-----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, H2PtmcUg0I8wMT6bmD6v7aFbAWcoSUmCoGAG1X0cmlaf8A4MoKXwjG7ZkWwxrHRH hA992Y1gAO3fNs1VldNmZQ== 0001021408-01-505681.txt : 20010821 0001021408-01-505681.hdr.sgml : 20010821 ACCESSION NUMBER: 0001021408-01-505681 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010820 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: 1934 Act SEC FILE NUMBER: 000-24363 FILM NUMBER: 1719567 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 d10q.txt QUARTERLY PERIOD ENDED JUNE 30, 2001 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-24363 Interplay Entertainment Corp. (Exact name of the registrant as specified in its charter) Delaware 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16815 Von Karman Avenue, Irvine, California 92606 (Address of principal executive offices) (949) 553-6655 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Class Issued and Outstanding at August 13, 2001 ----- ----------------------------------------- Common Stock, $0.001 par value 44,980,708
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q JUNE 30, 2001 TABLE OF CONTENTS ----------------
Page Number ------ Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000....................................... 3 Consolidated Statements of Operations for the Three and Six Months ended June 30, 2001 and 2000 (unaudited)............. 4 Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000 (unaudited).................... 5 Notes to Unaudited Consolidated Financial Statements........ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 35 Part II. Other Information Item 1. Legal Proceedings........................................... 36 Item 5. Other Information........................................... 36 Item 6. Exhibits and Reports on Form 8-K............................ 36 Signatures............................................................ 37
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 ----------- ------------ (Unaudited) (Dollars in thousands) ASSETS Current Assets: Cash................................................ $ 677 $ 2,835 Trade receivables, net of allowances of $5,150 and $6,543, respectively............................... 11,780 28,136 Inventories......................................... 2,358 3,359 Prepaid licenses and royalties...................... 16,754 17,704 Other............................................... 853 772 --------- --------- Total current assets.............................. 32,422 52,806 --------- --------- Property and Equipment, net........................... 5,332 5,331 Other Assets.......................................... 1,293 944 --------- --------- $ 39,047 $ 59,081 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current debt........................................ $ 9,281 $ 25,433 Accounts payable.................................... 14,820 12,270 Accrued liabilities................................. 7,220 7,722 Royalty liabilities................................. 10,319 7,258 --------- --------- Total current liabilities......................... 41,640 52,683 --------- --------- Commitments and Contingencies (Notes 1 and 5) Stockholders' Equity (Deficit) (Notes 6 and 12): Series A Preferred stock, $0.001 par value, authorized 5,000,000 shares; issued and outstanding, 719,424 shares........................ 21,470 20,604 Common stock, $0.001 par value, authorized 100,000,000 shares; issued and outstanding 38,301,402 and 30,143,636 shares, respectively..... 38 30 Paid-in-capital..................................... 100,632 88,759 Accumulated deficit................................. (124,951) (103,259) Accumulated other comprehensive income.............. 218 264 --------- --------- Total stockholders' equity (deficit).............. (2,593) 6,398 --------- --------- $ 39,047 $ 59,081 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Net revenues.................. $ 14,802 $ 24,921 $ 32,115 $ 43,064 Cost of goods sold............ 10,993 11,456 21,478 21,028 ---------- ---------- ---------- ---------- Gross profit.................. 3,809 13,465 10,637 22,036 Operating expenses: Marketing and sales......... 5,825 6,541 12,511 11,404 General and administrative.. 4,097 2,428 6,583 4,987 Product development......... 5,332 5,678 10,649 11,313 ---------- ---------- ---------- ---------- Total operating expenses.. 15,254 14,647 29,743 27,704 ---------- ---------- ---------- ---------- Operating loss............ (11,445) (1,182) (19,106) (5,668) Other expense: Interest expense, net....... 707 637 1,366 1,555 Other expense, net.......... 246 84 354 176 ---------- ---------- ---------- ---------- Total other expense....... 953 721 1,720 1,731 ---------- ---------- ---------- ---------- Net loss...................... $ (12,398) $ (1,903) $ (20,826) $ (7,399) ========== ========== ========== ========== Cumulative dividend on participating preferred stock........................ $ 300 $ -- $ 600 $ -- Accretion of warrants on preferred stock.............. 67 133 266 133 ---------- ---------- ---------- ---------- Net loss attributable to common stockholders.......... $ (12,765) $ (2,036) $ (21,692) $ (7,532) ========== ========== ========== ========== Net loss per common share: Basic and diluted........... $ (0.34) $ (0.07) $ (0.64) $ (0.25) ========== ========== ========== ========== Weighted average number of common shares outstanding: Basic and diluted........... 37,483,443 30,022,811 33,838,756 30,009,698 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ------------------ 2001 2000 -------- -------- (Dollars in thousands) Cash flows from operating activities: Net loss.................................................. $(20,826) $ (7,399) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization............................ 1,330 1,401 Write-off of prepaid royalties........................... 2,251 -- Changes in assets and liabilities: Trade receivables....................................... 16,306 (10,310) Inventories............................................. 1,001 2,212 Prepaid licenses and royalties.......................... (1,301) (929) Other current assets.................................... (81) (303) Accounts payable........................................ 2,550 (8,142) Accrued liabilities..................................... (5,985) 7,234 Royalty liabilities..................................... 3,061 (3,468) -------- -------- Net cash used in operating activities.................. (1,694) (19,704) -------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (1,080) (1,604) -------- -------- Net cash used in investing activities.................. (1,080) (1,604) -------- -------- Cash flows from financing activities: Net borrowings on line of credit.......................... 6,064 1,202 Net payment of previous line of credit.................... (24,433) -- Net payment of supplemental line of credit................ (1,000) -- Net proceeds from issuance of Series A Preferred Stock and warrants................................................. -- 20,000 Net proceeds from issuance of common stock................ 11,872 236 Proceeds (payments) on notes payable...................... 3,000 (375) Proceeds from exercise of stock options................... 9 21 Interest proceeds from restricted cash.................... -- 69 Proceeds from other advances.............................. 5,000 -- Proceeds (payments) on other debt......................... 150 (37) -------- -------- Net cash provided by financing activities.............. 662 21,116 -------- -------- Effect of exchange rate changes on cash.................... (46) 3 -------- -------- Net decrease in cash................................... (2,158) (189) Cash, beginning of period.................................. 2,835 399 -------- -------- Cash, end of period........................................ $ 677 $ 210 ======== ======== Supplemental cash flow information: Cash paid for: Interest................................................ $ 1,305 $ 1,555 Income taxes............................................ -- -- ======== ======== Supplemental disclosures of Noncash transactions: Acquisition of nine percent interest in Shiny............. $ 600 $ -- Accreution of preferred stock to redemption value.......... 266 133 Accrued dividend on participating preferred stock.......... 600 270 ======== ========
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 in the United States 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, 2000 as filed with the Securities and Exchange Commission. Factors Affecting Future Performance and Going Concern For the six months ended June 30, 2001, the Company incurred a net loss of $20.8 million. However, net cash used in operating activities was $1.7 million as the Company's negative operating results were largely offset by strong trade receivable collections and conservative management of inventories and disbursements. During the same period last year, the net cash used in operating activities was $19.7 million. In April 2001, the Company secured a new $15 million line of credit with a bank and completed the sale of $12.7 million of Common Stock in a private placement transaction. The net proceeds of $11.9 million from the private placement were used towards paying the outstanding balance under the Company's previous bank line of credit which was expiring, and enabled the Company to secure the new line of credit to fund ongoing operations (See Notes 4 and 6). Advances under the new line of credit are limited to an amount based on accounts receivable and inventories. The Company has not released sufficient product during the three month period ended June 30, 2001 to generate a profitable level of revenues, or sufficient accounts receivable to maximize the use of its line of credit. The Company also anticipates that delays in product releases could continue in the short-term, and funds available under its new line of credit and from ongoing operations are not sufficient to satisfy the projected working capital and capital expenditure needs in the normal course of business. In addition, the Company is not in compliance with certain financial covenants set forth in the new line of credit agreement as of June 30, 2001. If the bank does not waive compliance with the required covenants, terminates the credit agreement and demands acceleration of payment of the outstanding amounts, the Company would not have the funds to repay the bank and would be unable to continue to draw on the credit facility to fund future operations (See Note 4). The Company continues to implement cost reduction programs including a reduction of personnel, a reduction of fixed overhead commitments, cancelled or suspended development on future titles and have scaled back certain marketing programs. The Company is also seeking external sources of funding, including but not limited to, a sale or merger of the Company, a private placement of Company capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short- term funding, and potentially carry out management's long-term strategic objectives. However, there can be no assurance that the Company can complete the transactions necessary to provide the required funding on a timely basis in order to continue ongoing operations in the normal course of business. If the Company is unable to secure the required funding on a timely basis, it will continue to reduce its costs by selling or consolidating its operations, and by continuing to delay or cancel product development and marketing programs. These measures could have a material adverse effect on the Company's ability to continue as a going concern. 6 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition to the continuing risks related to the Company's future liquidity, the Company also faces numerous other risks associated with its industry. These risks include dependence on new platform introductions by hardware manufacturers, commercially successful new product introductions by the Company, new product introduction delays, rapidly changing technology, intense competition, dependence on distribution channels and risk of customer returns. The Company's consolidated financial statements have been presented on the basis that the Company is a going concern. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities or any other adjustments that might result should the Company be unable to continue as a going concern. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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. Prepaid Licenses and Royalties Prepaid licenses and royalties consist of payments for intellectual property rights and advanced royalty payments to outside developers. Such costs include certain other outside production costs generally consisting of film cost and amounts paid for digitized motion data with alternative future uses. Payments to developers represent contractual advanced payments made for future royalties. These payments are contingent upon the successful completion of milestones, which generally represent specific deliverables. Royalty advances are recoupable against future sales based upon the contractual royalty rate. The Company amortizes the cost of licenses, prepaid royalties and other outside production costs to cost of goods sold over six months commencing with the initial shipment of the related title at a rate based upon the number of units shipped. Management evaluates the future realization of such costs quarterly by reviewing the forecasted sales of the future titles in development. When a title is an externally developed title and the Company is paying royalty advances to the third party developer, the Company compares the forecasted net proceeds after selling costs to the amount capitalized. If the amount of net proceeds is greater than the amount capitalized, the advance on royalties is not considered to be impaired. If the amount capitalized is greater than the amount of net proceeds, the advance is considered impaired and the amount capitalized in excess of forecasted net proceeds is charged to cost of goods sold. Such costs are classified as current and noncurrent assets based upon estimated net product sales. Royalty Liabilities Royalty liabilities consist of amounts due to outside developers based on contractual royalty rates for sales of shipped titles. The Company records a royalty expense based upon a contractual royalty rate after it has fully recouped the royalty advances paid to the outside developer, if any, prior to shipping a title. Royalty liabilities also include unearned advances received by the Company from console hardware and software manufacturers for the development of titles for their console platforms. 7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition Revenues are recorded when products are delivered to customers in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition". For those agreements that provide the customers the right to multiple copies in exchange for guaranteed amounts, revenue is recognized at the delivery of the product master or the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. Guaranteed minimum royalties on sales that do not meet the guarantee are recognized as the minimum payments come due. The Company is generally not contractually obligated to accept returns, except for defective, shelf-worn and damaged products in accordance with negotiated terms. However, the Company permits customers to return or exchange product and may provide price protection on products unsold by a customer. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an allowance for estimated returns, exchanges, markdowns, price concessions, and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. The amount of reserves is an estimate and the amount ultimately required could differ materially in the near term from the amounts included in the accompanying consolidated financial statements. Customer support provided by the Company is limited to telephone and Internet support. These costs are not material and are charged to expense as incurred. Recent Accounting Pronouncements In April 2001, the Emerging Issues Task Force issued No. 00-25 ("EITF 00- 25"), "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products", which states that consideration from a vendor to a reseller of the vendor's products is presumed to be a reduction of the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement. That presumption is overcome and the consideration can be categorized as a cost incurred if, and to the extent that, a benefit is or will be received from the recipient of the consideration. That benefit must meet certain conditions described in EITF 00- 25. The consensus should be applied no later than in annual or interim financial statements for periods beginning after December 15, 2001. The Company is currently evaluating the impact of this consensus on its Statement of Operations. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. Under the new rules all acquisition transactions entered into after June 30, 2001, must be accounted for on the purchase method and goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 142. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 2. Inventories Inventories consist of the following:
June 30, December 31, 2001 2000 -------- ------------ (Dollars in thousands) Packaged software.............................. $1,873 $2,628 CD-ROMs, cartridges, manuals, packaging and supplies...................................... 485 731 ------ ------ $2,358 $3,359 ====== ====== ===
Note 3. Prepaid licenses and royalties Prepaid licenses and royalties are as follows:
June 30, December 31, 2001 2000 ------- ------------ (Dollars in thousands) Prepaid royalties for titles in development......... $12,851 $ 9,254 Prepaid royalties for shipped titles, net of amortization....................................... 1,580 6,174 Prepaid licenses and trademarks, net of amortization....................................... 2,323 2,276 ------- ------- $16,754 $17,704 ======= =======
During the three and six months ended June 30, 2001, the Company expensed $1.5 million and $2.3 million, respectively, for prepaid royalties that were impaired due to the cancellation of certain development projects. No amounts were impared and expensed during the three and six month periods ended June 30, 2000. Note 4. Current Debt Current debt consists of the following:
June 30, December 31, 2001 2000 -------- ------------ (Dollars in thousands) Working capital line of credit...................... $6,064 $24,433 Loan from Chairman and Chief Executive Officer...... 3,067 -- Supplemental line of credit from Titus.............. -- 1,000 Other............................................... 150 -- ------ ------- $9,281 $25,433 ====== =======
