rights Of First Refusal................................................................. 27 12.1 Subsequent Offerings............................................................. 27 12.2 Exercise Of Rights............................................................... 27 12.3 Issuance Of Equity Securities To Other Persons................................... 27 12.4 Excluded Securities.............................................................. 28
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Page ---- 12.5 Termination Of Rights.................................................... 28 13. Definitions..................................................................... 28 14. Miscellaneous................................................................... 31 14.1 Waivers And Amendments................................................... 31 14.2 Rights Of Investor....................................................... 32 14.3 Notices.................................................................. 32 14.4 Severability............................................................. 33 14.5 Assignment; Parties In Interest.......................................... 33 14.6 Headings................................................................. 34 14.7 Choice Of Law; Jurisdiction And Venue.................................... 34 14.8 Publicity................................................................ 34 14.9 Counterparts............................................................. 34 14.10 Entire Agreement; Effect On Initial Purchase Agreement................... 34 14.11 Attorneys' Fees.......................................................... 34 14.12 Arbitration.............................................................. 35
iv STOCK PURCHASE AGREEMENT ------------------------ THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of July 20, --------- 1999 among INTERPLAY ENTERTAINMENT CORP., a Delaware corporation (the "Company"), TITUS INTERACTIVE SA, a French corporation ("Titus" or the ------- ----- "Investor"), and to the extent expressly provided herein, BRIAN FARGO, an -------- individual ("Fargo"). Capitalized terms not otherwise defined herein shall have ----- the meanings ascribed thereto in Section 13 hereof. R E C I T A L S - - - - - - - - A. The Company, Investor and Fargo have previously entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") dated March 18, 1999, ------------------------ whereby, among other things, the Company agreed to sell and Investor agreed to purchase up to Five Million (5,000,000) Shares of the Company's Common Stock (as defined below), and the parties consummated the purchase and sale contemplated by the Stock Purchase Agreement. B. The Stock Purchase Agreement contemplated a merger or other business combination between the Company and Investor, referred to in the Stock Purchase Agreement as a "Permitted Transaction." Subsequent to the consummation of the --------------------- Initial Purchase Agreement, the Company and Investor entered into a Letter of Intent as of May 12, 1999 (the "Letter of Intent") whereby, among other things, ---------------- the Company and Investor entered into a nonbinding expression of intent with respect to a Permitted Transaction and amended the Stock Purchase Agreement in certain limited respects. The Stock Purchase Agreement, as amended by the Letter of Intent, shall be referred to herein from time to time as the "Initial ------- Purchase Agreement." - ------------------ C. The parties hereby desire to effect a Permitted Transaction, on the terms and conditions set forth herein. THE PARTIES hereby agree as follows: 1. Authorization of Investor Stock. The Company has authorized the issue ------------------------------- and sale of Six Million Two Hundred Fifty Thousand (6,250,000) shares (the "Investor Stock") of its Common Stock, par value $.001 per share ("Common - --------------- ------ Stock"). - ----- 2. Sale and Purchase of Investor Stock. Upon the terms and subject to ----------------------------------- the conditions herein contained, the Company agrees to sell to Investor, and Investor agrees to purchase from the Company, at the Closing (as hereinafter defined) on the Closing Date (as hereinafter defined) the Investor Stock at a price in the aggregate of Twenty-Five Million Dollars ($25,000,000) (the "Purchase Payment"). The parties acknowledge that Investor has previously paid - ----------------- the Company Five Million Dollars (the "Deposit"), in accordance with the Letter ------- of Intent, which Deposit the Company shall repay in accordance with the Convertible Promissory Note dated as of May 12, 1999 (the "Initial Note"). ------------ Simultaneously with the execution of this Agreement, Investor shall make additional payments to the Company as mutually agreed upon by the Company and Investor, which amounts the Company shall repay in accordance with the Convertible Promissory Note dated as of the date hereof (the "Additional Note"). --------------- 3. Closing; Termination. -------------------- 3.1 Closing. The closing of the sale to and purchase by Investor ------- of the Investor Stock (the "Closing") shall occur at the offices of Paul, ------- Hastings, Janofsky & Walker LLP, 555 South Flower Street, Twenty-Third Floor, Los Angeles, California, at the hour of 10:00 A.M., Pacific time, on the first business day after the date upon which all of the conditions to Investor's and the Company's obligations hereunder have been satisfied (or waived in accordance with the terms hereof), or at such later time or day as the Investor and the Company shall agree (the "Closing Date"). At the Closing, the Company shall ------------ deliver to Investor a certificate evidencing the Investor Stock which shall be registered in Investor's name, against delivery to the Company of payment by check or wire transfer in an amount equal to (a) the Purchase Payment less (b) the Deposit (the Net Purchase Payment"). Simultaneously therewith, each of the -------------------- Initial Note and the Additional Note shall be tendered to the Company by the Investor in satisfaction of the balance of the Purchase Payment. 3.2 Termination. This Agreement may be terminated at any time ----------- prior to the Closing Date by written notice from the terminating party, delivered in accordance with Section 14.3, specifying the reason therefor: (a) by mutual agreement of the parties hereto; (b) by Investor if (i) any condition precedent to Closing set forth in Section 7.1 of this Agreement has not been met on or before September 30, 1999, (ii) the Closing has not occurred on or before September 30, 1999 for any reason other than (I) a material default by Investor in its obligations hereunder or (II) failure to consummate the transactions contemplated by the Exchange Agreement attached hereto as Exhibit E, where such failure is solely --------- due to the inability of Investor to issue to Fargo the Exchanged Shares (as described therein) as of such date, or (iii) the Company has committed any material breach or default under the terms of this Agreement, which breach or default is not cured within ten (10) days after Company's receipt of written notice thereof; (c) by the Company if (i) any condition precedent to Closing set forth in Section 7.2 of this Agreement has not been met on or before September 30, 1999, (ii) the Closing has not occurred on or before September 30, 1999 for any reason other than (I) a material default by the Company in its obligations hereunder or (II) failure to consummate the transactions contemplated by the Exchange Agreement attached hereto as Exhibit E, where such --------- failure is solely due to the inability of Investor to issue to Fargo the Exchanged Shares (as described therein) as of such date, or (iii) the Investor has committed any material breach or default under the terms of this Agreement, which breach or default is not cured within ten (10) days after Investor's receipt of written notice thereof. 4. Register of Investor Stock; Restrictions on Transfer of Securities; ------------------------------------------------------------------- Removal of Restrictions on Transfer of Investor Stock. - ----------------------------------------------------- 4.1 Register of Investor Stock. The Company or its duly appointed --------------------------- agent shall maintain a register for the shares of Investor Stock, in which it shall register the issue and sale of all such shares. All transfers of the Investor Stock shall be recorded on the register maintained by the Company or its agent, and the Company shall be 2 entitled to regard the registered holder of the Investor Stock as the actual holder of the Investor Stock so registered until the Company or its agent is required to record a transfer of such Investor Stock on its register. Subject to Section 4.2(c) hereof, the Company or its agent shall be required to record any such transfer when it receives the shares of Investor Stock to be transferred duly and properly endorsed by the registered holder thereof or by its attorney duly authorized in writing. 4.2 Restrictions on Transfer. ------------------------ (a) Investor understands and agrees that the shares of Investor Stock it will be acquiring have not been registered under the Securities Act, and that accordingly they will not be fully transferable except as permitted under various exemptions contained in the Securities Act, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act. Investor acknowledges that it must bear the economic risk of its investment in the Investor Stock for an indefinite period of time (subject, however, to the Company's obligation to effect the registration of the Investor Stock under the Securities Act in accordance with this Agreement) since they have not been registered under the Securities Act and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. (b) Investor hereby represents and warrants to the Company that (i) it is acquiring the Investor Stock for investment purposes only, for its own account, and not as nominee or agent for any other Person, and not with the view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act, and (ii) it is an "accredited investor" within the meaning of Regulation D of the Commission under the Securities Act. (c) Investor hereby agrees with the Company as follows: (i) Subject to Section 4.3 hereof, the certificates evidencing the Investor Stock it has agreed to purchase, and each certificate issued in transfer thereof, will bear the following legend: "The securities evidenced by this certificate have not been registered under the Securities Act of 1933 and have been taken for investment purposes only and not with a view to the distribution thereof, and, except as stated in an agreement between the holder of this certificate, or its predecessor in interest, and the issuer corporation, such securities may not be sold or transferred unless there is an effective registration statement under such Act covering such securities or the issuer corporation receives an opinion of counsel (which may be counsel for the issuer corporation) stating that such sale or transfer is exempt from the registration and prospectus delivery requirements of such Act." (ii) The certificates representing such Investor Stock, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. (iii) Absent an effective registration statement under the Securities Act, covering the disposition of the Investor Stock which Investor acquires, Investor will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or 3 all of the Investor Stock without first providing the Company with an opinion of counsel (which may be counsel for the Company) to the effect that such sale, transfer, assignment, pledge, hypothecation or other disposition will be exempt from the registration and the prospectus delivery requirements of the Securities Act and the registration or qualification requirements of any applicable state securities laws, except that no such registration or opinion shall be required with respect to (A) a transfer not involving a change in beneficial ownership, (B) a transfer to an Affiliate of Investor, or (C) a sale to be effected in accordance with Rule 144 of the Commission under the Securities Act (or any comparable exemption). (iv) Investor agrees that, if the Investor Stock is issued in accordance herewith prior to the Final Valuation Date (as defined in Section 13 hereof), neither it nor any of its affiliates will, during the period between the Closing Date and the Final Valuation Date, (A) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any of the Investor Stock or (B) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Investor Stock, whether any such transaction described in clause (A) or (B) above is to be settled by delivery of the Investor Stock, in cash or otherwise. Investor agrees that the certificates evidencing the Investor Stock, if such Investor Stock is issued during the period between the Closing Date and the Final Valuation Date, and each certificate issued in transfer thereof, will bear the following legend: "The sale, pledge, hypothecation or transfer of the securities represented by this certificate is subject to the terms and conditions (including certain adjustment provisions) of a certain Stock Purchase Agreement by and between the Corporation and the holder hereof. Copies of such agreement may be obtained upon written request to the secretary of the Corporation." (v) Investor consents to the Company's making a notation on its records or giving instructions to any transfer agent of the Investor Stock in order to implement the restrictions on transfer of the Investor Stock mentioned in this subsection (c). 4.3 Removal of Transfer Restrictions. Any legend endorsed on a -------------------------------- certificate evidencing shares of Investor Stock pursuant to Section 4.2(c)(i) hereof and any stop transfer instructions and record notations with respect to such Investor Stock shall be removed and the Company shall issue a certificate without such legend to the holder of such Investor Stock (a) if such Investor Stock is registered under the Securities Act, or (b) if such Investor Stock may be sold under Rule 144(k) of the Commission under the Securities Act or (c) if such holder provides the Company with an opinion of counsel (which may be counsel for the Company) reasonably acceptable to the Company to the effect that a public sale or transfer of such Investor Stock may be made without registration under the Securities Act. 5. Representations and Warranties by the Company. In order to induce --------------------------------------------- Investor to enter into this Agreement and to purchase the Investor Stock, the Company hereby covenants with, and represents and warrants to, Investor, as of the date hereof, 4 except as set forth on the Schedule of Exceptions delivered to Investor concurrently herewith, as follows (unless the context otherwise requires, the "Company" shall refer to the Company and its Subsidiaries, collectively): 5.1 Organization, Standing, etc. The Company is a corporation ---------------------------- duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to carry on its business, to own and hold its properties and assets, to enter into this Agreement, to issue the Investor Stock and to carry out the provisions hereof and thereof. The copies of the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of the Company which have been delivered to Investor prior to the execution of this Agreement are true and complete and have not been amended or repealed. Subsidiaries of the Company are set forth on Schedule 5.1. ------------ 5.2 Qualification. The Company is duly qualified, licensed or -------------- domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or its properties owned or leased makes such qualification, licensing or domestication necessary, except where the failure to be so qualified would not have a Material Adverse Effect on the Company. 5.3 Capital Stock. The authorized capital stock of the Company ------------- consists of 50,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock, and the Company has no authority to issue any other capital stock. No shares of Preferred Stock have been issued prior to the Closing; 22,770,712 shares of Common Stock are issued and outstanding, and such shares are duly authorized, validly issued, fully paid and nonassessable. Except where the failure to do so would not result in a Material Adverse Effect on the Company, the offer, issuance and sale of the shares of Common Stock were (a) registered or qualified under (or were exempt from the registration and prospectus delivery requirements of) the Securities Act, (b) registered or qualified (or were exempt from registration or qualification) under the registration or qualification requirements of all applicable state securities laws, and (c) accomplished in conformity with all other federal and applicable state securities laws, rules and regulations. As of the date hereof, the Company has (A) reserved a total of 154,356 shares of Common Stock for issuance to employees, officers and directors under a 1991 stock purchase plan, under which options to purchase a total of 154,356 shares have been granted, but neither exercised nor forfeited by the holder thereof, (B) reserved a total of 353,050 shares of Common Stock for issuance to employees, officers and directors under a 1994 stock option plan, under which options to purchase a total of 353,050 shares have been granted, but neither exercised nor forfeited by the holder thereof, and (C) reserved a total of 2,353,425 shares of Common Stock for issuance to employees, officers and directors under a 1997 stock incentive plan, under which options to purchase 1,905,700 shares have been granted, but neither exercised nor forfeited by the holder thereof, (D) reserved a total of 200,000 shares of Common Stock for issuance to employees and officers under an Employee Stock Purchase Plan, of which 56,102 shares have been granted, but neither exercised nor forfeited by the holder thereof, and (E) reserved a total of 572,874 shares of Common Stock for issuance upon the exercise of options granted outside the Company's option plans, of which 572,874 shares have been granted, but neither exercised nor forfeited by the holder thereof. The Company has reserved a total of 400,000 shares for issuance upon exercise of outstanding warrants issued by the Company. Under the terms thereof, to the extent that any outstanding award under the 1991 stock purchase plan or 1994 stock option plan expires or terminates prior to exercise of such award in full, or if shares issued upon exercise are repurchased by the Company, the unexercised portion or repurchased shares shall be added to the pool of shares under the 1997 stock incentive plan and shall thereafter be available for grant under the terms of such 1997 stock incentive plan. Each of the 1991 stock purchase plan and 1994 stock option plan has been terminated with respect to future grants of shares of Common Stock. Except as expressly provided in the Initial Purchase Agreement and this Agreement, the Company has no outstanding subscription, option, warrant, call, contract, demand, commitment, convertible security or other instrument, agreement or arrangement of any character or nature whatsoever under which the Company is or may be obligated to issue Common Stock, Preferred Stock or other Equity Security (as hereinafter defined) of any kind. Neither the offer nor the issuance or sale of the Investor Stock constitutes or will constitute an event, under any Equity Security or any anti- dilution or similar provision of any agreement or instrument to which the Company is a party or by which it is bound or affected, which shall either increase the number of shares or units of Equity Securities issuable upon conversion of any securities (whether stock or Indebtedness for Borrowed Money (as hereinafter defined)) or upon exercise of any warrant or right to subscribe to or purchase any stock or similar security (including Indebtedness for Borrowed Money), or decrease the consideration per share or unit of Equity Security to be received by the Company upon such conversion or exercise. 5.4 Investor Stock. The Investor Stock has been duly authorized -------------- and validly issued, and upon payment to the Company of the Net Purchase Payment and cancellation of the Initial Note and the Additional Note at the Closing, will be fully paid and nonassessable Common Stock, free and clear of all Liens and restrictions, other than Liens that might have been created by Investor and restrictions imposed by (i) Section 4.2 hereof, (ii) applicable state securities laws, (iii) the Securities Act and (iv) the Stockholder Agreement. 