-----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, A5+KypVfIraXQl6hUo40IVp4GJSDg1bge3cNFgzJcsJzTjEaaRGvl+QLlNxFveQo 4gnN/ZFedtHp0wZGNOLjXA== 0001017062-99-001936.txt : 19991117 0001017062-99-001936.hdr.sgml : 19991117 ACCESSION NUMBER: 0001017062-99-001936 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752166 BUSINESS ADDRESS: STREET 1: 16815 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92606 BUSINESS PHONE: 9495536655 MAIL ADDRESS: STREET 1: 16815 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92606 10-Q 1 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 September 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 November 12, 1999 ----- ------------------------------------------- Common Stock, $0.001 par value 29,904,396 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q SEPTEMBER 30, 1999 TABLE OF CONTENTS _____________
Page Number ----------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three and Nine Months ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Nine Months ended September 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 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 33 Item 6. Exhibits and Reports on Form 8-K 33 Signatures 34
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, ASSETS 1999 1998 ------ ------------- ------------ (Unaudited) (Dollars in thousands) Current Assets: Cash and cash equivalents $ 906 $ 614 Restricted cash 1,567 - Trade receivables, net of allowances of $10,234 and $18,431, respectively 22,546 36,407 Inventories 9,245 6,303 Prepaid licenses and royalties 19,058 18,128 Deferred income taxes 4,000 5,358 Other 1,069 685 -------- -------- Total current assets 58,391 67,495 Property and Equipment, net 4,212 5,679 Other Assets 1,505 1,792 -------- -------- $ 64,108 $ 74,966 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current Liabilities: Accounts payable $ 29,168 $ 23,403 Accrued liabilities 19,664 22,300 Current portion of long-term debt 27,114 24,521 Income taxes payable 268 254 -------- -------- Total current liabilities 76,214 70,478 Long-Term Debt, net of current portion 5,567 130 Deferred Income Taxes - 22 Minority Interest 69 143 Commitments and Contingencies (Note 4) Stockholders' 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 23,654,396 shares as of September 30, 1999 and 18,292,431 shares as of December 31, 1998 23 18 Paid-in capital 62,247 51,918 Accumulated deficit (80,279) (48,097) Accumulated comprehensive income adjustments 267 354 -------- -------- Total stockholders' deficit (17,742) 4,193 -------- -------- $ 64,108 $ 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 Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Net revenues $ 23,636 $ 24,504 $ 74,582 $ 106,225 Cost of goods sold 15,333 19,141 45,441 58,653 ---------- ---------- ---------- ---------- Gross profit 8,303 5,363 29,141 47,572 Operating expenses: Marketing and sales 7,304 9,797 21,763 27,411 General and administrative 8,375 3,739 14,206 9,516 Product development 5,424 6,615 16,110 18,555 Other 3,308 - 4,940 - ---------- ---------- ---------- ---------- Total operating expenses 24,411 20,151 57,019 55,482 ---------- ---------- ---------- ---------- Operating income (loss) (16,108) (14,788) (27,878) (7,910) Other income (expense): Interest expense, net (925) (810) (2,647) (3,590) Other income (expense), net 68 (1) (273) (83) ---------- ---------- ---------- ---------- Total other expense (857) (811) (2,920) (3,673) Loss before provision for income taxes (16,965) (15,599) (30,798) (11,583) Provision (benefit) for income taxes 11 (468) 1,384 8 ---------- ---------- ---------- ---------- Net loss $ (16,976) $ (15,131) $ (32,182) $ (11,591) ========== ========== ========== ========== Net loss per share: Basic and diluted $ (0.75) $ (0.83) $ (1.55) $ (0.85) ========== ========== ========== ========== Weighted average number of common shares outstanding: Basic and diluted 22,689,285 18,230,673 20,785,031 13,591,820 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ---------------------- 1999 1998 ---------- ---------- (Dollars in thousands) Cash flows from operating activities: Net loss $(32,182) $(11,591) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 2,334 2,634 Noncash expense for stock options 26 134 Deferred income taxes 1,336 606 Minority interest in loss of subsidiary (74) (82) Changes in assets and liabilities: Trade receivables 13,861 (10,605) Inventories (2,942) 517 Income taxes receivable 1,427 Other current assets (384) (548) Other assets 410 (5) Prepaid licenses and royalties (930) (5,450) Accounts payable 5,765 6,717 Accrued liabilities (2,636) (2,777) Income taxes payable 14 (316) -------- -------- Net cash used in operating activities (15,402) (19,339) Cash flows from investing activities: Purchase of property and equipment (990) (1,527) -------- -------- Net cash used in investing activities (990) (1,527) Cash flows from financing activities: Net borrowings on line of credit 2,483 1,956 Net proceeds from issuance of common stock 10,300 24,349 Net proceeds from issuance of notes payable 5,547 Proceeds from exercise of stock options 8 - Additions to restricted cash (1,567) - Repayment of promissory notes and warrants (6,072) Other 214 -------- -------- Net cash provided by financing activities 16,771 20,447 -------- -------- Effect of exchange rate changes on cash and cash equivalents (87) 113 -------- -------- Net increase (decrease) in cash and cash equivalents 292 (306) Cash and cash equivalents, beginning of period 614 1,536 -------- -------- Cash and cash equivalents, end of period $ 906 $ 1,230 ======== ======== Supplemental cash flow information: Cash paid for: Interest $ 2,607 $ 3,659 Income taxes - 3 ======== ======== Supplemental disclosures of noncash transactions: Issuance of common stock in exchange for development of intellectual properties $ 1,000 - Issuance of note payable in exchange for put rights 1,000 - ======== ========
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 (8.25 percent at September 30, 1999) less three percent, or 5.25 percent at September 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 nine months ended September 30, 1999, the Company incurred a net loss of $32.2 million and used cash in operating activities of $15.4 million. Partially because of these losses, the Company's liquidity deteriorated during the period ended September 30, 1999. At September 30, 1999, the Company had negative working capital of $17.8 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 completed an equity transaction with an investor which provided for the issuance of 4,545,455 shares of the Company's Common Stock for $10 million (See Note 5), and in November 1999, the Company issued another 6.25 million shares of Common Stock to the same investor for consideration of $25 million (See Note 11). The Company believes that funds available under its line of credit, funds 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 this Quarterly Report on Form 10-Q. 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 nine months ended September 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:
September 30, December 31, 1999 1998 ------------- ------------ (Dollars in thousands) Packaged software $ 7,404 $ 4,070 CD-ROMs, cartridges, manuals, packaging and supplies 1,841 2,233 ------------- ----------- $ 9,245 $ 6,303 ============= ===========
7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3. Debt Debt consists of the following:
September 30, December 31, 1999 1998 ------------- ------------ (Dollars in thousands) Loan Agreement $ 26,958 $ 24,475 Convertible Loans (See Note 5) 5,000 - Other 723 176 ------------- ------------ 32,681 24,651 Less--current portion (27,114) (24,521) ------------- ------------ $ 5,567 $ 130 ============= ============
Loan Agreement Borrowings under the Loan and Security Agreement ("Loan Agreement") bear interest at LIBOR (5.4 percent at September 30, 1999 and 5.62 percent at December 31, 1998) plus 4.87 percent (10.27 percent at September 30, 1999 and 10.49 percent at December 31, 1998). At various times during 1999, the Company amended its line of credit under the Loan Agreement with a financial institution to extend its current line of credit through 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 November 4, 1999, $7 million through November 29, 1999 and $5 million in excess thereafter. Under the amended line of credit the Company has been required to place a cash collateral deposit from time to time, which was $1.5 million at September 30, 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 is required to maintain the $5 million personal guarantee by the Company's Chairman and Chief Executive Officer 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 completed an equity transaction with an investor which provided for the issuance of 4,545,455 shares of the Company's Common Stock for $10 million. 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 bearing interest at the rate of 6 percent per annum 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 was subject to standard conditions, including stockholders approval which was obtained at the August 24, 1999 stockholders meeting. In November 1999, the Company completed the transaction with the investor and issued 6,250,000 of the Company's Common Stock in exchange for a total consideration of $25 million, including the conversion of the $5 million note payable, $15 million in cash and a note receivable for $5 million due on November 30, 1999, bearing interest at the rate of six percent per annum. 8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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 and $0.2 million for the three and nine months ended September 30, 1999, respectively, in connection with the assumption of the put right, and an additional $0.1 million will be amortized as interest expense over the remaining term of the Loan Agreement. In May 1999, the Company issued 271,528 shares of Common Stock for the exercise of the former President's stock options in conjunction with an Agreement and General Release executed with the former President. The Company guaranteed the former President $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. As of September 30, 1999, the Company had not repurchased any shares under this Agreement. In April 1999, the Company entered into a multi-product development agreement with a developer which provides for the delivery of ten titles to the Company during 1999 and 2000 in exchange for $0.5 million paid in cash installments and the issuance of 484,848 shares of the Company's Common Stock. The shares of Common Stock will be subject to forfeiture until such products are delivered and accepted by the Company. The arrangement also includes certain penalties to the developer in the event of noncompliance. Note 6. Other Operating Expenses In February 1999, the Company acquired a minority interest in Virgin Interactive Entertainment Limited ("Virgin") and entered into a Distribution Agreement with Virgin (See Note 9). The new distribution and operating arrangements required the termination of the then existing Distribution Agreements with third parties and caused the re-organization of the Company's operations in Europe, including a reduction in the work force and a facilities move. The Company has recorded asset valuation, restructuring charges and severance expenses of $0.6 and $2.3 million during the three and nine-month periods ended September 30, 1999, respectively in connection with these arrangements. The Distribution Agreement with Virgin requires the Company to pay certain minimum operating charges in 1999, and the Company has recorded a provision of $2.7 million charged to operations in the three month period ended September 30, 1999 to cover these charges. In addition, the Company recorded severance expense of $0.3 and $0.8 million during the three and nine months ended September 30, 1999 respectively. 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 7. Net Loss Per Share Basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. Diluted net loss per share is the same as basic because the effect of outstanding stock options and warrants is anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1999 1998 1999 1998 ------------ ----------- ----------- ----------- BASIC and DILUTED (Dollars in thousands, except per share amounts) Net loss $ (16,976) $ (15,131) $ (32,182) $ (11,591) Average common shares outstanding 22,689,285 18,230,673 20,785,031 13,591,820 ------------ ----------- ----------- ----------- Net loss per common share $ (0.75) $ (0.83) $ (1.55) $ (0.85) ============ =========== =========== ===========
There were options and warrants outstanding to purchase 3,224,580 shares of common stock and there were 484,848 shares of restricted common stock at September 30, 1999 which were excluded from the loss per share computation. The weighted average exercise price of the outstanding options and warrants at September 30, 1999 and 1998 was $3.46 and $4.80, respectively. Note 8. Comprehensive Loss Comprehensive loss consists of the following:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (Dollars in thousands) Net loss $ (16,976) $ (15,131) $ (32,182) $ (11,591) Other comprehensive loss, net of income taxes: Foreign currency translation adjustments 23 (113) 87 (113) ----------- ----------- ----------- ----------- Other comprehensive loss 23 (113) 87 (113) ----------- ----------- ----------- ----------- Total comprehensive loss $ (16,953) $ (15,244) $ (32,095) $ (11,704) =========== =========== =========== ===========
During the three and nine months ended September 30, 1999, the Company had a pre-tax increase in foreign currency translation adjustments of $23,000 and $83,000, respectively, compared to a pre-tax decrease of $116,500 and $112,900 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 which provides for the exclusive distribution of substantially all of the Company's products in Europe, CIS, Africa and the Middle East for a seven-year period, cancelable under certain conditions, subject to termination penalties and costs. Under the Agreement, the Company pays Virgin a monthly overhead fee, certain minimum operating charges and a distribution fee based on net sales, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on behalf of the Company. In connection with this arrangement the Company paid $1.1 million in distribution fees and $2.0 million in overhead fees to Virgin for the three months ended September 30, 1999 and paid $2.1 million in distribution fees and $3.8 million in overhead fees for the nine months ended September 30, 1999. In addition, the Company has accrued $2.7 million to cover certain minimum operating charges in 1999 payable to Virgin. 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 nine months ended September 30, 1999, the Company recognized revenue of $390,000 and a gross profit of $58,000 for performing distribution services on behalf of Virgin. In April 1999, the Company entered into an exclusive North American distribution agreement with Titus Interactive S.A. ("Titus") which provides for the distribution of eight titles on multiple platforms for a two-year period. Under the terms of the arrangement, the Company will receive a distribution fee for all orders shipped and will provide certain services including marketing, order processing, billings and collections. During the three and nine months ended September 30, 1999, the Company recognized revenue of $0.5 and $1.4 million and gross profit of $0.1 and $0.2 million, respectively, for performing distribution services on behalf of Titus. During the three and nine months ended September 30, 1999, the Company executed publishing agreements with Titus for $0.4 and $2.6 million, respectively. As a result of these agreements, the Company has delivered the 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 its investment in VIE for the three and nine months ended September 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 Nine Months Ended September 30, September 30, -------------------- -------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (Dollars in thousands) Net revenues: United States $ 23,809 $ 17,471 $ 64,888 $ 81,485 United Kingdom (173) 7,033 9,694 24,740 -------- -------- -------- -------- Consolidated net revenues $ 23,636 $ 24,504 $ 74,582 $106,225 ======== ======== ======== ======== Operating income (loss): United States $(15,287) $(12,141) $(24,494) $ (7,543) United Kingdom (821) (2,647) (3,384) (367) -------- -------- -------- -------- Consolidated loss from operations $(16,108) $(14,788) $(27,878) $ (7,910) ======== ======== ======== ======== Expenditures made for the acquisition of long-lived assets: United States $ 77 $ 44 $ 986 $ 740 United Kingdom - 204 - 446 -------- -------- -------- -------- Total expenditures for long-lived assets $ 77 $ 248 $ 986 $ 1,186 ======== ======== ======== ========
Net revenues by geographic regions were as follows:
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------- ------------------------------------- 1999 1998 1999 1998 ----------------- ----------------- ----------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) North America $10,895 46.1% $15,472 63.1% $35,242 47.4% $ 63,379 59.6% Europe 4,815 20.4 6,179 25.2 17,846 23.9 23,064 21.7 Rest of World 1,203 5.1 856 3.5 4,532 6.1 5,273 5.0 OEM, royalty and licensing 6,723 28.4 1,997 8.2 16,962 22.6 14,509 13.7 ------- ----- ------- ----- ------- ----- -------- ----- $23,636 100.0% $24,504 100.0% $74,582 100.0% $106,225 100.0% ======= ===== ======= ===== ======= ===== ======== =====
Net investments in long-lived assets by geographic regions were as follows:
September 30, 1999 December 31, 1998 ------------------ ------------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) North America $5,492 97.0% $6,621 89.6% Europe 81 2.0 723 9.8 Rest of World - - - - OEM, royalty and licensing 62 1.0 44 0.6 ------ ----- ------ ----- $5,635 100.0% $7,388 100.0% ====== ===== ====== =====
12 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 11. Subsequent Events 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, which were consummated in November 1999, pursuant to which the Company issued 6.25 million shares of the Company's Common Stock in exchange for total consideration of $25 million, including the conversion of the $5 million note payable, $15 million in cash and a note receivable for $5 million due on November 30, 1999, bearing interest at the rate of six percent per annum. These transactions follow 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 exchanged 2 million shares of the Company's Common Stock held by him for shares of Titus Common Stock. Following the completed transactions, Titus holds approximately 43 percent of the outstanding Common Stock of the Company. In the event Titus exercises its option to purchase Universal's holdings of Common Stock of the Company, Titus is expected to hold approximately 58 percent of the outstanding Common Stock of the Company, resulting in a change of control of the Company in favor of Titus. At the closing of the transaction, the Company, Titus and the Company's chairman and chief executive officer entered 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 entered 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 also entered 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 are 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. In addition, two members of Titus' management have joined 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 Nine Months Ended September 30, September 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 $ 23,636 100.0% $ 24,504 100.0% $ 74,582 100.0% $106,225 100.0% Cost of goods sold 15,333 64.9% 19,141 78.1% 45,441 60.9% 58,653 55.2% -------- ----- -------- ----- -------- ----- -------- ----- Gross profit 8,303 35.1% 5,363 21.9% 29,141 39.1% 47,572 44.8% -------- ----- -------- ----- -------- ----- -------- ----- Operating expenses: Marketing and sales 7,304 30.9% 9,797 40.0% 21,763 29.2% 27,411 25.8% General and administrative 8,375 35.4% 3,739 15.3% 14,206 19.0% 9,516 9.0% Product development 5,424 22.9% 6,615 27.0% 16,110 21.6% 18,555 17.5% Other 3,308 14.0% - 0.0% 4,940 6.6% - 0.0% -------- ----- -------- ----- -------- ----- -------- ----- Total operating expenses 24,411 103.2% 20,151 82.3% 57,019 76.4% 55,482 52.3% -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss) (16,108) -68.1% (14,788) -60.3% (27,878) -37.3% (7,910) -7.5% Other income (expense) (857) -3.6% (811) -3.3% (2,920) -3.9% (3,673) -3.5% -------- ----- -------- ----- -------- ----- -------- ----- Income (loss) before income taxes (16,965) -71.7% (15,599) -63.7% (30,798) -41.2% (11,583) -11.0% Provision for income taxes 11 0.0% (468) -1.9% 1,384 1.9% 8 0.0% -------- ----- -------- ----- -------- ----- -------- ----- Net income (loss) $(16,976) -71.7% $(15,131) -61.8% $(32,182) -43.1% $(11,591) -11.0% ======== ===== ======== ===== ======== ===== ======== ===== Net revenues by geographic region: North America $ 10,895 46.1% $ 15,472 63.1% $ 35,242 47.4% $ 63,379 59.6% International 6,018 25.5% 7,035 28.7% 22,378 30.0% 28,337 26.7% OEM, royalty and licensing 6,723 28.4% 1,997 8.2% 16,962 22.6% 14,509 13.7% Net revenues by platform: Personal computer $ 13,192 55.9% $ 7,652 31.2% $ 46,096 61.9% $ 52,638 49.5% Video game console 3,721 15.7% 14,855 60.6% 11,524 15.5% 39,078 36.8%