Working Capital Line of Credit In April 2001, the Company entered into a new three year loan and security agreement with a bank providing for a $15 million working capital line of credit. The agreement with a new bank replaced an agreement with a former bank that was expiring. The expiring line of credit bore an interest rate of LIBOR (6.78 percent at December 31, 2000) plus 4.87 percent (11.65 percent at December 31, 2000). In April 2001, all amounts outstanding to the former Bank were paid in full. Advances under the new line of credit are limited to an amount based on qualified accounts receivable and inventory. The new line bears interest at the bank's prime rate, or, at the Company's option, a portion of the outstanding balance would bear interest at LIBOR plus 2.5% for a fixed 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) short-term. At June 30, 2001, borrowings under the working capital line of credit bore interest at various interest rates ranging between 6.39 percent and 7 percent, and the amount available for borrowing under the line was $3.1 million. The line is subject to review and renewal by the bank on April 30, 2002 and 2003, and is secured by substantially all of the Company's assets, plus a personal guarantee of $2 million from the Chairman, secured by $1 million in cash (See Note 6). The line requires that the Company meet certain financial covenants set forth in the agreement. The Company is not in compliance with the financial covenants related to net worth and minimum earnings before interest, taxes, depreciation and amortization as of June 30, 2001. If the bank does not waive compliance with the required covenants under the credit agreement, the bank could terminate the credit agreement and accelerate payment of all outstanding amounts. Because the Company depends on proceeds from its credit agreement to fund its operations, and the Company does not have the funds to pay the outstanding balance in the event payment is accelerated, the termination of the credit agreement and the acceleration of payment by the bank would have a material adverse effect on the Company's ability to continue as a going concern (See Note 1). Loan from Chairman and Chief Executive Officer In April 2001, the Chairman provided the Company with a $3 million loan, payable in May 2002, with interest at 10 percent (See Note 6). Supplemental line of credit from Titus In April 2000, the Company secured a $5 million supplemental line of credit with Titus Interactive SA ("Titus"), a major shareholder of the Company, expiring in May 2001. In connection with this line of credit, Titus received a warrant exercisable for 60,298 shares of the Company's Common Stock at $3.79 per share that will expire in April 2010. In April 2001, the total outstanding balance plus accrued interest in the aggregate amount of approximately $3.1 million was paid in full and the commitment under the supplemental line of credit was terminated. As of June 30, 2001, Titus has not exercised these warrants. Note 5. Commitments and Contingencies The Company and the former owner of the Company's wholly owned subsidiary Shiny Entertainment ("Shiny") had a dispute over cash payments upon the delivery and acceptance of interactive entertainment software titles that Shiny was committed to deliver over time. In March 2001, the Company entered into an amendment to the Shiny purchase agreement which, among other things, settled the dispute with the former owner of Shiny, and provided for the Company to acquire the remaining nine percent equity interest in Shiny for $600,000 payable in installments of cash and stock. The amendment also provided for additional cash payments to the former owner of Shiny for two interactive entertainment software titles to be delivered in the future. The former owner of Shiny will earn royalties after the future delivery of the two titles to the Company. At June 30, 2001, the Company owed the former owner of Shiny $150,000. Virgin Interactive Entertainment Limited ("Virgin"), whose ultimate parent is Titus, had disputed an amendment to the International Distribution Agreement with the Company, and claimed that the Company was obligated, among other things, to pay a contribution to their overhead of up to $9.3 million annually, subject to reductions by the amount of commissions earned by Virgin on its distribution of the Company's products. In April 2001, the Company settled this dispute with Virgin, and amended the International Distribution Agreement, the Termination Agreement and the Product Publishing Agreement, all of which were entered into in February 10, 1999 when the Company acquired an equity interest in Virgin's parent company VIE Acquisition Group LLC ("VIE"). As a result of the settlement, Virgin dismissed its claim for overhead fees, VIE fully redeemed the 10 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company's membership interest in VIE and Virgin paid the Company $3.1 million in net past due balances owed under the International Distribution Agreement. In addition, the Company will pay Virgin a one-time marketing fee of $333,000 for the period ending June 30, 2001 and the monthly overhead fee was revised for the Company to pay $111,000 per month for the nine month period beginning April 2001, and $83,000 per month for the six month period beginning January 2002, with no further overhead commitment for the remainder of the term of the International Distribution Agreement. The Company no longer has an equity interest in VIE or Virgin as of June 30, 2001. In March 2001, the Company entered into a supplement to a licensing agreement with a console hardware and software manufacturer under which it received an advance of $5 million. The advance is to be repaid at $20 per unit upon the sale of product under this agreement, as defined. If the full amount of the advance is not paid by June 2003, then the remaining outstanding balance is subject to interest at the prime rate plus one percent. This advance has been included in royalty liabilities on the accompanying consolidated balance sheet. Note 6. Stockholders' Equity In April 2001, the Company completed a private placement of 8,126,770 shares of Common Stock for $12.7 million, and received net proceeds of approximately $11.9 million. The shares were issued at $1.5625 per share, and included warrants to purchase one share of Common Stock for each share sold. The warrants are exercisable at $1.75, and can be exercised immediately. If the Company issues additional shares of Common Stock at a per share price below the exercise price of the warrants, then the warrants are to be repriced, as defined, subject to stockholder approval. The warrants expire in April 2006. In addition to the warrants issued with the private placement, the Company granted the investment banker associated with the transaction a warrant for 500,000 shares of the Company's Common Stock. The warrant has an exercise price of $1.5625 per share and vests one year after the registration statement for the shares of Common Stock issued under the private placement becomes effective. The warrant expires four years after it vests. The transaction provides for registration rights with a registration statement to be filed by April 16, 2001 and become effective by May 31, 2001. The effective date of the registration statement was not met and the Company is incurring a two percent penalty (approximately $250,000) per month, payable in cash, until the effectiveness of the registration. This obligation will continue to accrue each month that the registration statement is not declared effective and does not have a limit on the amount payable to these stockholders. Because the payment for non-compliance is cumulative, such obligation could have a material adverse effect on the financial condition of the Company. Moreover, the Company may be unable to pay these stockholders the amount of money due to them. During the three month period ended June 30, 2001 the Company accrued $254,000 payable to these stockholders, which was charged to results of operations and classified as other expense. In April 2001, the Chairman provided the Company with a $3 million loan, payable in May 2002. In connection with this loan to the Company and the Chairman's $2 million personal guarantee of the Company's new credit facility (See Note 4), the Chairman received warrants to purchase 500,000 shares of the Company's Common Stock at $1.75 per share, vesting upon issuance and expiring in April 2004. Note 7. General and Administrative Expenses Included in general and administrative expenses for the three months ended June 30, 2001 were a $0.6 million provision for the termination of a building lease in the United Kingdom and $0.5 million in legal, audit and investment banking fees and expenses incurred principally in connection with the efforts of a proposed sale of the Company to a third party which has been terminated. 11 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 8. 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 securities. Diluted net loss per share is the same as basic net loss per share because the effect of outstanding stock options and warrants is anti-dilutive. The impact of the Preferred Stock conversion into Common Stock shares was excluded from the loss per share computation at June 30, 2001 and 2000 (See Note 12). There were options and warrants outstanding to purchase 13,950,739 and 3,886,680 shares of Common Stock at June 30, 2001 and 2000, respectively, which were excluded from the loss per share computation as they were anti- dilutive. At June 30, 2000, there were 484,848 shares of restricted Common Stock that were excluded from the loss per share computation as they were anti-dilutive. The weighted average exercise price of the outstanding options and warrants at June 30, 2001 and 2000 was $2.12 and $3.56, respectively. Note 9. Comprehensive Loss Comprehensive loss consists of the following:
Three Months Ended Six Months Ended June 30, June 30, ----------------- ----------------- 2001 2000 2001 2000 -------- ------- -------- ------- (Dollars in thousands) Net loss............................. $(12,398) $(1,903) $(20,826) $(7,399) Other comprehensive loss, net of income taxes: Foreign currency translation adjustments....................... (24) (1) (46) 3 -------- ------- -------- ------- Total comprehensive loss........... $(12,422) $(1,904) $(20,872) $(7,396) ======== ======= ======== =======
During the three and six months ended June 30, 2001 and 2000, the net effect of income taxes on comprehensive loss was immaterial. Note 10. Related Parties Distribution and Publishing Agreements In connection with the amended International Distribution Agreement with Virgin, the Company incurred distribution commission expense of $341,000 and $758,000 for the three months ended June 30, 2001 and 2000 and $583,000 and $1,530,000 for the six months ended June 30, 2001 and 2000, respectively. In connection with the Product Publishing Agreement with Virgin, the Company earned $185,000 for performing publishing and distribution services on behalf of Virgin during the three months ended June 30, 2000 and $15,000 and $176,000 during the six months ended June 30, 2001 and 2000, respectively. No amounts were earned during the three month period ended June 30, 2001. As part of the terms of the April 2001 settlement between Virgin and the Company, the Product Publishing Agreement was amended to provide for the Company to publish only one future title developed by Virgin (see Note 5). As of June 30, 2001 and December 31, 2000, Virgin owed the Company $1.3 million and $12.1 million and the Company owed Virgin $0.4 million and $4.8 million, respectively. The net amounts due to the Company from Virgin as of December 31, 2000, were paid in full in April 2001. 12 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company performs distribution services on behalf of Titus for a fee. In connection with such distribution services during the three months ended June 30, 2001 and 2000 the Company recognized distribution fee revenue of $7,000 and $45,000, and $28,000 and $445,000 during the six months ended June 30, 2001 and 2000, respectively. As of June 30, 2001 and December 31, 2000, Titus owed the Company $269,000 and $280,000 and the Company owed Titus $269,000 and $1.1 million, respectively, including amounts owed under the supplemental line of credit (See Note 4). Investment in Affiliate The Company accounted for its investment in VIE in accordance with the equity method of accounting. The Company did not recognize any material income or loss in connection with its investment in VIE for the three and six months ended June 30, 2001 and 2000. In April 2001, VIE fully redeemed the Company's membership interest in VIE in connection with the April 2001 settlement between Virgin and the Company. The Company no longer has an equity interest in VIE or Virgin as of June 30, 2001. Note 11. Segment and Geographical Information The Company operates in one principal business segment. Information about the Company's operations in the United States and foreign markets is presented below:
Three Months Ended Six Months Ended June 30, June 30, ----------------- ----------------- 2001 2000 2001 2000 -------- ------- -------- ------- (Dollars in thousands) Net revenues: United States......................... $ 14,802 $24,921 $ 32,115 $43,022 United Kingdom........................ -- -- -- 42 -------- ------- -------- ------- Consolidated net revenues........... $ 14,802 $24,921 $ 32,115 $43,064 ======== ======= ======== ======= Operating loss: United States......................... $(10,692) $ (925) $(18,045) $(5,129) United Kingdom........................ (753) (257) (1,061) (539) -------- ------- -------- ------- Consolidated loss from operations... $(11,445) $(1,182) $(19,106) $(5,668) ======== ======= ======== ======= Expenditures made for the acquisition of long-lived assets: United States......................... $ 492 $ 856 $ 1,062 $ 1,560 United Kingdom........................ 9 41 18 44 -------- ------- -------- ------- Total expenditures for long-lived assets............................. $ 501 $ 897 $ 1,080 $ 1,604 ======== ======= ======== =======
13 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net revenues by geographic regions were as follows:
Three Months Ended June 30, Six Months Ended June 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Amount Percent Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) North America........... $ 9,941 67.1% $12,752 51.2% $23,897 74.4% $23,482 54.5% Europe.................. 2,482 16.8 5,375 21.5 3,820 11.9 9,607 22.3 Rest of World........... 914 6.2 1,389 5.6 1,579 4.9 2,436 5.7 OEM, royalty and licensing.............. 1,465 9.9 5,405 21.7 2,819 8.8 7,539 17.5 ------- ----- ------- ----- ------- ----- ------- ----- $14,802 100.0% $24,921 100.0% $32,115 100.0% $43,064 100.0% ======= ===== ======= ===== ======= ===== ======= =====
Net investments in long-lived assets by geographic regions were as follows:
June 30, December 31, 2001 2000 -------------- -------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) United States................................ $6,474 97.7% $6,139 97.8% United Kingdom............................... 86 1.3 76 1.2 OEM, royalty and licensing................... 65 1.0 60 1.0 ------ ----- ------ ----- $6,625 100.0% $6,275 100.0% ====== ===== ====== =====
Note 12. Subsequent Events Conversion of Series A Preferred Stock On August 13, 2001, Titus converted 336,070 shares of Series A Preferred Stock into 6,679,306 shares of Common Stock. Subsequent to this partial conversion, Titus owns 19,496,561 shares of Common Stock and 383,354 shares of Series A Preferred Stock with voting rights equivalent to 4,059,903 shares of Common Stock. Collectively, Titus has 48 percent of the total voting power of the Company's capital stock as of August 13, 2001. Distribution Agreement In August 2001, the Company received an advance of $4 million for the North American distribution rights of a future title. The advance will be recouped against future distribution commissions payable, based on the future sales of the title. 14 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, 2000 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," "should," "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 achieve its operating plans, generate positive cash flow in the future or that the Company will be able to maintain or replace its current financing arrangements or complete strategic transactions 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. 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 for the Company's products, 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 and 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. 15 Results of Operations The following table sets forth certain selected consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------- ------------------------------------- 2001 2000 2001 2000 ------------------ ----------------- ------------------ ----------------- % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues -------- -------- ------- -------- -------- -------- ------- -------- (Dollars in thousands) Net revenues............ $ 14,802 100.0% $24,921 100.0% $ 32,115 100.0% $43,064 100.0% Cost of goods sold...... 10,993 74.3% 11,456 46.0% 21,478 66.9% 21,028 48.8% -------- ----- ------- ----- -------- ----- ------- ----- Gross profit........... 3,809 25.7% 13,465 54.0% 10,637 33.1% 22,036 51.2% -------- ----- ------- ----- -------- ----- ------- ----- Operating expenses: Marketing and sales.... 5,825 39.4% 6,541 26.2% 12,511 39.0% 11,404 26.5% General and administrative........ 4,097 27.7% 2,428 9.7% 6,583 20.5% 4,987 11.6% Product development.... 5,332 36.0% 5,678 22.8% 10,649 33.2% 11,313 26.3% -------- ----- ------- ----- -------- ----- ------- ----- Total operating expenses.............. 15,254 103.1% 14,647 58.7% 29,743 92.7% 27,704 64.4% -------- ----- ------- ----- -------- ----- ------- ----- Operating loss.......... (11,445) (77.4)% (1,182) (4.6)% (19,106) (59.6)% (5,668) (13.1)% Other expense.......... 953 6.4% 721 2.9% 1,720 5.4% 1,731 4.0% -------- ----- ------- ----- -------- ----- ------- ----- Net loss............... $(12,398) (83.8)% $(1,903) (7.5)% $(20,826) (65.0)% $(7,399) (17.2)% ======== ===== ======= ===== ======== ===== ======= ===== Net revenues by geographic region: North America.......... $ 9,941 67.2% $12,752 51.2% $ 23,897 74.4% $23,482 54.5% International.......... 3,396 22.9% 6,764 27.1% 5,399 16.8% 12,043 28.0% OEM, royalty and licensing............. 1,465 9.9% 5,405 21.7% 2,819 8.8% 7,539 17.5% Net revenues by platform: Personal computer...... $ 12,270 82.9% $15,222 61.1% $ 24,609 76.6% $28,420 66.0% Video game console..... 1,067 7.2% 4,294 17.2% 4,687 14.6% 7,105 16.5% OEM, royalty and licensing............. 1,465 9.9% 5,405 21.7% 2,819 8.8% 7,539 17.5%
North American, International and OEM, Royalty and Licensing Net Revenues Overall, net revenues for the three months ended June 30, 2001 decreased 41 percent compared to the same period in 2000. This decrease resulted from a 22 percent decrease in North American net revenues, a 50 percent decrease in International net revenues and a 73 percent decrease in OEM, royalty and licensing, as described below. The decrease in North American and International net revenues for the three months ended June 30, 2001 was mainly because the titles released during the period generated $6.2 million less sales volume compared to the same period in 2000. We released six fewer titles this year as compared to last year. In addition, the volume of product returns and price concessions remained about the same for the current three month period as compared to the three months ended June 30, 2000. We expect that North American and International publishing net revenues in 2001 will decrease compared to 2000 as certain titles originally scheduled for release in the second half of 2001 have been rescheduled for release in 2002. Furthermore, we have canceled or suspended selected future titles in an effort to reduce future expenditures. The $3.9 million decrease in OEM, royalty and licensing net revenues in the three months ended June 30, 2001 compared to the same period in 2000 was due to decreased net revenues in the OEM business and in licensing transactions. This decrease was due to a $1 million decrease in the OEM business was primarily due to a decrease in the volume of transactions which relates to the general market decrease in personal computer sales, and the decrease in licensing transactions is primarily due to a $3 million multi- product licensing transaction with Titus Interactive SA ("Titus"), our major stockholder, in 2000 that did not recur in 2001. We expect that OEM, royalty and licensing net revenues in 2001 will decrease compared to 2000. Net revenues for the six months ended June 30, 2001 decreased 25 percent compared to the same six month period in 2000. The decrease resulted from a 55 percent decrease in International net revenues, a 63 percent decrease in OEM, royalty and licensing, offset by a two percent increase in North American net revenues, as 16 described below. International net revenues decreased for the six months ended June 30, 2001 mainly because the titles released during the period generated $4.6 million less sales volume as well as higher product returns and price concessions compared to the same period in 2000. Overall, we released 14 fewer titles across multiple platforms this year as compared to the same period last year. The $4.7 million decrease in OEM, royalty and licensing net revenues in the six months ended June 30, 2001 compared to the same period in 2000 was due to decreased net revenues in the OEM business and in licensing transactions. The $1.7 million decrease in the OEM business was primarily due to a decrease in the volume of transactions which relates to the general market decrease in personal computer sales, and the decrease in licensing transactions is primarily due to a $3 million multi-product licensing transaction with Titus in 2000 that did not recur in 2001. The increase in North American net revenues for the six months ended June 30, 2001 was mainly because the titles released during the period generated $1.2 million more sales volume compared to the same period in 2000. Platform Net Revenues PC net revenues decreased 19 percent during the three months ended June 30, 2001 compared to the same period in 2000. The decrease in PC net revenues was attributable to the release of four titles during the three months ended June 30, 2001 compared to six titles in the 2000 period. We expect our PC net revenues to decrease in 2001 due to our increased focus on next generation console titles, the cancellation of one selected project and rescheduling the release of certain titles from 2001 to 2002. We do not anticipate releasing any new major PC titles during the remainder of 2001. Video game console net revenues decreased 75 percent during the three months ended June 30, 2001 compared to the same period in 2000, due to only releasing the international version of one PlayStation 2 title compared to the same period last year, in which we released four video game console titles. We expect our video game console net revenues to increase in 2001 as a result of a substantial increase in planned title releases for next generation game consoles in 2001 compared to 2000. Our anticipated major video game console releases for the remainder of the year include Baldur's Gate: Dark Alliance (PlayStation 2) and Giants (PlayStation 2). For the six months ended June 30, 2001, PC net revenues decreased 13 percent compared to the same period in 2000. The decrease is mainly due to releasing six titles in the 2001 period compared to 15 titles in the 2000 period. We released three major titles during the six months ended June 30, 2001 versus two in the comparable 2000 period, however, two of the titles were expansions to previously released games resulting in a lower average selling price than a stand alone game. The decrease in net PC revenues from fewer title releases and higher than anticipated price concessions was partially offset by the 2001 period titles having higher sales volume as compared to the 2000 period title releases. Video game console net revenues decreased 34 percent in the six months ended June 30, 2001 compared to the same period in 2000 due to only releasing one video game console title versus six titles. Cost of Goods Sold; Gross Profit Margin Cost of goods sold decreased four percent in the three months ended June 30, 2001 compared to the same period in 2000 due to a lower gross revenues base offset