5.5 Indebtedness for Borrowed Money. The Company has no ------------------------------ Indebtedness for Borrowed Money except as disclosed on the Balance Sheet or on Schedule 5.5 hereto. - ------------ 5.6 Shareholder List. Schedule 5.6 hereto contains a true and ---------------- ------------ complete list of the names and addresses of all persons or entities known to the Company, based on Schedules 13D and/or 13G filed by such persons or entities or otherwise based on the Company's actual knowledge, to be the beneficial holders of more than five percent (5%) of the outstanding Common Stock and of the holders of all outstanding options, warrants or other rights to purchase from the Company more than five percent (5%) of Common Stock. With respect to holders of more than 5% of Common Stock, Schedule 5.6 contains, to the Company's ------------ knowledge, a true and complete description of the number of shares held by each such holder. With respect to each option set forth on such Schedule, Schedule -------- 5.6 sets forth the date of grant, the number of shares subject thereto, the - --- exercise price, vesting schedule and expiration date. With respect to the warrants set forth on such Schedule, Schedule 5.6 sets forth the date of issue ------------ of each warrant, the number of shares of Common Stock subject to the warrant, the exercise price and expiration date. Except as provided on Schedule 5.6, and ------------ except for the Investor, no holder of Common Stock or any other security of the Company or any other Person is entitled to any preemptive right, right of first refusal or similar right from the Company or, to the Company's knowledge, any Person as a result of the issuance of the Investor Stock or otherwise. Except as provided on Schedule 5.6, there is no voting trust, agreement or arrangement ------------ among any of the beneficial holders of Common Stock of the Company affecting the exercise of the voting rights of such stock. 6 5.7 Corporate Acts and Proceedings. All corporate acts and ------------------------------ proceedings required for the authorization, execution and delivery of this Agreement, the offer, issuance and delivery of the Investor Stock and the performance of this Agreement have been lawfully and validly taken or will have been so taken prior to the Closing. 5.8 Compliance with Laws and Other Instruments. The business and ------------------------------------------ operations of the Company have been and are being conducted in accordance with all applicable federal, state and local laws, rules and regulations, except to the extent that noncompliance with laws, rules and regulations would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The execution, delivery and performance by the Company of this Agreement (a) will not require from the Board or stockholders of the Company any consent or approval that has not been validly and lawfully obtained, (b) will not require any authorization, consent, approval, license, exemption of or filing or registration with any domestic or, to best of the Company's knowledge, foreign, court or governmental department, commission, board, bureau, agency or instrumentality of government, except such as shall have been lawfully and validly obtained prior to the Closing, (c) will not cause the Company to violate or contravene (i) any provision of law, (ii) any rule or regulation of any agency or government, domestic or foreign, (iii) any order, writ, judgment, injunction, decree, determination or award, or (iv) any provision of the Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws of the Company, (d) will not violate or be in conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under, any indenture, loan or credit agreement, note agreement, deed of trust, mortgage, security agreement or other agreement, lease or instrument, commitment or arrangement to which the Company is a party or by which the Company or any of its properties, assets or rights is bound or affected, which in any such case would have a Material Adverse Effect on the Company, and (e) will not result in the creation or imposition of any Lien, other than Liens in favor of the Investor. The Company is not in violation of, or (with or without notice or lapse of time or both) in default under, any term or provision of its Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws or of any indenture, loan or credit agreement (including any agreement evidencing Indebtedness for Borrowed Money), note agreement, deed of trust, mortgage, security agreement or other material agreement, lease or other instrument, commitment or arrangement to which the Company is a party or by which any of the Company's properties, assets or rights is bound or affected, which in any such case would have a Material Adverse Effect on the Company. The Company is not subject to any restriction of any kind or character which prohibits the Company from entering into this Agreement or would prevent its performance of or compliance with all or any part of this Agreement or the consummation of the transactions contemplated hereby or thereby. 5.9 Binding Obligations. This Agreement constitutes the legal, ------------------- valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally. 5.10 Securities Laws. Based in part upon the representations of --------------- Investor in Section 4.2, the offer, issue and sale of the Investor Stock are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, and have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. 7 5.11 No Brokers or Finders. No Person has, or as a result of the --------------------- transactions contemplated herein will have, any right or valid claim against the Company or the Investor for any commission, fee or other compensation as a finder or broker, or in any similar capacity based upon obligations incurred by the Company. 5.12 Financial Statements. Included in the Company's Annual Report -------------------- on Form 10-K for the year ended December 31, 1998 is the Company's audited balance sheet (the "Balance Sheet") as of December 31, 1998 (the "Balance Sheet ------------- ------------- Date"), and the audited statement of operations for the twelve-month period then - ---- ended. Included in the Company's Registration Statement on Form S-1 effective June 19, 1998 (the "Form S-1") are the Company's audited balance sheets as of -------- April 30, 1996 and 1997, and December 31, 1997, and the audited statements of operations, cash flow and shareholders' equity for each of the periods then ended, together with the related opinion thereon of Arthur Andersen LLP, independent certified public accountants. Included in the Company's Report on 10-Q for the quarterly period ended March 31, 1999 (the "Form 10-Q") are the --------- Company's unaudited balance sheet as of March 31, 1999 and the unaudited statement of operations for the three-month period then ended. The foregoing financial statements (i) are in accordance with the books and records of the Company, (ii) present fairly in all material respects, taken as a whole, the financial condition of the Company at the Balance Sheet Date and other dates therein specified and the results of its operations and cash flow for the periods therein specified, and (iii) have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior accounting periods ("GAAP"). Specifically, but not by way of limitation, ---- the Balance Sheet discloses all of the material debts, liabilities and obligations of any nature (whether absolute, accrued, contingent or otherwise and whether due or to become due) of the Company at the Balance Sheet Date which must be disclosed on a balance sheet in accordance with GAAP. 5.13 Changes. Since the Balance Sheet Date, except as disclosed on ------- Schedule 5.13 hereto, the Company has not (a) incurred any material debts, - ------------- obligations or liabilities, absolute, accrued, contingent or otherwise, whether due or to become due in excess of $250,000, except current liabilities incurred in the usual and ordinary course of business, none of which (individually or in the aggregate) materially and adversely affects the business, finances, properties or prospects of the Company, (b) discharged or satisfied any Liens other than those securing, or paid any obligation or liability other than, current liabilities shown on the Balance Sheet and current liabilities incurred since the Balance Sheet Date, in each case in the usual and ordinary course of business, (c) mortgaged, pledged or subjected to Lien any of its assets, tangible or intangible, (d) sold, transferred or leased any of its assets of value exceeding $250,000 except in the usual and ordinary course of business, (e) canceled or compromised any debt or claim, or waived or released any right, of value exceeding $250,000, (f) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the properties, business or prospects of the Company, (g) encountered any labor difficulties or labor union organizing activities, (h) made or granted any wage or salary increase to any executive officer other than in the ordinary course of business or entered into any employment agreement, (i) issued or sold any shares of capital stock or other securities or granted any options with respect thereto, (j) modified any Equity Security, except to the extent disclosed on Schedule 5.6 hereto, (k) declared or paid any dividends on or made any other - ------------ distributions with respect to, or purchased or redeemed, any of its outstanding Equity Securities, (l) suffered or experienced any change in, or condition affecting, the condition (financial or otherwise) of the Company as a whole other than 8 changes, events or conditions in the usual and ordinary course of its business, none of which (either by itself or in conjunction with all such other changes, events and conditions) has been or could reasonably be expected to be materially adverse, (m) made any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates theretofore adopted, or (n) entered into any agreement, or otherwise obligated itself, to do any of the foregoing. 5.14 Material Agreements of the Company. Except as expressly set ---------------------------------- forth in this Agreement, the Balance Sheet, as disclosed in the Index (compiled pursuant to Item 601 of Regulation S-K of the Commission) to the Company's filings under the Securities Act and the Exchange Act or as disclosed on Schedule 5.14 hereto, the Company is not a party to any written or oral - ------------- agreement, instrument or arrangement not made in the ordinary course of business that is material to the Company and is either (a) an agreement with any labor --- union, (b) an agreement for the purchase of fixed assets or for the purchase of materials, supplies or equipment over $250,000, (c) an agreement for the employment of any officer on other than an at-will basis, (d) an indenture, loan or credit agreement, note agreement, deed of trust, mortgage, security agreement, promissory note or other agreement or instrument relating to or evidencing Indebtedness for Borrowed Money in excess of $250,000 or subjecting any asset or property of the Company to any Lien, (e) a guaranty of any Indebtedness, (f) a lease or agreement under which the Company is lessee of or holds or operates any property, real or personal, owned by any other Person under which payments to such Person exceed $250,000 per annum, (g) a lease or agreement under which the Company is lessor or permits any Person to hold or operate any property, real or personal, owned or controlled by the Company having a value over $250,000 other than in the ordinary course of business, (h) an agreement granting any preemptive right, right of first refusal or similar right to any Person, (i) a covenant not to compete or other restriction on its ability to conduct a business or engage in any other activity, or (j) an agreement to register securities under the Securities Act. To the Company's knowledge, all parties having material contractual arrangements with the Company are in substantial compliance therewith, and none is in default in any material respect thereunder, except for noncompliance or defaults which will not have a Material Adverse Effect on the Company. 5.15 Employees. Fargo and David Perry (collectively, "Designated --------- ---------- Key Employees") are in the full-time employ of the Company and/or one or more of - ------------- its Subsidiaries. To the best of the Company's knowledge, no Designated Key Employee has any plans to terminate his employment with the Company or a Subsidiary, as the case may be, and the Company has no intention of terminating the employment of any Designated Key Employee. To the best of the Company's knowledge, no Designated Key Employee or any other employee of the Company is a party to or is otherwise bound by any agreement or arrangement (including, without limitation, any license, covenant, or commitment of any nature), or subject to any judgment, decree, or order of any court or administrative agency, (a) that would conflict with such employee's obligation diligently to promote and further the interests of the Company or (b) that would conflict with the Company's business as now conducted or as proposed to be conducted. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and the Company has encountered no material labor difficulties. 5.16 Tax Returns and Audits. All required federal, state and local ---------------------- tax returns of the Company have been accurately prepared and duly and timely filed, and 9 all federal, state and local taxes required to be paid with respect to the periods covered by such returns have been paid. The Company is not delinquent in the payment of any material tax, assessment or governmental charge. Except as set forth on Schedule 5.16 hereto, there is not currently pending against the ------------- Company any tax deficiency proposed or assessed against it and the Company has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge for any tax period for which the statute of limitations has not expired. Except as set forth on Schedule 5.16 ------------- hereto, none of the Company's federal income tax returns nor any state or foreign income or franchise tax returns has ever been audited by governmental authorities in any of the last five (5) tax years. The reserves for taxes, assessments and governmental charges reflected in the Balance Sheet are and will be sufficient for the payment of all unpaid taxes, assessments and governmental charges payable by the Company with respect to the period ended on the Balance Sheet Date. 5.17 Patents and Other Intangible Assets. ----------------------------------- (a) Except as disclosed on Schedule 5.17 hereto, the Company ------------- (i) owns or has the right to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in or necessary for the conduct of its business as now conducted and proposed to be conducted, (ii) to the Company's knowledge, is not infringing upon or otherwise acting adversely to the right or claimed right of any Person under or with respect to any patent, trademark, service mark, trade name, copyright or license with respect thereto, where such infringement would have a Material Adverse Effect on the Company. (b) The Company owns or has the right to use all product rights, manufacturing rights, trade secrets, including know-how, negative know- how, formulas, patterns, compilations, programs, devices, methods, techniques, processes, inventions, designs, technical data, computer software (in both source code and object code forms and all documentation therefor), including without limitation the Operational Software (as hereinafter defined) (all of the foregoing of which are collectively referred to herein as "intellectual ------------ property") required for or incident to the conduct of the Company's business, as - -------- it is presently conducted, in each case free and clear of any right, Lien or claim of others, including without limitation former employers of its employees, except for rights reserved by the licensors of such intellectual property and rights granted by the Company pursuant to license, publishing and distribution agreements, and except where such right, lien or claim would not have a Material Adverse Effect on the Company. (c) Since its organization, the Company has taken reasonable security measures to protect the secrecy, confidentiality and value of all intellectual property and all Inventions (as defined below). Without limiting the generality of the foregoing, except as set forth on Schedule 5.17, each of ------------- the Company's present employees has signed an agreement with the Company in the form provided to Investor, and each of the Company's past employees has signed an agreement with the Company substantially in the form provided to Investor, except, in either such case, where the failure to do so would not have a Material Adverse Effect on the Company. As used herein, "Inventions" means all ---------- inventions, developments and discoveries which during the period of an employee's or other Person's service to the Company he or she makes or conceives of, either solely or jointly with others, that relate to any subject matter with which his or her work for the Company may be concerned, or relate to or are connected with the business, products, services or projects of the Company, or relate to 10 the actual or demonstrably anticipated research or development of the Company or involve the use of the Company's time, material, facilities or trade secret information. (d) Except for license, publishing and distribution agreements with third parties entered into in the ordinary course of business, and except as disclosed on Schedule 5.17 hereto, the Company has not sold, transferred, ------------- assigned, licensed or subjected to any Lien, any intellectual property, trade secret, know-how, invention, design, process, computer software or technical data, or any interest therein, necessary for the development, manufacture, use, operation or sale of any product listed on Schedules 5.27(a) and 5.27(b) hereto. ----------------------------- (e) No director, officer, employee, agent or shareholder of the Company owns or has any right in the intellectual property of the Company, or any patents, trademarks, service marks, trade names, copyrights, licenses or rights with respect to the foregoing, or any inventions, developments or discoveries used in or necessary for the conduct of the Company's business as now conducted and as proposed to be conducted, which could reasonably be expected to have a Material Adverse Effect on the Company. (f) The Company has not received any communication alleging or stating that the Company or any of its employees or other agents has violated or infringed, or by conducting business as proposed, would violate or infringe, any patent, trademark, service mark, trade name, copyright, trade secret, proprietary right, process or other intellectual property of any other Person, which could reasonably be expected to have a Material Adverse Effect on the Company. 5.18 Employment Benefit Plans; ERISA. Except for the Interplay ------------------------------- Productions 401(k) Profit Sharing Plan (the "Plan"), as described in Schedule ---- -------- 5.18, the Company does not maintain or make contributions to any pension, profit - ---- sharing or other employee retirement benefit plan. The Plan has been maintained in compliance with all applicable laws, ordinances, rules, regulations, permits, orders, writs, judgments, injunctions, decrees, determinations and awards of any agency, government, or arbitrator. The Company has no material liability with respect to the Plan or any other such plan (including, without limitation, any unfunded liability or any accumulated funding deficiency) or any material liability to the Pension Benefit Guaranty Corporation or under Title IV of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with ----- respect to the Plan or any multi-employer pension benefit plan, nor would the Company have any such liability if the Plan or any multi-employer plan were terminated or if the Company withdrew, in whole or in part, from the Plan or any multi-employer plan. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will constitute a termination of employment or other event entitling any person to any additional or other benefits, or that would otherwise modify benefits or the vesting of benefits, provided under the Plan. 5.19 Title to Property and Encumbrances; Leases. The Company has ------------------------------------------ good and marketable title to all of its properties and assets, including without limitation the properties and assets reflected in the Balance Sheet and the properties and assets used in the conduct of its business, except for properties disposed of in the ordinary course of business since the Balance Sheet Date and except for properties held under valid and subsisting leases which are in full force and effect and which are not in default, subject to no Lien, except those which are shown and described on the Balance Sheet and 11 except for Permitted Liens (as hereinafter defined). All material leases under which the Company is lessee of any real or personal property are valid, enforceable and effective in accordance with their terms; there is not under any such lease any existing or claimed default by the Company or event or condition which with notice or lapse of time or both would constitute a default by the Company. Except as disclosed on Schedule 5.19 hereto, no material lease under ------------- which the Company is lessee of any real property contains any provision which either (i) treats a sale or transfer of any or all of the outstanding stock of the Company or a merger of the Company with another Person as an assignment of the Company's leasehold interest, or (ii) otherwise requires the consent of the lessor in the event of any such sale, transfer or merger. 5.20 Condition of Properties. All facilities, machinery, ----------------------- equipment, fixtures, vehicles and other properties owned, leased or used by the Company with fair market value in excess of $250,000 are in good operating condition and repair, subject to ordinary wear and tear, and are adequate and sufficient for the Company's business. 5.21 Insurance Coverage. There is in full force and effect one or ------------------ more policies of insurance issued by insurers of recognized responsibility, insuring the Company and its properties and business against such losses and risks, and in such amounts, as are customary in the case of corporations engaged in the same or similar business and similarly situated. The Company has not been refused any insurance coverage sought or applied for, and the Company has no knowledge of any facts that cause it to believe that the Company will be unable to renew its existing insurance coverage as and when the same shall expire upon terms at least as favorable as those presently in effect, other than possible increases in premiums that do not result from any act or omission of the Company. 5.22 Litigation. Except as disclosed on Schedule 5.22 hereto, ---------- ------------- there is no legal action, suit, arbitration or other legal, administrative or other governmental investigation, inquiry or proceeding (whether federal, state, local or foreign) pending or, to the Company's knowledge, threatened against or affecting (i) the Company or its properties, assets or business (existing or contemplated), or (ii) any Designated Key Employee, before any court or governmental department, commission, board, bureau, agency or instrumentality or any arbitrator, which if adversely determined would have a Material Adverse Effect on the Company. Except as disclosed on Schedule 5.22 hereto, the Company ------------- is not aware of any fact which might result in or form the basis for any such action, suit, arbitration, investigation, inquiry or other proceeding, which if adversely determined would have a Material Adverse Effect on the Company. Neither the Company nor, to the best of the Company's knowledge, any of the Key Employees is in default with respect to any order, writ, judgment, injunction, decree, determination or award of any court or of any governmental agency or instrumentality (whether federal, state, local or foreign). 5.23 Registration Rights. Except as set forth on Schedule 5.23, ------------------- ------------- other than under this Agreement and the Initial Purchase Agreement, the Company has not agreed to register under the Securities Act any of its authorized or outstanding securities. 5.24 Licenses. The Company possesses from the appropriate agency, -------- commission, board and governmental body and authority, whether state, local or federal, all licenses, permits, authorizations, approvals, franchises and rights which are necessary for the Company to engage in the business currently conducted by it and 12 proposed to be conducted (except where the failure to so hold would not have a Material Adverse Effect on the Company), including without limitation the development, manufacture, use, sale and marketing of its existing and proposed products and services; and all such certificates, licenses, permits, authorizations and rights have been lawfully and validly issued and are in full force and effect. 5.25 Interested Party Transactions. Except as disclosed on ----------------------------- Schedule 5.25 hereto, no officer, director or 5% shareholder of the Company or - ------------- any Affiliate of any such Person or the Company has, either directly or indirectly, (a) a material interest in any Person which (i) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (ii) purchases from or sells or furnishes to the Company any goods or services, or (b) a beneficial interest in any transaction, contract or agreement to which the Company is a party or by which it is bound or affected. 5.26 Minute Books. The minute books of the Company provided to ------------ Paul, Hastings, Janofsky & Walker LLP, special counsel for the Investor, contain all resolutions adopted by directors and stockholders since the incorporation of the Company and fairly and accurately reflect, in all material respects, all matters and transactions referred to in such minutes. 5.27 Computer Software. ----------------- (a) Each of the computer software programs developed by the Company that are listed on Schedule 5.27(a) hereto (the "Operational Software") ---------------- -------------------- is functional, complete and operational in all material respects in accordance with its specifications, has been documented in accordance with the Company's standard practices, and the Company possesses both the source code and object code versions thereof. (b) Attached as Schedule 5.27(b) hereto is a true and complete ---------------- list of all computer software games currently in active development by or on behalf of the Company (the "Developing Software"). Schedule 5.27(b) also sets ------------------- ---------------- forth whether each such game is being internally or externally developed and, if externally developed, the name of the third party developer. 5.28 Interplay Web Site and Systems. ------------------------------ (a) The Company owns and has the right to communicate and publish its "Interplay" Internet product offering (the "Web Site") and conduct -------- business on the World Wide Web at the Internet address "interplay.com" and in connection therewith to use the registered service mark and trade name "Interplay" and in so doing is not acting in conflict with any patent, trademark, service mark, trade name, copyright, trade secret, license or other proprietary right with respect thereto, except where such conflict would not have a Material Adverse Effect on the Company. (b) The Company has not received any communication from any Person that the Web Site or the conduct of the Company's business is in violation of any law, rule or regulation or in conflict with any patent, trademark, service mark, trade name, copyright, trade secret, license or other proprietary right with respect thereto, except where such violation or conflict would not have a Material Adverse Effect on the Company. 13 5.29 Product Returns. Schedule 5.29 hereto sets forth the --------------- ------------- Company's experience with respect to the return of any of its products sold or leased for the three (3) year period ended on December 31, 1998 and for the three (3) month period ended March 31, 1999. 5.30 Disclosure. To the Company's knowledge, the information ---------- contained in this Agreement, in the Form 10-Q, the Balance Sheet and the Form S- 1, and in any writing furnished pursuant hereto or in connection herewith, taken as a whole, is true, complete and correct (except that with respect to the Form 10-Q, the Balance Sheet and the Form S-1, the information contained therein shall be true, complete and correct as of the date thereof), and does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or herein or necessary to make the statements therein or herein, in light of the circumstances under which they were made, not misleading. 6. Representations and Warranties of Investor. In order to induce the ------------------------------------------ Company to enter into this Agreement and to issue the Investor Stock, Investor hereby covenants with, and represents and warrants to, the Company as follows: 6.1 Organization, Standing, etc Investor is a corporation duly --------------------------- organized, validly existing and in good standing under the laws of France, and has all requisite corporate power and authority to enter into this Agreement, and to carry out the provisions hereof and thereof. 6.2 Corporate Acts and Proceedings. All corporate acts and ------------------------------ proceedings required for the authorization, execution and delivery of this Agreement by Investor, and the performance of this Agreement by Investor, have been lawfully and validly taken or will have been so taken prior to the Closing. 6.3 Compliance with Laws and Other Instruments. The execution, ------------------------------------------ delivery and performance by Investor of this Agreement (a) will not require from the board of directors or stockholders of Investor any consent or approval that has not been validly and lawfully obtained, (b) will not require any authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality of government, except such as shall have lawfully and validly obtained prior to the Closing, (c) will not cause Investor to violate or contravene (i) any provision of law, (ii) any rule or regulation of any agency or government, domestic of foreign, (iii) any order, writ, judgment, injunction, decree, determination or award binding upon Investor, or (iv) any provision of the charter documents of Investor, (d) will not violate or be in conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under, any indenture, loan or credit agreement, note agreement, deed of trust, mortgage, security agreement or other material agreement, lease or instrument, commitment or arrangement to which Investor is a party or by which Investor or any of its properties, assets or rights is bound or affected, which in any case would have a Material Adverse Effect on Investor. 6.4 Binding Obligations. This Agreement constitutes the legal, ------------------- valid and binding obligations of Investor and is enforceable against Investor in accordance with its terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally. 14 6.5 No Brokers or Finders. No Person has, or as a result of the --------------------- transactions contemplated herein will have, any right or valid claim against the Company or Investor for any commission, fee or other compensation as a finder or broker, or in any similar capacity, except for Concordia Capital Technology Group, Inc., whose fees will be the responsibility of the Investor. 7. Conditions of Parties' Obligations. ---------------------------------- 7.1 Conditions of Investor's Obligations at the Closing. The --------------------------------------------------- obligation of Investor to purchase and pay for the Investor Stock is subject to the fulfillment prior to or on the Closing Date of the following conditions, any of which may be waived in whole or in part by Investor: (a) No Errors, etc. The representations and warranties of the -------------- Company under this Agreement shall be deemed to have been made again on the Closing Date and shall then be true and correct in all material respects (except to the extent already qualified as to materiality, in which case such representations and warranties shall then be true and correct in all respects). (b) Compliance with Agreement. The Company shall have ------------------------- performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. (c) No Default. There shall not exist on the Closing Date any ---------- Default (as hereinafter defined) or Event of Default (as hereinafter defined) or any event or condition which, with the giving of notice or lapse of time or both, would constitute a Default or Event of Default. (d) Certificate of Company. The Company shall have delivered ---------------------- to Investor a certificate dated the Closing Date, executed by the Chief Executive Officer and Chief Financial Officer of the Company, certifying the satisfaction of the conditions specified in subsections (a), (b) and (c) of this Section 7.1. (e) Opinion of the Company's Counsel. The Investor shall have -------------------------------- received from Stradling Yocca Carlson & Rauth, a professional corporation, counsel for the Company, a favorable opinion dated the Closing Date substantially in the form of Exhibit A hereto. --------- (f) Qualification Under State Securities Laws. All ----------------------------------------- registrations, qualifications, permits and approvals required under applicable state securities laws shall have been obtained for the lawful execution, delivery and performance of this Agreement, including without limitation the offer, sale, issue and delivery of the Investor Stock. (g) Supporting Documents. Investor shall have received the -------------------- following: (1) Copies of resolutions of the Board, certified by the Secretary of the Company, authorizing and approving the execution, delivery and performance of this Agreement, and all other documents and instruments to be delivered pursuant hereto and thereto, and taking all such other actions as required by the Delaware General Corporation Law with respect to this Agreement (including without limitation, if 15 necessary, approval by the stockholders of the Company), and the transactions contemplated hereby; (2) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the documents referred to in subsection (1) above and further certifying that the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of the Company delivered to the Investors at the time of the execution of this Agreement have been validly adopted and have not been amended or modified; and (3) Such additional supporting documentation and other information with respect to the transactions contemplated hereby as Investor or its special counsel, Paul, Hastings, Janofsky & Walker LLP ("Investor Counsel"), ---------------- may reasonably request. (h) Proceedings and Documents. All corporate and other proceedings ------------------------- and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transactions, shall be satisfactory in form and substance to Investor and to Investor Counsel. (i) Employment Agreements. The Company shall have entered into a --------------------- three-year employment agreement with Brian Fargo in substantially the form attached hereto as Exhibit B, and a three-year employment agreement with Herve --------- Caen in substantially the form attached hereto as Exhibit C. --------- (j) Lender's Consent. The Company's lenders with respect to any ---------------- Indebtedness for Borrowed Money shall have approved this Agreement and the transactions contemplated hereby, and shall otherwise provide such assurances to Investor as Investor may reasonably request with respect to the use of the proceeds from the sale of the Investor Stock and the continuing availability and renewal of such lenders' current credit facility to the Company (or the Company shall have provided such assurances to Investor with respect to a substitute credit facility). (k) Waiver of Existing Rights Agreement. If necessary, the requisite ----------------------------------- percentage of the Holders (as defined therein) party to the Investors' Rights Agreement dated as of October 10, 1996, by and among the Company and the Holders (the "Existing Rights Agreement"), shall have waived the application of the ------------------------- Existing Rights Agreement (including without limitation Section 1.12 thereof) to the issuance of the Investor Stock and the registration rights granted hereunder with respect to the Investor Stock. (l) Government and Other Consents. Any approval, consent or waiting ----------------------------- period required by any governmental agency or authority, or any other Person, necessary or material to the consummation of the transactions contemplated hereby shall have been obtained or expired, as the case may be, including without limitation any approval from NASDAQ and any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (m) Stockholder Agreement. The Company, Investor and Fargo shall have --------------------- entered into the Stockholder Agreement substantially in the form of Exhibit D --------- hereto. 16 (n) Exchange Agreement. Investor and Fargo shall have entered ------------------ into the Exchange Agreement substantially in the form of Exhibit E hereto, and --------- Fargo shall have delivered the proxy to Investor and the Interplay Shares (each as defined in the Exchange Agreement) into escrow as contemplated therein. (o) Termination of Shareholders' Agreement. The Shareholders' -------------------------------------- Agreement dated March 30, 1994 by and among the Company, Fargo and MCA Inc. shall have been terminated and be of no further force or effect. (p) Operating Plan. Titus and Fargo shall have jointly -------------- developed the Operating Plan for the operation of the Company for the period beginning the first day of the month following the Closing Date and ending December 31, 1999. (q) Universal Option. Universal shall have delivered to ---------------- Investor the shares of Option Stock (as defined therein). 7.2 Conditions of Company's Obligations. The Company's obligation ----------------------------------- to issue and sell the Investor Stock to Investor on the Closing Date is subject to the fulfillment prior to or at the Closing Date of the conditions precedent specified in paragraphs (f), (i), (j), (k), (l), (m), (n), (o) and (q) of Section 7.1 hereof, to the approval of the Company's stockholders of the transactions contemplated hereby, and to the accuracy in all material respects of the representations of Investor in Section 4.2 and Section 6 of this Agreement. 8. Covenants of the Company and Fargo. The Company agrees that unless ---------------------------------- Investor otherwise agrees in writing, from the date hereof through the later of the Final Valuation Date (as defined below) or the effective date of registration statement with respect to the Investor Shares (the "Adjustment ---------- Period"), unless another period is expressly provided for in this Section 8, the - ------ Company (and each of its Subsidiaries unless the context otherwise requires) and, to the extent expressly provided herein, Fargo, will do the following: 8.1 Maintain Insurance. Maintain in full force and effect (a) a ------------------ policy or policies of insurance issued by insurers of recognized responsibility, insuring it and its properties and business against such losses and risks, and in such amounts, as are customary in the case of corporations of established reputation engaged in the same or a similar business and similarly situated, and (b) the life insurance policy on the life of Fargo, for the benefit of Investor, in accordance with Section 8.18 of the Initial Purchase Agreement. 8.2 Compliance With Initial Purchase Agreement. Continue to ------------------------------------------ comply with the following covenants and agreements binding upon the Company set forth in the Initial Purchase Agreement in accordance with their respective terms: Sections 8.1, 8.3 through 8.9, 8.11, 8.12, 8.15, 8.17 and 9, including Sections 9.1 through 9.4. 8.3 Compliance with Section 7. Use commercially reasonable ------------------------- efforts to cause the conditions specified in Section 7.1 hereof to be met by the Closing Date. 17 8.4 Use of Proceeds. Use the proceeds from the sale of the --------------- Investor Stock hereunder solely for the purposes set forth on Schedule 8.4 ------------ hereto. 