Net Revenues Net revenues for the three months ended September 30, 1999 decreased 3.5 percent to $23.6 million from $24.5 million in the comparable 1998 quarter. North America net revenues decreased to $10.9 million, or 46.1 percent of net revenues, from $15.5 million, or 63.1 percent of net revenues, in the 1998 quarter. International net revenues decreased to $6.0 million, or 25.5 percent of net revenues, from $7.0 million, or 28.7 percent of net revenues in the 1998 quarter. OEM, royalty and licensing net revenues increased 236.7 percent to $6.7 million, or 28.4 percent of net revenues, in the 1999 quarter from $2.0 million, or 8.2 percent of net revenues, in the 1998 quarter. Net revenues for the nine months ended September 30, 1999 decreased 29.8 percent to $74.6 million from $106.2 million in the comparable 1998 period. North America net revenues decreased to $35.2 million, or 47.4 percent of net revenues, from $63.4 million, or 59.6 percent of net revenues, in the 1998 period. International net revenues decreased to $22.4 million, or 30 percent of net revenues, from $28.3 million, or 26.7 percent of net revenues in the 1998 period. OEM, royalty and licensing net revenues increased to $17 million, or 22.6 percent of net revenues, in the 1999 period from $14.5 million, or 13.7 percent of net revenues, in the 1998 period. The decrease in North America and International net revenues for the three and nine months ended September 30, 1999 was primarily due to decreased major title releases, lower initial ship-ins on new titles and higher reserves for product returns and price protection, which were partially offset by increases in OEM, royalty and licensing revenues. The increase in OEM, royalty and licensing during the three months ended September 30, 1999, is primarily attributable to OEM revenue increasing by $1.7 million over the same period in 1998 with $1 million pertaining to a single transaction with a customer and the recognition of $2.2 million in deferred revenue for the shipment of title to a customer. The increase in OEM, royalty and licensing during the nine months ended September 30, 1999 is primarily due to the licensing deals with Titus Interactive SA. 15 Cost of Goods Sold; Gross Margin Cost of goods sold decreased 19.9 percent in the three months ended September 30, 1999 to $15.3 million, or 64.9 percent of net revenues, from $19.1 million, or 78.1 percent of net revenues in the comparable 1998 quarter. Gross margin increased to 35.1 percent in the 1999 quarter from 21.9 percent in the 1998 quarter. Cost of goods sold decreased 22.5 percent in the nine months ended September 30, 1999 to $45.4 million, or 60.9 percent of net revenues, from $58.7 million, or 55.2 percent of net revenues in the comparable 1998 period. Gross margin decreased to 39.1 percent in the 1999 period from 44.8 percent in the 1998 period. The increase in gross margin during the three months ended September 30, 1999 was primarily a result of the change in the product mix from lower margin console titles to higher margin PC titles. The decrease in gross margin during the nine months ended September 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 that had been canceled, and a higher percentage of externally developed titles as well as higher royalty rates on such titles. Additionally, gross margin was adversely affected by the fact that the Company had more externally developed titles in 1999 as compared with 1998. Operating Expenses Total operating expenses increased 21.1 percent to $24.4 million, or 103.2 percent of net revenues, in the three months ended September 30, 1999 from $20.2 million, or 82.3 percent of net revenues, for the comparable 1998 quarter. Total operating expenses increased 2.8 percent to $57 million, or 76.4 percent of net revenues, in the nine months ended September 30, 1999 from $55.5 million, or 52.3 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 25.4 percent to $7.3 million, or 30.9 percent of net revenues, for the three months ended September 30, 1999 from $9.8 million, or 40 percent of net revenues for the comparable 1998 quarter and decreased 20.6 percent to $21.8 million, or 29.2 percent of net revenues, for the nine months ended September 30, 1999 from $27.4 million, or 25.8 percent of net revenues for the comparable 1998 period. The decreases are primarily attributable to decreased advertising, specifically television 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 by increased marketing development funds with U.S. retailers. General and Administrative. General and administrative expenses primarily include administrative personnel expenses, facilities costs, professional expenses, bad debt provisions and other overhead charges. General and administrative expenses increased 124 percent to $8.4 million, or 35.4 percent of net revenues, in the three months ended September 30, 1999 from $3.7 million, or 15.3 percent of net revenues in the comparable 1998 quarter and increased 49.3 percent to $14.2 million, or 19 percent of net revenues, for the nine months ended September 30, 1999 from $9.5 million, or 9 percent of net revenues for the comparable 1998 period. The Company recorded bad debt provisions of $6.0 and $6.9 million during the three and nine months ended September 30, 1999, respectively, in response to the deteriorating financial condition of certain customers, which placed serious doubt on their ability and intent to pay. Excluding the provision for bad debt expense, the Company's general and administrative expense decreased 36.5 and 27.4 percent for the three and nine months ended September 30, 1999, respectively. This decrease is primarily due to the reorganization of the Company's European operations and efforts to reduce North American overhead. 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 percent to $5.4 million, or 22.9 percent of net revenues, in the three month period ended September 30, 1999 from $6.6 million, or 27 percent of net revenues, in the comparable 1998 quarter and decreased 13.2 percent to $16.1 million, or 21.6 percent of net revenues, for the nine months ended September 30, 1999 from $18.6 million, or 17.5 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. 16 Other Operating Expense. Other operating expenses are primarily non- recurring or unusual expenses associated with the operations of the Company. Other operating expenses of $3.3 million and $4.9 million for the three and nine months ended September 30, 1999, respectively, include restructuring and severance charges of $616,000 and $1.6 million for the three and nine months ended September 30, 1999, respectively, incurred primarily in connection with the new distribution arrangements in Europe whereby Virgin replaced the third party distribution arrangements and the Company recorded provisions for the costs of reductions in work force and facilities move, including asset valuation, severance expenses, and estimated facility lease termination charges. In addition, in the three month period ended September 30, 1999 the Company recorded a $2.7 million provision to cover certain minimum operating charges payable to Virgin. Other Expense Other expense for the three and nine month periods ended September 30, 1999 primarily included interest expense on the Company's line of credit. Other expense increased to $0.9 million in the three months ended September 30, 1999 from $0.8 million in the comparable 1998 quarter and decreased to $2.9 million in the nine months ended September 30, 1999 from $3.7 million in the comparable 1998 period. The slight increase for the three month period was due to higher interest expense resulting from a slightly higher balance on the Company's line of credit. The decreases for the nine month period was primarily due to decreased interest expense resulting from the repayment of the Subordinated Secured Promissory Notes with the proceeds of the IPO in June 1998. Provision (Benefit) for Income Taxes The Company recorded no tax benefit in the three months ended September 30, 1999 compared to $0.5 million in the three months ended September 30, 1998 and recorded a tax provision of $1.4 million in the nine months ended September 30, 1999 compared to no provision in the nine months ended September 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 September 30, 1999 the Company's principal sources of liquidity included cash and short-term investments of approximately $0.9 million and the Company's line of credit bearing interest at the London Interbank Offered Rate plus 4.87 percent (10.27 percent as of September 30, 1999), expiring January 1, 2000. Under the terms of the line of credit, the Company has maximum availability for borrowings and letters of credit up to $37.5 million through November 29, 1999, $30.0 million through December 30, 1999 and $25.0 million thereafter, based in part upon qualifying receivables and inventory. Within the overall credit limit, the line of credit also provides that the Company may borrow up to $14.0 million in excess of its borrowing base through November 4, 1999, $7.0 million through November 29, 1999, and up to $5.0 million in excess of its borrowing base thereafter. Under the line of credit the Company is required to maintain a cash collateral deposit of $1.5 million as of September 30, 1999 and place an additional $1 million with the lender on November 5, 1999. As amended, the Company is additionally subject to certain borrowing limitations beginning August 16, 1999 which limit the Company's actual borrowings to $35.0 million with various month end limitations, generally decreasing to $25.0 million at December 31, 1999 and is required to maintain the $5.0 million personal guarantee by the Company's Chairman and Chief Executive Officer in place throughout the term. The Company is currently in compliance with the terms of the Loan Agreement. As of September 30, 1999, the Company's balance on the line of credit was $27.0 million with no stand by letters of credit outstanding. The amount available for borrowing under the line of credit was $0.5 million as of September 30, 1999. Based upon certain assumptions, including without limitation, the Company's ability to achieve anticipated operating results, and the completion of 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. 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, the acquisition or lease of equipment and other assets used in the product development process and fund the Company's operating losses. The Company's operating activities used cash of $15.4 million and $19.3 million during the nine months ended 17 September 30, 1999 and 1998, respectively. The cash used by operating activities in the nine months ended September 30, 1999 was primarily attributable to the net loss incurred and a decrease in accrued liabilities as well as increases in inventories and prepaid licenses and royalties and was partially offset by a decrease in trade receivables and an increase in accounts payable. Cash provided by financing activities of $16.8 million in the nine months ended September 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 $20.4 million in the nine months ended September 30, 1998 resulted primarily from the proceeds from the Company's initial public offering and borrowings on the line of credit offset in part by repayments on the promissory notes and warrants. Cash used in investing activities of $1.0 and $1.5 million during the nine months ended September 30, 1999 and 1998, respectively, 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 nine months of 1999, including a reduction of personnel, a decrease in management compensation and the delay, cancellation or scaling back of certain product development and marketing programs, among other actions. In addition, the Company entered into two Stock Purchase agreements with Titus Interactive SA. The first Stock Purchase Agreement was consummated in March 1999, and the second Stock Purchase Agreement was consummated in November 1999. There can be no assurance that the Company's operating expenses or current obligations will not materially exceed cash flows available from the Company's operations in fiscal 1999 and beyond. 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. In addition, such measures may adversely affect the Company's operation results in future periods. 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 potential 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 anticipated operating results and the completion of 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 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 18 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 has assessed 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. 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 has completed its assessment of its products for Year 2000 compliance. The failure of any of the Company's products to achieve Year 2000 compliance would result in increased warranty costs, customer satisfaction issues, potential lawsuits and other material costs and liabilities. In addition, if the computer systems on which the consumers use the Company's products are not Year 2000 compliant, such non-compliance could adversely affect the consumers' ability to use such products. The Company has substantially completed the implementation of its Year 2000 plan. 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 does not currently have any contingency plans in place to address the failure of timely conversion of its and/or third-party systems in respect of the Year 2000 issue. The Company's failure to address any unforeseen Year 2000 issues could negatively impact its results of operations. 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 19 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 We used net cash in operations of $15.4 million in the nine months ended September 30, 1999 and $19.3 million in the nine months ended September 30, 1998. We cannot assure you that we will ever generate positive cash flow from operations. Our ability to fund our capital requirements out of our available cash, line of credit and cash generated from our operations depends on a number of factors. Some of these factors include the progress of our product development programs, the rate of growth of our business, and our products' commercial success. We may have to seek additional funds through debt or equity financings, product licensing or distribution transactions or other sources of financing in order to provide ourselves with enough working capital. If we issue additional equity securities, our existing stockholders could suffer a large amount of dilution in their ownership. In the event we have to raise additional working capital from other sources, we cannot assure you that we will be able to raise additional working capital on acceptable terms, if at all. In the event we cannot raise additional working capital, we would have to take certain actions to reduce our costs, including selling or consolidating certain operations, delaying, canceling or scaling back product development and marketing programs and other actions. These measures could materially and adversely affect our ability to publish successful titles, and these measures may not be enough to generate operating profits. We might have to get the approval of other parties, including our financial lender, for some of these measures, and we cannot assure you that we would be able to obtain those approvals. Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality Our operating results have fluctuated a great deal in the past and will probably continue to fluctuate significantly in the future, both on a quarterly and an annual basis. Many factors may cause or contribute to these fluctuations, and many of these factors are beyond our control. Some of these factors include the following: . delays in shipping our products . demand for our products . demand for our competitors' products . the size and rate of growth of the market for interactive entertainment software . changes in computing platforms . the number of new products and product enhancements released by us and our competitors . changes in our product mix . the number of our products which are returned . the timing of orders placed by our distributors and dealers . delays in shipping our products . the timing of our development and marketing expenditures . price competition . the level of our international and OEM, royalty and licensing net revenues. Many factors make it difficult to accurately predict the quarter in which we will ship our products. Some of these factors include: . the uncertainties associated with the interactive entertainment software development process . long manufacturing lead times for Nintendo-compatible products . possible production delays 20 . the approval process for products compatible with the Sony Computer Entertainment, Nintendo and Sega video game consoles . approvals required from other licensors. Because of the limited number of products we introduce in any particular quarter, a delay in the introduction of a product may materially and adversely affect our operating results for that quarter, and may not be recaptured in later quarters. A significant portion of our operating expenses is relatively fixed, and planned expenditures are based largely on sales forecasts. If net revenues do not meet our expectations in any given quarter, operating results may be materially adversely affected. The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occur ring during the year-end holiday buying season, followed by demand during the first calendar quarter. As a result, our net revenues, gross profits and operating income have historically been highest during the fourth and the following first calendar quarters, and have declined from those levels in the following second and third calendar quarters. Our failure or inability to introduce products on a timely basis to meet these seasonal increases in demand may have a material adverse effect on our business, operating results and financial condition. We may over time become increasingly affected by the industry's seasonal patterns. Although we seek to reduce the effect of such seasonal patterns on our business by distributing our product release dates more evenly throughout the year, we cannot assure you that these efforts will be successful. We cannot assure you that we will be profitable in any particular period given the uncertainties associated with software development, manufacturing, distribution and the impact of the industry's seasonal patterns on our net revenues. As a result of the foregoing factors it is likely that our operating results in one or more future periods will fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our Common Stock would likely be materially adversely affected. Significant Recent Losses We have experienced significant net losses in recent periods, including losses of $32.2 million and $28.2 million for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively. These losses resulted largely from delays in the completion of certain products, a higher than expected level of product returns and markdowns on products released during the year, and the cost of restructuring our international distribution arrangements. These losses also resulted from lower