by higher amortization of prepaid royalties on externally developed products, including approximately $1.5 million in write-offs of canceled development projects. The 72 percent decrease in gross profit margin was due to product returns and price concessions increasing as a percentage of gross revenues, no internally developed products released in the 2001 period versus two titles in the 2000 period, licensing revenue decreasing by $3 million and $1.5 million in write-offs of canceled development projects. We expect our cost of goods sold to decrease in 2001 as compared to 2000 due to an expected lower net revenues base partially offset by a higher proportion of console titles released. In addition, we expect our gross profit margin in 2001 to decrease as compared to 2000 due to an increase in console title revenues, which typically have a higher cost of goods than PC titles. Cost of goods sold increased two percent in the six months ended June 30, 2001 compared to the same period in 2000, due to higher amortization of prepaid royalties. Prepaid royalty amortization increased due to a lack of internally developed titles and $2.2 million in write-offs of canceled development projects. The 52 percent 17 decrease in gross profit margin was primarily due to product returns and price concessions increasing $1.9 million and increasing as a percentage of gross revenues, one internally developed expansion title released in the 2001 period versus three internally developed stand alone titles in the 2000 period, licensing revenue decreasing by $3.1 million and $2.2 million in write-offs in connection with canceled development projects. We may incur additional write-offs of prepaid royalties for titles in development if additional projects are cancelled or suspended in order to reduce future expenditures and reduce the funding requirements of future operations. Marketing and Sales Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses. The 11 percent decrease in marketing and sales expenses for the three months ended June 30, 2001 compared to the 2000 period is primarily attributable to a $1.2 million decrease in worldwide advertising and retail marketing support expenditures and $0.2 million decrease in personnel costs and operating expenses, offset by $0.7 million in overhead fees payable to Virgin in 2001, in connection with the terms of the April 2001 settlement of a dispute with Virgin. We expect our marketing and sales expenses to decrease in 2001 as compared to 2000, due to decreased advertising and retail marketing support expenditures and lower personnel costs as a result of a reduction of headcount subsequent to June 30, 2001, offset by the overhead fees payable to Virgin in 2001, in connection with the terms of the April 2001 settlement of a dispute with Virgin. The 10 percent increase in marketing and sales expenses for the six months ended June 30, 2001 compared to the 2000 period is attributable primarily to a $0.4 million increase in marketing and sales expenses for increased worldwide advertising and retail marketing support expenditures that increased promotion and retail sell-through of previously released titles and $0.7 million in overhead fees payable to Virgin in 2001, in connection with the terms of the April 2001 settlement of a dispute with Virgin. General and Administrative General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, bad debt expenses and other related operating expenses. General and administrative expenses for the three months ended June 30, 2001 increased 69 percent due to a $0.6 million provision for the termination of a building lease in the United Kingdom, $0.1 million increase in the provision for bad debt, $0.5 million in legal, audit and investment banking fees and expenses incurred principally in connection with the efforts of a proposed sale of the Company which has been terminated and $0.5 million increase in personnel costs. Although we are continuing our efforts to reduce North American operating expenses including a reduction of headcount subsequent to June 30, 2001, we expect general and administrative expenses to increase slightly in 2001 as compared to 2000 as a result of the already incurred additional expenditures disclosed above. The 32 percent increase in general and administrative expenses for the six months ended June 30, 2001 compared to the same period in 2000 is primarily attributable to the additional expenditures in the three months ended June 30, 2001 as discussed in the previous paragraph. Product Development Product development expenses, which primarily consist of personnel and support costs, are charged to operations in the period incurred. The six percent decrease in product development expenses for the three months ended June 30, 2001 is primarily due to $0.4 million decrease in expenditures associated with resources dedicated to completing two major internally developed titles, which did not recur in the current period. We expect product development expenses to decrease in 2001 compared to 2000, due to canceled or suspended future projects in an effort to reduce expenditures and a reduction in headcount subsequent to June 30, 2001. The six percent decrease in product development expenses for the six months ended June 30, 2001 compared to the same period in 2000 is due to $0.7 million decrease in expenditures associated with resources dedicated to completing three major internally developed titles, which did not recur in the current period. 18 Other Expense, net Other expense consists primarily of interest expense on our lines of credit and foreign currency exchange transaction losses. Other expense increased 32 percent in the three months ended June 30, 2001 compared to the same period in 2000 due to $0.4 million in loan fees associated with the transition of our line of credit, $0.3 million penalty due to a delay in the effectiveness of a registration statement in connection with the private placement of 8,126,770 shares of Common Stock, offset by a $0.4 million decrease in interest expense on lower total debt. If the registration statement for the Common Stock shares sold in a private placement in April 2001 is not declared effective, we will continue to accrue a two percent penalty (approximately $250,000) each month that the registration statement is not declared effective and there is no limit on the amount payable. Because this payment is cumulative, this obligation could have a material adverse effect on our financial condition. Moreover, we may be unable to pay the total penalties due to the investors in the private placement of Common Stock. The two percent decrease for the six months ended June 30, 2001 compared to the same period in 2000 was due to $0.4 million in loan fees paid to the former bank associated with the transition of our line of credit to a new bank, $0.3 million penalty due to the registration statement for the private placement of 8,126,770 shares of Common Stock, offset by a $0.7 million decrease in interest expense on lower total debt under the new line of credit agreement. Liquidity and Capital Resources We have funded our operations to date primarily through the use of lines of credit, from royalty and distribution fee advances, through cash generated by the private sale of securities, from proceeds of the initial public offering and from results of operations. As of June 30, 2001 our principal sources of liquidity included cash of $0.7 million and availability of $3.1 million under our working capital line of credit. In August 2001, we received a $4 million advance for the North American distribution rights of a future title. In April 2001, we secured a new working capital line of credit from a bank and repaid all amounts outstanding on our former line of credit and supplemental line of credit. These lines of credit were terminated upon full payment. Our new working capital line of credit line bears interest at the bank's prime rate, or, at our option, a portion of the outstanding balance bears interest at LIBOR plus 2.5%, for a fixed short-term. At June 30, 2001, borrowings under the new working capital line of credit bore interest at various interest rates between 6.39 percent and 7 percent. Our new line of credit provides for borrowings and letters of credit of up to $15 million based in part upon qualifying receivables and inventory. Under the new line of credit the Company is required to maintain a $2 million personal guarantee by the Company's Chairman and Chief Executive Officer ("Chairman"). The new line of credit has a term of three years, subject to review and renewal by the bank on April 30 of each subsequent year. As of June 30, 2001, we are not in compliance with the financial covenants under the new line of credit pertaining to net worth and minimum earnings before interest, taxes, depreciation and amortization. If the bank does not waive compliance with the required covenants under the credit agreement, the bank could terminate the credit agreement and accelerate payment of all outstanding amounts. Because we depend on this credit agreement to fund our operations, the bank's termination of the credit agreement could cause material harm to our business, including our inability to continue as a going concern. In addition, in April 2001, we completed a private placement of 8,126,770 shares of Common Stock for $12.7 million, and received net proceeds of approximately $11.9 million. The shares were issued at $1.5625 per share, and included warrants to purchase one share of Common Stock for each share sold. The warrants are exercisable at $1.75 per share, and the warrants can be exercised immediately. The warrants expire in March 2006. The transaction provides for a registration statement covering the shares sold or issuable upon exercise of such warrants to be filed by April 16, 2001 and become effective by May 31, 2001. In the event that the agreed effective date of the registration statement is not met, we are subject to a two percent penalty per month, payable in cash, until the registration statement is effective. We did not meet the effective date of the registration statement and we are incurring a monthly penalty of $254,000, payable in cash, until the effectiveness of the 19 registration. This obligation will continue to accrue each month that the registration statement is not declared effective and does not have a limit on the amount payable to these investors. Because this payment is cumulative, this obligation could have a material adverse effect on our financial condition. Moreover, we may be unable to pay the total penalty due to the investors. In April 2001, the Chairman provided us with a $3 million loan, payable in May 2002, with interest at 10 percent. In connection with this loan to us and the $2 million guarantee he provided under the new line of credit from a bank, the Chairman received warrants to purchase 500,000 shares of our Common Stock at $1.75 per share, vesting upon issuance and expiring in April 2004. Our primary capital needs have historically been to fund working capital requirements necessary to fund our net losses, our sales growth, the development and introduction of products and related technologies and the acquisition or lease of equipment and other assets used in the product development process. Our operating activities used cash of $1.7 million during the six months ended June 30, 2001, primarily attributable to the net loss for the year, substantially offset by collections of accounts receivable. Net cash provided by financing activities of $0.7 million for the six months ended June 30, 2001, consisted primarily of the proceeds from the private placement of 8,126,770 shares of our Common Stock, an advance for the development of future titles on a next generation video game console, borrowings under our new working capital line of credit and borrowings under a loan payable to our Chairman, offset by repayments of our previous line of credit and supplemental line of credit from Titus. Cash used in investing activities of $1.1 million for the six months ended June 30, 2001 consisted of normal capital expenditures, primarily for office and computer equipment used in our operations. We do not currently have any material commitments with respect to any future capital expenditures. To reduce our working capital needs, we have implemented various measures including a reduction of personnel, a reduction of fixed overhead commitments, cancelled or suspended development on future titles and have scaled back certain marketing programs. We will continue to pursue various alternatives to improve future operating results, including further expense reductions, some of which may have a long-term adverse impact on our ability to generate successful future business activities. Advances under our line of credit are limited to an amount calculated as a percentage of accounts receivable and inventories. We have not released sufficient product during the three month period ended June 30, 2001 to generate a profitable level of revenues, or sufficient accounts receivable to maximize the use of our credit line. We also anticipate that delays in product releases could continue in the short-term, and funds available under our new credit line and from ongoing operations are not sufficient to satisfy the projected working capital and capital expenditures to continue operating in the normal course of business. In addition, we are not in compliance with the financial covenants required under our credit line and the bank could terminate the financing agreement and accelerate payment of outstanding amounts. We will request waivers for non-compliance and extension of the line of credit from our bank, continue to implement cost reduction programs, including a reduction of personnel, a reduction of fixed overhead commitments, cancelled or suspended development on future titles and have scaled back certain marketing programs, and we will continue to seek external sources of funding, including but not limited to, a sale or merger of the Company, a private placement of the Company's capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve our long-term strategic objectives. However, there is no assurance that we can complete the transactions necessary to provide the required funding on a timely basis in order to continue operating as a going concern. Our consolidated financial statements have been presented on the basis that we are a going concern. However, our independent public accountant has informed us that if we are unable to resolve the covenant violations on our line of credit with our current bank or obtain alternative debt or equity financing sufficient to cover our operating cash flow requirements through December 31, 2001 and beyond, or to adequately address the issues described above, that it is likely that they will issue a modified report for going concern on our financial statements as of December 31, 2001. 20 FACTORS AFFECTING FUTURE PERFORMANCE Our future operating results depend upon many factors and are subject to various risks and uncertainties. Some of the risks and uncertainties which may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results are as follows: We currently have a number of obligations that we are unable to meet without generating additional revenues or raising additional capital. If we cannot generate additional revenues or raise additional capital in the near future, we may become insolvent and our stock would become illiquid or worthless. As of June 30, 2001, our cash balance was approximately $677,000 and our outstanding accounts payables totaled approximately $14.8 million. If we do not receive sufficient financing we may (i) liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue operations, but incur material harm to our business, operations or financial condition. In addition, because we have not yet registered the shares issued in our April 2001 private placement of common stock, we have, as of August 1, 2001, an accrued obligation to pay the private placement investors an aggregate amount of $508,000 in cash payable on demand. This obligation will continue to accrue at approximately $250,000 each month that we do not register the shares. There is no cap on the penalty due to our failure to register such shares. Because of our financial condition, our Board of Directors has a duty to our creditors that may conflict with the interests of our stockholders. If we cannot obtain additional capital, the Board may make decisions that favor the interests of creditors at the expense of our stockholders. We depend, in part, on external financing to fund our capital needs. If we are unable to obtain sufficient financing on favorable terms, we may not be able to continue to operate our business. Historically, our business has not generated revenues sufficient to create operating profits. To supplement our revenues, we have funded our capital requirements with debt and equity financing. Our ability to obtain additional equity and debt financing depends on a number of factors including: . the progress and timely completion of our product development programs; . our products' commercial success; . our ability to license intellectual property on favorable terms; . the introduction and acceptance of new hardware platforms by third parties; and . our compliance with the financial covenants of our existing line of credit. If we cannot raise additional capital on favorable terms, we will have to reduce our costs by selling or consolidating our operations, and by delaying, canceling, suspending or scaling back product development and marketing programs. These measures could materially limit our ability to publish successful titles and may not decrease our costs enough to restore our operations to profitability. Our failure to comply with the covenants in our existing credit agreement could result in the termination of the agreement and a substantial reduction in the cash available to finance our operations. Pursuant to our credit agreement with LaSalle Business Credit Inc., or "LaSalle," entered into in April 2001, we agreed: . to safeguard, maintain and insure substantially all of our property, which property is collateral for any loans made under the credit agreement; . not to incur additional debt, except for trade payables and similar transactions, or to make loans; . not to enter into any significant corporate transaction, such as a merger or sale of substantially all of our assets without the knowledge of and consent LaSalle; . to maintain an agreed-upon tangible consolidated net worth, to be set by the parties for periods subsequent to April 2001; 21 . to maintain a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense of at least 1.25 to 1.00; . not to make capital expenditures in an aggregate amount of more than $2.5 million in any fiscal year without the consent of LaSalle; and . to maintain EBITDA of at least the following amounts for the following periods: . negative $7.2 million for the six month period from January 1, 2001 through June 30, 2001; . negative $3.5 million for the nine month period from January 1, 2001 through September 30, 2001; and . $7.7 million during any consecutive twelve-month period from and after January 1, 2001. We are not in compliance with the financial covenants pertaining to net worth and minimum EBITDA. If LaSalle does not waive compliance with these covenants, or if we breach other covenants or if there are other events of default in effect under the credit agreement and LaSalle does not waive compliance with them, LaSalle would be able to terminate the credit agreement and all outstanding amounts owed to LaSalle would immediately become due and payable. Because we depend on our credit agreement to fund our operations, LaSalle's termination of the credit agreement could cause material harm to our business. A change of control may cause the termination of several of our material contracts with our licensors and distributors. If there were a change of control of our Board of Directors, certain of our third-party developers and licensors may assert that this event constitutes a change of control and they may attempt to terminate existing development and distribution agreements with us. In particular, our license for "the Matrix" allows for the licensor to terminate the license if there is a change of control without their approval. The loss of the Matrix license would materially harm our projected operating results and financial condition. The unpredictability of our quarterly results may cause our stock price to decline. Our operating results have fluctuated in the past and may fluctuate in the future due to several factors, some of which are beyond our control. These factors include: . demand for our products and our competitors' products; . the size and rate of growth of the market for interactive entertainment software; . changes in personal computer and video game console platforms; . the timing of announcements of new products by us and our competitors and the number of new products and product enhancements released by us and our competitors; . changes in our product mix; . the number of our products that are returned; and . the level of our international and original equipment manufacturer royalty and licensing net revenues. Many factors make it difficult to accurately predict the quarter in which we will ship our products. Some of these factors include: . the uncertainties associated with the interactive entertainment software development process; . approvals required from content and technology licensors; and . the timing of the release and market penetration of new game hardware platforms. It is likely that in some future periods our operating results will not meet the expectations of the public or of public market analysts. Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause securities analysts and investors to revalue our stock and this may cause fluctuations in our stock price. 22 There are high fixed costs to developing our products. If our revenues decline because of delays in the introduction of our products, or if there are significant defects or dissatisfaction with our products, our business could be harmed. We have incurred significant net losses in recent periods, including a net loss of $20.8 million in the six months ended June 30, 2001, $12.1 million during 2000 and $41.7 million during 1999. Our losses stem partly from the significant costs we incur to develop our entertainment software products. Moreover, a significant portion of our operating expenses are relatively fixed, with planned expenditures based largely on sales forecasts. At the same time, most of our products have a relatively short life cycle and sell for a limited period of time after their initial release, usually less than one year. Relatively fixed costs and short windows in which to earn revenues mean that sales of new products are important in enabling us to recover our development costs, to fund operations and to replace declining net revenues from older products. Our failure to accurately assess the commercial success of our new products, and our delays in releasing new products, could reduce our net revenues and our ability to recoup development and operational costs. In the past, revenues have been reduced by: . delays in the introduction of new software products; . delays in the introduction, manufacture or distribution of the platform for which a software product was developed; . a higher than expected level of product returns and markdowns on products released during the year; . the cost of restructuring our operations, including international distribution arrangements; and . lower than expected worldwide sales of entertainment software releases. Similar problems may occur in the future. Any reductions in our net revenues could harm our business and financial results. Our growing dependence on revenues from game console software products increases our exposure to seasonal fluctuations in the purchases of game consoles. The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occurring during the year-end holiday buying season. As a result, our net revenues, gross profits and operating income have historically been highest during the second half of the year. The impact of this seasonality will increase as we rely more heavily on game console net revenues in the future. Moreover, delays in game console software products largely depend on the timeliness of introduction of game console platforms by the manufacturers of those platforms, such as Sega and Nintendo. The introduction by a manufacturer of a new game platform too late in the holiday buying season could result in a substantial loss of revenues by us. Seasonal fluctuations in revenues from game console products may cause material harm to our business and financial results. If our products do not achieve broad market acceptance, our business could be harmed significantly. Consumer preferences for interactive entertainment software are always changing and are extremely difficult to predict. Historically, few interactive entertainment software products have achieved continued market acceptance. Instead, a limited number of releases have become "hits" and have accounted for a substantial portion of revenues in our industry. Further, publishers with a history of producing hit titles have enjoyed a significant marketing advantage because of their heightened brand recognition and consumer loyalty. We expect the importance of introducing hit titles to increase in the future. We cannot assure you that our new products will achieve significant market acceptance, or that we will be able to sustain this acceptance for a significant length of time if we achieve it. 23 We believe that our future revenue will continue to depend on the successful production of hit titles on a continuous basis. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of these products to achieve market acceptance could cause material harm to our business. Further, if we do not achieve market acceptance, we could be forced to accept substantial product returns or grant significant pricing concessions to maintain our relationship with retailers and our access to distribution channels. If we are forced to accept significant product returns or grant significant pricing concessions, our business and financial results could suffer material harm. Our largest stockholder, Titus Interactive SA, may implement or block corporate actions in ways that are not in the best interests of our stockholders as a whole. Titus currently owns approximately 43.3% of our common stock, and, in connection with their ownership of our Series A Preferred Stock, controls approximately 48% of the total voting power of our stock. Upon conversion of the Series A Preferred Stock held by Titus as of August 14, 2001, Titus could own up to approximately 7.7 million additional shares of our common stock, bringing its total ownership to approximately 51.6%, of our common stock. Titus may continue to convert each share of their Series A Preferred Stock, to the extent not previously redeemed by us, into a number of shares of our Common Stock determined by dividing $27.80 by the lesser of (i) $2.78 or (ii) 85 percent of the average closing price per share as reported by Nasdaq for the twenty trading days preceding the date of conversion. Pursuant to the terms of our Series A Preferred Stock, Titus also has the ability to block approval of a merger or change in control that the holders of a majority of our common stock may deem beneficial. In connection with its investment, Titus has elected its Chief Executive Officer and its President to serve as members of our Board of Directors and Titus' Chief Executive Officer serves as our President. Titus may elect additional members that would constitute a majority of directors. As a consequence of its stock ownership and Board and management representation, Titus exerts significant influence over corporate policy and potentially may implement or block corporate actions that are not in the interests of Interplay and its stockholders as a whole. For example, Titus could compel us to enter into agreements with Titus or its subsidiaries on terms more favorable than those we would agree to with a third party or to forego enforcement of our rights against Titus or its subsidiaries. Titus could also use its veto over mergers to prevent a merger than may be in the best interests of our stockholders as a whole or to try to negotiate more favorable merger consideration for itself. Our stock price may decline significantly if we are delisted from the Nasdaq National Market. Our common stock currently is quoted on the Nasdaq National Market System. For continued inclusion on the Nasdaq National Market, we must meet certain tests, including a minimum bid price of $1.00 and net tangible assets of at least $4 million. We currently are not in compliance with the minimum net tangible assets requirement. In addition, during the second quarter of fiscal 2000 we were subject to a hearing before a Nasdaq Listing Qualifications Panel, which determined to continue the listing of our common stock on the Nasdaq National Market subject to certain conditions, all of which were fulfilled. However, if we continue to fail to satisfy the listing standards on a continuous basis, Nasdaq may delist our common stock from its National Market System. The variable conversion price of our Series A Preferred Stock increases our risk of being delisted in several ways: . Bid Price. The substantial number of shares that are potentially issuable upon conversion of the Series A Preferred Stock and the short selling that may occur as a result of the future priced nature of those shares increases the risk that our stock price will fall below Nasdaq's minimum bid price requirement and could, as noted above, result in our being delisted. See our risk factors "Substantial sales of our common stock by our existing stockholders may reduce the price of our stock and dilute existing stockholders" and "The holder of our Series A Preferred Stock could engage in short selling . . ." 24 . Public Interest Concerns. If the returns on our Series A Preferred Stock are deemed "excessive" compared with those of public investors in our common stock, Nasdaq may deny inclusion or apply more stringent criteria to the continued listing of our common stock. In making this analysis, Nasdaq considers: -- the amount raised in the transaction relative to our capital structure at the time of issuance; -- the dilutive effect of the transaction on our existing holders of common stock; -- the risk undertaken by Titus in purchasing our Series A Preferred Stock; -- the relationship between Titus and us; -- whether the transaction was preceded by other similar transactions; and -- whether the transaction is consistent with the just and equitable principles of trade. Nasdaq also considers, as mitigating factors in its analysis, incentives that encourage Titus to hold the Series A Preferred Stock for a longer time period and limit the number of shares into which the Series A Preferred Stock may be converted. Such features may limit the dilutive effect of the transaction and increase the risk undertaken by Titus in relationship to the reward available. . Change of Control and Change of Financial Structure. As of August 14, 2001, the Series A Preferred Stock was convertible into 7.7 million shares of our common stock. The exercise of these conversion rights could increase Titus' percentage ownership of our capital stock significantly and may cause Nasdaq to determine that (i) a merger or consolidation that results in a change of control or (ii) a change in financial structure has occurred. If Nasdaq determines that the conversion of our Series A Preferred Stock constitutes a change in control and a change in financial structure, we would need to re-apply for listing on Nasdaq and satisfy all initial listing requirements as of that time. We currently do not satisfy those initial listing requirements. If our common stock were delisted from the Nasdaq National Market, trading of our common stock, if any, may be conducted on the Nasdaq Small Cap Market, in the over-the-counter market on the "pink sheets" or, if available, the NASD's "Electronic Bulletin Board." In any of those cases, investors could find it more difficult to buy or sell, or to obtain accurate quotations as to the value of our common stock. The trading price per share of our common stock likely would be reduced as a result. A significant percentage of our international sales depend on our distribution agreement with Virgin and Virgin's diligent sales efforts and timely payments pursuant to that agreement. In connection with our acquisition in February 1999 of a 43.9% limited liability company membership interest in VIE Acquisition Group, LLC, or VIE, the parent entity of Virgin Interactive Entertainment Limited, or Virgin, we signed an international distribution agreement with Virgin. Under this agreement, we appointed Virgin as exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East, for a seven-year period. During the course of the last two years, due to a dispute regarding the amount of overhead fees and commissions we owed Virgin, Virgin withheld material amounts of proceeds from us from their distribution of our products from time to time. In April 2001, we entered into a settlement agreement with Virgin in which: . each party entered into a general release from claims against the other party; . Virgin paid us $3.1 million in settlement of amounts due us under the distribution agreement; . we paid Virgin $330,000 for marketing overhead related to sales of our products; . VIE redeemed our membership interest in VIE in full in exchange for the performance of our obligations under the settlement agreement; . pursuant to the concurrent third amendment to our distribution agreement with Virgin, the overhead fees owed to Virgin going forward were immediately reduced and will be eliminated by July 2002; and . we no longer have an equity interest in Virgin. Virgin is a wholly owned subsidiary and is controlled by Titus. 25 Virgin remains our exclusive distributor throughout much of the world, therefore our revenues could fall significantly and our business and financial results could suffer material harm if: . further disputes arise over amounts payable by us to Virgin; . Virgin fails to deliver to the full proceeds owed us from distribution of our products; . fails to effectively distribute our products abroad; or . otherwise fails to perform under the distribution agreement. Two of our directors have substantial, conflicting interests in our most significant distributor, Virgin Interactive Entertainment, Limited. All of the equity interests of VIE are owned by Titus, a significant stockholder of Interplay, which is controlled by two of our directors, Messrs. Herve Caen and Eric Caen. Herve Caen is the Chief Executive Officer of Titus and Eric Caen is the President of Titus. Herve Caen also serves as our President. Due to their positions with both of us and Titus, either of the Caens could influence or induce us to enter into agreements or business arrangements with VIE, or its subsidiary Virgin, on terms less favorable to us than we would negotiate with an unaffiliated third party in an arm's length transaction. Our long-term exclusive distribution agreement with Virgin may discourage potential acquirors from acquiring us. Pursuant to the settlement agreement we entered into with Titus, Virgin and VIE on April 11, 2001, during the seven-year term of our February 1999 distribution agreement with Virgin, we agreed not to sell, license our publishing rights, or enter into any agreement to either sell or license our publishing rights with respect to any products covered by the distribution agreement in the territory covered by the distribution agreement, with the exception of two qualified sales each year. The restrictions on sales and licensing of publishing rights until 2006 may discourage potential acquirors from entering into an acquisition transaction with us, or may cause potential acquirors to demand terms that are less favorable to our stockholders. In addition, the settlement agreement contains termination penalties of a minimum of $10 million, subject to substantial increases pursuant to the terms of the settlement agreement, which also may discourage potential acquirors that already have their own distribution capabilities in these territories. Our reliance on third party software developers subjects us to the risks that these developers will not supply us in a timely manner with high quality products or on acceptable terms. Third party interactive entertainment software developers, such as Bioware Corp. and Planet Moon Studios develop many of our software products. Since we depend on these developers in the aggregate, we remain subject to the following risks: . continuing strong demand for the developers' products may cause developers who developed products for us in the past to instead work for our competitors in the future; . the inability for us to control whether developers complete products on a timely basis or within acceptable quality standards, or at all; . limited financial resources may force developers out of business prior to their completion of projects for us or require us to fund additional costs; and . the possibility that developers could demand that we renegotiate our arrangements with them to include new terms less favorable to us. Increased competition for skilled third party software developers also has compelled us to agree to make advance payments on royalties and to guarantee minimum royalty payments to intellectual property licensors and game developers. If the products subject to these arrangements do not generate sufficient sales volumes to recover these royalty advances and guaranteed payments, we would have to write-off unrecovered portions of these payments, which could cause material harm to our business and financial results. 26 If we fail to anticipate changes in video game platforms and technology, our business may be harmed. The interactive entertainment software industry is subject to rapid technological change. New technologies could render our current products or products in development obsolete or unmarketable. Some of these new technologies include: . operating systems such as Microsoft Windows 2000; . technologies that support games with multi-player and online features; . new media formats such as online delivery and digital video disks, or DVDs; and . recent releases or planned releases in the near future of new video game consoles such as the Sony Playstation 2, the Nintendo Gamecube and the Microsoft Xbox. We must continually anticipate and assess the emergence of, and market acceptance of, new interactive entertainment software platforms well in advance of the time the platform is introduced to consumers. Because product development cycles are difficult to predict, we must make substantial product development and other investments in a particular platform well in advance of introduction of the platform. If the platforms for which we develop new software products or modify existing products are not released on a timely basis or do not attain significant market penetration, or if we develop products for a delayed or unsuccessful platform, our business and financial results could suffer material harm. New interactive entertainment software platforms and technologies also may undermine demand for products based on older technologies. Our success will depend in part on our ability to adapt our products to those emerging game platforms which gain widespread consumer acceptance. Our business and financial results may suffer material harm if we fail to: . anticipate future technologies and platforms and the rate of market penetration of those technologies and platforms; . obtain licenses to develop products for those platforms on favorable terms; or . create software for those new platforms on a timely basis. We compete with a number of companies that have substantially greater financial, marketing and product development resources than we do. The interactive entertainment software industry is intensely competitive and new interactive entertainment software programs and platforms are regularly introduced. The greater resources of our competitors permit them to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and pay higher fees than we can to licensors of desirable motion picture, television, sports and character properties and to third party software developers. We believe that the main competitive factors in the interactive entertainment software industry include: . product features; . brand name recognition, . access to distribution channels; . quality; . ease of use, price, marketing support and quality of customer service; and . ability to obtain licenses to popular motion picture, television, sports and character properties and to third party software developers. We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant competitors include: . Electronic Arts Inc. . Activision, Inc. 27 . Infogrames Entertainment . Microsoft Corporation . LucasArts Entertainment Company . Midway Games Inc. . Acclaim Entertainment, Inc. . Vivendi Universal Interactive Publishing . Ubi Soft Entertainment Publishing . The 3DO Company . Take Two Interactive Software, Inc. . Eidos PLC . THQ Inc. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Competitors with more extensive customer bases, broader customer relationships and broader industry alliances may be able to use such resources to their advantage in competitive situations, including establishing relationships with many of our current and potential customers. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo, Microsoft Corporation and Sega compete directly with us in the development of software titles for their respective platforms and they have generally discretionary approval authority over the products we develop for their platforms. Large diversified entertainment companies, such as The Walt Disney Company, many of which own substantial libraries of available content and have substantially greater financial resources, may decide to compete directly with us or to enter into exclusive relationships with our competitors. We also believe that the overall growth in the use of the Internet and online services by consumers may pose a competitive threat if customers and potential customers spend less of their available home personal computing time using interactive entertainment software and more time using the Internet and online services. We may face difficulty obtaining access to retailers necessary to market and sell our products effectively. Retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer software producers, and in particular producers of interactive entertainment software products, for high quality retail shelf space and promotional support from retailers. To the extent that the number of consumer software products and computer platforms increases, competition for shelf space may intensify and require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an improving position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of any retailer's sale volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support. A prolonged failure in this regard may cause material harm to our business. Because we sell a substantial portion of our products on a purchase order basis, our sales may decline substantially without warning and in a brief period of time. We currently sell our products through our sales force to mass merchants, warehouse club stores, large computer and software specialty chains and through catalogs in the United States and Canada, as well as to certain distributors. Outside North America, we generally sell products to third party distributors. We make our sales primarily on a purchase order basis, without long-term agreements. The loss of, or significant reduction in sales to, any of our principal retail customers or distributors could cause material harm to our business. 