8.5 Exclusivity. The Company will not, between the date hereof ----------- and the earlier of the Closing or the termination of this Agreement (the "Restricted Period"), directly or indirectly, through any officer, director, - ------------------ employee, agent, 5% stockholder, partner or otherwise, (a) solicit or initiate, or participate in discussions or negotiations with, or encourage the submission of bids, offers or proposals by (or commence negotiations with or provide any information to), any Person with respect to an acquisition of the Company, its business or assets, or any interest therein, other than Investor, or (b) provide any non-public information concerning the Company, its business or assets, to any Person, other than Investor, except for product developers, distributors, publishers and licensees under agreements with the Company entered into in the ordinary course of business consistent with past practices, except for the Company's lender. Notwithstanding the foregoing, the Company may entertain a written unsolicited bid or proposal from, and provide non-public information to, any party who delivers such a written bid or proposal with respect to an acquisition of the Company, its business or assets, but only if and so long as the Board determines in good faith by a majority vote (with the written concurring and concurrent advice from outside legal counsel) that failing to entertain such written bid or proposal would constitute a breach of the fiduciary duties of the Board under applicable law. The Company shall notify Investor in writing promptly upon receipt of any bids, offers or proposals received, written or oral. The Company further agrees that it will not engage any broker, financial advisor or other consultant on a basis which might provide such broker, financial advisor or consultant with an incentive to initiate or encourage proposals or offers from other parties with respect to the Company, its business or assets, or any interest therein. The Company shall not commence any proceeding to merge, consolidate, liquidate or dissolve the Company or obligate itself to do so. 8.6 Restriction on Transfer of Fargo's Common Stock. During the ----------------------------------------------- Restricted Period, Fargo shall not sell, assign, pledge, mortgage or otherwise dispose of or transfer his Common Stock, or any other securities of the Company, whether now owned or hereafter acquired, or agree to do any of the foregoing, except to Investor. 8.7 Fargo Voting Covenant. Fargo hereby agrees, if necessary, to --------------------- vote his shares of Common Stock in favor of the issuance and sale of the Investor Stock. 8.8 HSR Filing. From the date hereof through the Closing, to the ---------- extent that Investor is required in connection with the transactions contemplated hereby, or the transactions contemplated by the Initial Purchase Agreement or the Universal Agreement, to file a notification and report form in compliance with the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, or the rules and regulations promulgated thereunder (collectively, the "HSR Act"), the Company shall agree to fully cooperate with Investor to enable ------- Investor to promptly make such filing and to respond to any requests for additional information in connection therewith. 8.9 Development of Extended Operating Plan. The Company and Fargo -------------------------------------- shall cooperate with Investor, and Investor's officers, employees and representatives in the development of an extended operating plan for the Company for the Company's fiscal year ending December 31, 2000 (the "Extended Operating ------------------ Plan"). - ---- 18 8.10 Maintenance of Distribution Arrangements; Negotiations for ---------------------------------------------------------- Distribution Agreement. The Company shall continue to distribute certain of - ---------------------- Investor's products to those accounts previously agreed upon by the Company and Investor on the terms previously agreed upon by the parties. The Company shall enter into good faith negotiations with Investor involving the grant by Investor to the Company (or a newly formed entity jointly owned by the Company and Investor) of exclusive rights to distribute in North America all or a portion of Investor's products related to console gaming systems, in exchange for consideration to be mutually agreed upon by the Company and Investor. 9. Covenants of Investor. Investor agrees that, unless the Company --------------------- otherwise agrees in writing, during the Restricted Period (unless another period is expressly provided for in this Section 9) Investor will do the following: 9.1 Compliance with Legal Requirements. Comply promptly with all ---------------------------------- legal requirements that applicable law may impose upon it with respect to the transactions contemplated by this Agreement, and cooperate promptly with, and furnish information to, the Company in connection with any such requirements imposed upon Investor in connection therewith or herewith. 9.2 Additional Financing. Use its commercially reasonable efforts -------------------- to raise additional debt or equity financing in the European capital markets following the Closing on terms and conditions reasonably acceptable to Investor (the "Investor Financing"). If Investor can raise such Investor Financing, and ------------------ such Investor Financing is in the form of debt or debt and equity, provide the Company with an unsecured line of credit (the "Line of Credit") for a term of -------------- one year in an aggregate principal amount equal to the lesser of (a) thirty percent (30%) of the Investor Financing or (b) Fifteen Million Dollars ($15,000,000), in either case with an interest rate and other material terms substantially the same as the Investor Financing. If Investor can raise such Investor Financing, and such financing is solely in the form of equity, the interest rate payable and other material terms with respect to such Line of Credit would have an interest rate and other material terms substantially the same as the terms of any intercompany indebtedness between Investor and its subsidiary, Titus Software Corporation, which interest rate shall be the lowest rate permitted by applicable law. Investor shall, from time to time, execute and deliver commercially reasonable Subordination agreements with respect to any senior lender of the Company. 9.3 Compliance With Initial Purchase Agreement. Except as ------------------------------------------ expressly provided otherwise herein, continue to comply with all covenants and agreements binding upon Investor set forth in the Initial Purchase Agreement. 9.4 Maintenance of Distribution Arrangements; Negotiations for ---------------------------------------------------------- Distribution Agreement. Investor shall continue to permit the Company to - ---------------------- distribute certain of Investor's products to those accounts previously agreed upon by the Company and Investor on the terms previously agreed upon by the parties. Investor shall enter into good faith negotiations with the Company involving the grant by Investor to the Company (or a newly formed entity jointly owned by the Company and Investor) of exclusive rights to distribute in North America all or a portion of Investor's products related to console gaming systems, in exchange for consideration to be mutually agreed upon by the Company and Investor. 19 10. Registration of Investor Stock. ------------------------------ 10.1 Required Registration. On the date which is one business day --------------------- after the Closing Date (the "Registration Date"), the Company shall prepare and ----------------- file a registration statement under the Securities Act, on a form selected by the Company, covering all Investor Stock (which registration statement may also cover all of the shares to be registered under the Initial Purchase Agreement under the terms and conditions set forth therein ) and shall use its best efforts to cause such registration statement to become effective as expeditiously as possible and to remain effective until the earlier to occur of the date (x) the Investor Stock covered thereby has been sold, or (y) by which all Investor Stock covered thereby may be sold under Rule 144(k). Notwithstanding the foregoing, if (i) prior to the Registration Date, the Company shall become ineligible to use Form S-3 or (ii) prior to such date the Company enters into an agreement to cause a sale or other disposition of all or substantially all of the assets or outstanding Common Stock of the Company and the Investor would be materially prejudiced in such transaction by holding unregistered Common Stock, then in either of such cases the Company shall promptly prepare and file such registration statement on Form S-1. Without limiting the generality of clause (ii) in the preceding sentence, the parties agree that Investor would be materially prejudiced in such transaction in the event that it is unable to dispose of the shares of Investor Stock immediately upon the consummation of such transaction. 10.2 Registration Procedures. When the Company effects the ----------------------- registration of the Investor Stock under the Securities Act pursuant to Section 10.1 hereof, the Company will, at its expense, as expeditiously as possible: (a) In accordance with the Securities Act and the rules and regulations of the Commission, prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period described herein, and prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period and such registration statement and prospectus accurate and complete for such period; the plan of distribution set forth in such registration statement or in any amendment or supplement shall be subject to the approval of Investor; (b) Furnish to Investor such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as Investor may reasonably request in order to facilitate the public offering of such securities; (c) Use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Investor may reasonably request within twenty (20) days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction where it is not so qualified; (d) Notify Investor, promptly after it shall receive notice thereof, of the date and time when such registration statement and each post- effective amendment thereto has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; 20 (e) Notify Investor promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (f) Prepare and file with the Commission, promptly upon the request of Investor, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Investor, is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Investor Stock by Investor; (g) Prepare and promptly file with the Commission, and promptly notify Investor of the filing of, such amendments or supplements to such registration statement or prospectus as may be necessary (i) to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event has occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) to revise or amend the plan of distribution of the Investor Stock, as requested by Investor; (h) In case Investor is required to deliver a prospectus at a time when the prospectus then in circulation is not in compliance with the Securities Act or the rules and regulations of the Commission, prepare promptly upon request such amendments or supplements to such registration statement and such prospectus as may be necessary in order for such prospectus to comply with the requirements of the Securities Act and such rules and regulations; and (i) Advise Investor, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. 10.3 Expenses. With respect to any registration effected pursuant -------- to Section 10.1 hereof, the Company agrees to bear all fees, costs and expenses of and incidental to such registration and the public offering in connection therewith; provided, however, that Investor shall bear its pro rata share of any underwriting discounts or commissions. The fees, costs and expenses of registration to be borne as provided in this Section 10.3 shall include, without limitation, all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or selling security holders are otherwise required to bear such fees and disbursements), all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified, reasonable fees and disbursements of one firm of counsel for the Investor (not to exceed $15,000), and the premiums and other costs of policies of insurance against liability of directors and officers arising out of such public offering. 21 10.4 Indemnification. --------------- (a) The Company will indemnify and hold harmless Investor and any underwriter (as defined in the Securities Act) for Investor, and any Person who controls Investor or such underwriter within the meaning of the Securities Act, and any officer, director, employee, agent, partner or affiliate of Investor, from and against, and will reimburse Investor and each such underwriter, controlling person, officer, director, employee, agent, partner and affiliate with respect to, any and all claims, actions, demands, losses, damages, liabilities, costs and expenses to which Investor or any such underwriter or controlling Person or any such officer, director, employee, agent, partner or affiliate may become subject under the Securities Act or otherwise, insofar as such claims, actions, demands, losses, damages, liabilities, costs or expenses arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such claim, action, demand, loss, damage, liability, cost or expense is caused by an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity in all material respects with information furnished to the Company by Investor, such underwriter or such controlling person or such officer, director, employee, agent, partner or affiliate in writing specifically for use in the preparation thereof. (b) Investor will indemnify and hold harmless the Company, and any Person who controls the Company within the meaning of the Securities Act, from and against, and will reimburse the Company and such controlling Persons with respect to, any and all losses, damages, liabilities, costs or expenses to which the Company or such controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or are caused by the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in conformity in all material respects with written information furnished by Investor to the Company in writing specifically for use in the preparation thereof. Notwithstanding the foregoing, the liability of Investor pursuant to this subsection (b) shall be limited to an amount equal to the per share sale price (less any brokerage or underwriting discount and commissions) multiplied by the number of shares of Investor Stock sold by Investor pursuant to the registration statement which gives rise to such obligation to indemnify (less the aggregate amount of any damages which Investor has otherwise been required to pay in respect of such losses, damages, liabilities, costs or expenses or any substantially similar losses, damages, liabilities, costs or expenses arising from the sale of such Investor Stock). (c) Promptly after receipt by a party indemnified pursuant to the provisions of paragraph (a) or (b) of this Section 10.4 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of paragraph (a) or (b), notify the 22 indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 10.4 and shall not relieve the indemnifying party from liability under this Section 10.4 except to the extent that such indemnifying party is materially prejudiced by such omission. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of such paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall be liable to an indemnified party for any settlement of any action or claim without the consent of the indemnifying party. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a complete and unconditional release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in subsection (a) or (b) of this Section 10.4 is held by a court of competent jurisdiction to be unavailable to a party to be indemnified with respect to any claims, actions, demands, losses, damages, liabilities, costs or expenses referred to therein, then each indemnifying party under any such subsection, in lieu of indemnifying such indemnified party thereunder, hereby agrees to contribute to the amount paid or payable by such indemnified party as a result of such claims, actions, demands, losses, damages, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such claims, actions, demands, losses, damages, liabilities, costs or expenses, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, the amount Investor shall be obligated to contribute pursuant to this subsection (d) shall be limited to an amount equal to the per share sale price (less any brokerage or underwriting discount and commissions) multiplied by the number of shares of Investor Stock sold by Investor pursuant to the registration statement which gives rise to such obligation to contribute (less the aggregate amount of any damages which Investor has otherwise been required to pay in respect of such claim, action, demand, loss, damage, liability, cost or expense or any substantially similar claim, action, demand, loss, damage, liability, cost or expense arising from the sale of such Investor Stock). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution hereunder from any person who was not guilty of such fraudulent misrepresentation. 10.5 Reporting Requirements Under the Exchange Act. The Company --------------------------------------------- shall timely file such information, documents and reports as the Commission 23 may require or prescribe under Section 13 or 15(d) of the Exchange Act. The Company acknowledges and agrees that the purposes of the requirements contained in this Section 10.5 are (a) to enable Investor to comply with the current public information requirement contained in paragraph (c) of Rule 144 should Investor ever wish to dispose of any of the Investor Stock without registration under the Securities Act in reliance upon Rule 144 (or any other similar exemptive provision) and (b) to qualify the Company for the use of registration statements on Form S-3. 10.6 Investor Information. The Company may require Investor to -------------------- furnish the Company such information with respect to Investor and the distribution of the Investor Stock as the Company may from time to time reasonably request in writing as shall be required by law or by the Commission in connection therewith. 10.7 Transferability of Registration Rights. Notwithstanding -------------------------------------- anything to the contrary in this Section 10, the rights of the Investor under this Section 11 shall automatically transfer to any transferee of at least ten percent (10%) of the Investor Stock in accordance with Section 14.5 hereof. 10.8 Suspension of Registration Obligations in Initial Purchase ---- ---------------------------------------------------------- Agreement; Reinstatement of Registration Obligations in Event of Termination. - ---------------------------------------------------------------------------- The Company's obligations set forth in this Section 10 shall be deemed to relieve the Company of its obligations set forth in Section 11 of the Initial Purchase Agreement; provided, however, that if this Agreement is terminated -------- ------- prior to the Closing Date, then the Company's obligations in Section 11 of the Initial Purchase Agreement shall be reinstated as set forth therein; provided, -------- further, that upon such reinstatement Section 11.1 of the Initial Purchase - ------- Agreement shall be deemed amended to (a) replace "June 21, 1999" in the first sentence thereof with the first business day following the date of termination of this Agreement, and (b) include in the definition of "Registrable Stock" all shares of Common Stock into which the Initial Note and/or Additional Note have been converted, if any, in accordance therewith. 11. Enforcement. ----------- 11.1 Survival of Representations and Warranties. The ------------------------------------------ representations, warranties, covenants and agreements of the parties hereto contained in this Agreement or in any writing delivered pursuant to the provisions of this Agreement or at the Closing shall survive any examination by or on behalf of any party hereto and shall survive the Closing and the consummation of the transactions contemplated hereby until the date which is twelve (12) months after the Closing Date; provided, however, that each of the -------- ------- representations and warranties contained in Sections 5.4, 5.7 and 5.9 hereof shall survive any examination by or on behalf of any party hereto and shall survive the Closing and the consummation of the transactions contemplated hereby until the expiration of any applicable statute of limitations with respect to such representation and warranty. 