than expected worldwide sales of certain releases, as well as from operating expense levels that were high relative to our revenue level. We may experience similar problems in current or future periods and we may not be able to generate sufficient net revenues or adequate working capital, or bring our costs into line with revenues, so as to attain or sustain profitability in the future. Dependence on New Product Introductions; Risk of Product Delays and Product Defects Our products typically have short life cycles, and we depend on the timely introduction of successful new products to generate net revenues, to fund operations and to replace declining net revenues from older products. These new products include enhancements of or sequels to our existing products and conversions of previously released products to additional platforms. If in the future, for any reason, net revenues from new products fail to replace declining net revenues from existing products, our business, operating results and financial condition could be materially adversely affected. The timing and success of new interactive entertainment software product releases remains unpredictable due to the complexity of product development, including the uncertainty associated with new technology. The development cycle of new products is difficult to predict but typically ranges from 12 to 24 months with another six to 12 months for adapting a product to a different technology platform. In the past, we have frequently experienced significant delays in the introduction of new products, including certain products currently under development. Because net revenues associated with the initial shipments of a new product generally constitute a high percentage of the total net revenues associated with a product, any delay in the introduction of, or the presence of a defect in, one or more new products expected in a period could have a material adverse effect on the ultimate success of these products and on our business, operating results and financial condition. The cost of developing and marketing new interactive entertainment software has increased in recent years due to such factors as the increasing complexity and content of interactive entertainment software, the increasing sophistication of hardware technology and consumer tastes and the increasing costs of obtaining licenses for intellectual properties. We expect this trend to continue. We cannot assure you that our new products will be introduced on schedule, if at 21 all, or that, if introduced, these products will achieve significant market acceptance or generate significant net revenues for us. In addition, software products as complex as the ones we offer may contain undetected errors when first introduced or when new versions are released. We cannot assure you that, despite testing prior to release, errors will not be found in new products or releases after shipment, resulting in loss of or delay in market acceptance. This loss or delay could have a material adverse effect on our business, operating results and financial condition. Uncertainty of Market Acceptance; Dependence on Hit Titles Consumer preferences for interactive entertainment software are always changing and are extremely difficult to predict. Historically, few interactive entertainment software products have achieved continued market acceptance. Instead, a limited number of releases have become "hits" and have accounted for a substantial portion of revenues in our industry. Further, publishers with a history of producing hit titles have enjoyed a significant marketing advantage because of their heightened brand recognition and consumer loyalty. We expect the importance of introducing hit titles to increase in the future. We cannot assure you that our new products will achieve significant market acceptance, or that we will be able to sustain this acceptance for a significant length of time if we achieve it. We also cannot assure you that product life cycles will be sufficient to permit us to recover product development and other associated costs. Most of our products have a relatively short life cycle and sell for a limited period of time after their initial release, usually less than one year. We believe that these trends will continue in our industry and that our future revenue will continue to be dependent on the successful production of hit titles on a continuous basis. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of these products to achieve market acceptance could have a material adverse effect on our business, operating results and financial condition. Further, if we do not achieve market acceptance, we could be forced to accept substantial product returns or grant significant markdown allowances to maintain our relationship with retailers and our access to distribution channels. For example, we had higher than expected product returns and markdowns in the three months ended June 30, 1999 and we cannot assure you that higher than expected product returns and markdowns will not continue in the future. In the event that we are forced to accept significant product returns or grant significant markdown allowances, our business, operating results and financial condition could be materially adversely affected. Potential for Control by Titus Titus currently owns approximately 42.9 percent of our outstanding Common Stock. In connection with Titus' investment, Herve Caen, Titus' president and chief executive officer, serves as our president and as a member of our Board of Directors, and Herve's brother Eric Caen, also serves on our Board. As a consequence, Titus holds significant voting power with respect to the election of our Board of Directors and the approval of significant corporate actions, and Herve and Eric Caen have substantial authority over our operations. As the Company's capital structure currently stands, in the event that the Stockholder Agreement pursuant to which our Board is currently nominated terminates, Titus would be able to elect 3 of 7 members of the Board. In the event Titus acquires enough additional shares of our common stock so that it owns more than 50% of our total outstanding common stock, Titus would be able to elect a majority of our Board, set our dividend policy and otherwise exercise substantial control over our management. This control could prevent or hinder a sale of the Company on terms which are not acceptable to Titus. Continued Listing on the NASDAQ National Market Our Common Stock is currently quoted on the NASDAQ National Market under the symbol "IPLY." For continued inclusion on the NASDAQ National Market, a company must meet certain tests, including a minimum bid price of $1.00 and net tangible assets of at least $4.0 million. In the event that we fail to satisfy the listing standards on a continuous basis, our Common Stock may be removed from listing on the NASDAQ National Market. If our Common Stock were delisted from the NASDAQ National Market, trading of our Common Stock, if any, would be conducted on the NASDAQ Small Cap Market, in the over-the-counter market on the so-called "pink sheets" or, if available, the NASD's "Electronic Bulletin Board." In any of those cases, investors could find it more difficult to dispose of, or to obtain accurate quotations as to the value of, our Common Stock. The trading price per share of our Common Stock would most likely be reduced as a result. 22 Distribution Agreement In February 1999, in connection with our acquisition of a 43.9 percent membership interest in Virgin's parent entity, we signed an International Distribution Agreement with Virgin. Under this Agreement, we appointed Virgin as our exclusive distributor for substantially all of our products in Europe, the CIS, Africa and the Middle East, subject to certain reserved rights, for a seven period. Because of the exclusive nature of the Agreement, if Virgin were to experience problems with its business, or were to fail to perform as expected, our business, operating results and financial condition could be materially and adversely affected. In connection with this Agreement, Virgin hired our European sales and marketing personnel, and we pay Virgin a distribution fee for marketing and distributing our products, certain minimum operating charges, as well as a fixed overhead fee, subject to reduction in certain events. In the quarter ended September 30, 1999, we recorded a $2.7 million provision to cover certain minimum operating charges in 1999. In addition, due to the fixed nature of the overhead fee, we will not be able to reduce our European sales and marketing expenses in response to downturns in our sales in Europe, which could have a material adverse effect on our business, operating results and financial condition. Dependence on Third Party Software Developers We rely on third party interactive entertainment software developers for the development of a significant number of our interactive entertainment software products. As there continues to be high demand for reputable and competent third party developers, we cannot assure you that third party software developers that have developed products for us in the past will continue to be available to develop products for us in the future. Many third party software developers have limited financial resources, which could expose us to the risk that such developers may go out of business prior to completing a project. In addition, due to our limited control over third party software developers, we cannot assure you that such developers will complete products for us on a timely basis or within acceptable quality standards, if at all. Due to increased competition for skilled third party software developers, we have had to agree to make advance payments on royalties and guaranteed minimum royalty payments to intellectual property licensors and game developers, and we expect to continue to enter into these kinds of arrangements. If the products subject to these arrangements do not have sufficient sales volumes to recover these royalty advances and guaranteed payments, we would have to write-off unrecovered portions of these payments, which could have a material adverse effect on our business, operating results and financial condition. Further, we cannot assure you that third party developers will not demand renegotiation of their arrangements with the Company. Rapidly Changing Technology; Platform Risks The interactive entertainment software industry is subject to rapid technological change. New technologies, including operating systems such as Microsoft Windows 98, technologies that support multi-player games, new media formats such as on-line delivery and digital video disks ("DVDs") and as yet unreleased video game platforms could render our current products or products in development obsolete or unmarketable. We must continually anticipate and assess the emergence of, and market acceptance of, new interactive entertainment software platforms well in advance of the time the platform is introduced to consumers. Because product development cycles are difficult to predict, we must make substantial product development and other investments in a particular platform well in advance of introduction of the platform. If the platforms for which we develop software are not released on a timely basis or do not attain significant market penetration, our business, operating results and financial condition could be materially adversely affected. Alternatively, if we fail to develop products for a platform that does achieve significant market penetration, then our business, operating results and financial condition could also be materially adversely affected. The emergence of new interactive entertainment software platforms and technologies and the increased popularity of new products and technologies may materially and adversely affect the demand for products based on older technologies. The broad range of competing and incompatible emerging technologies may lead consumers to postpone buying decisions with respect to products until one or more emerging technologies gain widespread acceptance. This postponement could have a material adverse effect on our business, operating results and financial condition. We are currently actively developing products for the Microsoft Windows 2000, Sony PlayStation, Nintendo 64 and Sega Dreamcast platforms. Our success will depend in part on our ability to anticipate technological changes and to adapt our products to emerging game platforms. We cannot assure you that we will be 23 able to anticipate future technological changes, to obtain licenses to develop products for those platforms on favorable terms or to create software for those new platforms. Any failure to do so could have a material adverse effect on our business, operating results and financial condition. Industry Competition; Competition for Shelf Space The interactive entertainment software industry is intensely competitive and new interactive entertainment software programs and software platforms are regularly introduced. Our competitors vary in size from small companies to very large corporations with significantly greater financial, marketing and product development resources than ours do. Due to these greater resources, certain of our competitors can undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, sports and character properties and pay more to third party software developers than we can. We believe that the main competitive factors in the interactive entertainment software industry include: . product features . brand name recognition . access to distribution channels . quality . ease of use, price, marketing support and quality of customer service. We compete primarily with other publishers of PC and video game console interactive entertainment software. Significant competitors include: . Electronic Arts . GT Interactive Software Corp. . Mattel . Activision, Inc. . Microsoft Corporation . LucasArts Entertainment Company . Midway Games Inc. . Acclaim Entertainment Inc. . Havas Interactive . Hasbro Inc. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo and Sega compete directly with us in the development of software titles for their respective platforms. Large diversified entertainment companies, such as The Walt Disney Company, many of which own substantial libraries of available content and have substantially greater financial resources, may decide to compete directly with us or to enter into exclusive relationships with our competitors. We also 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 using the Internet and on-line services. Retailers of our products typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer software producers, and in particular interactive entertainment software products, for high quality retail shelf space and promotional support from retailers. To the extent that the number of consumer software products and computer platforms increases, competition for shelf space may intensify and may require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of any retailer's sale volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support. A prolonged failure in this regard may have a material adverse effect on our business, operating results and financial condition. 24 Dependence on Distribution Channels; Risk of Customer Business Failures; Product Returns We currently sell our products directly through our own sales force to mass merchants, warehouse club stores, large computer and software specialty chains through catalogs in the U.S. and Canada, as well as to certain distributors. Outside North America, we generally sell products to third party distributors. Our sales are made primarily on a purchase order basis, without long-term agreements. The loss of, or significant reduction in sales to, any of our principal retail customers or distributors could materially adversely affect our business, operating results and financial condition. The distribution channels through which publishers sell consumer software products evolve continuously through a variety of means, including consolidation, financial difficulties of certain distributors and retailers, and the emergence of new distributors and new retailers such as warehouse chains, mass merchants and computer superstores. As more consumers own PCs, the distribution channels for interactive entertainment software will likely continue to change. Mass merchants have become the most important distribution channels for retail sales of interactive entertainment software. A number of these mass merchants, including Wal-Mart, have entered into exclusive buying arrangements with other software developers or distributors, which arrangements prevent us from selling certain of our products directly to that mass merchant. If the number of mass merchants entering into exclusive buying arrangements with our competitors were to increase, our ability to sell to such merchants would be restricted to selling through the exclusive distributor. Because sales to distributors typically have a lower gross profit than sales to retailers, this would have the effect of lowering our gross profit. This trend could increase the material adverse impact on our business, operating results and financial condition. In addition, emerging methods of distribution, such as the Internet and on-line services, may become more important in the future, and it will be important for us to maintain access to these channels of distribution. We cannot assure you that we will maintain access or that our access will allow us to maintain our historical sales volume levels. Distributors and retailers in the computer industry have from time to time experienced significant fluctuations in their businesses, and a number have failed. The insolvency or business failure of any significant distributor or retailer of our products could have a material adverse effect on our business, operating results and financial condition. We typically make sales to distributors and retailers on unsecured credit, with terms that vary depending upon the customer and the nature of the product. Although we have insolvency risk insurance to protect against our customers' bankruptcy, insolvency or liquidation, this insurance contains a significant deductible and a co-payment obligation, and the policy does not cover all instances of non-payment. In addition, while we maintain a reserve for uncollectible receivables, the actual reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could have a material adverse effect on our business, operating results and financial condition. We are exposed to the risk of product returns and markdown allowances with respect to our distributors and retailers. We allow distributors and retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms, and also offer a 90-day limited warranty to our end users that our products will be free from manufacturing defects. In addition, we provide markdown allowances to our customers to manage our customers' inventory levels in the distribution channel. Although we maintain a reserve for returns and markdown allowances, and although our agreements with certain of our customers place certain limits on product returns and markdown allowances, we could be forced to accept substantial product returns and provide markdown allowances to maintain our relationships with retailers and our access to distribution channels. Product return and markdown allowances that exceed our reserves could have a material adverse effect on our business, operating results and financial condition. In this regard, our results of operations for the three months ended September 30, 1999 were adversely affected by a higher than expected level of product returns and markdown allowances, which reduced our net revenues. We may continue to experience such high levels of product returns and markdown allowances in future periods, which could have a material adverse effect on our business, operating results and financial condition. Shares Eligible for Future Sale In March 1999, we entered into a Stock Purchase Agreement with Titus Interactive S.A. ("Titus"), pursuant to which Titus purchased 4,545,455 shares of our Common Stock from us for an aggregate purchase price of $10 million. In connection with this agreement, Titus was granted an option to purchase all of the shares of our common stock currently held by Universal