28 If we are compelled to sell a larger proportion of our products to distributors, our gross profit may decline. Mass merchants are the most important distribution channel for retail sales of interactive entertainment software. A number of these mass merchants have entered into exclusive buying arrangements with software developers or other distributors, which arrangements could prevent us from selling some or all of our products directly to that mass merchant. If the number of mass merchants entering into exclusive buying arrangements with our competitors were to increase, our ability to sell to such merchants would be restricted to selling through the exclusive distributor. Because sales to distributors typically have a lower gross profit than sales to retailers, this would lower our gross profit. This trend could cause material harm to our business. If our distributors or retailers cannot honor their credit arrangements with us, we may be burdened with payment defaults and uncollectible accounts. We typically sell to distributors and retailers on unsecured credit, with terms that vary depending upon the customer and the nature of the product. We have risk of non-payment from our customers due to financial inability to pay, or otherwise. In addition, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could cause material harm to our business. Our customers have the ability to return our products or to receive pricing concessions and such returns and concessions could reduce our net revenues and results of operations. We are exposed to the risk of product returns and pricing concessions with respect to our distributors and retailers. We allow distributors and retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms, and also offer a 90-day limited warranty to our end users that our products will be free from manufacturing defects. In addition, we provide pricing concessions to our customers to manage our customers' inventory levels in the distribution channel. We could be forced to accept substantial product returns and provide pricing concessions to maintain our relationships with retailers and our access to distribution channels. Product return and pricing concessions that exceed our reserves have caused material harm to our results of operations in the recent past and may do so again in the future. Substantial sales of our common stock by our existing stockholders may reduce the price of our stock and dilute existing stockholders. We have filed registration statements covering a total of approximately 49.4 million shares of our common stock for the benefit of the holders we describe below. Assuming the effectiveness of these registration statements, these shares would be eligible for immediate resale in the public market. . Universal Studios, Inc. holds approximately 10.4%, of our outstanding common stock, all of which are being registered. . Titus currently holds approximately 43.3% of our outstanding common stock and upon conversion of all its shares of Series A Preferred Stock, may own up to approximately 51.6% of our common stock. All of the shares of common stock issuable to Titus upon the conversion of the preferred stock or the exercise of the warrants are being registered in this registration statement. . Pursuant to registration statement 333-59008, filed on April 4, 2001, we intend to register shares equal to approximately 18% of our outstanding common stock, held by a number of our investors as set forth in that registration statement. . Employees and directors hold options and warrants to purchase 10.8% of our common stock, substantially most of which are eligible for immediate resale. We may issue options to purchase up to an additional 2.0% of our common stock to employees and directors, which we anticipate will be freely tradable when issued. 29 Although the holders described above are subject to restrictions on the transfer of our common stock, future sales by such holders could decrease the trading price of our common stock and, therefore, the price at which you could resell your shares. A lower market price for our shares also might impair our ability to raise additional capital through the sale of our equity securities. Any future sales of our stock would also dilute existing stockholders. We depend upon third party licenses of content for many of our products. Many of our current and planned products, such as our Star Trek, Advanced Dungeons and Dragons, Matrix and Caesars Palace titles, are lines based on original ideas or intellectual properties licensed from other parties. From time to time we may not be in compliance with certain terms of these license agreements. We may not be able to obtain new licenses, or maintain or renew existing licenses, on commercially reasonable terms, if at all. For example, Viacom Consumer Products, Inc. has granted the Star Trek license to another party upon the expiration of our rights in 2002. If we are unable to obtain licenses for the underlying content that we believe offers the greatest consumer appeal, we would either have to seek alternative, potentially less appealing licenses, or release the products without the desired underlying content, either of which could limit our commercial success and cause material harm to our business. We may fail to obtain new licenses from hardware companies on acceptable terms or to obtain renewals of existing or future licenses from licensors. We are required to obtain a license to develop and distribute software for each of the video game console platforms for which we develop products, including a separate license for each of North America, Japan and Europe. We have obtained licenses to develop software for the Sony PlayStation and PlayStation 2, as well as video game platforms from Nintendo and Microsoft. In addition, each of these companies has the right to approve the technical functionality and content of our products for their platforms prior to distribution. Due to the competitive nature of the approval process, we must make significant product development expenditures on a particular product prior to the time we seek these approvals. Our inability to obtain these approvals could cause material harm to our business. Our sales volume and the success of our products depends in part upon the number of product titles distributed by hardware companies for use with their video game platforms. Even after we have obtained licenses to develop and distribute software, we depend upon hardware companies such as Sony Computer Entertainment, Nintendo and Microsoft to manufacture the CD-ROM or DVD-ROM media discs that contain our software. These discs are then run on the companies' video game consoles. This process subjects us to the following risks: . we are required to submit and pay for minimum numbers of discs we want produced containing our software, regardless of whether these discs are sold, shifting onto us the financial risk associated with poor sales of the software developed by us; and . reorders of discs are expensive, reducing the revenues we receive from software releases that have stronger sales than initially anticipated and that require the production of additional discs. As a result, Sony, Nintendo and Microsoft can shift onto us the risk that if actual retailer and consumer demand for our interactive entertainment software differs from our forecasts, we must either bear the loss from overproduction or the lesser revenues associated with producing additional discs. Either situation could lead to material reductions in our net revenues. We have a limited number of key personnel. The loss of any single key person or the failure to hire and integrate capable new key personnel could harm our business. Our interactive entertainment software requires extensive time and creative effort to produce and market. The production of this software is closely tied to the continued service of our key product design, development, sales, marketing and management personnel, and in particular on the leadership, strategic vision and industry reputation of our founder and Chief Executive Officer, Brian Fargo. Our future success also will depend upon 30 our ability to attract, motivate and retain qualified employees and contractors, particularly software design and development personnel. Competition for highly skilled employees is intense, and we may fail to attract and retain such personnel. Alternatively, we may incur increased costs in order to attract and retain skilled employees. Our failure to retain the services of Brian Fargo or other key personnel, including competent executive management, or to attract and retain additional qualified employees could cause material harm to our business. Titus intends to gain control of our board of directors, which could result in a significant change in management and operations. Titus has stated that they intend to gain control of our Board of Directors. It is possible that this change in control could result in a change in our management and operations. Significant changes in the composition of our executive management team may hinder our ability to address the other challenges we face, and may cause material harm to our business or financial condition. Our international sales expose us to risks of unstable foreign economies, difficulties in collection of revenues, increased costs of administering international business transactions and fluctuations in exchange rates. Our net revenues from international sales accounted for 17 percent of our total net revenues for the six months ended June 30, 2001 and 28 percent for the six months ended June 30, 2000. Most of these revenues come from our distribution relationship with Virgin, pursuant to which Virgin became the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. To the extent our resources allow, we intend to continue to expand our direct and indirect sales, marketing and product localization activities worldwide. Our international sales and operations are subject to a number of inherent risks, including the following: . recessions in foreign economies may reduce purchases of our products; . translating and localizing products for international markets is time- consuming and expensive; . accounts receivable are more difficult to collect and when they are collectible, they may take longer to collect; . regulatory requirements may change unexpectedly; . it is difficult and costly to staff and manage foreign operations; . fluctuations in foreign currency exchange rates; . political and economic instability; . we depend on Virgin as our exclusive distributor in Europe, the Commonwealth of Independent States, Africa and the Middle East; and . delays in market penetration of new platforms in foreign territories. These factors may cause material declines in our future international net revenues and, consequently, could cause material harm to our business. A significant, continuing risk we face from our international sales and operations stems from exchange rate fluctuations. Because we do not engage in currency hedging activities, fluctuations in currency exchange rates have caused significant reductions in our net revenues from international sales and licensing due to the loss in value upon conversion into U.S. Dollars. We may suffer similar losses in the future. 31 Inadequate intellectual property protections could prevent us from enforcing or defending our proprietary technology. We regard our software as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various copyrights and trademarks, and hold the rights to one patent application related to one of our titles. While we provide "shrinkwrap" license agreements or limitations on use with our software, it is uncertain to what extent these agreements and limitations are enforceable. We are aware that some unauthorized copying occurs within the computer software industry, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, it could cause material harm to our business and financial results. Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or are weakly enforced. Legal protection of our rights may be ineffective in such countries, and as we leverage our software products using emerging technologies such as the Internet and online services, our ability to protect our intellectual property rights and to avoid infringing others' intellectual property rights may diminish. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies. We may unintentionally infringe on the intellectual property rights of others which could expose us to substantial damages or restrict our operations. As the number of interactive entertainment software products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Intellectual property litigation or claims could force us to do one or more of the following: . cease selling, incorporating or using products or services that incorporate the challenged intellectual property; . obtain a license from the holder of the infringed intellectual property, which license, if available at all, may not be available on commercially favorable terms; or . redesign our interactive entertainment software products, possibly in a manner that reduces their commercial appeal. Any of these actions may cause material harm to our business and financial results. Our software may be subject to governmental restrictions or rating systems. Legislation is periodically introduced at the state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. In addition, many foreign countries have laws that permit governmental entities to censor the content of interactive entertainment software. We believe that mandatory government-run rating systems eventually will be adopted in many countries that are 32 significant markets or potential markets for our products. We may be required to modify our products to comply with new regulations, which could delay the release of our products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business. In addition to such regulations, certain retailers have in the past declined to stock some of our products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date these actions have not caused material harm to our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business. Our directors and officers control a large percentage of our voting stock and may use this control to compel corporate actions that are not in the best interests of our stockholders as a whole. Including Titus, our directors and executive officers beneficially own approximately 69% of our aggregate common stock. In the event Titus converts all of its shares of Series A Preferred Stock into common stock, the additional shares could increase Titus' ownership to approximately 51.6%. These stockholders can control substantially all matters requiring stockholder approval, including the election of directors, subject to our stockholders' cumulative voting rights, and the approval of mergers or other business combination transactions. This concentration of voting power could discourage or prevent a change in control that otherwise could result in a premium in the price of our common stock. Moreover, since Titus owns 100% of VIE and only up to approximately 51.6% of Interplay, Titus will recognize more revenue on a consolidated basis to the extent it is able to divert revenues to the Virgin entities at the expense of Interplay. Therefore, Titus has an incentive to compel Interplay to enter into transactions with the Virgin entities on terms less favorable than might prevail in a transaction with an unaffiliated third party. We may fail to implement Internet-based product offerings successfully. We seek to establish an online presence by creating and supporting sites on the Internet and by offering our products through these sites. Our ability to establish an online presence and to offer online products successfully depends on: . increases in the Internet's data transmission capability; . growth in an online market sizeable enough to make commercial transactions profitable. Because global commerce and the exchange of information on the Internet and other open networks are relatively new and evolving, a viable commercial marketplace on the Internet may not emerge and complementary products for providing and carrying Internet traffic and commerce may not be developed. Even with the proper infrastructure, we may fail to develop a profitable online presence or to generate any significant revenue from online product offerings in the near future, or at all. If the Internet does not become a viable commercial marketplace, or if this development occurs but is insufficient to meet our needs or if such development is delayed beyond the point where we plan to have established an online service, our business and financial condition could suffer material harm. Some provisions of our charter documents may make takeover attempts difficult, which could depress the price of our stock and inhibit our ability to receive a premium price for your shares. Our Board of Directors has the authority, without any action by the stockholders, to issue up to 4,616,646 shares of preferred stock and to fix the rights and preferences of such shares. In addition, our certificate of incorporation and bylaws contain provisions that: . eliminate the ability of stockholders to act by written consent and to call a special meeting of stockholders; and . require stockholders to give advance notice if they wish to nominate directors or submit proposals for stockholder approval. 33 These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. The holder of our Series A Preferred Stock could engage in short selling to increase the number of shares of common stock issuable upon conversion of our Series A Preferred Stock. If this occurs, the market price of our common stock and the value of your investment may decline. Titus, the sole holder of shares of our Series A Preferred Stock, may convert those shares into shares of our common stock. The shares of our Series A Preferred Stock generally are convertible into a number of shares of common stock determined by dividing $27.80 by the lesser of (a) $2.78 and (b) 85 percent of the average of the closing prices per share as reported by the Nasdaq National Market for the twenty trading days preceding the date of conversion. Based on the above formula, the number of shares of our common stock that are issuable upon conversion of the Series A Preferred Stock increases as the price of our common stock decreases. Increases in the number of shares of our common stock which are publicly traded could put downward pressure on the market price of our common stock. Depending on the trading volume of our stock, the sale of a relatively limited number of shares could cause a significant decrease in price. Therefore, Titus could sell short our common stock prior to conversion of the Series A Preferred Stock, potentially causing the market price to decline and a greater number of shares to become issuable upon conversion of the Series A Preferred Stock. Titus could then convert its Series A Preferred Stock and use the shares of common stock received upon conversion to cover its short positions. Titus could thereby profit by the decline in the market price of our common stock caused by its short selling. See also the risk factor entitled "Substantial sales of our common stock by our existing stockholders may reduce the price of our stock and dilute existing stockholders." Our stock price is volatile. The trading price of our common stock has previously and could continue to fluctuate in response to factors that are largely beyond our control, and which may not be directly related to the actual operating performance of our business, including: . general conditions in the computer, software, entertainment, media or electronics industries; . changes in earnings estimates or buy/sell recommendations by analysts; . investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers; . price and trading volume volatility of the broader public markets, particularly the high technology sections of the market. We do not pay dividends on our common stock. We have not paid any cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Increases in interest rates will increase the cost of our debt. Our working capital line of credit bears interest at either the bank's prime rate or LIBOR, at our option both of which are variable rates. As such, if interest rates increase, we will have to use more cash to service our debt, which could impede our ability to meet other expenses as they become due and could cause material harm to our business and financial condition. 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have any derivative financial instruments as of June 30, 2001. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with interest rate fluctuations on our revolving line of credit agreement, and the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations. Interest Rate Risk The table below provides information as of June 30, 2001 about our other financial instruments that are sensitive to changes in interest rates.