11.2 Indemnification. --------------- (a) Subject to Section 11.2(e), the Company hereby covenants and agrees to defend, indemnify and save and hold harmless Investor, together with its officers, directors, shareholders, employees, attorneys and representatives and each Person who controls Investor within the meaning of the Securities Act, from and against any loss, cost, expense, liability, claim or legal damages (including, without 24 limitation, reasonable fees and disbursements of counsel and accountants and other costs and expenses incident to any actual or threatened claim, suit, action or proceeding (each, an "Action") and all costs of investigation) ------ (collectively, the "Damages") arising out of or resulting from (i) any Default, ------- or any inaccuracy in or breach of, or failure to perform or observe, any representation, warranty, covenant or agreement made by the Company or Fargo in this Agreement or in any writing delivered pursuant to this Agreement or at the Closing, or (ii) any claims of third parties claiming compensation, commissions or expenses for services as a broker or finder based upon obligations incurred by the Company. (b) In the event that any indemnified party is made a defendant in or party to any action, suit, proceeding or claim, judicial or administrative, instituted by any third party for Damages or other relief (any such third party action, suit, proceeding or claim being referred to as a "Claim"), the ----- indemnified party (referred to in this clause (b) as the "notifying party") --------------- shall give notice thereof (a "Notice of Claim") as soon as practicable and in --------------- any event within thirty (30) days after the notifying party receives notice thereof. The failure to give such notice shall not affect whether an indemnifying party is liable for reimbursement unless such failure has resulted in the loss of substantive rights with respect to the indemnifying party's ability to defend such Claim, and then only to the extent of such loss. Notice of the intention so to contest and defend shall be given by the indemnifying party to the notifying party within twenty (20) business days after the notifying party's notice of such Claim (but, in all events, at least ten (10) business days prior to the date that an answer to such Claim is due to be filed). Such contest and defense shall be conducted by reputable attorneys employed by the indemnifying party and approved by the indemnified party (which approval will not be unreasonably withheld). The indemnifying party shall have the sole right to control the contest and defense of such Claim. The notifying party shall be entitled, at its own cost and expense (which expense shall not constitute Damages unless the notifying party reasonably determines that the indemnifying party because of a conflict of interest, may not adequately represent, the interests of the indemnified parties, and has provided the indemnifying party with notice of such determination, and only to the extent that such expenses are reasonable), to participate in such contest and defense and to be represented by attorneys of its or their own choosing. The notifying party will cooperate with the indemnifying party in the conduct of such defense. Neither the notifying party nor the indemnifying party may concede, settle or compromise any Claim without the consent of the other party, which consent will not be unreasonably withheld or delayed in light of all factors of importance to such party; provided, however, that if the indemnified party shall fail to consent to the settlement of any Claim where (i) such settlement includes an unconditional release of all claims against the indemnified party and requires no payment on the part of the indemnified party to the claimant or any other party, (ii) such settlement does not require any action on the part of the indemnified party and does not impose terms restricting or adversely affecting the indemnified party's activity, and (iii) the claimant has affirmatively indicated that it will accept such settlement, then the indemnifying party shall no liability with respect to any payment to be made in respect of such claim in excess of the proposed settlement amount. (c) In the event any indemnified party shall have a claim against any indemnifying party that does not involve a Claim, the indemnified party shall deliver a notice of such claim with reasonable promptness to the indemnifying party. The failure to give such notice shall not affect whether an indemnifying party is liable for reimbursement unless such failure has resulted in the loss of substantive rights with respect to the indemnifying party's ability to defend such claim, and then only to the 25 extent of such loss. If the indemnifying party notifies the indemnified party that it does not dispute the claim described in such notice or fails to notify the indemnified party within thirty (30) days after delivery of such notice by the indemnified party whether the indemnifying party disputes the claim described in such notice, the Damages in the amount specified in the indemnified party's notice will be conclusively deemed a liability of the indemnifying party and the indemnifying party shall pay the amount of such Damages to the indemnified party on demand. (d) Any claim for indemnity under this Section 11.2 shall be delivered in writing to the indemnifying party and set forth with reasonable specificity as to the amount claimed and the underlying facts supporting such claim. The indemnifying party shall have thirty (30) days to accept or dispute such claim by written notice to the indemnified party (a "Contest Notice"); provided, -------------- however, that if, at the time a Notice of Claim is submitted to the indemnifying party the amount of the Claim in respect thereof has not yet been determined, such thirty (30) day period shall not commence until a further written notice (a "Notice of Liability") has been sent or delivered by the indemnified party to ------------------- the indemnifying party setting forth the amount of the Claim incurred by the indemnified party that was the subject of the earlier Notice of Claim. Such Contest Notice shall specify the reasons or bases for the objection of the Indemnifying Party to the claim, and if the objection relates to the amount of the Claim asserted, the amount, if any, which the indemnifying party believes is due the indemnified party. If no such Contest Notice is given with such 30-day period, the obligation of the indemnifying party to pay to the indemnified party the amount of the Claim set forth in the Notice of Claim, or subsequent Notice of Liability, shall be deemed established and accepted by the indemnifying party. If, on the other hand, the indemnifying party contests a Notice of Claim or Notice of Liability (as the case may be) within such 30-day period, the indemnified party and the indemnifying party shall thereafter attempt in good faith to resolve their dispute by agreement. If the parties are unable to so resolve their dispute within the immediately succeeding thirty (30) days, such dispute shall be resolved by binding arbitration in Los Angeles, California, as provided in Section 14.13 below. The award of the arbitrator shall be final and binding on the parties and may be enforced in any court of competent jurisdiction. Upon final determination of the amount of the Claim that is the subject of an indemnification claim (whether such determination is the result of the indemnifying party's acceptance of, or failure to contest, a Notice of Claim or Notice of Liability, or of a resolution of any dispute with respect thereto by agreement of the parties or binding arbitration), such amount shall be payable, in cash by the indemnifying party to the indemnified parties who have been determined to be entitled thereto within fifteen (15) days of such final determination of the amount of the Claim due by the indemnifying party. Any amount that becomes due hereunder and is not paid when due shall bear interest at the maximum legal rate per annum from the date due until paid. (e) Anything to the contrary notwithstanding, (i) the Investor shall not be indemnified and held harmless in respect of any Damages unless and until the aggregate amount of such Damages exceeds $100,000, in which event the Investor shall be indemnified and held harmless in respect of all Damages without regard to the foregoing $100,000 limit, and (ii) the liability of the Company to the Investor shall be limited to an amount equal to the Purchase Payment. (f) Investor hereby covenants and agrees to defend, indemnify and save and hold harmless the Company, together with officers, directors, shareholders, employees, attorneys and representatives and each Person who controls the 26 Company within the meaning of the Securities Act from and against any Damages arising out of or resulting from (i) any inaccuracy in breach of, or failure to perform or observe, any representation, warranty, covenant or agreement made by Investor in this Agreement or in any writing or other agreement delivered pursuant hereto, or (ii) any claims of third parties claiming compensation, commissions or expenses for services as a broker or finder based upon obligations incurred by Investor. (g) Except as provided in Section 11.3, the provisions of this Section 11.2 shall be the exclusive remedy or exclusive means to obtain relief, as the case may be, of any party in the event of any breach of any representation, warranty, covenant or agreement contained herein (or in any certificate or other document delivered pursuant hereto) by another party, or with respect to any Action or Claim; provided, however, that this subsection (g) -------- ------- shall not limit any statutory claim, or any claim in tort, which any party may have against the other party. 11.3 Injunctive Relief. (a) Any party may bring a claim seeking ----------------- specific performance by way of injunctive relief before a court of competent jurisdiction to enforce the provisions of this Agreement, (b) any party seeking to enforce a claim for indemnification may bring any claim of indemnification which is not resolved within the thirty day period provided in Section 11.2(b) before a court of competent jurisdiction, and (c) in the event of any breach by either party of Section 14.9, the other party may seek injunctive relief from a court of competent jurisdiction to restrain any such breach. 11.4 No Implied Waiver. Except as expressly provided in this ----------------- Agreement, no course of dealing between the Company and Investor and no delay in exercising any such right, power or remedy conferred hereby or now or hereafter existing at law in equity, by statute or otherwise, shall operate as a waiver of, or otherwise prejudice, any such right, power or remedy. 12. Rights of First Refusal. ----------------------- 12.1 Subsequent Offerings. Investor shall have the right of first -------------------- refusal to purchase all (or any part of all) Equity Securities that the Company may, from time to time, propose to sell and issue between the date hereof and the Closing Date, other than the Equity Securities excluded by Section 12.4 hereof. 12.2 Exercise of Rights. If and each time the Company proposes to ------------------ issue any Equity Securities, it shall give Investor written notice of its intention, describing the Equity Securities, the price, and the general terms and conditions upon which the Company proposes to issue the same. Investor shall have ten (10) days from the giving of such notice to agree to purchase Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company. 12.3 Issuance of Equity Securities to Other Persons. If Investor ---------------------------------------------- fails to exercise in full the rights of first refusal within such ten (10) day period by giving the agreement referred to in Section 12.2, the Company shall have ninety (90) days thereafter to complete the sale of the Equity Securities in respect of which Investor's rights were not exercised, at a price and upon general terms and conditions no more favorable to the purchasers thereof than specified in the Company's notice to the Investors pursuant to Section 12.2 hereof. If the Company has not sold all of such Equity Securities within such ninety (90) days, the Company shall not thereafter issue or sell any 27 of such Equity Securities, without first offering such securities to Investor in the manner provided above. 12.4 Excluded Securities. The rights of first refusal established ------------------- by this Section 12 shall have no application to (a) any shares of Common Stock issued in accordance with the stock option plans and warrants currently reserved for issuance to employees, directors and advisors, as described in Sections 5.3 and 5.6, and Schedule 5.6, (b) shares of Common Stock issued as consideration to ------------ third parties for product development services or publishing or distribution rights, not to exceed 500,000 shares, (c) shares of Common Stock issued in connection with any stock split, stock dividend or reverse stock split, and (d) shares of Common Stock issued in connection with acquisitions of other entities by way of merger, share exchange, sale of assets or otherwise. 12.5 Termination of Rights. The Company's obligations set forth in this Section 12 shall be deemed to relieve the Company of its obligations set forth in Section 13 of the Initial Purchase Agreement; provided, however, that -------- ------- if this Agreement is terminated prior to the Closing Date, then the Company's obligations in Section 13 of the Initial Purchase Agreement shall be reinstated as set forth therein. 13. Definitions. Unless the context otherwise requires, the terms ----------- defined in this Section 13 shall have the meanings herein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms herein defined. All accounting terms defined in this Section 13 and those accounting terms used in this Agreement not defined in this Section 13 shall, except as otherwise provided for herein, be construed in accordance with those generally accepted accounting principles that the Company is required to employ by the terms of this Agreement. If and so long as the Company has any Subsidiary, the accounting terms defined in this Section 13 and those accounting terms appearing in this Agreement but not defined in this Section 13 shall be determined on a consolidated basis for the Company and its Subsidiaries, and the financial statements and other financial information to be furnished by the Company pursuant to this Agreement shall be consolidated and presented with consolidating financial statements of the Company and its Subsidiaries. Capitalized terms not otherwise defined herein shall have their respective meanings in the Initial Purchase Agreement. "Action" shall have the meaning assigned to it in Section 11.2(a). ------ "Affiliate" shall have the meaning assigned to it in Rule 405 of the --------- Commission under the Securities Act. "Agreement" shall mean this Agreement. --------- "Balance Sheet" and "Balance Sheet Date" shall have the meanings ------------- ------------------ assigned to these terms in Section 5.12 hereof. "Board" shall mean the Board of Directors of the Company. ----- "Claim" shall have the meaning assigned to it in Section 11.2(b). ----- "Closing" and "Closing Date" shall have the meanings assigned to ------- ------------ these terms in Section 3.1. 28 "Common Stock" shall have the meaning assigned to it in Section 1 ------------ hereof. "Commission" shall mean the Securities and Exchange Commission. ---------- "Damages" shall have the meaning assigned to it in Section 11.2(a). ------- "Default" shall mean a default or failure in the due observance or ------- performance of any covenant, condition or agreement on the part of the Company or any of its Subsidiaries to be observed or performed under the terms of this Agreement, if such default or failure in performance shall remain unremedied for ten (10) days. "Deposit" shall have the meaning assigned to it in Section 2. ------- "Designated Key Employees" shall have the meaning assigned to it in ------------------------ Section 5.15. "Designee" shall have the meaning assigned to it in Section 7.6(a). -------- "Developing Software" shall have the meaning assigned to it in ------------------- Section 5.27(b). "Equity Security" shall mean any stock or similar security of the --------------- Company or any security (whether stock or Indebtedness for Borrowed Money) convertible or exchangeable, with or without consideration, into or for any stock or similar security, or any security (whether stock or Indebtedness for Borrowed Money) carrying any warrant or right to subscribe to or purchase any stock or similar security, or any such warrant or right. "Event of Default" shall mean (a) the failure of either the Company or ---------------- any Subsidiary to pay any Indebtedness for Borrowed Money, or any interest or premium thereon, within ten (10) days after the same shall become due, whether such Indebtedness shall become due by scheduled maturity, by required prepayment, by acceleration, by demand or otherwise, (b) an event of default under any agreement or instrument evidencing or securing or relating to any such Indebtedness, or (c) the failure of either the Company or any Subsidiary to perform or observe any material term, covenant, agreement or condition on its part to be performed or observed under any agreement or instrument evidencing or securing or relating to any such Indebtedness when such term, covenant or agreement is required to be performed or observed. "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. "Final Valuation Date" shall have the meaning assigned to it in the -------------------- Initial Purchase Agreement. "Form 10-Q" shall have the meaning assigned to it in Section 5.12. --------- "Form S-1" shall have the meaning assigned to it in Section 5.12. -------- "GAAP" shall have the meaning assigned to it in Section 5.12. ---- 29 "Indebtedness" shall mean any obligation of the Company or any ------------ Subsidiary which under GAAP is required to be shown on the balance sheet of the Company or such Subsidiary as a liability. Any obligation secured by a Lien on, or payable out of the proceeds of production from, property of the Company or any Subsidiary shall be deemed to be Indebtedness even though such obligation is not assumed by the Company or Subsidiary. "Indebtedness for Borrowed Money" shall mean (a) all Indebtedness in ------------------------------- respect of money borrowed including, without limitation, Indebtedness which represents the unpaid amount of the purchase price of any property and is incurred in lieu of borrowing money or using available funds to pay such amounts and not constituting an account payable or expense accrual incurred or assumed in the ordinary course of business of the Company or any Subsidiary, (b) all Indebtedness evidenced by a promissory note, bond or similar written obligation to pay money, or (c) all such Indebtedness guaranteed by the Company or any Subsidiary or for which the Company or any Subsidiary is otherwise contingently liable. "Initial Purchase Agreement" shall have the meaning assigned to it in -------------------------- the Recitals. "Investor Counsel" shall have the meaning assigned to it in Section ---------------- 7.1(g)(3). "Investor Financing" shall have the meaning assigned to it in Section ------------------ 9.2. "Investor Stock" shall have the meaning assigned to it in Section 1. -------------- "Letter of Intent" shall have the meaning assigned to it in the ---------------- Recitals. "Lien" shall mean any mortgage, pledge, security interest, ---- encumbrance, lien or charge of any kind, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction and including any lien or charge arising by statute or other law. "Line of Credit" shall have the meaning assigned to it in Section -------------- 9.2. "Material Adverse Effect" on a Person means a material adverse effect, ----------------------- or any condition, situation or set of circumstances that could reasonably be expected to have an adverse effect, on such Person and its Subsidiaries, taken as a whole. "Note" shall have the meaning assigned to it in Section 3. ---- "Operational Software" shall have the meaning assigned to it in -------------------- Section 5.27(a). "Permitted Liens" shall mean (a) Liens for taxes and assessments or --------------- governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings; (b) Liens in respect of pledges or deposits under workers' compensation laws or similar legislation, 30 carriers', warehousemen's, mechanics', laborers' and materialmen's and similar Liens, if the obligations secured by such Liens are not then delinquent or are being contested in good faith by appropriate proceedings; and (c) Liens incidental to the conduct of the business of the Company or any Subsidiary which were not incurred in connection with the borrowing of money or the obtaining of advances or credits and which do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business. "Person" shall include any natural person, corporation, trust, ------ association, company, partnership, limited liability company, joint venture and other entity and any government, governmental agency, instrumentality or political subdivision. "Purchase Payment" shall have the meaning assigned to it in Section ---------------- 2. "Restricted Period" shall have the meaning assigned to it in Section ----------------- 8.5. "Securities Act" shall mean the Securities Act of 1933, as amended. -------------- "Stock Purchase Agreement" shall have the meaning assigned to it in ------------------------ the Recitals. "Subsidiary" shall mean any corporation, association or other business ---------- entity at least fifty percent (50%) of the outstanding voting stock of which is at the time owned or controlled directly or indirectly by the Company or by one or more of such subsidiary entities or both, where "voting stock" means any shares of stock having general voting power in electing the board of directors (irrespective of whether or not at the time stock of any other class or classes has or might have voting power by reason of any contingency). "Universal Agreement" shall mean the letter agreement dated as of ------------------- March 18, 1999, by and among the Company, Investor and Universal Studios, Inc. "Web Site" shall have the meaning assigned to it in Section 5.28(a). -------- 14. Miscellaneous. ------------- 14.1 Waivers and Amendments. With the written consent of Investor, ---------------------- the obligations of the Company and the rights of Investor under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of any supplemental agreement or modifying in any manner the rights and obligations hereunder of Investor and the Company. Neither this Agreement, nor any provision hereof, may be amended, waived, discharged or terminated orally or by course of dealing, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, as provided in this Section 14.1. Specifically, but without limiting the generality of the foregoing, the failure of Investor at any time or times to require performance of any provision hereof by the Company shall in no manner affect the right of Investor at a later time to enforce the same. No waiver by any party of the breach of any term or provision contained in this Agreement, in any one or more 31 instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in the Agreement. 