Studios, Inc. 25 We have agreed to register all of the unregistered shares held by Titus for resale under the Securities Act of 1933, as amended. This registration could temporarily impair our ability to raise capital through the sale of our equity securities, and, if such registered shares are sold, could have a material adverse effect on the market price of our Common Stock. In May 1999, we signed a letter of intent with Titus pursuant to which Titus loaned us $5 million, and we negotiated certain additional agreements with Titus. In November 1999, we completed certain of the transactions contemplated by the letter of intent, including the sale of 6.25 million shares of our Common Stock at a purchase price of $4 per share to Titus for a total purchase price of $25 million (including the conversion of the $5 million loan). As part of the agreements, Titus' chairman and chief executive officer became our president, and our chairman and chief executive officer exchanged 2 million personal shares of our Common Stock for an agreed upon number of Titus shares. As a result of these transactions, Titus currently owns approximately 42.9% of our outstanding common stock. If Titus exercises its option to purchase Universal's holdings of our Common Stock, Titus will own approximately 58 percent of our outstanding Common Stock, resulting in a change of control in favor of Titus. Dependence upon Third Party Licenses Many of our products, such as our Star Trek, Major League Baseball and the Caesar's Palace titles, are based on original ideas or intellectual properties licensed from other parties. We cannot assure you that we will be able to obtain new licenses, or renew existing licenses, on commercially reasonable terms, if at all. For example, Paramount has granted the Star Trek license to another party upon the expiration of our rights. If we are unable to obtain licenses for the underlying content that we believe offers the greatest consumer appeal, we would either have to seek alternative, potentially less appealing licenses, or release the products without the desired underlying content, either of which could have a material adverse effect on our business, operating results and financial condition. We cannot assure you that acquired properties will enhance the market acceptance of our products based on those properties. We also cannot assure you that our new product offerings will generate net revenues in excess of their costs of development and marketing or minimum royalty obligations, or that net revenues from new product sales will meet or exceed net revenues from existing product sales. Dependence on Licenses from and Manufacturing by Hardware Companies We are required to obtain a license to develop and distribute software for each of the video game console platforms for which we develop products, including a separate license for each of North America, Japan and Europe. We have obtained licenses to develop software for the PlayStation in North America and are currently negotiating agreements covering additional territories. In addition, we have obtained a license to develop software for the Nintendo 64 in North America, Europe and Australia and are currently negotiating with Nintendo for licenses covering additional territories. We are currently negotiating agreements to develop software for the Sega Dreamcast platform, which was introduced in the United States and Europe in Fall 1999. We cannot assure you that we will be able to obtain licenses from hardware companies on acceptable terms or that any existing or future licenses will be renewed by the licensors. In addition, Sony Computer Entertainment, Nintendo and Sega each have the right to approve the technical functionality and content of the Company's products for such platform prior to distribution. Due to the nature of the approval process, we must make significant product development expenditures on a particular product prior to the time it seeks those approvals. Our inability to obtain these approvals could have a material adverse effect on our business, operating results and financial condition. Hardware companies such as Sony Computer Entertainment, Nintendo and Sega may impose upon their licensees a restrictive selection and product approval process, such that those licensees are restricted in the number of titles that will be approved for distribution on the particular platform. While we have prepared our future product release plans taking this competitive approval process into consideration, if we incorrectly predict its impact and fail to obtain approvals for all products in our development plans, this failure could have a material adverse effect on our business, operating results and financial condition. We depend upon Sony Computer Entertainment, Nintendo and Sega for the manufacture of our products that are compatible with their respective video game consoles. As a result, Sony, Nintendo and Sega have the ability to raise prices for supplying these products at any time and effectively control the timing of our release of new titles for those platforms. PlayStation and Dreamcast products consist of CD-ROMs and are typically delivered by Sony Computer Entertainment and Sega, respectively, within a relatively short lead time. Manufacturers of Nintendo and other video game cartridges typically deliver software to us within 45 to 60 days after receipt of a purchase order. If we experience unanticipated delays in the delivery of 26 video game console products from Sony Computer Entertainment or Nintendo, or if actual retailer and consumer demand for our interactive entertainment software differs from our forecast, our business, operating results and financial condition could be materially adversely affected. Dependence on Key Personnel Our success depends to a significant extent on the continued service of our key product design, development, sales, marketing and management personnel, and in particular on the leadership, strategic vision and industry reputation of our founder and Chief Executive Officer, Brian Fargo. Our future success will also depend upon our ability to continue to attract, motivate and retain highly qualified employees and contractors, particularly key software design and development personnel. Competition for highly skilled employees is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. Specifically, we may experience increased costs in order to attract and retain skilled employees. Our failure to retain the services of Brian Fargo or other key personnel or to attract and retain additional qualified employees could have a material adverse effect on our business, operating results and financial condition. Risks Associated with International Operations; Currency Fluctuations Our international net revenues accounted for 25.5 percent and 28.7 percent of our total net revenues for the three months ended September 30, 1999 and 1998, and 30 percent and 26.7 percent of our total net revenues for the nine months ended September 30, 1999 and 1998, respectively. In February 1999, we entered into an International Distribution Agreement with Virgin for the exclusive distribution of its products in selected international territories. We intend to continue to expand our direct and indirect sales, marketing and product localization activities worldwide. This expansion will require a great deal of management time and attention and financial resources in order to develop improved international sales and support channels. We cannot assure you, however, that we will be able to maintain or increase international market demand for our products. Our international sales and operations are subject to a number of inherent risks, including the following: . the impact of recessions in foreign economies . the time and financial costs associated with translating and localizing products for international markets . longer accounts receivable collection periods . greater difficulty in accounts receivable collection . unexpected changes in regulatory requirements . difficulties and costs of staffing and managing foreign operations . political and economic instability. For example, we have recently experienced difficulties selling products in certain Asian countries as a result of economic instability in such countries, and we cannot assure you that these difficulties will not continue or occur in other countries in the future. These factors may have a material adverse effect on our future international net revenues and, consequently, on our business, operating results and financial condition. We currently do not engage in currency hedging activities. Although exposure to currency fluctuations to date has been insignificant, we cannot assure you that fluctuations in currency exchange rates in the future will not have a material adverse effect on net revenues from international sales and licensing, and thus on our business, operating results and financial condition. Risks Associated with New European Currency On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and a new European currency, the euro. These eleven countries adopted the euro as the common legal currency on that date. We make a significant portion of our sales to these countries. Consequently, we anticipate that the euro conversion will, among other things, create technical challenges to adapt information technology and other systems to accommodate euro-denominated transactions. The euro conversion may also limit our ability to charge different prices for our products in different markets. While we anticipate that the conversion will not cause major disruption of our business, the conversion may have a material effect on our business or financial condition. 27 Protection of Proprietary Rights We regard our software as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various copyrights and trademarks, and hold the rights to one patent application related to the software engine for our Messiah title. While we provide "shrinkwrap" license agreements or limitations on use with our software, it is uncertain to what extent these agreements and limitations are enforceable. We are aware that some unauthorized copying occurs within the computer software industry, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, our operating results could be materially adversely affected. While we do not generally copy protect our products, we do not provide source code to third parties unless they have signed nondisclosure agreements with respect to that source code. We rely on existing copyright laws to prevent unauthorized distribution of our software. Existing copyright laws afford only limited protection. Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in certain international markets. Further, the laws of certain countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the U.S. or are weakly enforced. Legal protection of our rights may be ineffective in such countries, and as we leverage our software products using emerging technologies, such as the Internet and on-line services, our ability to protect our intellectual property rights and to avoid infringing others' intellectual property rights becomes more difficult. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies. As the number of interactive entertainment software products in the industry increases and the features and content of these products continues to overlap, software developers may increasingly become subject to infringement claims. Although we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, we cannot assure you that claims of infringement will not be made. Any such claims, with or without merit, can be time consuming and expensive to defend. From time to time, we receive communications from third parties regarding such claims. We cannot assure you that existing or future infringement claims against us will not result in costly litigation or require us to license the intellectual property rights of third parties, either of which could have a material adverse effect on our business, operating results and financial condition. Entertainment Software Rating System; Governmental Restrictions Legislation is periodically introduced at the state and federal levels in the U.S. and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. Such a system would include procedures for interactive entertainment software publishers to identify particular products within defined rating categories and communicate these ratings to consumers through appropriate package labeling and through advertising and marketing presentations. In addition, many foreign countries have laws that permit governmental entities to censor the content of certain works, including interactive entertainment software. In certain instances, we may be required to modify our products to comply with the requirements of these governmental entities, which could delay the release of those products in those countries. Those delays could have a material adverse effect on our business, operating results and financial condition. While we currently voluntarily submit our products to industry-created review boards and publish their ratings on our game packaging, we believe that mandatory government-run interactive entertainment software products rating systems eventually will be adopted in many countries which represent significant markets or potential markets for our products. Due to the uncertainties inherent in the implementation of such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business. In addition to such regulations, certain retailers have in the past declined to stock certain of our products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date these actions have not had a material adverse effect on our business, operating results or financial condition, we cannot assure you that similar actions by our distributors or retailers in the future would not have a material adverse effect on our business, operating results and financial condition. 28 Control by Directors and Officers Including Titus, our directors and executive officers beneficially own an aggregate of about 58 percent of our outstanding Common Stock. These stockholders, if acting together with Universal Studios, Inc. ("Universal"), would be able to control substantially all matters requiring our stockholders' approval, including the election of directors (subject to our stockholders' cumulative voting rights) and the approval of mergers or other business combination transactions. This concentration of ownership could discourage or prevent a change in control. 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, these systems and applications could fail or create incorrect results unless corrected so that they can correctly process data related to the Year 2000 and beyond. We rely on our systems and applications in operating and monitoring all major aspects of our business, including financial systems (such as general ledger, accounts payable and payroll modules), customer services, networks and telecommunications systems equipment and end products. We also rely, 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. We could be affected through disruptions in the operation of the enterprises with which we interact or from general widespread problems or an economic crisis resulting from noncompliant Year 2000 systems. Despite our efforts to address the Year 2000 impact on our internal systems and business operations, we cannot assure you that such impact will not result in a material disruption of our business or have a material adverse effect on our business, operating results and financial condition. We have assessed the potential impact of the Year 2000 issue on our business and the related foreseeable expenses that may be incurred in attempting to remedy that impact. Although we have identified certain systems and applications that are not Year 2000 compliant and have upgraded substantially all of our software to address the Year 2000 issue, we cannot assure you that these 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 of our operations. With respect to customers, developers, suppliers and other enterprises upon which we rely, even where these enterprises give assurances that they are Year 2000 compliant, there remains a risk that failure of their systems and applications could have a material adverse effect on us. Development of Internet/On-Line Services or Products We seek to establish an on-line presence by creating and supporting sites on the Internet. Our future plans envision conducting and supporting on-line product offerings through these sites or others. Our ability to successfully establish an on-line presence and to offer online products will depend on several factors outside our control. These factors include the emergence of a robust online industry and infrastructure and the development and implementation of technological advancements to the Internet to increase bandwidth and speed to the point that will allow us 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, we cannot assure you that a viable commercial marketplace on the Internet will emerge from the developing industry infrastructure or that the appropriate complementary products for providing and carrying Internet traffic and commerce will be developed. We also cannot assure you that we will be able to create or develop a sustainable or profitable on-line presence or that we will be able to generate any significant revenue from on-line product offerings in the near future, it at all. If the Internet does not become a viable commercial marketplace, or if this development occurs but is insufficient to meet our needs or if such development is delayed beyond the point where we plan to have established an on-line service, our business, operating results and financial condition could be materially adversely affected. Risks Associated with Acquisitions As part of our strategy to enhance distribution and product development capabilities, we intend to review potential acquisitions of complementary businesses, products and technologies. Some of these acquisitions could be 29 material in size and scope. While we will continue to search for appropriate acquisition opportunities, we cannot assure you that the Company will be successful in identifying suitable acquisition opportunities. If we do identify any potential acquisition opportunity, we cannot assure you that we will consummate the acquisition, and if the acquisition does occur, we cannot assure you that it will be successful in enhancing our business or will increase our earnings. As the interactive entertainment software industry continues to consolidate, we may face increased competition for acquisition opportunities, which may inhibit our ability to complete suitable transactions or increase their cost. Future acquisitions could also divert substantial management time, result in short term reductions in earnings or special transactions or other charges and may be difficult to integrate with existing operations or assets. We may, in the future, issue additional shares of Common Stock in connection with one or more acquisitions, which may dilute our stockholders. Additionally, with respect to future acquisitions, our stockholders may not have an opportunity to review the financial statements of the entity being acquired or to vote on these acquisitions. Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions Our Certificate of Incorporation and Bylaws, as well as Delaware corporate law, contain certain provisions that could delay, defer or prevent a change in control and could materially adversely affect the prevailing market price of our common stock. Certain of these provisions impose various procedural and other requirements that could make it more difficult for stockholders to take certain corporate actions. Stock Price Volatility The trading price of our Common Stock has been and could continue to be subject to wide fluctuations in response certain factors, including: . quarter to quarter variations in results of operations . our announcements of new products . our competitors' announcements of new products . our product development or release schedule . general conditions in the computer, software, entertainment, media or electronics industries . changes in earnings estimates or buy/sell recommendations by analysts . investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers . other events or factors In addition, the public stock markets experience extreme price and trading volume volatility, particularly in high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons often unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our Common Stock. 