Working Capital Line of Credit (Variable Rate) ---------------------------------------------- Amount borrowed at June 30, 2001......................... $6.1 million Maximum amount of Line................................... $15 million(1) Variable interest rates.................................. 6.39-7.0%(2) Expiration............................................... April 30, 2004(3)
- -------- (1) Advances under the line are limited to an advance formula of qualified accounts receivable and inventory. At June 30, 2001, the amount available for borrowing under the line was $3.1 million. (2) Borrowings bear interest at the bank's prime rate, or, at our option, a portion of the outstanding balance at LIBOR plus 2.5 percent. (3) The line is subject to review and renewal by the bank on April 30, 2002 and 2003. At June 30, 2001, we were not in compliance with certain financial covenants and the line may be subject to termination and acceleration of payment. Foreign Currency Risk Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables, primarily from Virgin. We recognized foreign exchange losses of $339,000 for the six months ended June 30, 2001 and $935,000 for the year ended December 31, 2000, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable from Virgin. Based upon the average foreign currency rates for the six months ended June 30, 2001, a hypothetical 10 percent change in the applicable foreign exchange rates would have increased our loss by approximately $34,000. 35 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. Item 5. Other Information On August 13, 2001, the Company's largest stockholder, Titus Interactive, S.A., converted 336,070 shares of Series A Preferred Stock of the Company into 6,679,306 shares of Common Stock. After the conversion, Titus owns approximately 19,496,561 shares of Common Stock, which constitutes approximately 43 percent of the total outstanding common stock of the Company. In addition, Titus holds a remaining 383,354 shares of Series A Preferred Stock, which depending upon the conversion ratio, upon conversion most likely would result in Titus owning a majority of the Company's issued and outstanding shares of Common Stock. Titus did not pay any additional consideration for the Common Stock issued upon conversion of the Series A preferred stock. As of August 13, Titus controls approximately 48 percent of the voting securities of the Company. The Company previously had announced discussions during the quarter with a third party concerning the acquisitions of the Company. The discussions with such third party have terminated. 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 Loan and Security Agreement between the Company and LaSalle Business Credit, Inc., dated April 11, 2001 10.2 Warrant to Purchase Common Stock issued to Brian Fargo, dated April 11, 2001 10.3 Secured Promissory Note issued to Brian Fargo, dated April 11, 2001 10.4 Security Agreement between the Company and Brian Fargo, dated April 11, 2001
36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERPLAY ENTERTAINMENT CORP. Date: August 17, 2001 /s/ Brian Fargo By: _________________________________ Brian Fargo, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: August 17, 2001 /s/ Manuel Marrero By: _________________________________ Manuel Marrero, Chief Financial Officer (Principal Financial and Accounting Officer) 37 EX-10.1 3 dex101.txt LOAN AND SECURITY AGREEMENT Exhibit 10.1 LOAN AND SECURITY AGREEMENT Dated as of April 11, 2001 among INTERPLAY ENTERTAINMENT CORP., INTERPLAY OEM, INC. and GAMESONLINE.COM, INC. as Co-Borrowers and LaSALLE BUSINESS CREDIT, INC., as Lender $15,000,000 TABLE OF CONTENTS
Page 1. DEFINITIONS............................................................................... 1 2. REVOLVING LOANS........................................................................... 15 3. INTENTIONALLY DELETED..................................................................... 16 4. LETTERS OF CREDIT......................................................................... 16 5. INTEREST, FEES AND CHARGES................................................................ 16 6. LOAN ADMINISTRATION....................................................................... 21 7. GRANT OF SECURITY INTEREST TO LASALLE..................................................... 22 8. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN22 9. POSSESSION OF COLLATERAL AND RELATED MATTERS.............................................. 23 10. COLLECTIONS............................................................................... 23 11. SCHEDULES AND REPORTS..................................................................... 25 12. TERM...................................................................................... 27 13. REPRESENTATIONS AND WARRANTIES............................................................ 28 14. COVENANTS................................................................................. 33 15. CONDITIONS PRECEDENT...................................................................... 37 16. DEFAULT................................................................................... 39 17. REMEDIES UPON AN EVENT OF DEFAULT......................................................... 40 18. INDEMNIFICATION........................................................................... 41 19. NOTICES................................................................................... 42 20. CHOICE OF GOVERNING LAW AND CONSTRUCTION.................................................. 42
i LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made as of this 11/th/ day of April, 2001, by and between LaSALLE BUSINESS CREDIT, INC., a Delaware corporation ("LaSalle"), with its principal office at 135 South LaSalle Street, Chicago, Illinois 60603, and INTERPLAY ENTERTAINMENT CORP., a Delaware corporation, INTERPLAY OEM, INC., a California corporation, and GAMESONLINE.COM, INC., a Delaware corporation (each a "Borrower" and collectively, "Borrowers"), each with its principal office at 16815 Von Karman Avenue, Irvine, California 92606. WITNESSETH: WHEREAS, from time to time Borrowers may request LaSalle to make loans and advances to and extend certain credit accommodations to Borrowers, and the parties wish to provide for the terms and conditions upon which such loans, advances and credit accommodations shall be made; NOW, THEREFORE, in consideration of any loans, advances and credit accommodations (including any loans by renewal or extension) hereafter made to Borrowers by LaSalle, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Borrowers, the parties agree as follows: 1. DEFINITIONS. (1) General Definitions ------------------- "Account," "Account Debtor," "Chattel Paper," "Documents," "Equipment," "General Intangibles," "Goods," "Instruments," and "Inventory," shall have the respective meanings assigned to such terms, as of the date of this Agreement, in the Illinois Uniform Commercial Code. "Affiliate" shall mean, with respect to any Person, any other Person (i) directly or indirectly controlling or controlled by or under direct or indirect common control with such Person or (ii) directly or indirectly owning or holding five percent (5%) or more of the equity interest in such Person. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Bank" shall mean LaSalle National Bank, Chicago, Illinois, a national banking association. "Bankruptcy Code" shall mean the United States Bankruptcy Code (11 U.S.C.(S).101, et seq.). -- --- "Benefit Plan" shall mean an employee pension benefit plan of any Borrower or an ERISA Affiliate, as defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA. "Borrowing Base" shall have the meaning specified in paragraph 2(b)(i) ----------------- hereof. "Business Day" shall mean any day other than a Saturday, Sunday, or such other day as banks in Chicago, Illinois are authorized or required to be closed for business. "Capital Expenditures" shall mean, with respect to any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including expenditures for capitalized lease obligations) by Borrowers during such period that are required by GAAP to be included in or reflected by the property, plant or equipment or similar fixed asset accounts (or in intangible accounts subject to amortization) in the balance sheet of Borrowers. "Change of Control" shall mean, with respect to IEC, (a) at any time the members of the Board of Directors of IEC on the date hereof shall not constitute a majority of the Board of Directors; or (b) any Person or group (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended), other than Titus Interactive SA or Brian Fargo, or Persons controlled by any of them, shall at any time have acquired direct or indirect beneficial ownership of a percentage equal to or more than thirty percent (30%) of the outstanding voting stock of IEC; and with respect to Interplay OEM, IEC shall cease to be the Parent of OEM. "Closing Agenda" shall have the meaning specified in paragraph ---------- 15(a)(i) hereof. - -------- "Closing Date" shall mean the date upon which the initial Loan is made. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall mean all of the personal property of each of the Borrowers described in paragraph 7 hereof, and all other real or personal property of any Obligor or any other Person now or hereafter pledged to LaSalle to secure, either directly or indirectly, repayment of any of the Liabilities. "Default" shall mean any event, condition or default which with the giving of notice, the lapse of time or both would be an Event of Default. "Dilution" shall mean, with respect to any period, the percentage obtained by dividing: (a) the sum of non-cash credits against Accounts of Borrowers for such period, plus pending or probable, but not yet applied, non- cash credits against Accounts of Borrowers for such period, as reasonably determined by LaSalle, by (b) gross invoiced sales of Borrowers for such period. "EBITDA" shall mean, with respect to any period, net income after taxes for such period (excluding any after-tax gains or losses on the sale of assets and excluding other after-tax extraordinary gains or losses) plus ---- interest expense, income tax expense, depreciation and 2 amortization for such period, less gains and losses attributable to any fixed ---- asset sales made during such period, minus interest income, plus or minus any ----- ---- ----- other non-cash charges or gains which have been subtracted or added in calculating net income after taxes for such period, all as determined in accordance with GAAP. "Eligible Account" shall mean an Account owing to either Borrower which is acceptable to LaSalle in its sole discretion for lending purposes. LaSalle shall, in general, consider an Account to be an Eligible Account if it meets, and so long as it continues to meet, the following requirements: (1) it is genuine and in all respects is what it purports to be; (2) it is owned by either Borrower and such Borrower has the right to subject it to a security interest in favor of LaSalle; (3) it arises from (A) the performance of services by a Borrower and such services have been fully performed and acknowledged and accepted by the Account Debtor thereunder; or (B) the sale of Goods by a Borrower, and such Goods have been completed in accordance with the Account Debtor's specifications (if any) and delivered to and accepted by the Account Debtor, such Account Debtor has not refused to accept and has not returned any of the Goods, or has not refused to accept any of the services, which are the subject of such Account, and such Borrower has possession of, or has delivered to LaSalle at LaSalle's request, shipping and delivery receipts evidencing delivery of such Goods; (4) it is evidenced by an invoice rendered to the Account Debtor thereunder, is due and payable within one hundred twenty (120) days after the stated invoice date thereof and does not remain unpaid more than ninety (90) days past the stated due date thereof; provided, however, that if more than -------- ------- fifty percent (50%) of the aggregate dollar amount of invoices owing by a particular Account Debtor remain unpaid for more than one hundred twenty (120) days past the respective invoice dates thereof or ninety (90) days after the stated due date, then all Accounts owing to either Borrower by that Account Debtor shall be deemed ineligible; (5) it is not subject to any prior assignment, claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; (6) it is a valid, legally enforceable and unconditional obligation of the Account Debtor thereunder, and is not subject to setoff, counterclaim, credit, allowance or adjustment by such Account Debtor, or to any claim by such Account Debtor denying liability thereunder in whole or in part; (7) it does not arise out of a contract or order which fails in any material respect to comply with the requirements of applicable law; (8) the Account Debtor thereunder is not a director, officer, employee or agent of either Borrower, or a Subsidiary, Parent or Affiliate of either Borrower; 3 (9) it is not an Account with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to LaSalle pursuant to, and in full compliance with, the Assignment of Claims Act of 1940, as amended; (10) it is not an Account with respect to which the Account Debtor is located in a state which requires Borrower, as a precondition to commencing or maintaining an action in the courts of that state, either to (A) receive a certificate of authority to do business and be in good standing in such state, or (B) file a notice of business activities report or similar report with such state's taxing authority, unless (x) Borrower has taken one of the actions described in clauses (A) or (B), (y) the failure to take one of the actions described in either clause (A) or (B) may be cured retroactively by Borrower at its election, or (z) Borrower has proven, to LaSalle's reasonable satisfaction, that it is exempt from any such requirements under any such state's laws; (11) it is an Account which arises out of a sale made in the ordinary course of Borrower's business; (12) the Account Debtor is a resident or citizen of, and is located within, the United States of America or Canada; (13) it is not an Account with respect to which the Account Debtor's obligation to pay is conditional upon the Account Debtor's approval of the Goods or services or is otherwise subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale on approval, sale or return or consignment basis; (14) it is not an Account (A) with respect to which any representation or warranty contained in this Agreement is untrue in a material respect or (B) which violates in a material respect any of the covenants of Borrowers contained in this Agreement; (15) it is not an Account which, when added to a particular Account Debtor's other indebtedness to Borrowers, exceeds the lesser of twenty percent (20%) of the aggregate of Borrowers' Accounts (except for Account Debtors listed on Schedule 1(xv) annexed hereto) or a credit limit determined by -------------- LaSalle in its reasonable credit judgment for that Account Debtor, provided, -------- however, that Accounts excluded from Eligible Accounts solely by reason of this - ------- paragraph 1(a)(xv) shall be Eligible Accounts to the extent of such credit - ------------------ limit. (16) it is not an Account with respect to which the prospect of payment or performance by the Account Debtor is or will be impaired, as determined by LaSalle in its sole discretion. (17) it is not an Account arising from progress billings, invoices for deposits, samples or tooling 4 (18) it is not an Account with respect to which the sale is on an installment basis, lease or other extended payment basis (19) it is not the portion of an Account representing licensing fees (except for Interplay OEM, Inc.), late fees, service charges or interest. "Eligible Inventory" shall mean that portion of the Inventory of a Borrower which is acceptable to LaSalle in its sole discretion. Without limiting LaSalle's discretion, LaSalle shall, in general, consider Inventory to be Eligible Inventory if it meets, and so long as it continues to meet, the following requirements: (20) it is owned by a Borrower and such Borrower has the right to subject it to a first and prior security interest in favor of LaSalle; (21) it is located on the premises listed on Exhibit A and is --------- not in transit; (22) it is not subject to any prior assignment, claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; (23) it is finished goods held for sale by a Borrower, normally and currently saleable in the ordinary course and not raw materials or work in process and is held for sale or furnishing under contracts of service, it is (except as LaSalle may otherwise consent in writing) new and unused of good and merchantable quality and free from defects which would, in LaSalle's sole determination, affect its market value; (24) it is not stored with a bailee, consignee, warehouseman, processor or similar party unless LaSalle has given its prior written approval and any Borrower has caused any such bailee, consignee, warehouseman, processor or similar party to issue and deliver to LaSalle, in form and substance reasonably acceptable to LaSalle, such UCC financing statements, warehouse receipts, waivers and other documents as LaSalle shall reasonably require; (25) LaSalle has determined in accordance with LaSalle's customary business practices that it is not unacceptable due to age, type, category or quantity and is not listed as a "reserve" on Borrower's general ledger; and (26) it is not Inventory (A) with respect to which any of the representations and warranties contained in this Agreement are untrue in any material respect or (B) which violates in any material respect any of the covenants of Borrowers contained in this Agreement. Eligible Inventory shall not include any of the following: (a) catalogs and other promotional materials of any kind; (b) damaged, defective or recalled items; (c) obsolete items; (d) items used as demonstrators, prototypes or salesmen's samples; (e) items of Inventory which have been consigned to Borrowers or as to which a Person claims a security interest, prior assignment claim or encumbrances whatsoever other than liens of the type set forth in clauses (i), (ii) and (iv) of the definition of Permitted Liens; (f) packing and shipping materials; (g) Inventory located on 5 premises leased by a Borrower from a landlord with whom Landlord has not entered into a landlord's waiver on terms reasonably satisfactory to Lender; (h) Inventory which in the reasonable judgment of Lender is considered to be slow moving or otherwise not merchantable; and (i) Inventory which is subject to a license agreement which prohibits the assignment thereof or which contains restrictions which would impair Lender's ability to sell any Inventory subject to such license agreement unless Lender shall have entered into a licensor consent letter with the licensor in form and substance reasonably satisfactory to Lender. "Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to Borrowers' business or facilities owned or operated by Borrowers, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and all references to sections thereof shall include such sections and any predecessor and successor provisions thereto. "ERISA Affiliate" shall mean any member of a controlled group of entities as determined under Section 414(b), (c), (m), or (o) of the IRC, of which the Borrowers are a member. "Eurocurrency Reserve Requirements" for any day, as applied to a LIBOR Loan, shall mean the aggregate (without duplication) of the maximum rates of reserve requirements (expressed as a decimal fraction) in effect with respect to LaSalle and/or any present or future lender or participant on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under Regulation D or any other applicable regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect, dealing with reserve requirements prescribed for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by LaSalle and/or any such lenders or participants (such rate to be adjusted to the nearest one sixteenth of one percent (1/16 of 1%) or, if there is not a nearest one sixteenth of one percent (1/16 of 1%), to the next higher one sixteenth of one percent (1/16 of 1%)). "Event of Default" shall have the meaning specified in paragraph 16 hereof. "Excess Availability" shall mean, as of any date of determination by LaSalle, the excess, if any, of (i) the Borrowing Base over (ii) the outstanding Revolving Loans and Letter of Credit Obligations, in each case as of the close of business on such date. For purposes of calculating Borrowers' Excess Availability and the amount of the Borrowing Base relating thereto, all of Borrowers' trade payables and outstanding debt, other than the Liabilities hereunder, which remain 6 unpaid more than ninety (90) days past invoice date excluding special arrangements, shall, on the date of the determination of Excess Availability, be deemed to have been paid by Borrowers. "Exhibit A" shall mean the exhibit entitled Exhibit A -Business and --------- Collateral Locations, which is attached hereto and made a part hereof. "Exhibit B" shall mean the exhibit entitled Exhibit B - Officer's --------- Certificate, which is attached hereto and made a part hereof. "Fiscal Year" shall mean with respect to each Borrower, the twelve (12) month accounting period of such Borrower commencing January 1st of each calendar year and ending December 31st of such calendar year. "GAAP" shall mean generally accepted accounting principles and policies in the United States as in effect from time to time. "Guarantor" shall mean Brian Fargo or any other guarantor of the Liabilities, from time to time. "Guaranty" shall mean the Guaranty executed and delivered by Guarantor to LaSalle, as amended, modified or supplemented from time to time. "Hazardous Materials" shall mean any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation, any that are or become classified as hazardous or toxic under any Environmental Law). "Indebtedness" shall mean all obligations of each Borrower which in accordance with GAAP would be classified upon a balance sheet as liabilities (except capital stock and surplus earned or otherwise) and in any event, without limitation by reason of enumeration, shall include all indebtedness, debt and other similar monetary obligations of each Borrower whether direct or guaranteed, and all premiums, if any, due at the required prepayment dates of such indebtedness, and all indebtedness secured by a lien on assets owned by each Borrower, whether or not such indebtedness actually shall have been created, assumed or incurred by such Borrower, whether or not such indebtedness of such Borrower resulting from the acquisition by such Borrower of any assets subject to any lien shall be deemed, for the purpose hereof, to be the equivalent of the creation, assumption and incurring of the indebtedness secured thereby, whether or not actually so created, assumed or incurred. "Indemnified Party" shall have the meaning specified in paragraph 18 hereof. 