14.2 Rights of Investor. Investor shall have the absolute right to ------------------ exercise or refrain from exercising any right or rights which Investor may have by reason of this Agreement or any Investor Stock, including, without limitation, the right to consent to the waiver of any obligation of the Company under this Agreement and to enter into an agreement with the Company for the purpose of modifying this Agreement or any agreement effecting any such modification, and Investor shall not incur any liability to any other shareholder of the Company with respect to exercising or refraining from exercising any such right or rights. 14.3 Notices. All notices, requests, consents and other ------- communications required or permitted hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to the Company to: Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, California 92606 Attention: Mr. Brian Fargo, Chairman and Chief Executive Officer Telecopier: (949) 252-0667 with a copy to: K.C. Schaaf, Esq. Stradling Yocca Carlson & Rauth, a professional corporation 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660 Telecopier: (949) 725-4100 if to Investor to: Titus Interactive SA c/o Titus Software Corporation 20432 Corisco Street Chatsworth, California 91311 Attention: Mr. Herve Caen, Chairman and Chief Executive Officer Telecopier: (818) 709-6537 32 with copies to: Titus Interactive SA Parc de l'esplanade 12, Rue Enrico Fermi Saint Thibault des Vignes 77462 Lagny sur Marne Cedex France Telecopier: 011-33-1-60-31-59-60 and Robert A. Miller, Jr., Esq. Paul, Hastings, Janofsky & Walker LLP 555 South Flower Street - 23/rd/ Floor Los Angeles, California 90071 Telecopier: (213) 627-0705 if to Fargo to: Mr. Brian Fargo c/o Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, California 92606 Telecopier: (949) 252-0667 or to such other address or telecopier number as such party may specify for the purpose by notice to the other party or parties to this Agreement, as the case may be. Any notice, request, consent or other communication hereunder shall be deemed to have been given and received on the day on which it is delivered (by any means including personal delivery, overnight air courier, United States or French mail) or telecopied (or, if such day is not a business day or if the notice, request, consent or communication is not telecopied during business hours of the intended recipient, at the place of receipt, on the next following business day). 14.4 Severability. Should any one or more of the provisions of ------------ this Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 14.5 Assignment; Parties in Interest. Neither this Agreement nor ------------------------------- any interest herein may be assigned by either party hereto without the written consent of the other parties hereto, except that Investor may assign all of its rights hereunder to any Subsidiary of Investor. Subject to the foregoing, all the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not. Subject to the immediately preceding sentence, this Agreement shall not run to the benefit of or be enforceable by any Person other than a party to this Agreement and its successors and assigns. 33 14.6 Headings. The headings of the Sections and paragraphs of this -------- Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 14.7 Choice of Law; Jurisdiction and Venue. The internal ------------------------------------- substantive laws, and not the laws of conflicts, of the State of California shall govern the enforceability and validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties. The parties hereby consent and agree that the United States District Court for the Central District of California, or the Superior Court of California for the County of Orange will have exclusive jurisdiction over any legal action or proceeding arising out of or relating to this Agreement, and each party consents to the in personam jurisdiction of such courts for the purpose of any such -- -------- action or proceeding and agrees that venue is proper in such courts. 14.8 Publicity. Without the prior consent of the other parties, no --------- party shall, and each party shall cause its directors, officers, employees, representatives and agents not to, make any public statement or press release with respect to the transactions contemplated by this Agreement or otherwise disclose to any Person the existence, terms, content or effect of this Agreement; provided, however, that if a disclosure is required by law, the party -------- required to make such disclosure shall be permitted to make such disclosure but shall use best efforts to consult with the other parties hereto before making the required disclosure. The foregoing restriction shall not limit the applicability of the Nondisclosure Agreements between the Company and Investor dated November 10, 1998, and March 3, 1999, which shall continue in full force and effect in accordance with their respective terms. 14.9 Counterparts. This Agreement may be executed in any number of ------------ counterparts (including by facsimile) and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. 14.10 Entire Agreement; Effect on Initial Purchase Agreement. This ------------------------------------------------------ Agreement, and the Exhibits, Schedules, certificates, and documents referred to herein, together with the Initial Purchase Agreement, and all exhibits, schedules, certificates and documents referred to therein, constitute the entire agreement of the parties hereto with respect to the subject matter hereof, and supersede all prior understandings (including the Letter of Intent, except and solely to the extent that such Letter of Intent, by its terms, is binding upon the parties) with respect to the subject matter hereof, and no representation or warranty not included herein has been relied upon by any party hereto. Without limiting the generality of the foregoing, the Initial Purchase Agreement shall continue in full force and effect in accordance with its terms, as expressly amended hereby; provided, that in the event of any inconsistency between the -------- terms of this Agreement and the terms of the Initial Purchase Agreement, the terms of this Agreement shall control; and provided, further, that upon the -------- ------- Closing, Section 10.3 of the Initial Purchase Agreement shall be deleted in its entirety, and shall have no further force or effect. 14.11 Attorneys' Fees. In the event of any dispute, controversy, or --------------- proceeding between the parties concerning this Agreement or the transactions contemplated hereby, the prevailing party shall be entitled to receive from the non-prevailing party its costs and expenses, including attorneys' fees. 34 14.12 Arbitration. Except for actions to obtain injunctions or ----------- other equitable remedies, all disputes between the parties hereto shall be determined solely and exclusively by arbitration under, and in accordance with the rules then in effect of, the American Arbitration Association, or any successors thereto ("AAA"), in Los Angeles, California, unless the parties --- otherwise agree in writing. The parties shall, in connection with such arbitration, in addition to any discovery permitted under AAA rules, be permitted to conduct discovery in accordance with Section 1283.05 of the California Code of Civil Procedure, the provisions of which are incorporated herein by this reference. The parties shall jointly select an arbitrator. In the event the parties fail to agree upon an arbitrator within ten (10) days, then each party shall select an arbitrator and such arbitrators shall then select a third arbitrator to serve as the sole arbitrator; provided, that if -------- either party, in such event, fails to select an arbitrator within seven (7) days, such arbitrator shall be selected by the AAA upon application of either party. Judgment upon the award of the agreed upon arbitrator or the so chosen third arbitrator, as the case may be, shall be binding and may be entered in any court of competent jurisdiction. 35 [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective duly authorized officers as of the day and year first above written. INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: /s/ Brian Fargo ------------------------ An Authorized Officer TITUS INTERACTIVE SA, a French corporation By: /s/ Herve Caen ------------------------ An Authorized Officer /s/ Brian Fargo ------------------------ Brian Fargo 36 EX-10.2 3 EXCHANGE AGREEMENT DATED JULY 20, 1999 EXHIBIT 10.2 EXECUTION COPY EXCHANGE AGREEMENT ------------------ This EXCHANGE AGREEMENT (this "Agreement") is made and entered into as of ---------- the 20th day of July, 1999, by and among TITUS INTERACTIVE SA, a French corporation ("Titus"), BRIAN FARGO, an individual ("Fargo"), HERVE CAEN, an ------ ------ individual, and ERIC CAEN, an individual (together, the "Caens"). ------ RECITALS -------- WHEREAS, Interplay Entertainment Corp., a Delaware corporation ("Interplay"), Titus and Fargo are entering into a Stock Purchase Agreement (the ---------- "Stock Purchase Agreement") whereby Interplay will issue and sell and Titus will ------------------------- purchase 6,250,000 shares of common stock of Interplay for an aggregate purchase price of $25,000,000; WHEREAS, it is a condition to the closing of the transactions contemplated by the Stock Purchase Agreement that Titus, Fargo and the Caens enter into this Agreement. AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual covenants and premises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Exchange of Shares. Upon the terms and subject to the conditions ------------------ herein contained, at the Closing (as hereinafter defined) on the Closing Date (as hereinafter defined), Fargo will exchange Two Million (2,000,000) shares of common stock, no par value, of Interplay (the "Interplay Common Stock") owned by ----------------------- him (the "Interplay Shares") for Ninety-Six Thousand Six Hundred Sixty-Six ----------------- (96,666) shares of common stock, par value Twenty-Five (25) Francs per share, of Titus (the "Titus Common Stock") (such shares of Titus Common Stock shall be ------------------- referred to as the "Exchanged Shares"). Such exchange ratio is calculated based ----------------- upon a valuation of Interplay Common Stock of Four Dollars ($4.00) per share and a valuation of Titus Common Stock of Eighty-Two and 76/100 Dollars ($82.76) per share. 2. Restrictions on Transfer; Holding Period; Lock-Up Period. Fargo hereby -------------------------------------------------------- agrees that the Exchanged Shares will be subject to the following restrictions upon Transfer (as defined below), in addition to the restrictions set forth in Section 3: 2.1 Restrictions on Transfer. ------------------------ (a) Fargo understands and agrees that the Exchanged Shares have not been registered under any French or United States securities laws, and that accordingly they will not be fully transferable except as permitted under various exemptions contained in such laws. Fargo acknowledges that he must bear the economic risk of its investment in the Exchanged Shares for an indefinite period of time (subject, however, to Titus' obligation under Section 3.1(b) of this Agreement) since they have not been registered under French or United States securities laws and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. (b) Fargo hereby represents and warrants to Titus that he is acquiring the Exchanged Shares for investment purposes only, for his own account, and not as nominee or agent for any other any natural person, corporation, trust, association, company, partnership, limited liability company, joint venture and other entity and any government, governmental agency, instrumentality or political subdivision (collectively, "Person"), and not with the view to, or for ------- resale in connection with, any distribution thereof. (c) Fargo hereby agrees with Titus as follows: (i) Subject to Section 2.1(d) below, the certificates evidencing the Exchanged Shares and each certificate issued in transfer thereof, will bear such legend or legends as may be appropriate to effectuate the purposes of this Agreement, and as may be required under any applicable law. (ii) Fargo will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all of the Exchanged Shares without first providing Titus with an opinion of counsel to the effect that such sale, transfer, assignment, pledge, hypothecation or other disposition will be exempt from any registration, disclosure, qualification or other like requirements under French or United States securities laws. (iii) Fargo consents to Titus' making a notation on its records or giving instructions to any transfer agent of the Exchanged Shares in order to implement the restrictions on transfer of the Exchanged Shares mentioned in this subsection (c). (d) Any legend endorsed on a certificate evidencing Exchanged Shares pursuant to Section 2.1(c)(i) hereof and any stop transfer instructions and record notations with respect to such Exchanged Shares shall be removed and Titus shall issue a certificate without such legend to the holder of such Exchanged Shares (a) if such Exchanged Shares are registered under French securities laws or (b) if Fargo provides Titus with an opinion of counsel (which may be counsel for Titus) reasonably acceptable to Titus to the effect that a public sale or transfer of such Exchanged Shares may be made without registration under French securities laws. 2.2 Holding Period. Fargo understands and agrees that, pursuant to -------------- the restrictions of Le Nouveau Marche (the "Stock Exchange"), he will not be --------------- permitted to sell, transfer or otherwise dispose of, or pledge, collateralize or hypothecate any of the Exempt Exchanged Shares, or enter into any contract, option, or other arrangement with respect to any of the foregoing (each, a "Transfer"), any of the Restricted Exchanged Shares for a period (the "Holding - ---------- ------- Period") commencing on the date of the issuance of the Exchanged Shares and - ------- ending on July 8, 2000. The "Restricted Exchanged Shares" shall mean those shares representing eighty percent (80%) of the Exchanged Shares. 2.3 Lock-Up Period. With respect to the Exchanged Shares which are -------------- not subject to the restrictions set forth in Section 2.2 (the "Exempt Exchanged ---------------- Shares"), Fargo agrees not to Transfer any of such Exempt Exchanged Shares for a - ------- period (the "Lock-Up Period") commencing on the date of the issuance of the --------------- Exchanged Shares and ending on the date which is two hundred seventy (270) days following the Closing Date. 2 3. Sale of Exchanged Shares; Right of First Refusal; Tag-Along Rights. ------------------------------------------------------------------ 3.1 Sale of Exchanged Shares. Following the expiration of the ------------------------ Holding Period or Lock-Up Period, as applicable: (a) Fargo shall have the right, from time to time, to elect, by written notice to Titus, to require Titus to arrange for the sale of all or any portion of such Exchanged Shares on the Stock Exchange on Fargo's behalf; provided, however, that Titus shall have the right to elect that such sale of - -------- ------- the Exchanged Shares be to Titus, or to Herve Caen and/or Eric Caen on the terms and conditions set forth in Section 3.2 with respect to the right of first refusal; provided, however, that notwithstanding the provisions of Section 3.2, -------- ------- such sale shall be made at the then-current trading price of Titus Common Stock. (b) If Titus (or either of the Caens) does not exercise the right of first refusal pursuant to Section 3.2, or if Titus is unable to arrange a sale of such Exchanged Shares within sixty (60) days following receipt of notice from Fargo, then Titus shall, at Fargo's option, either (i) repurchase such Exchanged Shares for cash at a purchase price equal to the average closing trading price per share of Titus Common Stock for the ten (10) trading days immediately preceding the date of such notice or (ii) exchange such Exchanged Shares for shares of Interplay Common Stock at an exchange rate based upon the average closing trading price per share of Interplay Common Stock and Titus Common Stock for the ten (10) trading days immediately preceding the date of such notice. 3.2 Right of First Refusal. If after expiration of the Holding ---------------------- Period or Lock-Up Period, as applicable, Fargo desires in good faith to Transfer any of the Exchanged Shares, he shall deliver a written notice of such intent (the "Refusal Notice") to Titus. The Refusal Notice shall contain (a) a --------------- description of the proposed Transfer transaction and the terms thereof including the number of Exchanged Shares proposed to be transferred (collectively, the "Refusal Securities"), (b) the name of each Person to whom or in favor of whom - -------------------- the proposed Transfer is to be made (the "Refusal Transferee"), (c) a ------------------- description of the consideration to be received by Fargo upon Transfer of the Refusal Securities and (d) an offer to sell to Titus or its nominee all, but not less than all, of such Refusal Securities which are the subject of the Refusal Notice (the "Refusal Offer"). The Refusal Notice shall be accompanied by a copy -------------- of any written offer by the Refusal Transferee relating to such proposed Transfer (e.g. any executed letter of intent stating the terms of such offer). ---- Each Refusal Offer shall contain the same terms and conditions, and shall be for the same consideration, as described in the Refusal Notice. In the event that the Refusal Offer provides payment of non-cash consideration for all or a portion of the Refusal Securities, Titus shall have the right to pay the purchase price in the form of cash equal in amount to the value of the non-cash consideration. If Fargo and Titus cannot agree on such cash value within ten (10) days following delivery of the Refusal Offer, the valuation (the "Valuation") shall be made by an appraiser of recognized standing selected by - ----------- mutual agreement of Fargo and Titus or, if the parties cannot agree on an appraiser within twenty (20) days after delivery of the Refusal Offer, each shall select an appraiser of recognized standing and the two appraisers so selected shall designate a third appraiser of recognized standing, whose Valuation shall be determinative of such value of the non-cash consideration. Within ten (10) business days after the Refusal Notice is delivered by Fargo to Titus (or, if later, the delivery of the 3 Valuation), Titus may, by written notice delivered to Fargo (the "Refusal ------- Acceptance Notice"), accept the offer to acquire all, but not less than all, of - ----------------- the Refusal Securities as described in the Refusal Notice. If Titus does not deliver a Refusal Acceptance Notice to Fargo within ten (10) business days after the Refusal Notice is delivered by Fargo to Titus, then Fargo may proceed with the Transfer of the Refusal Securities to the Refusal Transferee without any further obligations under this Section 3.2. Transfers pursuant to the Refusal Acceptance Notice shall occur not more than ninety (90) calendar days after the date on which the Refusal Acceptance Notice has been delivered to Fargo by Titus. Titus shall have the right, in its sole discretion, to transfer all or a portion of its right of first refusal set forth in this Section 3.2 to Herve Caen and/or Eric Caen. 3.3 Binding Upon Transferee. The obligations of Fargo under Section ----------------------- 3.2 shall be binding upon each Transferee to whom shares of the applicable Exchanged Shares are Transferred by Fargo. Prior to the consummation of any Transfer, Fargo shall cause the Transferee to execute an agreement in form and substance reasonably satisfactory to Titus, providing that such Transferee shall fully comply with the terms of this Agreement. 