30 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any derivative financial instruments as of September 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 known 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 August 20, 1999, the Company issued 883,684 shares of the Company's Common Stock without additional consideration to Titus Interactive S.A., a French corporation under the terms of the Stock Purchase Agreement signed in March 1999. Item 4. Submission of Matters to a Vote of Security Holders On August 24, 1999, the Company held its annual stockholders' meeting. There were 22,727,008 shares of common stock outstanding entitled to vote and a total of 17,251,750 shares (75.9%) were represented at the meeting in person or by proxy. The following summarizes vote results of proposals submitted to the Company's stockholders. 1. Proposal to elect directors, each for a term extending until the next annual meeting of Stockholders or until their successors are duly elected and qualified. For Withheld ---------- -------- Brian Fargo 17,085,414 166,336 Richard S.F. Lehrberg 16,862,208 389,542 Charles S. Paul 17,160,856 90,894 Herve Caen 17,158,939 92,811 Eric Caen 17,158,019 93,731 2. Proposal for the issuance of up to 5,000,000 shares of the Company's common stock to Titus Interactive S.A., pursuant to the terms of the Stock Purchase Agreement dated March 18, 1999. For Against Withheld Broker Non-vote --- ------- -------- --------------- 13,151,790 130,331 93,315 3,876,314 3. Proposal for the sale and issuance of 6,250,000 shares of the Company's common stock to Titus Interactive S.A., in exchange for aggregate consideration of $25,000,000 pursuant to the terms of the Stock Purchase Agreement dated July 20, 1999. For Against Withheld Broker Non-vote --- ------- -------- --------------- 13,282,477 74,424 18,535 3,876,314 4. Proposal to ratify the appointment of Arthur Andersen LLP as independent auditors for the fiscal year ending December 31, 1999. For Against Withheld Broker Non-vote --- ------- -------- --------------- 17,229,070 8,945 13,735 -- 32 Item 5. Other Information On November 2, 1999, the Company closed a strategic equity investment by Titus Interactive SA ("Titus") resulting in the issuance of 6.25 million shares of the Company's Common Stock in exchange for total consideration of $25 million, including the conversion of the $5 million note payable that was issued when the letter of intent was entered into in May 1999, $15 million in cash and a note receivable for $5 million due on November 30, 1999, bearing interest at the rate of six percent. The Company used the Cash proceeds to pay down its line of credit. The pro forma information on the accompanying balance sheet (see Exhibit 99.1) reflects the transaction as if it had been consummated on September 30, 1999. Effective November 2, 1999, the Company's Board of Directors elected James Barnett as a director, and appointed James Barnett and Herve Caen to the Board of Directors' Audit Committee. The Company's Board of Directors now consists of Mr. Barnett, Brian Fargo, Herve Caen, Richard S.F. Lehrberg, and Charles S. Paul. The Audit Committee of the Board of Directors consists of James Barnett, Herve Caen and Charles S. Paul. 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 Stockholder Agreement dated November 2, 1999 by and among the Company, Titus Interactive SA, Brain Fargo and Herve Caen. 10.2 Employment Agreement dated November 2, 1999 between the Company and Brian Fargo. 10.3 Employment Agreement dated November 2, 1999 between the Company and Herve Caen. 27.1 Financial data schedule for the three-month period ended September 30, 1999. 99.1 Pro forma Balance Sheet (b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K, dated July 20, 1999, reporting that it had entered into a stock purchase with Titus Interactive SA ("Titus") and Brian Fargo ("Fargo") regarding the purchase of 6.25 million shares of the Company's Common Stock by Titus at a purchase price of $4 per share. The Company also reported that, in connection with the Stock Purchase Agreement, Fargo and Titus have entered into an Exchange Agreement pursuant to which Fargo will exchange 2,000,000 of his share of the Company's Common Stock for 96,666 shares of Titus Common Stock, and that the Company, Titus and Fargo had negotiated a voting agreement which provides for certain restrictions on the voting of the shares of Company Common Stock held by Titus and Fargo, and gives Titus and Fargo certain rights and imposes certain obligations with respect to transfers or sales of such shares. The Company also reported that it had negotiated employment agreements with Fargo and with Titus President Herve Caen, which provide that, following the closing of the Stock Sale and the transaction contemplated thereby, Messrs. Fargo and Caen would serve as the Company's Chief Executive Officer and President, respectively. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERPLAY ENTERTAINMENT CORP. Date: November 12, 1999 By: /s/ BRIAN FARGO ----------------------- Brian Fargo, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: November 12, 1999 By: /s/ MANUEL MARRERO --------------------- Manuel Marrero, Chief Financial Officer (Principal Financial and Accounting Officer) 34 EX-10.1 2 STOCKHOLDER AGREEMENT DATED 11/2/1999 EXHIBIT 10.1 EXECUTION COPY STOCKHOLDER AGREEMENT --------------------- This STOCKHOLDER AGREEMENT (this "Agreement") is entered into as of --------- November 2, 1999, by and among INTERPLAY ENTERTAINMENT CORP., a Delaware corporation (the "Company"), TITUS INTERACTIVE SA, a French corporation ------- ("Titus"), and BRIAN FARGO, an individual ("Fargo"; and together with Titus, the ----- ----- "Stockholders"). ------------ RECITALS -------- WHEREAS, the Company, Titus and Fargo have entered into a Stock Purchase Agreement dated as of July 20, 1999 (the "Stock Purchase Agreement"), ------------------------ whereby the Company will issue and sell and Titus will purchase 6,250,000 shares of common stock of the Company for an aggregate purchase price of $25,000,000; WHEREAS, the parties hereto further deem it in their best interests and in the best interest of the Company to provide for the consistent and uniform management of the Company, to regulate certain of their rights in connection with their interests in the Company and to restrict the sale, assignment, transfer, encumbrance or other disposition of the Company Stock (as hereinafter defined), and desire to enter into this Agreement in order to effectuate those purposes and the transactions contemplated by the Stock Purchase Agreement; and WHEREAS, as a condition to the closing of the transactions contemplated by the Stock Purchase Agreement, the Company, Titus and Fargo have agreed to 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: ARTICLE I DEFINITIONS ----------- 1.1 Defined Terms. As used herein, the terms below shall have the ------------- following meanings: "Accredited Investor" shall have the meaning set forth for such term ------------------- in Regulation D. "Act" shall mean the Securities Act of 1933, as amended, and the rules --- and regulations promulgated thereunder. "Affiliate" shall mean with respect to a Person, any other Person that --------- directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities or by agreement or otherwise. "Board of Directors" shall mean the Board of Directors of the Company. ------------------ "Caen Employment Agreement" shall mean the Employment Agreement dated ------------------------- as of the Closing Date between the Company and Herve Caen. "Change of Control" shall mean a transaction or series of transactions ----------------- after the consummation of which Titus holds less than fifty percent (50%) of the Fully-Diluted Common Stock of the Company (or the voting securities of the surviving Person or parent of such surviving Person). "Closing" shall mean the closing of the transactions contemplated by ------- the Stock Purchase Agreement. "Closing Date" shall mean the date on which the Closing occurs. ------------ "Common Stock" shall mean, at any time, the common stock, no par ------------ value, of the Company. "Company Stock" shall mean, at any time, the then outstanding shares ------------- of capital stock of the Company, including without limitation the shares of Common Stock. "Effective Date" shall mean the date on which the Closing occurs. -------------- "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations promulgated thereunder. "Fargo Employment Agreement" shall mean the Employment Agreement dated -------------------------- as of the Closing Date between the Company and Fargo. "Fully-Diluted Common Stock" shall mean, at any time, the then -------------------------- outstanding Common Stock of the Company plus (without duplication) all shares of Common Stock issuable, whether at such time or upon the passage of time or the occurrence of future events, upon the exercise, conversion or exchange of all then-outstanding securities of the Company which can be converted or exchanged into Common Stock. "Holder of Securities" shall have the meaning set forth in Section -------------------- 3.1. "Indebtedness" shall mean any obligation of the Company or any ------------ Subsidiary which under generally accepted accounting principles is required to be shown on the balance sheet of the Company or such Subsidiary as a liability. Any obligation secured by a Lien on, or payable out of the proceeds of production from, property of the Company or any Subsidiary shall be deemed to be Indebtedness even though such obligation is not assumed by the Company or Subsidiary. "Initial Stock Purchase Agreement" shall mean the Stock Purchase -------------------------------- Agreement dated as of March 18, 1999, by and among the Company, Titus and Fargo, as amended through the date hereof. "issuance" shall have the meaning set forth in Section 4.1. -------- "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. "New Securities" shall have the meaning set forth in Section 4.1. -------------- "Notice" shall have the meaning set forth in Section 7.4. ------ "Notice of Issuance" shall have the meaning set forth in Section 4.1. ------------------ "Permitted Transfer" shall mean any Transfer pursuant to Section 3.3. ------------------ "Person" shall mean an individual, partnership, limited liability ------ company, association, joint venture, corporation, trust or unincorporated organization, a government or any department, agency or political subdivision thereof or other entity. "Purchase Agreements" shall mean the Stock Purchase Agreement and the ------------------- Initial Stock Purchase Agreement. "Regulation D" shall mean Regulation D as promulgated under the Act, ------------ as amended from time to time. "SEC" shall mean the Securities and Exchange Commission. --- "Stock Purchase Agreement" shall have the meaning set forth in the ------------------------ Recitals. "Subsidiary" shall mean any Person a majority of the voting equity of ---------- which is, at the time as of which any determination is being made, owned by the Company directly or through one or more Subsidiaries. "Tag-Along Formula" shall have the meaning set forth in Section ----------------- 5.1(b). "Tag-Along Notice" shall have the meaning set forth in Section 5.1(d). ---------------- "Tag-Along Shares" shall have the meaning set forth in Section 5.1(b). ---------------- "Tag-Along Stockholder" shall have the meaning set forth in Section --------------------- 5.1(b). "Transfer" shall have the meaning set forth in Section 3.1. -------- 3 "Transferee" shall have the meaning set forth in Section 3.2. ---------- "Transferee Terms" shall have the meaning set forth in Section 5.1(c). ---------------- "Transfer Shares" shall have the meaning set forth in Section 5.1(a). --------------- ARTICLE II BOARD OF DIRECTORS; VOTING OF CAPITAL STOCK; CERTAIN OTHER MATTERS --------------------- 2.1 Board of Directors. Immediately following the Closing, until the ------------------ earliest of (a) the termination of Fargo's employment with the Company for "Cause" or Fargo's resignation other than for "Good Reason" (each, as defined in the Fargo Employment Agreement), or (b) the termination of Caen's employment with the Company other than for "Cause" or Caen's resignation for "Good Reason" (each, as defined in the Caen Employment Agreement), or (c) the date that Fargo ceases to hold at least Two Million (2,000,000) shares of Common Stock, the parties hereto shall take all action within their respective powers as stockholders, including the voting of Common Stock, required to cause the Board of Directors to consist of seven (7) directors, who shall be designated as follows: (a) Titus shall designate, in the aggregate, two (2) directors of the Company; (b) Fargo shall designate, in the aggregate, two (2) directors of the Company; (c) the Stockholders shall mutually designate, in the aggregate, three (3) directors of the Company. Each Stockholder hereby agrees to vote all shares of voting Common Stock owned beneficially or of record by it to effect the election of all directors so designated. 2.2 Removal. If a director designated and elected pursuant to Section ------- 2.1 hereof: (a) has been designated by Titus and Titus requests that such director be removed (with or without cause) by written notice thereof to the Company and Fargo; (b) has been designated by Fargo and Fargo requests that such director be removed (with or without cause) by written notice thereof to the Company and Titus, then such director shall be removed, with or without cause, upon the affirmative vote of holders of a majority of the outstanding shares of voting Common Stock, and each Stockholder hereby agrees to vote all shares of voting Common Stock owned beneficially or of record by such Stockholder to effect such removal upon such request. 2.3 Vacancies. In the event that a vacancy is created on the Board of --------- Directors at any time by the death, disability, retirement, resignation, removal (with or without cause) or otherwise, or if for any other reason there shall exist or occur any vacancy on the Board of 4 Directors, each Stockholder hereby agrees to cause the directors designated by such Stockholder to vote for that individual designated to fill such vacancy and serve as a director by whichever of the Stockholders that had designated (pursuant to Section 2.1 hereof) the director whose death, disability, retirement, resignation or removal (with or without cause) resulted in such vacancy on the Board of Directors (in the manner set forth in Section 2.1) or, if the vacancy is filled by Stockholders of the Company, to vote and cause to be voted all shares of voting Common Stock owned beneficially or of record by such Stockholder to elect the individual designated to fill such vacancy; provided, -------- however, that such other individual so designated may not previously have been - ------- a director of the Company who was removed for cause from its Board of Directors. 2.4 Actions of the Board of Directors. The parties shall take all actions --------------------------------- necessary to provide that: (a) The By-Laws of the Company shall provide that the presence of a majority of the directors shall be necessary to constitute a quorum at any meeting of the Board of Directors. (b) The By-Laws of the Company shall also provide that any action of the Board of Directors requires the vote of a majority of the directors present at a meeting with respect to which a quorum is in attendance. (c) The By-Laws of the Company shall further provide that the Board of Directors may only take actions with respect to matters described as proposed subjects for action in the written notice of meeting circulated as provided in the By-Laws; provided, however, that the By-Laws shall also provide that this -------- ------- limitation can be waived by the majority vote of the directors in attendance at a meeting of the Board of Directors with respect to which (i) a quorum, (ii) at least one designee of Titus and (iii) at least one designee of Fargo are present. 2.5 Covenant to Vote. Each Stockholder hereby agrees to take all ---------------- actions necessary to call, or to cause the Company and the appropriate officers and directors of the Company to call, a special or annual meeting of Stockholders of the Company and to vote and cause to be voted all shares of voting stock of the Company owned beneficially or of record by such Stockholder at any such annual or special meeting in favor of, or take all action by written consent in lieu of any such meeting, necessary to ensure that the number of directors constituting the entire Board of Directors is consistent with, and that the election as members of the Board of Directors of those individuals so designated is in accordance with, and to otherwise effect the intent of, this Article II. In addition, each Stockholder agrees to vote and cause to be voted the shares of such voting stock owned beneficially or of record by such Stockholder upon any other matter arising under this Agreement submitted to a vote of the stockholders of the Company in a manner so as to implement the terms of this Agreement. 2.6 Interested Party Transactions. At any time after the date hereof, in ----------------------------- the event that any matter is submitted to a vote of the Company's stockholders in which either Stockholder or any Affiliate of either Stockholder has any material interest, other than an interest as a stockholder of the Company that is proportional to the interests of all other stockholders of the Company, then, unless a majority of the members of the Board of Directors not nominated by or otherwise affiliated with such Stockholder have approved such matter, such Stockholder shall abstain from voting his shares of Common Stock with respect to such matter. 5 2.7 Other Activities of Titus; No Fiduciary Duties. It is understood ---------------------------------------------- and accepted that Titus and its Affiliates have or may hereafter have interests in other business ventures that are or may be competitive with the activities of the Company and that, to the fullest extent permitted by law, nothing in this Agreement shall limit the current or future business activities of Titus or any of its Affiliates, whether or not such activities are competitive with those of the Company or otherwise. Nothing in this Agreement shall limit in any manner the ability of Titus to exercise its rights under this Agreement or (except as expressly set forth herein) as a stockholder of the Company and this Agreement shall not create, or be deemed or interpreted to create, any fiduciary or similar duty of Titus owing to Stockholder or the Company. The foregoing provision shall not be deemed to limit any obligations of any party under applicable law. ARTICLE III TRANSFERS OF COMPANY STOCK AND WARRANTS --------------------------------------- 3.1 General. No party to this Agreement who is a holder of any Company ------- Stock (a "Holder of Securities") 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")) Company Stock except in accordance with this Agreement. The -------- Company shall not, and shall not permit any transfer agent or registrar for the Company Stock to, Transfer upon the books of the Company any shares of Company Stock by any Holder of Securities to any Transferee (as hereinafter defined), in any manner, except in accordance with this Agreement, and any purported Transfer not in compliance with this Agreement shall be void. 3.2 Legends; Shares Subject to this Agreement. In the event a Holder of ----------------------------------------- Securities shall Transfer any shares of Company Stock (including any such Company Stock acquired after the date hereof) pursuant to Section 3.3(a), 3.3(b) or 3.3(c) to any Person (all Persons acquiring shares of Company Stock pursuant to any such Section, regardless of the method of Transfer, shall be referred to herein collectively as "Transferees" and individually as a "Transferee") in ----------- ---------- accordance with this Agreement, such securities shall nonetheless bear legends as provided in the Stock Purchase Agreement and in Section 7.1 hereof. 