7 "Interest Coverage Ratio" shall mean, with respect to any period, the ratio of (i) EBITDA for such period, to (ii) interest expense as calculated in the determination of net income for such period of Borrowers on a consolidated basis for such period. "Interest Period" shall mean: (27) with respect to any initial request by the Borrowers for a LIBOR Loan, a one month, two month, three month or six month period commencing on the borrowing or conversion date with respect to a LIBOR Loan and ending one, two, three or six months thereafter, as applicable; and (28) thereafter with respect to any continuation of, or conversion to, a LIBOR Loan, at the option of the Borrowers, any one month, two month, three month or six month period commencing on the last day of the immediately preceding Interest Period applicable to such LIBOR Loan and ending one, two, three or six months thereafter, as applicable; provided that, the foregoing provisions relating to Interest Periods are subject - -------- to the following: 1. if any Interest Period would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day, unless the result of such extension would extend such payment into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; 2. any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month, at the end of such Interest Period) shall end on the last Business Day of a calendar month; and 3. for purposes of determining the availability of Interest Periods, such Interest Periods shall be deemed available if (x) the Bank quotes an applicable rate or LaSalle determines LIBOR, as provided in the definition of LIBOR, (y) the LIBOR determined by the Bank or LaSalle will adequately and fairly reflect the cost of maintaining or funding its loans bearing interest at LIBOR, for such Interest Period, and (z) such Interest Period will end on or before the last day of the then current term of this Agreement. If a requested Interest Period shall be unavailable in accordance with the foregoing sentence, Borrowers shall continue to pay interest on the Liabilities at the applicable per annum rate based upon the Prime Rate. "Investment Property" shall mean all of Borrowers' present and future investment property, including all certificated and uncertificated securities, securities entitlements, securities accounts, commodity accounts and commodity contracts. "Letter of Credit Obligations" shall mean, as of any date of determination, the sum of (i) the aggregate undrawn face amount of all Letters of Credit and (ii) the aggregate unreimbursed amount of all drawn Letters of Credit not already converted to a Loan hereunder. 8 "Letters of Credit" shall mean those documentary or stand-by letters of credit issued for a Borrower's account in accordance with the terms of paragraph 4 hereof. - ----------- "Liabilities" shall mean any and all obligations, liabilities and indebtedness of either Borrower to LaSalle or to any parent, affiliate or subsidiary of LaSalle of any and every kind and nature, howsoever created, arising or evidenced and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, whether primary, secondary, direct, indirect, absolute, contingent or otherwise (including, without limitation, obligations of performance), whether several, joint or joint and several, and whether arising or existing under written or oral agreement or by operation of law. "Loan" or "Loans" shall mean any and all Revolving Loans made by LaSalle to Borrowers pursuant to paragraph 2 hereof and all other loans, ----------- advances and financial accommodations now or hereafter made by LaSalle to or on behalf of a Borrower hereunder. "LIBOR" shall mean, at any time of determination, and subject to availability, for each applicable Interest Period, a variable rate of interest equal to: (a) at LaSalle's election (i) the applicable LIBOR quoted to LaSalle by the Bank, or (ii) the rate of interest determined by LaSalle at which deposits in U.S. dollars are offered for the relevant Interest Period based on information presented on Telerate Systems at Page 3750 as of 11:00 A.M. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period, provided that, if at least two such offered rates appear on the Telerate System at Page 3750 in respect of such Interest Period, the arithmetic mean of all such rates (as determined by LaSalle) will be the rate used; divided by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of Eurocurrency Reserve Requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period. "LIBOR Lending Office" shall mean the office of the Bank, maintained at 135 South LaSalle Street, Chicago, IL 60603. "LIBOR Loan" shall mean any loans made pursuant to this Agreement which are made or maintained at a rate of interest based upon LIBOR, provided that (i) no Default or Event of Default has occurred hereunder, which has not been waived in writing by LaSalle, and (ii) no LIBOR Loan shall be made with an Interest Period that ends subsequent to the then current term of this Agreement. "Lock Box" and "Blocked Account" shall have the meanings specified in paragraph 10 hereof. - ------------ "Material Adverse Effect" shall mean with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of the business, property, assets, operations, condition (financial or otherwise) or prospects of Borrowers, on a consolidated basis. 9 "Multiemployer Plan" shall mean a plan described in Section 4001(a)(3) of ERISA which covers employees of any Borrower or any ERISA Affiliate. "Note" shall mean the Revolving Note, as the same may be amended from time to time. "Obligor" shall mean each Borrower and each Person who is or shall become primarily or secondarily liable for any of the Liabilities; provided, -------- however, that such term shall not include any Account Debtor. - ------- "Other Agreements" shall mean all agreements, instruments and documents including, without limitation, guaranties, mortgages, trust deeds, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, leases, financing statements and all other writings heretofore, now or from time to time hereafter executed by or on behalf of any Borrower or any other Person and delivered to LaSalle or to any parent, affiliate or subsidiary of LaSalle in connection with the Liabilities or the transactions contemplated hereby. "Parent" shall mean any Person now or at any time or times hereafter owning or controlling (alone or with any other Person) at least a majority of the issued and outstanding voting stock or other similar ownership interest of any Borrower or any Subsidiary. "Permitted Liens" shall mean (i) statutory liens of landlords, carriers, warehousemen, mechanics, materialmen or suppliers incurred in the ordinary course of business and securing amounts not yet due or declared to be due by the claimant thereunder, (ii) liens or security interests in favor of LaSalle, (iii) zoning restrictions and easements, rights of way, licenses, covenants and other restrictions affecting the use of real property that do not individually or in the aggregate have a Material Adverse Effect on Borrowers' ability to use such real property for its intended purpose in connection with Borrowers' business, (iv) liens securing the payment of taxes or other governmental charges not yet delinquent or being contested in good faith and by appropriate proceedings, (v) liens incurred or deposits made in the ordinary course of Borrowers' business in connection with capitalized leases or purchase money security interests for purchase of, and applying only to, Equipment included in the permitted borrowings under paragraph 13(q) or permitted as --------------- Capital Expenditures under paragraph 14(n), the documents relating to such liens --------------- to be in form and substance reasonably acceptable to LaSalle, (vi) liens securing indebtedness owing by any Subsidiary to any Borrower to the extent such indebtedness is permitted under paragraph 14(q), or to any other Subsidiary of --------------- any Borrower, (vii) deposits to secure performance of bids, trade contracts, leases and statutory obligations (to the extent not excepted elsewhere herein); (viii) liens specifically permitted by LaSalle in writing as set forth on Schedule 1(a) attached hereto; (ix) any lien arising out of the refinancing, - ------------- extension, renewal or refunding of any indebtedness secured by any lien permitted by any of the foregoing subparagraphs (i) through (viii) inclusive; -------------------------------- provided, that (a) such indebtedness is not secured by any additional assets, - -------- and (b) the amount of such indebtedness is not increased, (x) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation, (xi) rights of setoff, banker's lien and other similar rights arising solely by operation of law and (xii) judgment liens that shall not have been in existence for a period longer than thirty (30) days after the creation thereof or, if a stay or execution shall have been obtained, for a 10 period longer than thirty (30) days after the expiration of such stay; and (xiii) liens securing indebtedness (other than indebtedness permitted pursuant to Section 13(i)) of the Borrowers in an amount not to exceed $250,000). -------------- "Person" shall mean any individual, sole proprietorship, partnership, limited liability company venture, trust, unincorporated organization, association, corporation, institution, entity, party or foreign or United States government (whether federal, state, county, city, municipal or otherwise), including, without limitation, any instrumentality, division, agency, body or department thereof. "Prime Rate" shall mean the publicly announced prime rate of Bank in effect from time to time. The Prime Rate is not intended to be the lowest or most favorable rate of Bank in effect at any time. "Prime Rate Loans" shall mean any loans or advances made pursuant to this Agreement made or maintained at a rate of interest based upon the Prime Rate. "Revolving Loans" shall have the meaning specified in paragraph 2 ----------- hereof. "Revolving Loan Commitment" shall mean the sum of $15,000,000. "Revolving Note" shall mean the promissory note in the original principal amount of $15,000,000, executed by Borrowers to the order of LaSalle, dated as of the Closing Date. "Subordinated Creditor" shall mean collectively Brian Fargo, and his successors and assigns, and Microsoft Corporation, and its successors and assigns. "Subordinated Debt Documents" shall mean all documents evidencing debt from Borrowers or any one of them to Subordinate Creditor or any one of them as they may be amended, modified or supplemented from time to time. "Subordination Agreement" shall mean that certain Subordination Agreement and Intercreditor Agreement dated as of the Closing Date between LaSalle and Subordinated Creditor pursuant to which the indebtedness evidenced by the Subordinated Debt Documents is subordinated to the Liabilities and the liens in favor of LaSalle, which agreement shall be in form and substance acceptable to LaSalle. "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by any Borrower or by any partnership or joint venture of which more than fifty percent (50%) of the outstanding equity interests are at the time, directly or indirectly, owned by any Borrower. 11 "Tangible Net Worth" shall mean with respect to any applicable fiscal period, the following for Borrowers, each calculated on a consolidated basis, for such period: shareholders' equity (including retained earnings), less the book value of all intangible assets and less prepaid expenses, reasonably determined by LaSalle on a consistent basis, plus the amount of any debt subordinated to LaSalle on terms and conditions acceptable to LaSalle in its sole judgment. "Term" shall have the meaning specified in paragraph 12 hereof. ------------ "Total Credit Facility" shall mean the sum of $15,000,000. (2) Accounting Terms and Definitions. Unless otherwise defined or -------------------------------- specified herein, all accounting terms used in this Agreement shall be construed in accordance with GAAP, applied on a basis consistent in all material respects with the financial statements delivered by Borrowers to LaSalle on or before the Closing Date. All accounting determinations for purposes of determining compliance with the financial covenants contained in paragraph 14(n) shall be --------------- made in accordance with GAAP as in effect on the Closing Date and applied on a basis consistent in all material respects with the audited financial statements delivered to LaSalle by Borrowers on or before the Closing Date. The financial statements required to be delivered hereunder from and after the Closing Date, and all financial records, shall be maintained in accordance with GAAP. If GAAP shall change from the basis used in preparing the audited financial statements delivered to LaSalle by Borrowers on or before the Closing Date, the certificates required to be delivered pursuant hereto demonstrating compliance with the covenants contained herein shall include, at the election of Borrowers or upon the request of LaSalle, calculations setting forth the adjustments necessary to demonstrate how Borrowers are in compliance with the financial covenants based upon GAAP as in effect on the Closing Date. (3) (i) The liability of each Borrower for all amounts due to LaSalle under Agreement shall be joint and several regardless of which Borrower actually receives any extensions of credit hereunder or on its books and records. Each Borrower's Liabilities with respect to the Loans made to it and related fees, costs and expenses, and each Borrower's obligations arising as a result of the joint and several liability of each Borrower hereunder, together with the related fees, costs and expenses, shall be separate and distinct obligations, all of which are primary obligations of each Borrower. Each Borrower's Liabilities arising as a result of the joint and several liability of the Borrowers hereunder with respect to extensions of credit made to the other Borrower hereunder shall, to the fullest extent permitted by law, be unconditional irrespective of (i) the validity, enforceability, avoidance or subordination of the Liabilities of the other Borrower or of any promissory note or other documents evidencing all or any part of the Liabilities from the other Borrower, any other guarantor, or any other security therefor, or the absence of any other action to enforce the same, (ii) the waiver, consent, extension, forbearance or granting of any indulgence by LaSalle with respect to any provision of any instrument evidencing the Liabilities of the other Borrower, or any part thereof, or any other agreement now or hereafter executed by the other Borrower, and delivered to LaSalle, (iii) the failure by LaSalle to take any steps to perfect and maintain its security interest in, or to preserve its rights to, any security or collateral for the 12 Liabilities of the other Borrower, (iv) LaSalle's election, in any proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code, (v) any borrowing or granting of a security interest by the other Borrower, as debtor-in-possession under Section 364 of the Bankruptcy Code, (vi) the disallowance of all or any portion of LaSalle's claim(s) for repayment of the Liabilities of the other Borrower under Section 502 of the Bankruptcy Code, or (vii) any other circumstance which might constitute a legal or equitable discharge or defense of a guarantor or the other Borrower. With respect to each Borrower's Liabilities arising as a result of the joint and several liability of each Borrower hereunder with respect to loans or other extensions of credit made to the other Borrower hereunder, such Borrower waives, until the Liabilities shall have been indefeasibly paid in full and this Agreement shall have been terminated, any right to enforce any right of subrogation or any remedy which LaSalle now has or may hereafter have against any Borrower, any endorser or any guarantor of all or any part of the Liabilities, and any benefit of, and any right to participate in, any security or collateral given to LaSalle, whether any such right arises by way of suretyship or otherwise. Each Borrower hereby further waives, to the fullest extent permitted by law, all suretyship or similar defense in respect of LaSalle and the transactions contemplated herein. Upon any Event of Default, LaSalle may, at its sole election, proceed directly and at once, without notice, against any Borrower to collect and recover the full amount, or any portion of the Liabilities, without first proceeding against any other Borrower or any other person, against any security or collateral for the Liabilities. Each Borrower consents and agrees that LaSalle shall not be under any obligation to marshal any assets in favor of such Borrower or against or in payment of any or all of the Liabilities. (1) In order to utilize the borrowing powers of the Borrowers in the most efficient and economical manner, and in order to facilitate the handling of the accounts of the Borrowers on LaSalle's books, the Borrowers have requested, and LaSalle has agreed to handle accounts of the Borrowers on LaSalle's books on a combined basis, all in accordance with the following provisions: (i) in lieu of maintaining separate accounts on LaSalle's books in the name of each of the Borrowers, LaSalle shall maintain one account under the name: Interplay Entertainment Corp. (herein the "Collective Account"). Confirmatory assignments of Accounts will continue to be made to LaSalle by each of the Borrowers. Loans and advances made by LaSalle to any of the Borrowers will be charged to the Collective Account indicated above, along with any charges and expenses under this Agreement. The Collective Account will be credited, with all amounts received by LaSalle from any of the Borrowers or from others for their account including all amounts received by LaSalle in payment of Accounts assigned to LaSalle as provided in this Agreement; (ii) each month LaSalle will render to the Borrowers one extract of the combined Collective Account, which shall be deemed to be an account stated as to each of the Borrowers and which will be deemed correct and accepted by all of the Borrowers unless LaSalle receives a written statement of exceptions from them within thirty (30) days after such extract has been rendered by LaSalle. It is expressly understood and agreed by each of the Borrowers that LaSalle shall have no obligation to account separately to any of the Borrowers; (iii) requests for loans and advances may be made by Interplay Entertainment Corp. ("IEC") as agent for the Borrowers and LaSalle is hereby authorized and directed to accept, honor and rely on such instructions and requests, subject to the limitation and provisions set forth in this Agreement. It is expressly understood and agreed by each of the 13 Borrowers that LaSalle shall have no responsibility to inquire into the correctness of the apportionment, allocation, or disposition of (x) any loans and advances made to any of the Borrowers or (y) any of LaSalle's expenses and charges relating thereto. All loans and advances are made for the Collective Account; (iv) the Borrowers jointly and severally unconditionally guarantee to LaSalle the prompt payment in full of (A) all loans and advances made and to be made by LaSalle to any of them under this Agreement, as well as (B) all other Liabilities of the Borrowers to LaSalle and hereby expressly confirm in all respects the guaranties executed by each of the Borrowers in LaSalle's favor as more fully set forth therein; (v) all Accounts assigned to LaSalle by any of the Borrowers and any other collateral security now or hereafter given to LaSalle by any of the Borrowers (be it Accounts or otherwise), shall secure all loans and advances made by LaSalle to any of the Borrowers, and shall be deemed to be pledged to LaSalle as security for any and all other Liabilities of the Borrowers to LaSalle as set forth under this Agreement, the guaranties, or any other agreements between LaSalle and any of the Borrowers; (vi) It is understood that the handling of the accounts of the Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to the Borrowers and at their request, and that LaSalle shall incur no liability to the Borrowers as a result hereof. To induce LaSalle to do so, and in consideration thereof, each of the Borrowers hereby agrees to indemnify LaSalle and hold LaSalle harmless against any and all liability, expense, loss or claim of damage or injury, made against LaSalle by any of the Borrowers or by any third party whosoever, arising from or incurred solely by reason of (1) the method of handling the accounts of the Borrowers as herein provided, (2) LaSalle relying on any instructions of any of the Borrowers, or (3) any other action taken by LaSalle in accordance with this subparagraph of this Agreement. The foregoing request was made because the Borrowers are engaged in an integrated operation that requires financing on a basis permitting the availability of credit from time to time to each of the Borrowers as required for the continued successful operation of each of the Borrowers. Each of the Borrowers expects to derive benefit, directly or indirectly, from such availability since the successful operation of each of the Borrowers is dependent on the continued successful performance of the functions of the integrated group. In addition, the Companies have informed LaSalle that: (1) IEC, in order to increase the efficiency and productivity of the other Borrower, has centralized in itself a cash management system which entails, in part, central disbursement and operating accounts in which it provides the working capital needs of the other Borrower and manages and timely pays the accounts payable of the other Borrower; (2) IEC is further enhancing the operating efficiencies of the other Borrower by purchasing, or causing to be purchased, in its name for its account all materials, supplies, inventory and services required by the other Borrower which will result in reducing the operating costs of the other Borrower; and (3) Since each of the Borrowers is now engaged in an integrated operation that requires financing on an integrated basis and since each Borrower expects to benefit from the continued successful performance of such integrated operations and in order to best utilize the borrowing powers of each Borrower in the most effective and cost efficient manner and to avoid adverse effects on the operating efficiencies of each 14 Borrower and the existing back-office practices of the Borrowers, each Borrower has requested that all Revolving Loans and advances be disbursed solely upon the request of IEC and to bank accounts managed solely by IEC and that IEC will manage for the benefit of each Borrower the expenditure and usage of such funds. 