3.4 Fargo Tag-Along Rights. ---------------------- (a) Tag-Along Right. Neither Herve Caen nor Eric Caen (in such --------------- case, a "Selling Stockholder") shall, directly or indirectly, sell, assign, ------------------- pledge, encumber, hypothecate, gift, bequest or otherwise transfer, whether for value or no value and whether voluntarily or involuntarily (including, without limitation, by operation of law or by judgment, levy, attachment, garnishment, bankruptcy or other legal or equitable proceedings, (in each case, a "Transfer") -------- value to any transferee (a "Transferee") shares of Titus Common Stock which in ---------- the aggregate equal or exceed fifty percent (50%) of the aggregate holdings of Titus Common Stock held by the Caens on the date prior to such proposed Transfer (the "Transfer Shares") held by such Stockholder (a "Selling Stockholder") --------------- ------------------- unless the terms and conditions of such Transfer shall include an offer (the "Offer") to Fargo (the "Tag-Along Stockholder"), at the same price and on the ----- --------------------- same terms and conditions as the Selling Stockholder has agreed to sell the Transfer Shares, to include in the Transfer to the third party Transferee an amount of Titus Common Stock determined in accordance with this Section 3.4. (b) Obligation of Transferee to Purchase. The Transferee of the ------------------------------------ Selling Stockholder shall purchase from the Tag-Along Stockholder the number of shares of Titus Common Stock owned or controlled by the Tag-Along Stockholder that the Tag-Along Stockholder desires to require the Transferee to purchase (the "Tag-Along Shares"); provided, however, that the number of Tag-Along Shares ----------------- -------- ------- to be sold by each Tag-Along Stockholder shall not exceed the number of shares of Titus Common Stock derived by multiplying (i) the aggregate number of shares of Titus Common Stock covered by the Offer by (ii) a fraction the numerator of which is the number of shares of Titus Common Stock owned by the Tag-Along Stockholder at the time of the Transfer and the denominator of which is the total number of shares of Titus Common Stock held by the Stockholders at the time of the Transfer (the "Tag-Along Formula"). ------------------ (c) Notice. In the event a Selling Stockholder proposes to ------ Transfer any Transfer Shares, it shall notify, or cause to be notified, in writing, the Tag-Along Stockholder of each such proposed Transfer. Such notice shall be given not more than sixty (60) nor less than twenty (20) calendar days prior to the proposed sale date and 4 set forth: (i) the name of the Transferee and the number of Transfer Shares proposed to be transferred, (ii) the proposed amount and form of consideration and terms and conditions of payment offered by the Transferee (the "Transferee ---------- Terms"), (iii) that the Transferee has been informed of the "tag-along right" - ----- provided for in this Section 3.4, and has agreed to purchase any Tag-Along Shares from the Tag-Along Stockholder in accordance with the terms hereof, and (iv) the proposed sale date. (d) Exercise. The tag-along right may be exercised by the Tag-Along -------- Stockholder by delivery of a written notice to the Selling Stockholder (the "Tag-Along Notice") within fifteen (15) business days following receipt of the - ------------------ notice specified in the preceding subsection. The Tag-Along Notice shall state the number of Tag-Along Shares that the Tag-Along Stockholder wishes to include in such Transfer to the Transferee, which number may exceed the total number of Transfer Shares proposed to be transferred but which may not exceed the total number of shares of Titus Common Stock owned or controlled by the Tag-Along Stockholder. Upon the giving of a Tag-Along Notice, the Tag-Along Stockholder shall be entitled and obligated to sell the number of Tag-Along Shares set forth in the Tag-Along Notice, subject to adjustment pursuant to the Tag-Along Formula, to the Transferee on the Transferee Terms; provided, however, the -------- ------- Selling Stockholder shall not consummate the sale of any Transfer Shares offered by them if the Transferee does not purchase all Tag-Along Shares which the Tag- Along Stockholder is entitled and desires to sell pursuant hereto. After expiration of the fifteen (15) business day period referred to above, if the provisions of this Section 3.4 have been complied with in all respects, the Selling Stockholder shall have the right, for a period of forty-five (45) calendar days from the expiration of the fifteen (15) business day period referred to above, to Transfer the Transfer Shares to the Transferee on the Transferee Terms without further notice to any other party. (e) Proportional Indemnity. Anything to the contrary contained herein ---------------------- notwithstanding, any indemnity provided by any Stockholder making a Transfer pursuant to this Section 3.4 shall be in proportion to and limited to the consideration received by such Stockholder for the Titus Common Stock transferred by such Stockholder, as a percentage of all consideration received by all Stockholders for all Titus Common Stock transferred pursuant to this Section 3.4. (f) No Limitation on Section 3.1. Nothing in this Section 3.4 shall ---------------------------- in any way limit Fargo's rights under Section 3.1 hereof. (g) No Limitation on Permitted Transfers. The foregoing ------------------------------------ notwithstanding, the rights and obligations set forth in Section 2 and this Section 3 shall not apply to any Permitted Transfer. For purposes of this Agreement, a "Permitted Transfer" shall mean (i) any Transfer by a Stockholder ------------------- to such Stockholder's ancestors, descendants or spouse or to a trust for the benefit of such individuals or (ii) any bona fide gift or (iii) any Transfer by a Stockholder to an entity that is wholly owned, and will remain wholly owned, by such Stockholder (or such Stockholder and one or more of the individuals referred to in the preceding clause (i)); provided, that (a) as a condition -------- precedent to any Transfer made pursuant to one of the exemptions provided in clause (i), (ii) or (iii), (1) the Stockholder proposing the Permitted Transfer shall inform the other Stockholders of such Transfer or gift prior to effecting it, and (2) the transferee or donee shall furnish the other Stockholders and Titus with a written agreement to be bound by and comply with all provisions of this Agreement, and such transferee or donee shall be treated as a "Stockholder" for all purposes of this Agreement, (b) in the case of a Transfer 5 in trust, such Stockholder shall become the trustee or, with such Stockholder's spouse, a co-trustee of such trust, (c) in the case of a Transfer not in trust, as a condition precedent to such Transfer such Stockholder shall retain an irrevocable proxy to vote the transferred shares of Titus Common Stock and (d) in the case of a Transfer described in clause (iii), as a condition precedent to the Transfer all holders of equity or other ownership interests in such entity shall enter into an agreement with the other Stockholders and Titus, which shall be mutually satisfactory to the other Stockholders, Titus and the transferee, under which the outstanding equity or other ownership interests in such transferee shall be subjected to the same restrictions against Transfer that appear in this Agreement. 4. Closing; Satisfaction of Conditions to Closing; Escrow Arrangement. ------------------------------------------------------------------ 4.1 Closing. Subject to satisfaction of the conditions set forth in ------- Section 4.2, the closing of the exchange of the Interplay Shares for the Exchanged Shares (the "Closing") shall occur at the offices of Paul, Hastings, -------- Janofsky & Walker LLP, 555 South Flower Street, Twenty-Third Floor, Los Angeles, California, concurrently with the closing of the other transactions contemplated by the Stock Purchase Agreement (the "Closing Date"). At the Closing, Titus ------------- will deliver to Fargo a certificate evidencing the Exchanged Shares, which shall be registered in Fargo's name, against surrender to Titus by Fargo of the Interplay Shares. 4.2 Satisfaction of Conditions to Closing; Interim Closing. ------------------------------------------------------ Notwithstanding the provisions of Section 4.1, Fargo acknowledges and agrees that, in order for Titus to issue the Exchanged Shares: (a) an independent auditor appointed by a court sitting in France shall have issued a report with respect to the adequacy of consideration received by Titus for the Exchanged Shares; (b) the shareholders of Titus shall have duly approved the issuance of the Exchanged Shares after receipt of the report described in clause (a) above; and (c) the Agreement shall have been duly executed and delivered by all the respective parties thereto. If the conditions set forth in clauses (a) through (c) of this Section 4.2 have not been satisfied on or before the Closing Date, then, notwithstanding the provisions of Section 4.1, on the Closing Date the parties shall consummate an interim closing (the "Interim Closing") whereby --------------- Fargo shall deliver (i) to Titus a proxy (the "Proxy") in the form attached ------ hereto as Exhibit A and (ii) to the escrow agent the Interplay Shares pursuant --------- to the Escrow Agreement attached hereto as Exhibit B (the "Escrow Agreement"). --------- ----------------- Upon the consummation of the Interim Closing, Titus shall be deemed to be the beneficial owner of the Interplay Shares. Upon the satisfaction of the conditions set forth in clauses (a) through (c) of this Section 4.2, the parties shall use their reasonable best efforts to consummate the transactions contemplated hereby as promptly as practicable. In the event that Titus has not satisfied the conditions set forth in Section clauses (a) and (b) hereof which are applicable to it on or prior to December 31, 1999, then the Escrow Agent shall on the first business day thereafter return to Fargo the Interplay Shares and this Agreement shall be null and void unless otherwise agreed by the parties. 5. Representations and Warranties by Fargo. In order to induce Titus to --------------------------------------- enter into this Agreement, Fargo hereby covenants with, and represents and warrants to, Titus as follows: 5.1 Binding Obligations. This Agreement has been duly executed and ------------------- delivered by Fargo and constitutes the legal, valid and binding obligations of Fargo and is enforceable against Fargo in accordance with its terms, except as such enforcement is 6 limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally. 5.2 Ownership of Interplay Shares. Fargo owns of record and ----------------------------- beneficially the Interplay Shares, free and clear of any and all mortgages, pledges, security interests, encumbrances, liens or charges of any kind (collectively, "Liens"), and upon the delivery to Titus of the Interplay Shares, ------ Titus will be the record and beneficial owner of the Interplay Shares, free and clear of any and all Liens. 5.3 Compliance with Laws and Other Instruments. The execution, ------------------------------------------ delivery and performance by Fargo of this Agreement (a) will not require from the board of directors or stockholders of Interplay any consent or approval that has not been validly and lawfully obtained, (b) will not require any authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality of government, except such as shall have lawfully and validly obtained prior to the Closing, (c) will not cause Fargo to violate or contravene (i) any provision of law, (ii) any rule or regulation of any agency or government, domestic of foreign, (iii) any order, writ, judgment, injunction, decree, determination or award binding upon Fargo. 5.4 No Proxy. Fargo has not granted nor is Fargo a party to any -------- proxy, voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. 6. Representations and Warranties by Titus. In order to induce Fargo to --------------------------------------- enter into this Agreement, Titus hereby covenants with, and represents and warrants to, Fargo as follows: 6.1 Organization, Standing, etc. Titus is a corporation duly --------------------------- organized, validly existing and in good standing under the laws of France, and has all requisite corporate power and authority to enter into this Agreement, and to carry out the provisions hereof and thereof. 6.2 Capital Stock. The authorized capital stock of Titus consists of ------------- 10,100,000 shares of common stock, and Titus has no authority to issue any other capital stock. 1,152,302 shares of common stock are issued and outstanding, and such shares are duly authorized, validly issued, fully paid and nonassessable. Except where the failure to do so would not result in a material adverse effect, or any condition, situation or set of circumstances that could reasonably be expected to have an adverse effect, on Titus and its Subsidiaries, taken as a whole (a "Material Adverse Effect"), the offer, issuance and sale of the shares ------------------------ of common stock were registered or qualified under French law. 6.3 Exchanged Shares. On or before the Closing, the Exchanged Shares ---------------- will have been duly authorized and validly issued, and upon the consummation of the transactions contemplated hereby, will be fully paid and nonassessable, free and clear of all Liens and restrictions, other than Liens that might have been created by Fargo and restrictions imposed by this Agreement and applicable law. 6.4 Corporate Acts and Proceedings . Except as disclosed on ------------------------------ Schedule 6.4 hereto, all corporate acts and proceedings required for the - ------------ authorization, execution 7 and delivery of this Agreement by Titus, and the performance of this Agreement by Titus, have been lawfully and validly taken or will have been so taken prior to the Closing. 6.5 Compliance with Laws and Other Instruments . Except as ------------------------------------------ disclosed on Schedule 6.5, and except as provided in Section 4.2 and the Stock ------------ Purchase Agreement, the execution, delivery and performance by Titus of this Agreement (a) will not require from the board of directors or stockholders of Titus any consent or approval that has not been validly and lawfully obtained, (b) will not require any authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality of government, except such as shall have lawfully and validly obtained prior to the Closing, (c) will not cause Titus to violate or contravene (i) any provision of law, (ii) any rule or regulation of any agency or government, domestic of foreign, (iii) any order, writ, judgment, injunction, decree, determination or award binding upon Titus, or (iv) any provision of the charter documents of Titus, (d) will not violate or be in conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under, any indenture, loan or credit agreement, note agreement, deed of trust, mortgage, security agreement or other material agreement, lease or instrument, commitment or arrangement to which Titus is a party or by which Titus or any of its properties, assets or rights is bound or affected, which in any case would have a Material Adverse Effect. 6.6 Binding Obligations . This Agreement constitutes the legal, ------------------- valid and binding obligations of Titus and is enforceable against Titus in accordance with its terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally. 6.7 Financial Statements. Attached hereto as Schedule 6.7 is Titus' -------------------- ------------ unaudited balance sheet (the "Balance Sheet") as of December 31, 1998 (the -------------- "Balance Sheet Date") and the unaudited statement of operations for the twelve- - -------------------- month period then ended. The foregoing financial statements (a) are in accordance with the books and records of Titus, (b) present fairly the financial condition of Titus at the Balance Sheet Date and the results of its operations and cash flow for the period therein specified, and (c) have been prepared in accordance with accounting principles generally accepted in France and applied on a basis consistent with prior accounting periods, subject to normal year end adjustments. 6.8 Litigation. Except as disclosed on Schedule 6.8 hereto, there is ---------- ------------ no legal action, suit, arbitration or other legal, administrative or other governmental investigation, inquiry or proceeding (whether federal, state, local or foreign) pending or, to Titus' knowledge, threatened against or affecting Titus or its properties, assets or business (existing or contemplated), before any court or governmental department, commission, board, bureau, agency or instrumentality or any arbitrator, which if adversely determined would have a Material Adverse Effect. Except as disclosed on Schedule 6.8 hereto, Titus is ------------ not aware of any fact which might result in or form the basis for any such action, suit, arbitration, investigation, inquiry or other proceeding, which if adversely determined would have a Material Adverse Effect. Titus is not in default with respect to any order, writ, judgment, injunction, decree, determination or award of any court or of any governmental agency or instrumentality (whether federal, state, local or foreign), except where such default would not have a Material Adverse Effect. 8 6.9 Securities Laws. Based in part upon the representations of Fargo in --------------- Sections 2.1 and 5, the offer, issue and sale of the Exchanged Shares are and will be exempt from any registration, disclosure, qualification or other like requirements under French securities laws. 6.10 No Brokers or Finders. No Person has, or as a result of the --------------------- transactions contemplated herein will have, any right or valid claim against Titus or Fargo for any commission, fee or other compensation as a finder or broker, or in any similar capacity, except for Concordia Capital Technology Group, Inc., whose fees will be the responsibility of Titus. 6.11 Patents and Other Intangible Assets. ----------------------------------- (a) Except as disclosed on Schedule 6.11 hereto, Titus (i) owns or has ------------- the right to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in or necessary for the conduct of its business as now conducted, (ii) to Titus" actual knowledge, is not infringing upon or otherwise acting adversely to the right or claimed right of any Person under or with respect to any patent, trademark, service mark, trade name, copyright or license with respect thereto, where such infringement would have a material adverse effect on Titus. (b) Except for license, publishing and distribution agreements with third parties entered into in the ordinary course of business, and except as disclosed on Schedule 6.11 hereto, Titus has not sold, transferred, assigned, ------------- licensed or subjected to any Lien, any intellectual property, trade secret, know-how, invention, design, process, computer software or technical data, or any interest therein, necessary for the development, manufacture, use, operation or sale of any product listed on Schedules 6.13(a) and 6.13(b) hereto. (c) Titus has not received any communication alleging or stating that Titus or any of its employees or other agents has violated or infringed, or by conducting business as proposed, would violate or infringe, any patent, trademark, service mark, trade name, copyright, trade secret, proprietary right, process or other intellectual property of any other Person, which could reasonably be expected to have a material adverse effect on Titus. 