3.3 Permitted Transfers by the Holders of Securities. No Holder of ------------------------------------------------ Securities shall, directly or indirectly, Transfer any shares of Company Stock except under the following conditions: (a) any Holder of Securities may make a Transfer of Company Stock to any Affiliate of such Holder of Securities; provided that such Transferee agrees -------- to be bound by this Agreement in the same manner as such Holder of Securities; (b) pursuant to an exercise of the tag-along rights set forth in Article V hereof; (c) any Stockholder may make a Transfer after such Stockholder has complied with (i) the provisions of Section 3.4 and (ii) (if applicable) the terms of Article V hereof with respect to the provisions of tag-along rights; and 6 (d) any Stockholder may make one or more Transfers of an aggregate of One Million (1,000,000) shares of Company Stock held by such Stockholder during any consecutive twelve-month period, so long as such Transfers do not exceed, in the aggregate, Eighty-Three Thousand Three Hundred Thirty-Three (83,333) shares in any calendar month (each, a "De Minimis Transfer"); provided, that such ------------------- -------- Stockholder has complied with the provisions of Section 3.4 hereof. Any Transferee of a De Minimis Transfer shall not be bound by the terms of this Agreement. In the event of any Transfer pursuant to Section 3.3(a), 3.3(b) or 3.3(c), the Company shall cause the Transferee to execute a copy of this Agreement and the Transferee shall be subject to this Agreement and may further Transfer shares of Company Stock to Transferees only in compliance with this Agreement as if such Transferee were the original transferor. A Transferee of a Holder of Securities pursuant to Section 3.3(a), 3.3(b) or 3.3(c) shall be treated for purposes of this Agreement as if such Transferee is the same category of Person (Fargo or Titus) as is the transferor on the date of this Agreement and shall in all respects be bound by the actions taken pursuant to Section 7.10. 3.4 Right of First Refusal. ---------------------- (a) A Stockholder that desires in good faith to Transfer any Company Stock (other than a Transfer covered by Section 3.3(a) or 3.3(b) (the "Offeror ------- Stockholder") shall deliver a written notice of such intent (the "Refusal - ----------- ------- Notice") to the Company, if the transferor is Titus, and to Titus, if the transferor is Fargo. The party receiving the Refusal Notice shall be referred to herein as the "Offeree." The Refusal Notice shall contain (i) a description ------- of the proposed Transfer transaction and the terms thereof including the number and type of securities proposed to be transferred (collectively, the "Refusal ------- Securities"), (ii) the name of each Person to whom or in favor of whom the - ---------- proposed Transfer is to be made (the "Refusal Transferee"), (iii) a description ------------------ of the consideration to be received by the Offeror Stockholder upon Transfer of the Refusal Securities and (iv) an offer to sell to the Offeree 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, the Offeree 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 the Offeror Stockholder and the Offeree 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 the Offeror Stockholder and the Offeree 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 the Offeror Stockholder to the Offeree (or, if later, the delivery of the Valuation), the Offeree may, by written notice delivered to the Offeror Stockholder (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 the Offeree does not deliver a Refusal Acceptance Notice to the Offeror Stockholder within such ten business day period, then the Offeror Stockholder may proceed with the Transfer of the Refusal Securities to the Refusal Transferee without any further obligations under this Section 7 3.4. 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 the Offeror Stockholder by the Offeree. Titus may freely assign all or a portion of its right of first refusal pursuant to this Section 3.4 to Herve Caen and/or Eric Caen, and the Company may freely assign all or a portion of its right of first refusal pursuant to this Section 3.4 to Fargo. (b) Notwithstanding paragraph (a) of this Section 3.4, Titus acknowledges and agrees (i) that its right of first refusal with respect to Fargo's transfer of Company Stock set forth in paragraph (a) of this Section 3.4 (the "Titus Right of First Refusal") is subordinate to the right of first refusal with respect to certain transfers of common stock of the Company by Fargo (the "Universal Right of First Refusal") granted to Universal Studios, Inc., a Delaware corporation ("Universal") pursuant to Section 2.3 of that certain Shareholders' Agreement dated as of March 30, 1994 (the "Shareholders' Agreement") by and among Interplay Productions, Inc., a California corporation, and the predecessor in interest to the Company, MCA Inc., a Delaware corporation, and the predecessor in interest to Universal and Fargo, until such time as the Universal Right of First Refusal has terminated and is of no further force or effect, and (ii) that the Titus Right of First Refusal shall consequently only apply to a Transfer of Company Stock by Fargo at such time as Fargo has satisfied the requirements of Section 2.3 of the Shareholders' Agreement with respect to the Universal Right of First Refusal and Universal elects not to exercise such right pursuant to the terms of Section 2.3 of the Shareholders' Agreement. 3.5 No Agreements. Except as set forth in Section 3.3, no Holder of ------------- Securities shall grant any irrevocable proxy or any other proxy inconsistent with this Agreement or enter into or agree to be bound by any voting trust with respect to any shares of Company Stock nor shall any Holder of Securities enter into any stockholder agreements or arrangements of any kind with any Person with respect to any shares of Company Stock (whether or not such agreements and arrangements are with the other parties to this Agreement or Holders of Securities who are not parties to this Agreement), including agreements or arrangements with respect to the acquisition, disposition or voting (if applicable) of any shares of Company Stock, except this Agreement, nor shall any Holder of Securities act, for any reason, as a member of a group or in concert with any other persons in connection with the acquisition, disposition (other than a disposition pursuant to the terms of this Agreement) or voting (if applicable) of any shares of Company Stock, except to the extent consistent with this Agreement. 3.6 Standstill. Each Stockholder agrees that for a period from and ---------- after the date hereof until the earlier of (a) the termination of the provisions of Section 2.1 hereof in accordance with its terms or (b) the termination of this Agreement in accordance with its terms, neither it nor any of its Subsidiaries will, without the prior written consent of the other party: (i) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or direct or indirect rights to acquire any voting securities of the Company or Titus, as the case may be, or any Subsidiary thereof, or any material amount of the assets of the Company or Titus, as the case may be, or any Subsidiary or division thereof outside the ordinary course of business; (ii) make, or in any way participate in, directly or indirectly, any "solicitation" of "proxies" (as such terms are used in the rules of the Securities and Exchange Commission) to vote, or seek to advise or influence any Person with respect to the voting of, any voting securities of the Company or Titus, as the case may be, for the purpose of changing or influencing the control of the Company or Titus, as the case may be; or (iii) make any public announcement with respect to, or submit a proposal for, or offer of (with or without conditions) any merger, business combination, recapitalization, restructuring, liquidation or other extraordinary transaction involving the Company or Titus, as the case may be, or its securities or assets; provided, -------- however, the foregoing restrictions shall not (x) preclude Titus from (A) - ------- acquiring the securities 8 contemplated by Article IV of this Agreement and the shares of Common Stock of the Stock Purchase Agreement and the transactions contemplated hereby and thereby, including without limitation the transactions contemplated by the Initial Purchase Agreement and the Universal Agreement (each as defined in the Stock Purchase Agreement), (B) filing a Schedule 13D in connection with the transactions contemplated by the Stock Purchase Agreement or the Exchange Agreement among Titus, Fargo, Herve Caen and Eric Caen of even date herewith (the "Exchange Agreement"), (C) voting its shares of Common Stock within its ------------------ discretion on any matter submitted for a vote or consent of the Company's stockholders, (D) taking any other action contemplated by the Stock Purchase Agreement, or (E) purchasing shares of Company Stock pursuant to open-market transactions on a national securities exchange or in the over-the-counter market; provided, further, that the restrictions on Titus in this Section 3.6 -------- ------- shall lapse automatically to the extent any Person other than Titus or an Affiliate of Titus takes any action with respect to the matters described in clauses (ii) and (iii) above, or (y) preclude Fargo from (A) acquiring the shares of Titus common stock pursuant to the Exchange Agreement or (B) filing a Schedule 13D in connection with the transactions contemplated by the Stock Purchase Agreement or the Exchange Agreement. ARTICLE IV PREEMPTION ---------- 4.1 Certain Purchase Rights. If the Company proposes to issue, sell, or ----------------------- grant (collectively, an "issuance") any equity securities or any securities -------- convertible into or exchangeable for equity securities (collectively, the "New --- Securities"), then the Company shall, no later than ten (10) business days prior - ---------- to the consummation of such issuance, give written notice to each of the Stockholders of such issuance (the "Notice of Issuance"). Such Notice of ------------------ Issuance shall describe such issuance, and contain an offer to each such Stockholder to sell to such Stockholder, at the same price and for the same consideration to be paid by the proposed purchasers, such Stockholder's pro rata portion (which shall be a percentage, determined immediately prior to such issuance, equal to the percentage of the Fully-Diluted Common Stock held by such Stockholder). Subject to the foregoing, if Common Stock is being issued with other securities as a unit, each Stockholder who desires to accept such offer must purchase such unit in order for such acceptance to be valid. If any such Stockholder fails to accept such offer by written notice within ten (10) business days after its receipt of the Notice of Issuance, the Company shall proceed with such issuance, free of any right on the part of such Stockholder under this Section 4.1 in respect thereof. Any issuance of New Securities more than forty-five (45) days after the expiration of such ten business day period, or to a different issuee, or on terms and conditions less favorable to the Company in any material respect than those described in the notice to the Stockholders, shall be subject to a new notice to and new purchase rights by the Stockholders under this Section 4.1. This Section 4.1 shall not apply to the issuance of any Excluded Securities. For purposes of this Agreement, "Excluded -------- Securities" shall mean: (a) issuances of securities which have been approved - ---------- prior to the date hereof (including without limitation issuances under the Company's employee stock purchase plans described under Section 5.3 of the Stock Purchase Agreement), provided that such issuances are permitted under the Purchase Agreements; (b) issuances of securities which have been approved by the Board of Directors in accordance with this Agreement and by the stockholders; (c) New Securities distributed or set aside to all holders of Common Stock on a per share equivalent basis; (d) issuances pursuant to the Purchase Agreements; and (e) issuances of New Securities upon the 9 grant, exercise or conversion of (i) options or warrants to purchase shares of Company Stock or (ii) securities which are convertible into shares of Company Stock ((i) and (ii) shall be referred to collectively as "Convertible ----------- Securities"), in each case where such Convertible Securities have been granted - ---------- or issued prior to the date hereof or have been granted or issued in accordance with this Agreement. 4.2 Purchase Rights Upon Issuance of Excluded Securities. In the event ---------------------------------------------------- that the Company proposes to issue, sell or grant any Excluded Securities pursuant to subsections (a), (b) and (e) of Section 4.1 hereof, the Company shall send a notice of such issuance to Titus in accordance with the provisions concerning a Notice of Issuance as set forth in Section 4.1 hereof (an "Excluded -------- Securities Notice"). Following receipt of an Excluded Securities Notice, Titus - ----------------- shall have the option to purchase such number of Excluded Securities as are necessary for Titus to maintain its percentage ownership of the Company's Fully Diluted Common Stock at the same level as immediately prior to such issuance, at the price and on the other terms and conditions upon which such Excluded Securities are being issued, sold or granted (the "Excluded Securities Option"). -------------------------- The Excluded Securities Option shall be exercisable by Titus no later than thirty (30) calendar days after Titus' receipt of an Excluded Securities Notice; provided, however, that in the case of Excluded Securities which are Convertible - -------- ------- Securities, Titus must exercise the Excluded Securities Option no later than thirty (30) calendar days after Titus' receipt of notice from the Company of the exercise or conversion, as applicable, of such Excluded Securities. ARTICLE V TAG-ALONG RIGHTS ---------------- 5.1 Tag-Along Procedures. -------------------- (a) Tag-Along Right. Subject to Section 5.3, no Stockholder shall --------------- Transfer for value to any Person or group of Persons shares of Company Stock (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 the other Stockholder (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 Company Stock determined in accordance with this Section 5.1. (b) Obligation of Transferee to Purchase. The Transferee of the ------------------------------------ Selling Stockholder shall purchase from the Tag-Along Stockholder the number of shares of Company 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 Company Stock derived by multiplying (i) the aggregate number of shares of Company Stock covered by the Offer by (ii) a fraction the numerator of which is the number of shares of Company 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 Company 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 set forth: (i) the name of the 10 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 5.1, 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 Company 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 5.1 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 Article V shall be in proportion to and limited to the consideration received by such Stockholder for the Company Stock transferred by such Stockholder, as a percentage of all consideration received by all Stockholders for all Company Stock transferred pursuant to this Article V. 5.2 Closing. At the closing of the purchase of the shares of Company ------- Stock subject to this Article V, the holders of Company Stock who are making the Transfer shall deliver certificates evidencing such shares, duly endorsed, or accompanied by written instruments of transfer in form reasonably satisfactory to the Transferee, free and clear of any adverse claim against payment of the purchase price therefor. 5.3 Exceptions. The foregoing notwithstanding, this Article V shall not ---------- apply to any sale of shares of Company Stock pursuant to Section 3.3(a). ARTICLE VI RESTRICTIONS AND LIMITATIONS ---------------------------- 6.1 Restrictions and Limitations Upon Major Decisions. Notwithstanding ------------------------------------------------- the provisions of the Certificate of Incorporation and By-Laws of the Company, the Company shall not, and shall not permit any Subsidiary to, engage in any of the following actions or transactions, or enter into a contract or arrangement to engage in any of such actions or transactions, without the written consent or approval of Fargo and Titus: 11 (a) Authorize or issue, or obligate itself to issue, any other equity security, including any indebtedness convertible into or exchangeable for shares of equity securities of the Company or issued with (i) shares of Company Stock or (ii) warrants or other rights to purchase Company Stock or any other equity security, without compliance with the provisions of Section 4.1 hereof; (b) Effect any recapitalization, or any dissolution, liquidation, or winding up of the Company; (c) Permit any Subsidiary to issue or sell, or obligate itself to issue or sell, except to the Company or any wholly-owned Subsidiary, any stock of such Subsidiary, without first offering Titus the right to purchase such stock on the same terms and conditions as those offered to the Company by any third party; (d) Amend its Certificate of Incorporation or amend or repeal its By- Laws; (e) Increase the number of members of the Board of Directors; (f) Take any action that would constitute a bankruptcy or insolvency event for the Company or any Subsidiary of the Company; or (g) Guarantee or otherwise become contingently obligated for the payment of Indebtedness of any Person (other than a wholly-owned Subsidiary), where such obligation is not related to the Company's business. ARTICLE VII MISCELLANEOUS ------------- 7.1 Endorsement of Stock Certificates. Each certificate evidencing --------------------------------- shares of the Company Stock held by any Stockholder will bear a legend reading substantially as follows until the transfer restrictions with respect to such shares contained in this Agreement are no longer effective: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN TRANSFER AND OTHER RESTRICTIONS SET FORTH IN A STOCKHOLDER AGREEMENT DATED AS OF NOVEMBER 2, 1999, A COPY OF EACH OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT COMPLYING WITH THE TERMS AND CONDITIONS OF SUCH AGREEMENTS." 7.2 Term. Except as expressly provided in Section 2.1, this Agreement ---- shall commence on the date hereof and continue in full force and effect until the earlier to occur of (a) a Change of Control or (b) the termination of Herve Caen as President of the Company without Cause (as defined in the Employment Agreement dated as of the date hereof by and between 12 Caen and the Company), except for the provisions of Section 3.4, which shall survive for a period of three (3) years following such termination. 7.3 Injunctive Relief. It is hereby agreed and acknowledged that it ----------------- will be impossible to measure in money the damages that would be suffered if the parties fail to comply with any of the obligations herein imposed on them and that in the event of any such failure, an aggrieved Person will be irreparably damaged and will not have an adequate remedy at law. Any such Person 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. 7.4 Notices. Any and all notices, designations, consents, offers, ------- acceptances, or other communications provided for herein (each a "Notice") shall ------ be given in writing personally by hand-delivery, overnight courier, telegram, or telecopy which shall be addressed, or sent, to the respective addresses or telecopy numbers as follows (or such other address or telecopy number as the Company or any Stockholder may specify for itself to the Company and all other Stockholders by Notice): 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 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 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 - 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 All Notices shall be deemed effective, delivered and received (a) at the time delivered by hand, if personally delivered; (b) if given by telecopy, when such telecopy is transmitted to the telecopy number specified above and receipt thereof is confirmed; (c) if given by overnight courier, on the business day immediately following the day on which such Notice is delivered to a reputable overnight courier service; or (d) if given by telegram, when such Notice is delivered at the address specified above. Whenever pursuant to this Agreement any Notice is required to be given by any Holder of Securities to any other Holder(s) of Securities, such Holder of Securities may request from the Company a list of addresses of all Holders of Securities of the Company, which list shall be promptly furnished to such Holder of Securities. 7.5 Assignment. Except for transfers of Company Stock as set forth ---------- herein (including Permitted Transfers), neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party hereto without the prior written consent of the other parties hereto. Subject to the foregoing (and to the provisions of Section 7.10 hereof), this Agreement shall inure to the benefit of and be binding upon the parties, and permitted successors and assigns of each of the parties; and any transferees, successors and assigns of any Stockholder shall be bound by the terms and conditions of this Agreement, and any other agreement or commitment of such Stockholder to the other parties hereto. If any Stockholder shall acquire any additional shares of 14 Company Stock in any manner, whether by operation of law or otherwise, such Company Stock shall be held subject to all of the terms of this Agreement. 7.6 Governing Law; Jurisdiction and Venue; Attorneys' Fees. This ------------------------------------------------------ Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the principles of conflicts of laws. The parties hereto 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 Titus and Fargo 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. 7.7 Headings. The headings in this Agreement are inserted herein for -------- convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.8 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. 7.9 Entire Agreement. This Agreement, together with the other writings ---------------- referred to herein and therein, contain the entire agreement among the parties hereto with respect to the subject matter contained herein, and supersede all prior agreements, negotiations and understandings, whether written or oral, with respect 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. 7.10 Amendments and Waiver. Any provision of this Agreement may be --------------------- amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Stockholders. Any amendment or waiver effected in accordance with this Section 7.10 shall be binding upon each party hereto. In the event of the amendment or modification of this Agreement in accordance with its terms, the Stockholders shall cause the Board of Directors to meet within thirty (30) calendar days following such amendment or modification or as soon thereafter as is practicable for the purpose of adopting any amendment to the Certificate of Incorporation and By-Laws of the Company that may be required as a result of such amendment or modification to this Agreement, and, if required, proposing such amendments to the Stockholders entitled to vote thereon. No action taken pursuant to this Agreement shall be deemed to constitute a waiver by the party taking such action of compliance with any covenants or agreements contained herein. No failure to exercise and no delay in exercising any right, power or privilege of a party hereunder shall operate as a waiver or a consent to the modification of the terms hereof unless given by that party in writing. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach. 7.11 Inspection. So long as this Agreement shall be in effect, this ---------- Agreement shall be made available for inspection by any Stockholder at the principal offices of the Company. 15 7.12 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts each of which when so executed shall be deemed to be an original and all of which together shall constitute one and the same Agreement. 7.13 Not for Benefit of Third Parties. This Agreement is not made for -------------------------------- the benefit of any third party. 7.14 Recapitalizations, Exchanges, Etc., Affecting Company Stock. The ----------------------------------------------------------- provisions of this Agreement shall apply, to the full extent set forth herein with respect to shares of the Company Stock outstanding as of the date hereof, and to any and all shares of capital stock of the Company or any successor or assigns of the Company (whether by merger, consolidation, sale of assets, or otherwise) which may be issued in respect of, or in substitution for, such shares, and shall be approximately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. 7.15 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. 16 [SIGNATURE PAGE TO VOTING AGREEMENT] IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have caused this Agreement to be duly executed on their respective behalf by their respective officers or partners thereunto duly authorized, as of the day and year first above written. INTERPLAY ENTERTAINMENT CORP., a Delaware corporation By: /s/ Brian Fargo ------------------------------- Name: Brian Fargo Its: Chief Executive Officer TITUS INTERACTIVE SA, a French corporation By: /s/ Herve Caen ------------------------------- Name: Herve Caen Its: Chairman & CEO /s/ Brian Fargo ---------------------------------- Brian Fargo 17 EX-10.2 3 EMPLOYMENT AGREEMENT BRIAN FARGO EXHIBIT 10.2 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is hereby entered into by and between Interplay Entertainment Corp., a Delaware corporation (the "Company"), and Brian Fargo (the "Executive"), as of the 2nd day of November, 1999. WHEREAS, the Company and the Executive propose to into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Titus Interactive SA, a French corporation ("Titus"), pursuant to which Titus will purchase 6,250,000 shares of Common Stock of the Company from the Company ("the Stock Purchase"); WHEREAS, the Company and the Executive desire to set forth in a written agreement the terms and conditions under which the Executive will continue to be employed by the Company after the Stock Purchase; and WHEREAS, it is a condition to the obligation of Titus to consummate the Stock Purchase that the Executive and the Company enter into this Agreement; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall employ the Executive, and the ----------------- Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for the period commencing on the date of consummation of the Stock Purchase and ending on the third anniversary of such date (the "Employment Period"). 2. Position and Duties. ------------------- (a) Executive shall be employed by the Company as Chief Executive Officer and shall serve as Chairperson of the Board of Directors of the Company, (i) in the case of Executive's position as Chief Executive Officer, with the duties and responsibilities set forth on Exhibit A attached hereto and made a --------- part hereof, and (ii) in the case of Executive's position as Chairperson of the Board, with duties and responsibilities substantially similar to those assigned to the Executive prior to the Stock Purchase. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote full attention and time to the business and affairs of the Company, using the Executive's reasonable best efforts to carry out faithfully and efficiently the responsibilities assigned to the Executive under this Agreement. It shall not be considered a violation of the foregoing for the Executive to (i) serve on corporate boards with the approval of the Company, (ii) serve on civic or charitable boards or committees, (iii) deliver lectures or fulfill speaking engagements and (iv) manage personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities under this Agreement or otherwise violate the terms of this Agreement. (c) The Executive's services shall be performed primarily at the Company's corporate headquarters, located at 16815 Von Karman Ave., Irvine, California 92606. Travel in connection with the business of the Company may be reasonably requested from time to time by the Board of Directors of the Company (the "Board"). 3. Compensation. ------------ (a) Base Salary. During the Employment Period, the Executive shall ----------- receive an annual salary (the "Annual Base Salary") in an amount not less than Two Hundred Fifty Thousand Dollars ($250,000), payable in accordance with the Company's payroll for executives, as in effect from time to time. During the Employment Period, the Annual Base Salary shall be reviewed for possible increase at least annually. Any increase in the Annual Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Annual Base Salary shall not be reduced after any such increase, unless the annual base salaries of all executives of the Company are proportionately reduced, and in any event shall not be reduced below Two Hundred Fifty Thousand Dollars ($250,000). After any such increase (or decrease), the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased (or decreased). (b) Annual Bonus. In addition to the Annual Base Salary, the ------------ Executive shall be eligible to receive annual bonuses (each, an "Annual Bonus") at the discretion of the Board of Directors of the Company. (c) Stock Options. Concurrently with the entering into of this ------------- Agreement by the Company and the Executive, the Executive shall be granted options to purchase 500,000 shares of the Common Stock of the Company pursuant to the Company's Amended and Restated 1997 Stock Option Plan at an exercise price equal to the closing price per share of the Company's Common Stock on the date hereof as reported by Nasdaq (the "Options"). The Options shall vest over a four-year period commencing with the date of grant of such options, with 25% of the aggregate number of such options vesting each year during such four year period. Such options shall immediately vest in full in the event that (i) a Change in Control (as defined in that certain Stockholder Agreement of even date herewith among the Company, the Executive and Titus Interactive SA) occurs, or (ii) Executive is terminated without Cause (as such term is defined in Section 4.b.(i) below) or terminates his employment with Good Reason (as such term is defined in Section 4.c.(i) below). (d) Other Benefits. The Executive shall be entitled to participate in -------------- any of the Company's medical, dental or other benefit plans approved by the Company's Board of Directors. (e) Expenses. During the Employment Period, the Executive shall be -------- entitled to receive prompt reimbursement for all normal and customary expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. (f) Fringe Benefits. During the Employment Period, the Executive --------------- shall be entitled to the fringe benefits provided by the Company from time to time to its other executive officers. (g) Vacation. During the Employment Period, the Executive shall be -------- entitled to vacations in accordance with Company policies then in effect and, in no event, shall such vacation time be less than four (4) weeks per calendar year. 4. Termination of Employment. ------------------------- 2 (a) Death or Disability. The Executive's employment shall terminate ------------------- automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has failed, over a period of 180 consecutive days, to perform the Executive's duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity constitutes a disability for purposes of the Company's long-term disability insurance coverage. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective upon receipt of such notice by the Executive (the "Disability Effective Date"). (b) By the Company. -------------- (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud, embezzlement or willful misconduct materially injurious to the Company on the part of the Executive, (B) the Executive's (x) persistent and continued failure to substantially perform his material duties (as set forth on Exhibit A hereto) --------- for the Company when and to the extent reasonably requested by the Board to do so and (y) failure to correct same within thirty (30) days after notice from the Board requesting the Executive to do so (it being understood that this standard is intended to assure the Company of the reasonable attendance, efforts and good faith business attention of the Executive to his duties on behalf of the Company, but may not be relied upon by the Company to terminate the Executive based upon the operating performance of the Company), or (C) the Executive's breach of any material provision of this Agreement, which breach has not been cured in all material respects within thirty (30) days after notice of such breach is given to the Executive by the Company. No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board or the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The Executive shall not be deemed to have been terminated for Cause unless such notice is accompanied by a copy of a resolution duly adopted by the Board to such effect. (ii) A termination of the Executive's employment by the Company without Cause shall be effected by giving the Executive written notice of the termination. (c) Good Reason. ----------- (i) The Executive may terminate employment for Good Reason. "Good Reason" means: (A) removal of duties set forth on Exhibit A hereto from the --------- the Executive, or the assignment to the Executive of duties inconsistent in any material respect with the duties set forth on Exhibit A hereto, other than --------- actions that are not taken in bad faith and are remedied by the Company within five (5) business days after receipt of notice thereof from the Executive; 3 (B) any failure by the Company to comply with any provision of Section 3 of this Agreement other than failures that are not taken in bad faith and are remedied by the Company within five (5) business days after receipt of notice thereof from the Executive; (C) any requirement by the Company that the Executive's services be rendered primarily at a location or locations not complying with the provisions of paragraph (c) of Section 2 of this Agreement; or (D) any failure by the Company to require any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform if no such succession had taken place. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the tenth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given); provided, that such termination of employment shall not become effective if the Company shall have previously corrected to the reasonable satisfaction of the Executive the circumstance giving rise to the Notice of Termination. (d) Date of Termination. The "Date of Termination" means the date of ------------------- the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive for Good Reason is effective, or the date on which the Company gives the Executive notice of a termination of employment without Cause, as the case may be. 5. Obligations of the Company Upon Termination. ------------------------------------------- (a) Death, Disability, Cause. If, during the Employment Period, the ------------------------ Executive's employment is terminated by the Company because of death, Disability, or for Cause or by the Executive other than for Good Reason, then except as provided in Section 8, the Executive shall not be entitled to any compensation provided for under this Agreement, other than Annual Base Salary through the effective date of any such termination or resignation, benefits under the long-term disability insurance coverage in the case of termination because of Disability, and (without limiting the provisions of Section 6 hereof) vested benefits, if any, required to be paid or provided by law. (b) Without Cause; Good Reason. If, during the Employment Period, the -------------------------- Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Executive shall not be entitled to any compensation provided for under this Agreement except as set forth in the following sentence. For the remainder of the Employment Period, the Executive shall continue to be considered an employee of the Company, and the Company (i) shall continue to pay the Executive for and with respect to the unexpired portion of the Employment Period (in the same manner as specified herein) (A) an amount equal to one hundred and fifty percent (150%) of his Annual Base Salary and (B) an amount equal to seventy-five percent (75%) of the 4 Executive's Imputed Annual Bonuses and (ii) shall continue during the unexpired portion of the Employment Period the welfare benefits set forth in Section 3 (in the same manner as specified herein); provided that (x) if any such benefits cannot be provided under the terms of the applicable plans or applicable law, the Company shall provide the Executive with substitute benefits that are comparable and equal in value to such benefits, and (y) during any period when the Executive is eligible to receive any such benefits under another employer- provided plan, the benefits provided by the Company under this paragraph may be made secondary to those provided under such other plan. As used herein, "Imputed Annual Bonuses" shall mean the "target" bonuses or similar amounts under any Company bonus plan then in effect approved by the Board that the Executive would have received had he not been terminated. 6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or ------------------------- limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor, subject to paragraph (f) of Section 10, shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. No Mitigation or Reduction. In no event shall the Executive be -------------------------- obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 8. Confidential Information; Other Covenants. ----------------------------------------- (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its business that the Executive has obtained during the Executive's employment by the Company and that is not public knowledge (other than as a result of the Executive's violation of this paragraph (a) of Section 8) ("Confidential Information"), unless disclosure of such information is required by court order. The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. (b) During the full original term of the Employment Period, except as otherwise provided in paragraph (d) of this Section 8, the Executive shall not, without the prior written consent of the Board, engage in or become associated with a Prohibited Activity. For purposes of this paragraph (b) of Section 8: (i) a "Prohibited Activity" means any business or other endeavor in the interactive software business, anywhere in the world, that is directly competitive with the business in which the Company is engaged at the date hereof, or at any time during the Employment Period; and (ii) except as provided on Exhibit B attached --------- hereto and made a part hereof, the Executive shall be considered to have become "associated with a Prohibited Activity" if he becomes directly or indirectly involved as an owner, employee, officer, director, independent contractor, agent, partner, advisor, lender, or in any other capacity with any individual, partnership, corporation or other organization that is engaged in a Prohibited Activity. Notwithstanding the foregoing: (i) the Executive may make and retain investments during the Employment Period in not more than five 5 percent (5%) of the equity of any entity engaged in a Prohibited Activity, provided that the Executive does not engage in any of the other activities listed in the preceding sentence with respect to such entity; and (ii) if the Executive's employment is terminated because of Disability, the provisions of this paragraph (b) of Section 8 shall only apply if, following notice from the Executive that his disability has ended and that he intends to seek employment in a Prohibited Activity, the Company commences payment and continues to pay from the date of such notice throughout the remainder of the Employment Period the compensation and benefits provided for hereunder in respect of such remaining term. (c) The Executive agrees that he will not, at any time during which he is an employee of the Company and for a period of two (2) years thereafter, without the prior written consent of the Company, whether directly or indirectly, solicit the employment of, whether as an employee, officer, director, agent, consultant or independent contractor, any person who was or is at any time during the previous twelve (12) months an employee, representative, officer or director of the Company or any of its affiliates. The foregoing shall not be deemed to restrict the Executive's ability to hire any such person if such person responds to a general solicitation of employment or otherwise seeks on his own initiative employment by the Executive or any of his affiliates. (d) The Executive acknowledges and agrees that the Company's remedy at law for any breach of the Executive's obligations under this Section 8 would be inadequate and agrees and consents that temporary and permanent injunctive relief may be granted in any proceeding which may be brought to enforce any provision of such Section without the necessity of proof of actual damage. With respect to any provision of this Section 8 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. 