6.12 Title to Property and Encumbrances; Leases. Except where failure ------------------------------------------ to do so would not have a Material Adverse Effect, Titus has good and marketable title to all of its properties and assets, including without limitation the properties and assets reflected in the Balance Sheet and the properties and assets used in the conduct of its business, except for properties disposed of in the ordinary course of business since the Balance Sheet Date and except for properties held under valid and subsisting leases which are in full force and effect and which are not in default, subject to no Lien, except those which are shown and described on the Balance Sheet and except for Permitted Liens (as hereinafter defined). "Permitted Liens" shall mean (a) Liens for taxes and ---------------- assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings; (b) Liens in respect of pledges or deposits under workers' compensation laws or similar legislation, carriers', warehousemen's, mechanics', laborers' and materialmen's and similar Liens, if the obligations secured by such Liens are not then delinquent or are being contested in good faith by appropriate proceedings; and (c) Liens incidental to the 9 conduct of the business of Titus or any subsidiary of Titus which were not incurred in connection with the borrowing of money or the obtaining of advances or credits and which do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business. 6.13 Computer Software. ----------------- (a) Except as set forth on Schedule 6.13(a) hereto, each of the ---------------- computer software programs developed by Titus that are listed on Schedule -------- 6.13(a) hereto (the "Operational Software") is functional, complete and - ------- --------------------- operational in all material respects in accordance with its specifications, has been documented in accordance with Titus' standard practices, and Titus possesses both the source code and object code versions thereof. (b) Attached as Schedule 6.13(b) hereto is a true and complete list of ---------------- all computer software games currently in active development by or on behalf of Titus (the "Developing Software"). Schedule 6.13(b) also sets forth whether -------------------- ---------------- each such game is being internally or externally developed and, if externally developed, the name of the third party developer. 6.14 Disclosure. To the knowledge of Herve Caen, the information ---------- contained in this Agreement, the Balance Sheet, and in any writing furnished pursuant hereto or in connection herewith, taken as a whole, is true, complete and correct (except that with respect to the Balance Sheet, the information contained therein shall be true, complete and correct as of the date thereof), and does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or herein or necessary to make the statements therein or herein, in light of the circumstances under which they were made, not misleading. 7. Certificates. The certificates evidencing the Exchanged Shares, and each ------------ certificate issued in transfer thereof, will bear appropriate legends as required by this Agreement and applicable law and the rules and regulations of the Stock Exchange. 8. Enforcement. ----------- 8.1 Survival of Representations and Warranties. The representations, ------------------------------------------ warranties, covenants and agreements of the parties hereto contained in this Agreement or in any writing delivered pursuant to the provisions of this Agreement or at the Closing shall survive any examination by or on behalf of any party hereto and shall survive the Closing and the consummation of the transactions contemplated hereby until the date which is twelve (12) months after the Closing Date; provided, however, that each of the -------- ------- representations and warranties contained in Sections 5.1, 5.2, 6.3 and 6.6 hereof shall survive any examination by or on behalf of any party hereto and shall survive the Closing and the consummation of the transactions contemplated hereby until the expiration of any applicable statute of limitations with respect to such representation and warranty. 8.2 Indemnification. --------------- 10 (a) Subject to Section 8.2(e) hereof, Titus hereby covenants and agrees to defend, indemnify and save and hold harmless Fargo from and against any loss, cost, expense, liability, claim or legal damages (including, without limitation, reasonable fees and disbursements of counsel and accountants and other costs and expenses incident to any actual or threatened claim, suit, action or proceeding (each, an "Action") and all costs of investigation) ------- (collectively, the "Damages") arising out of or resulting from (i) any -------- inaccuracy in or breach of, or failure to perform or observe, any representation, warranty, covenant or agreement made by Titus in this Agreement or in any writing delivered pursuant to this Agreement or at the Closing, or (ii) any claims of third parties claiming compensation, commissions or expenses for services as a broker or finder based upon obligations incurred by Titus. (b) Subject to Section 8.2(e) hereof, Fargo hereby covenants and agrees to defend, indemnify and save and hold harmless Titus, together with officers, directors, shareholders, employees, attorneys and representatives and each Person who controls Titus from and against any Damages arising out of or resulting from (i) any inaccuracy in breach of, or failure to perform or observe, any representation, warranty, covenant or agreement made by Fargo in this Agreement or in any writing or other agreement delivered pursuant hereto, or (ii) any claims of third parties claiming compensation, commissions or expenses for services as a broker or finder based upon obligations incurred by Fargo. (c) In the event that any indemnified party is made a defendant in or party to any action, suit, proceeding or claim, judicial or administrative, instituted by any third party for Damages or other relief (any such third party action, suit, proceeding or claim being referred to as a "Claim"), the ------ indemnified party (referred to in this clause (b) as the "notifying party") ---------------- shall give notice thereof (a "Notice of Claim") as soon as practicable and in ---------------- any event within thirty (30) days after the notifying party receives notice thereof. The failure to give such notice shall not affect whether an indemnifying party is liable for reimbursement unless such failure has resulted in the loss of substantive rights with respect to the indemnifying party's ability to defend such Claim, and then only to the extent of such loss. Notice of the intention so to contest and defend shall be given by the indemnifying party to the notifying party within twenty (20) business days after the notifying party's notice of such Claim (but, in all events, at least ten (10) business days prior to the date that an answer to such Claim is due to be filed). Such contest and defense shall be conducted by reputable attorneys employed by the indemnifying party and approved by the indemnified party (which approval will not be unreasonably withheld). The indemnifying party shall have the sole right to control the contest and defense of such Claim. The notifying party shall be entitled, at its own cost and expense (which expense shall not constitute Damages unless the notifying party reasonably determines that the indemnifying party because of a conflict of interest, may not adequately represent, the interests of the indemnified parties, and has provided the indemnifying party with notice of such determination, and only to the extent that such expenses are reasonable), to participate in such contest and defense and to be represented by attorneys of its or their own choosing. The notifying party will cooperate with the indemnifying party in the conduct of such defense. Neither the notifying party nor the indemnifying party may concede, settle or compromise any Claim without the consent of the other party, which consent will not be unreasonably withheld or delayed in light of all factors of importance to such party; provided, however, that if the indemnified party shall fail to consent to the settlement of any Claim where (i) such settlement includes an unconditional release of all claims against the indemnified party and requires no payment 11 on the part of the indemnified party to the claimant or any other party, (ii) such settlement does not require any action on the part of the indemnified party and does not impose terms restricting or adversely affecting the indemnified party's activity, and (iii) the claimant has affirmatively indicated that it will accept such settlement, then the indemnifying party shall no liability with respect to any payment to be made in respect of such claim in excess of the proposed settlement amount. (d) In the event any indemnified party shall have a claim against any indemnifying party that does not involve a Claim, the indemnified party shall deliver a notice of such claim with reasonable promptness to the indemnifying party. The failure to give such notice shall not affect whether an indemnifying party is liable for reimbursement unless such failure has resulted in the loss of substantive rights with respect to the indemnifying party's ability to defend such claim, and then only to the extent of such loss. If the indemnifying party notifies the indemnified party that it does not dispute the claim described in such notice or fails to notify the indemnified party within thirty (30) days after delivery of such notice by the indemnified party whether the indemnifying party disputes the claim described in such notice, the Damages in the amount specified in the indemnified party's notice will be conclusively deemed a liability of the indemnifying party and the indemnifying party shall pay the amount of such Damages to the indemnified party on demand. (e) Any claim for indemnity under this Section 8.2 shall be delivered in writing to the indemnifying party and set forth with reasonable specificity as to the amount claimed and the underlying facts supporting such claim. The indemnifying party shall have thirty (30) days to accept or dispute such claim by written notice to the indemnified party (a "Contest Notice"); provided, --------------- however, that if, at the time a Notice of Claim is submitted to the indemnifying party the amount of the Claim in respect thereof has not yet been determined, such thirty (30) day period shall not commence until a further written notice (a "Notice of Liability") has been sent or delivered by the indemnified party to -------------------- the indemnifying party setting forth the amount of the Claim incurred by the indemnified party that was the subject of the earlier Notice of Claim. Such Contest Notice shall specify the reasons or bases for the objection of the Indemnifying Party to the claim, and if the objection relates to the amount of the Claim asserted, the amount, if any, which the indemnifying party believes is due the indemnified party. If no such Contest Notice is given with such 30-day period, the obligation of the indemnifying party to pay to the indemnified party the amount of the Claim set forth in the Notice of Claim, or subsequent Notice of Liability, shall be deemed established and accepted by the indemnifying party. If, on the other hand, the indemnifying party contests a Notice of Claim or Notice of Liability (as the case may be) within such 30-day period, the indemnified party and the indemnifying party shall thereafter attempt in good faith to resolve their dispute by agreement. If the parties are unable to so resolve their dispute within the immediately succeeding thirty (30) days, such dispute shall be resolved by binding arbitration in Orange County, California, as provided in Section 9.4 below. The award of the arbitrator shall be final and binding on the parties and may be enforced in any court of competent jurisdiction. Upon final determination of the amount of the Claim that is the subject of an indemnification claim (whether such determination is the result of the indemnifying party's acceptance of, or failure to contest, a Notice of Claim or Notice of Liability, or of a resolution of any dispute with respect thereto by agreement of the parties or binding arbitration), such amount shall be payable, in cash by the indemnifying party to the indemnified parties who have been determined to be entitled thereto within fifteen (15) days of such final 12 determination of the amount of the Claim due by the indemnifying party. Any amount that becomes due hereunder and is not paid when due shall bear interest at the maximum legal rate per annum from the date due until paid. (f) Anything to the contrary notwithstanding, (i) Fargo shall not be indemnified and held harmless in respect of any Damages unless and until the aggregate amount of such Damages exceeds $100,000, in which event Fargo shall be indemnified and held harmless in respect of all Damages without regard to the foregoing $100,000 limit, and (ii) the liability of Titus to Fargo shall be limited to an amount equal to the valuation of the Exchanged Shares as calculated in accordance with Section 1 above. (g) Except as provided in Section 8.3, the provisions of this Section 8.2 shall be the exclusive remedy or exclusive means to obtain relief, as the case may be, of any party in the event of any breach of any representation, warranty, covenant or agreement contained herein (or in any certificate or other document delivered pursuant hereto) by another party, or with respect to any Action or Claim; provided, however, that this subsection (g) shall not limit any -------- ------- statutory claim, or any claim in tort, which any party may have against the other party. 8.3 Injunctive Relief. (a) Any party may bring a claim seeking specific ----------------- performance by way of injunctive relief before a court of competent jurisdiction to enforce the provisions of this Agreement, and (b) any party seeking to enforce a claim for indemnification may bring any claim of indemnification which is not resolved within the thirty day period provided in Section 8.2(b) before a court of competent jurisdiction. 8.4 No Implied Waiver. Except as expressly provided in this Agreement, ----------------- no course of dealing between Titus and Fargo and no delay in exercising any such right, power or remedy conferred hereby or now or hereafter existing at law in equity, by statute or otherwise, shall operate as a waiver of, or otherwise prejudice, any such right, power or remedy. 9. Miscellaneous. ------------- 9.1 Notices. All notices, requests, consents and other communications ------- required or permitted hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to Titus to: Titus Interactive SA c/o Titus Software Corporation 20432 Corisco Street Chatsworth, California 91311 Attention: Mr. Herve Caen, Chairman and Chief Executive Officer Telecopier: (818) 709-6537 13 with a copy to: Robert A. Miller, Jr., Esq. Paul, Hastings, Janofsky & Walker LLP 555 South Flower Street - 23rd Floor Los Angeles, California 90071 Telecopier: (213) 627-0705 if to Fargo to: Mr. Brian Fargo c/o Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, California 92606 Telecopier: (949) 252-0667 with a copy to: K.C. Schaaf, Esq. Stradling Yocca Carlson & Rauth, a professional corporation 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660 Telecopier: (949) 725-4100 or to such other address or telecopier number as such party may specify for the purpose by notice to the other party or parties to this Agreement, as the case may be. Any notice, request, consent or other communication hereunder shall be deemed to have been given and received on the day on which it is delivered (by any means including personal delivery, overnight air courier, United States or French mail, as the case may be) or telecopied (or, if such day is not a business day or if the notice, request, consent or communication is not telecopied during business hours of the intended recipient, at the place of receipt, on the next following business day). 9.2 Injunctive Relief. It is hereby agreed and acknowledged that it ----------------- will be impossible to measure in money the damages that would be suffered if the parties fail to comply with any of the obligations herein imposed on them and that in the event of any such failure, an aggrieved party will be irreparably damaged and will not have an adequate remedy at law. Any such party shall, therefore, be entitled to injunctive relief, including specific performance, to enforce such obligations, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. 9.3 Survival of Representations and Warranties. Each party's ------------------------------------------ representations and warranties made in this Agreement shall survive the execution and delivery of this Agreement and of the consummation of the transactions contemplated hereby. 9.4 Governing Law; Jurisdiction and Venue; Attorneys' Fees. This ------------------------------------------------------ Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to its conflicts of laws principles. The parties hereto 14 hereby consent and agree that the United States District Court for the Central District of California, or the Superior Court of California for the County of Orange, will have exclusive jurisdiction over any legal action or proceeding arising out of or relating to this Agreement or the subject matter hereof, and each party consents to the in personam jurisdiction of such courts for the -- -------- purpose of any such action or proceeding and agrees that venue is proper in such courts. In the event of any dispute, controversy or proceeding between or among the parties concerning this Agreement or the subject matter hereof, the prevailing party shall be entitled to receive from the non-prevailing party its costs and expenses, including reasonable attorneys' fees. 9.5 Execution in Counterparts. This Agreement may be executed in one ------------------------- or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 9.6 Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 9.7 Entire Agreement; Amendments and Waiver. This Agreement --------------------------------------- (including the Exhibits hereto) constitutes the entire agreement among Titus and Fargo with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings, if any, relating to the subject matter hereof. There are no restrictions, promises, warranties or undertakings relating to such subject matter other than those set forth in this Agreement and such other writings. The terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by a written document executed by the party entitled to the benefits of such terms or provisions. 9.8 Limitation of Liability on Caens. It is acknowledged and agreed -------------------------------- that Herve Caen and Eric Caen are entering into this Agreement solely in their capacities as shareholders of Titus, and that they shall not be held personally liable for any breaches of any representations and warranties of Titus hereunder, or for any breaches of any obligations of Titus hereunder. 9.9 Arbitration. Except for actions to obtain injunctions or other ----------- equitable remedies, all disputes among the parties hereto shall be determined solely and exclusively by arbitration under, and in accordance with the rules then in effect of, the American Arbitration Association, or any successors thereto ("AAA"), in Los Angeles, California, unless the parties otherwise agree ---- in writing. The parties shall, in connection with such arbitration, in addition to any discovery permitted under AAA rules, be permitted to conduct discovery in accordance with Section 1283.05 of the California Code of Civil Procedure, the provisions of which are incorporated herein by this reference. The parties shall unanimously select an arbitrator; provided, that if the parties cannot -------- agree upon an arbitrator within seven (7) days, such arbitrator shall be selected by the AAA upon application of any party. Judgment upon the award of the agreed upon arbitrator or the so chosen arbitrator, as the case may be, shall be binding and may be entered in any court of competent jurisdiction. 15 [EXCHANGE AGREEMENT SIGNATURE PAGE] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. TITUS INTERACTIVE SA, a French corporation /s/ Herve Caen By: _____________________________ An Authorized Officer /s/ Brian Fargo _____________________________ Brian Fargo /s/ Herve Caen _____________________________ Herve Caen /s/ Eric Caen _____________________________ Eric Caen 16 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 3,274 0 33,116 15,011 8,612 69,992 16,534 (11,678) 76,445 71,267 0 0 0 23 (2,111) 76,445 26,323 29,430 17,616 17,616 17,363 7,032 952 (5,549) (1,372) (6,921) 0 0 0 (6,921) (.33) (.33)
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