9. Successors. ---------- (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. 10. Miscellaneous. ------------- (a) The validity of this Agreement, the construction of its terms and the determination of the rights and duties of the parties hereto shall all be governed by the laws of the State of California, without reference to principles of conflicts of laws. 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. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended, modified, terminated or waived except with the prior written consent of (i) the parties hereto and (ii) so long as no Change in Control has occurred, Titus, or (in either such case) their respective successors and legal representatives. 6 Titus and its successors and assigns are intended to be and shall be intended third-party beneficiaries of the preceding sentence. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Brian Fargo Interplay Productions, Inc. 16815 Von Karman Avenue Irvine, CA 92606 If to the Company: Interplay Productions, Inc. 16815 Von Karman Avenue Irvine, CA 92606 Attention: President with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660 Attention: K.C. Schaaf, Esq. or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 10. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 4 of this Agreement) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement except to the extent any other party hereto is materially prejudiced by such failure. (f) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them, including, without limitation, that certain Employment Agreement dated March 28, 1994, as amended by amendments dated March 2, 1998 and March 18, 1999, concerning the subject matter hereof. 7 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. INTERPLAY ENTERTAINMENT CORP. By: /s/ MANUEL MARRERO --------------------------------------- Manuel Marrero, Chief Financial Officer /s/ BRIAN FARGO --------------------------------------- Brian Fargo 8 EXHIBIT A Duties of Executive ------------------- Executive shall have primary responsibility and authority in the Company with respect to the following management functions: 1. Product Development. Supervision of all internal and external product ------------------- development activities of the Company, including, without limitation, setting product development strategy and management of developer relationships. The Company's Vice President of Development will report to Executive. 2. Marketing. Supervision of all the Company's marketing functions. The --------- Company's Vice President of Marketing will report to Executive. 3. Business Development/Corporate Strategy. Setting of global corporate --------------------------------------- strategy for the Company and development of corporate relationships. The Company's Vice President of Strategic Development and Vice President of Business Development will report to the Executive. 4. Legal. Supervision of the Company's legal and contractual affairs. ----- The Company's Vice President of Legal and Business Affairs will report to the Executive. 5. Consultation With President. The Executive shall consult with the --------------------------- President of the Company in the development of all operating plans for the Company, and shall not take any action which constitutes a material deviation from any operating plan without the concurrence of the President. The Executive shall also consult with the President of the Company with respect to all material decisions relating to Interplay Films. EXHIBIT B Exceptions to Prohibited Activities ----------------------------------- Fargo may serve as a consultant to Games On-Line, Inc. in the area of online gaming, so long as Fargo's obligations under such consulting arrangement do not exceed, on average, twenty (20) hours per month. EX-10.3 4 EMPLOYMENT AGREEMENT HERVE CAEN EXHIBIT 10.3 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is hereby entered into by and between Interplay Entertainment Corp., a Delaware corporation (the "Company"), and Herve Caen (the "Executive"), as of the 2nd day of November, 1999. WHEREAS, the Company and the Executive are entering into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Titus Interactive SA, a French corporation ("Titus"), pursuant to which Titus will purchase 6,250,000 shares of Common Stock of the Company from the Company (the "Stock Purchase"); WHEREAS, the Company and the Executive desire to set forth in a written agreement the terms and conditions under which the Executive will continue to be employed by the Company after the consummation of the Stock Purchase; and WHEREAS, it is a condition to the obligation of Titus to consummate the Stock Purchase that the Executive and the Company enter into this Agreement; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall employ the Executive, and the ----------------- Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for the period commencing on the date of consummation of the Stock Purchase and ending on the third anniversary of such date (the "Employment Period"). 2. Position and Duties. ------------------- (a) Executive shall be employed by the Company as President of the Company, with the duties and responsibilities set forth on Exhibit A attached --------- hereto and made a part hereof. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote full attention and time to the business and affairs of (i) the Company, (ii) Titus and (iii) all subsidiaries and affiliates of the Company or Titus. The Executive shall use his reasonable best efforts to carry out faithfully and efficiently the responsibilities assigned to the Executive under this Agreement, and shall devote such portion of his attention and time to the Company as Executive reasonably determines necessary to carry out such responsibilities. It shall not be considered a violation of the foregoing for the Executive to (i) serve as an officer and director of Titus, and subsidiaries and affiliates of Titus, (ii) serve on other corporate boards with the approval of the Company, (iii) serve on civic or charitable boards or committees, (iv) deliver lectures or fulfill speaking engagements, (v) manage his personal holdings in the capital stock of Titus and (vi) manage other personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities under this Agreement or otherwise violate the terms of this Agreement. -1- 3. Compensation. ------------ (a) Base Salary. During the Employment Period, subject to the ----------- provisions of this Section 3(a), the Executive shall receive an annual salary (the "Annual Base Salary") in an amount not less than Two Hundred Fifty Thousand Dollars ($250,000), payable in accordance with the Company's payroll for executives, as in effect from time to time. During the Employment Period, the Annual Base Salary shall be reviewed for possible increase at least annually. Any increase in the Annual Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Annual Base Salary shall not be reduced after any such increase, unless the annual base salaries of all executives of the Company are proportionately reduced, and in any event shall not be reduced below Two Hundred Fifty Thousand Dollars ($250,000). After any such increase (or decrease), the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased (or decreased). Executive shall have the option to decline any portion of the Annual Base Salary otherwise payable during any calendar month by giving notice thereof to the Company at least five (5) business days prior to the beginning of such month. (b) Annual Bonus. In addition to the Annual Base Salary, the ------------ Executive shall be eligible to receive annual bonuses (each, an "Annual Bonus") at the discretion of the Board of Directors of the Company. (c) Other Benefits. The Executive shall be entitled to participate -------------- in any of the Company's medical, dental or other benefit plans approved by the Company's Board of Directors. (d) Expenses. During the Employment Period, the Executive shall be -------- entitled to receive prompt reimbursement for all normal and customary expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. (e) Fringe Benefits. During the Employment Period, the Executive --------------- shall be entitled to the fringe benefits provided by the Company from time to time to its other executive officers. (f) Vacation. During the Employment Period, the Executive shall be -------- entitled to vacations in accordance with Company policies then in effect and, in no event, shall such vacation time be less than four (4) weeks per calendar year. 4. Termination of Employment. ------------------------- (a) Death or Disability. The Executive's employment shall terminate ------------------- automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has failed, over a period of one hundred eighty (180) consecutive days, to perform the Executive's duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity constitutes a disability for purposes of the Company's -2- long-term disability insurance coverage. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective upon receipt of such notice by the Executive (the "Disability Effective Date"). (b) By the Company. -------------- (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud, embezzlement or willful misconduct materially injurious to the Company on the part of the Executive, (B) the Executive's (x) persistent and continued failure to substantially perform his material duties (as set forth on Exhibit A hereto) --------- for the Company when and to the extent reasonably requested by the Board to do so and (y) failure to correct same within thirty (30) days after notice from the Board requesting the Executive to do so (it being understood that this standard is intended to assure the Company of the reasonable attendance, efforts and good faith business attention of the Executive to his duties on behalf of the Company, but may not be relied upon by the Company to terminate the Executive based upon the operating performance of the Company), or (C) the Executive's breach of any material provision of this Agreement, which breach has not been cured in all material respects within thirty (30) days after notice of such breach is given to the Executive by the Company. No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board or the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The Executive shall not be deemed to have been terminated for Cause unless such notice is accompanied by a copy of a resolution duly adopted by the Board to such effect. (ii) A termination of the Executive's employment by the Company without Cause shall be effected by giving the Executive one hundred eighty (180) days' written notice of the termination. (c) Good Reason. ----------- (i) The Executive may terminate employment for Good Reason. "Good Reason" means: (A) removal of duties set forth on Exhibit A hereto from the --------- Executive, or the assignment to the Executive of duties inconsistent in any material respect with the duties set forth on Exhibit A hereto, other than --------- actions that are not taken in bad faith and are remedied by the Company within five (5) business days after receipt of notice thereof from the Executive; (B) any failure by the Company to comply with any provision of Section 3 of this Agreement other than failures that are not taken in bad faith and are remedied by the Company within five (5) business days after receipt of notice thereof from the Executive; -3- (C) any failure by the Company to require any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform if no such succession had taken place. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the tenth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given); provided, that such termination of employment shall not become effective if the Company shall have previously corrected to the reasonable satisfaction of the Executive the circumstance giving rise to the Notice of Termination. (d) Date of Termination. The "Date of Termination" means the date of ------------------- the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive for Good Reason is effective, or the date on which the Company gives the Executive notice of a termination of employment without Cause, as the case may be. 5. Obligations of the Company Upon Termination. If, during the Employment ------------------------------------------- Period, the Executive's employment is terminated by the Company or Executive for any reason or no reason, the Executive shall not be entitled to any compensation provided for under this Agreement, other than Annual Base Salary through the effective date of any such termination or resignation, benefits under the long- term disability insurance coverage in the case of termination because of Disability, and (without limiting the provisions of Section 6 hereof) vested benefits, if any, required to be paid or provided by law. 6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or ------------------------- limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. No Mitigation or Reduction. In no event shall the Executive be -------------------------- obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. -4- 8. Confidential Information; Other Covenants. ----------------------------------------- (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its business that the Executive has obtained during the Executive's employment by the Company and that is not public knowledge (other than as a result of the Executive's violation of this paragraph (a) of Section 8) ("Confidential Information"), unless disclosure of such information is required by court order. The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. (b) The Executive acknowledges and agrees that the Company's remedy at law for any breach of the Executive's obligations under this Section 8 would be inadequate and agrees and consents that temporary and permanent injunctive relief may be granted in any proceeding which may be brought to enforce any provision of such Section without the necessity of proof of actual damage. With respect to any provision of this Section 8 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. 9. Successors. ---------- (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. 10. Miscellaneous. ------------- (a) The validity of this Agreement, the construction of its terms and the determination of the rights and duties of the parties hereto shall all be governed by the laws of the State of California, without reference to principles of conflicts of laws. 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. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended, modified, terminated or waived except with the prior written consent of the parties hereto. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -5- If to the Executive: Herve Caen c/o Titus Software Corporation 20432 Corisco Street Chatsworth, CA 91311 With a copy to: Paul, Hastings, Janofsky & Walker LLP 555 South Flower Street, 23rd Floor Los Angeles, CA 90071 Attention: Robert A. Miller, Jr., Esq. If to the Company: Interplay Productions, Inc. 16815 Von Karman Avenue Irvine, CA 92606 Attention: President with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660 Attention: K.C. Schaaf, Esq. or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 10. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 4 of this Agreement) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement except to the extent any other party hereto is materially prejudiced by such failure. -6- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. INTERPLAY ENTERTAINMENT CORP. By: /s/ MANUEL MARRERO ---------------------------------------- Manuel Marrero, Chief Financial Officer EXECUTIVE: /s/ HERVE CAEN -------------------------------------------- Herve Caen -7- EXHIBIT A Duties of Executive ------------------- Executive shall have primary responsibility and authority in the Company with respect to the following management functions: 1. Finance. Supervision of all financial expenditures of the Company and ------- related matters, including establishment of fiscal policies of the Company. The Company's Chief Financial Officer will report to Executive. 2. Sales and Distribution. Supervision of all sales and distribution ---------------------- activities of the Company, including without limitation negotiation and monitoring of distributor relationships. The Company's Vice President of Sales will report to Executive. 3. Operations. Supervision of the operating activities of the Company. The ---------- Company's Chief Operating Officer will report to Executive. 4. International. Development and monitoring of the business relationships ------------- with and operational activities of Interplay OEM. The President of Interplay OEM will report to Executive. 5. Legal. Supervision of Company's legal affairs as they relate to the ----- other management functions of Executive. 6. Consultation with Chief Executive Officer. The Executive shall consult ----------------------------------------- with the Chief Executive Officer of the Company in the development of all operating plans for the Company, and shall not take any action which constitutes a material deviation from any operating plan without the concurrence of the Chief Executive Officer. -8- EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 2,473 0 22,546 10,234 9,245 58,391 16,658 12,445 64,108 76,214 0 0 0 23 (18,033) 64,108 20,136 23,636 15,333 15,333 25,267 4,654 928 (16,965) 11 (16,976) 0 0 0 (16,976) (.75) (.75)
EX-99.1 6 PRO FORMA BALANCE SHEET EXHIBIT 99.1
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 (Unaudited) ASSETS Actual Pro forma ------ -------- --------- Current Assets: (Dollars in thousands) Cash and cash equivalents $ 906 $ 906 Restricted cash 1,567 1,567 Note receivable - 5,000 Trade receivables, net of allowances of $10,234 and $18,431, respectively 22,546 22,546 Inventories 9,245 9,245 Prepaid licenses and royalties 19,058 19,058 Deferred income taxes 4,000 4,000 Other 1,069 1,069 -------- -------- Total current assets 58,391 63,391 Property and Equipment, net 4,212 4,212 Other Assets 1,505 1,505 -------- -------- $ 64,108 $ 69,108 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current Liabilities: Accounts payable $ 29,168 $ 29,168 Accrued liabilities 19,664 19,664 Current portion of long-term debt 27,114 12,114 Income taxes payable 268 268 -------- -------- Total current liabilities 76,214 61,214 Long-Term Debt, net of current portion 5,567 567 Deferred Income Taxes - - Minority Interest 69 69 Commitments and Contingencies 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 23,654,296 shares and pro forma 29,904,296 23 29 shares Paid-in capital 62,247 87,241 Accumulated deficit (80,279) (80,279) Accumulated comprehensive income adjustments 267 267 -------- -------- Total stockholders' equity (deficit) (17,742) 7,258 -------- -------- $ 64,108 $ 69,108 ======== ========
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