2. REVOLVING LOANS Subject to the terms and conditions of this Agreement and the Other Agreements, during the Term, absent the existence of an Event of Default: (1) LaSalle shall make such revolving loans and advances (the "Revolving Loans") to Borrowers as Borrowers shall from time to time request, in accordance with the terms of paragraph 2(b) hereof. The aggregate unpaid principal amount of all Revolving Loans outstanding at any one time made to Borrowers shall not exceed the lesser of (i) the Borrowing Base or (ii) the Revolving Loan Commitment. All Revolving Loans shall be repaid in full upon the earlier to occur of (A) the end of the Term, if either LaSalle or Borrowers elects to terminate this Agreement as of the end of any such term and (B) the acceleration of the Liabilities pursuant to paragraph 17 of this Agreement. If at any time the outstanding principal balance of the Revolving Loans made to Borrowers exceeds (i) the Borrowing Base or (ii) the Revolving Loan Commitment, in each case less the outstanding Letter of Credit Obligations, Borrowers shall immediately, and without the necessity of a demand by LaSalle, pay to LaSalle such amount as may be necessary to eliminate such excess, and LaSalle shall apply such payment against the outstanding principal balance of the Revolving Loans. In addition, if at any time the sum of (A) the outstanding principal balance of the Loans and (B) the outstanding Letter of Credit Obligations exceeds the Total Credit Facility, Borrowers shall immediately and without the necessity of a demand by LaSalle pay to LaSalle such amount as may be necessary to eliminate such excess, and LaSalle shall apply such payment against the outstanding principal balance of the Loans in such order as LaSalle shall determine in its sole discretion. Borrowers hereby authorize LaSalle to charge any of Borrowers' accounts to make any payments of principal or interest required by this Agreement. All Revolving Loans shall, in LaSalle's sole discretion, be evidenced by one or more promissory notes in form and substance satisfactory to LaSalle. However, if such Revolving Loans are not so evidenced, such Revolving Loans may be evidenced solely by entries upon the books and records maintained by LaSalle. (2) LaSalle shall make Revolving Loans to Borrowers up to the lesser of the following amounts, the amount calculated pursuant to subparagraph (i) ---------------- below being the "Borrowing Base": (1) an amount equal to the sum of: (A) up to sixty-five percent (65%) of the face amount of Eligible Accounts plus, (B) the lesser of (x) up to ---- sixty-five percent (65%) of the value of Eligible Inventory, calculated on the basis of the lower of cost or market value on a first-in, first-out basis, and (y) Three Million Dollars ($3,000,000), in each case, less such reasonable reserves as LaSalle elects to establish from time to time in the exercise of its sole discretion minus the outstanding amount of all Letter of Credit Obligations; or -- 15 (2) the Revolving Loan Commitment, minus the outstanding amount ----- of all Letter of Credit Obligations. (3) Discretionary Rights. The percentages set forth above may be -------------------- increased or decreased by Lender and reserves may be imposed by Lender at any time and from time to time if in its sole discretion, Lender determines that a diminution or dilution in the value of the Accounts or Inventory has occurred or is imminent. Each Borrower acknowledges that decreasing the percentages set forth above or imposing reserves may limit or restrict Loans requested by Borrowers. 3. INTENTIONALLY DELETED. 4. LETTERS OF CREDIT. Subject to the terms and conditions of this Agreement, and the Other Agreements, during the Term LaSalle shall, absent the existence of an Event of Default, from time to time cause the issuance of and co-sign for, upon Borrowers' request, Letters of Credit; provided, that the standby Letters of -------- Credit shall be in form and substance acceptable to LaSalle in its sole discretion and that the aggregate undrawn face amount of all such Letters of Credit shall at no time exceed Three Million Dollars ($3,000,000); and provided -------- further, that no Letter of Credit shall have an expiry date (i) more than 180 - ------- days from the date of issuance or (ii) beyond five (5) days prior to the expiration of the Term. Borrowers' reimbursement obligation in respect of the Letters of Credit shall automatically reduce, dollar for dollar, the amount which Borrowers may borrow based upon the Revolving Loan Commitment and the Borrowing Base. Any payment made by LaSalle to any Person on account of any Letter of Credit shall constitute a Revolving Loan hereunder. At no time shall the aggregate sum of direct Revolving Loans by LaSalle to Borrowers plus the contingent liability of LaSalle under the outstanding Letters of Credit be in excess of the Revolving Loan Commitment or the Borrowing Base. 5. INTEREST, FEES AND CHARGES. (1) Rates of Interest. Interest accrued on all Loans shall be due on ----------------- the earliest of: (i) the first day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month; (ii) the occurrence of an Event of Default in consequence of which LaSalle elects to accelerate the maturity and payment of the Liabilities; or (iii) termination of this Agreement pursuant to paragraph 12 hereof. At Borrowers' election, interest ------------ shall accrue on: the principal amount of the Revolving Loans made to Borrower outstanding at the end of each day at (i) a fluctuating rate per annum equal to the Prime Rate, or (ii) at a rate per annum equal to two and one-half percent (2.5%) above LIBOR determined for each Interest Period. The rate of interest payable on Prime Rate Loans shall increase or decrease by an amount equal to any increase or decrease in the Prime Rate, effective as of the opening of business on the day that any such change in the Prime Rate occurs. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest on demand at a rate per annum equal to the rate of interest then in effect plus two percent (2%). 16 (2) Computation of Interest and Fees. Interest and collection charges -------------------------------- hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year consisting of three hundred and sixty (360) days. For the purpose of computing interest hereunder, all items of payment received by LaSalle shall be deemed applied by LaSalle on account of the Liabilities (subject to final payment of such items) on the first Business Day after receipt by LaSalle of good funds in LaSalle's account located in Chicago, Illinois. (3) Maximum Interest. It is the intent of the parties that the rate ---------------- of interest and the other charges to Borrowers under this Agreement shall be lawful; therefore, if for any reason the interest or other charges payable under this Agreement are found by a court of competent jurisdiction, in a final determination, to exceed the limit which LaSalle may lawfully charge Borrowers, then the obligation to pay interest and other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to Borrowers. (4) Letter of Credit Fees. Borrowers shall remit to LaSalle a Letter --------------------- of Credit fee equal to one percent (1%) per annum on the aggregate undrawn face amount of all outstanding Letters of Credit issued for the account of Borrowers, which fee shall be payable monthly in arrears on each day that interest is payable hereunder. Borrowers shall also pay on demand the normal and customary administrative charges for issuance, amendment, negotiation, renewal or extension of any Letter of Credit imposed by the bank issuing such Letter of Credit. Upon the occurrence and during the continuance of an Event of Default, all Letter of Credit fees shall be payable on demand at a rate equal to two percent (2%) per annum in excess of rate in existence in the absence of an Event of Default on the aggregate undrawn face amount thereof. (5) Closing Fee. Borrowers shall pay to LaSalle a closing fee of One ----------- Hundred Twenty-Five Thousand Dollars ($125,000), which shall be fully earned and payable on the Closing Date. No additional closing fee shall be payable in the event the Revolving Loan Commitment is increased in an amount up to $25,000,000. (6) Unused Line Fee. Borrowers shall pay to LaSalle a fee equal to --------------- one quarter of one percent (.25%) per annum of the average monthly amount by which the Revolving Loan Commitment exceeds the sum of the outstanding principal balance of the Loans. The unused line fee shall be payable monthly in arrears on the first day of each month thereafter. (7) Fixed, Examination Fees. Intentionally deleted. ----------------------- (8) Collateral Management Fee. Borrowers shall pay to LaSalle, on ------------------------- the Closing Date and on each anniversary date of the Closing Date thereafter, a collateral management fee in the amount of $40,000 per annum, which sum shall be fully earned on the Closing Date and on each anniversary date thereof and shall be payable quarterly in arrears on the first day of each consecutive calendar quarter after the Closing Date. Such fee shall include the cost of LaSalle's field examinations of Borrower's books and records and the Collateral and such other matters as LaSalle shall deem appropriate in its reasonable commercial judgment. Borrowers hereby consent to four (4) field examinations in all Fiscal Years, provided that after and during the continuation of an Event 17 of Default, there shall be no such limit and Borrowers shall be liable for the costs of all additional examinations. (9) Success Fee. Borrowers shall pay to LaSalle the sum of $100,000 ----------- at the earlier of: (i) termination of this Agreement for any reason whatsoever (unless LaSalle terminates this Agreement on or before April 30, 2002; or (ii) two (2) years from the Closing Date. (10) Capital Adequacy Charge. If LaSalle shall have determined that ----------------------- the adoption of any law, rule or regulation regarding capital adequacy, or any change therein or in the interpretation or application thereof, or compliance by LaSalle with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or governmental authority enacted after the Closing Date, does or shall have the effect of reducing the rate of return on LaSalle's capital as a consequence of its obligations hereunder to a level below that which LaSalle could have achieved but for such adoption, change or compliance (taking into consideration LaSalle's policies with respect to capital adequacy) by a material amount, then from time to time, after submission by LaSalle to Borrowers of a written demand therefor ("Capital Adequacy Demand") together with the certificate described below, Borrowers shall pay to LaSalle such additional amount or amounts ("Capital Adequacy Charge") as will compensate LaSalle for such reduction, such Capital Adequacy Demand to be made with reasonable promptness following such determination. A certificate of LaSalle claiming entitlement to payment as set forth above shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such reduction, the amount of the Capital Adequacy Charge to be paid to LaSalle, and the method by which such amount was determined. In determining such amount, LaSalle may use any reasonable averaging and attribution method, applied on a non-discriminatory basis. (11) Borrowers may request LIBOR Loans on the following terms and conditions: (1) Borrowers may elect, subsequent to the Closing Date and from time to time thereafter (i) to request any loan made hereunder to be a LIBOR Loan as of the date of such loan or (ii) to convert Prime Rate Loans to LIBOR Loans, and may elect from time to time to convert LIBOR Loans to Prime Rate Loans by giving LaSalle at least three (3) Business Days' prior irrevocable notice of such election, provided that any such conversion of LIBOR Loans to -------- Prime Rate Loans shall only be made, subject to the second following sentence, on the last day of an Interest Period with respect thereto. Should Borrowers elect to convert Prime Rate Loans to LIBOR Loans, they shall give LaSalle at least four (4) Business Days' prior irrevocable notice of such election. If the last day of an Interest Period with respect to a loan that is to be converted is not a Business Day, then such conversion shall be made on the next succeeding Business Day, and during the period from such last day of an Interest Period to such succeeding Business Day, such loan shall bear interest as if it were a Prime Rate Loan. All or any part of outstanding Prime Rate Loans then outstanding may be converted to LIBOR Loans as provided herein, provided that partial conversions shall be in multiples of $100,000 in an aggregate principal amount of $1,000,000 or more. (2) Any LIBOR Loans may be continued as such upon the expiration of an Interest Period, provided Borrowers so notify LaSalle, at least three (3) Business Days' prior to the 18 expiration of said Interest Period, and provided further that no LIBOR Loan may be continued as such upon the occurrence of any Default or Event of Default under this Agreement, but shall be automatically converted to a Prime Rate Loan on the last day of the Interest Period during which occurred such Default or Event of Default. Absent such notification, LIBOR Rate Loans shall convert to Prime Rate Loans on the last day of the applicable Interest Period. Each notice of election, conversion or continuation furnished by Borrowers pursuant hereto shall specify whether such election, conversion or continuation is for a one, two, or three month period. Notwithstanding anything to the contrary contained herein, LaSalle (or any participant, if applicable) shall not be required to purchase United States Dollar deposits in the London interbank market or from any other applicable LIBOR Rate market or source or otherwise "match fund" to fund LIBOR Rate Loans, but any and all provisions hereof relating to LIBOR Rate Loans shall be deemed to apply as if LaSalle (and any participant, if applicable) had purchased such deposits to fund any LIBOR Rate Loans. (3) Borrowers may request a LIBOR Loan, convert any Prime Rate Loan or continue any LIBOR Loan provided there is then no Default or Event of Default in effect. (12) (i) If all or a portion of the outstanding principal amount of the Liabilities shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such outstanding amount, to the extent it is a LIBOR Loan, shall be converted to a Prime Rate Loan at the end of the last Interest Period therefor. (1) Borrowers may not have more than three (3) LIBOR Loans outstanding at any given time. (13) In the event that LaSalle (or any financial institution which may become a participant hereunder) shall have determined in the exercise of its reasonable business judgement (which determination shall be conclusive and binding upon Borrower) that by reason of circumstances affecting the interbank LIBOR market, adequate and reasonable means do not exist for ascertaining LIBOR applicable for any Interest Period with respect to: (a) a proposed loan that Borrowers have requested be made as a LIBOR Loan; (b) a LIBOR Loan that will result from the requested conversion of a Prime Rate Loan into a LIBOR Loan; or (c) the continuation of LIBOR Loans beyond the expiration of the then current Interest Period with respect thereto, LaSalle shall forthwith give written notice of such determination to Borrowers at least one day prior to, as the case may be, the requested borrowing date for such LIBOR Loan, the conversion date of such Prime Rate Loan or the last day of such Interest Period. If such notice is given (i) any requested LIBOR Loan shall be made as a Prime Rate Loan, (ii) any Prime Rate Loan that was to have been converted to a LIBOR Loan shall be continued as a Prime Rate Loan, and (iii) any outstanding LIBOR Loan shall be converted, on the last day of then current Interest Period with respect thereto, to a Prime Rate Loan. Until such notice has been withdrawn by LaSalle, no further LIBOR Loan shall be made nor shall Borrowers have the right to convert a Prime Rate Loan to a LIBOR Loan. (14) If any payment on a LIBOR Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month in which event such payment shall be made on the immediately preceding Business Day. 19 (15) Notwithstanding any other provisions herein, if any law, regulation, treaty or directive or any change therein or in the interpretation or application thereof, shall make it unlawful for LaSalle to make or maintain LIBOR Loans as contemplated herein, the then outstanding LIBOR Loans, if any, shall be converted automatically to Prime Rate Loans as of the end of such month, or within such earlier period as required by law. Borrowers hereby agree promptly to pay LaSalle, upon demand, any additional amounts necessary to compensate LaSalle for any costs incurred by LaSalle in making any conversion in accordance with this subsection including, but not limited to, any interest or fees payable by LaSalle to lenders of funds obtained by LaSalle in order to make or maintain LIBOR Loans hereunder. (16) Borrowers agree to indemnify and to hold LaSalle (including any participant) harmless from any loss or expense which LaSalle or such participant may sustain or incur as a consequence of: (a) Default by Borrowers in payment of the principal amount of or interest on any LIBOR Loans, as and when the same shall be due and payable in accordance with the terms of this Agreement, including, but not limited to, any such loss or expense arising from interest or fees payable by LaSalle or such participant to lenders of funds obtained by it in order to maintain the LIBOR Loans hereunder; (b) default by Borrowers in making a borrowing or conversion after Borrowers have given a notice in accordance with subsection (k) above; (c) any prepayment of LIBOR Loans on a day which is not the last day of the Interest Period applicable thereto, including, without limitation, prepayments arising as a result of the application of the proceeds of Collateral to the Revolving Loans; and (d) default by Borrowers in making any prepayment after Borrowers have given notice to LaSalle thereof. The determination by LaSalle of the amount of any such loss or expense, when set forth in a written notice to Borrowers, containing LaSalle's calculations thereof in reasonable detail, shall be conclusive on Borrowers in the absence of manifest error. Calculation of all amounts payable under this paragraph with regard to LIBOR Loans shall be made as though LaSalle had actually funded the LIBOR Loans through the purchase of deposits in the relevant market and currency, as the case may be, bearing interest at the rate applicable to such LIBOR Loans in an amount equal to the amount of the LIBOR Loans and having a maturity comparable to the relevant interest period; provided, however, that -------- ------- LaSalle may fund each of the LIBOR Loans in any manner LaSalle sees fit and the foregoing assumption shall be used only for calculation of amounts payable under this paragraph. In addition, notwithstanding anything to the contrary contained herein, LaSalle shall apply all proceeds of Collateral and all other amounts received by it from or on behalf of Borrowers (i) initially to the Prime Rate Loans and (ii) subsequently to LIBOR Loans; provided, however, (x) upon the -------- ------- occurrence of an Event of Default or (y) in the event the aggregate amount of outstanding LIBOR Rate Loans exceeds Availability or the applicable maximum levels set forth therefor, LaSalle may apply all such amounts received by it to the payment of Liabilities in such manner and in such order as LaSalle may elect in its reasonable business judgment. In the event that any such amounts are applied to Revolving Loans which are LIBOR Loans, such application shall be treated as a prepayment of such loans and LaSalle shall be entitled to indemnification hereunder. This covenant shall survive termination of this Agreement and payment of the outstanding Liabilities. (17) Notwithstanding anything to the contrary in this Agreement, in the event that, by reason of any Regulatory Change (for purposes hereof "Regulatory Change" shall mean, with 20 respect to LaSalle, any change after the date of this Agreement, in United States federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including LaSalle of or under any United States federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), LaSalle either (a) incurs any material additional costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such bank which includes deposits by reference to which the interest rate on LIBOR Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of LaSalle which includes LIBOR Loans, or (b) becomes subject to any material restrictions on the amount of such a category of liabilities or assets which it may hold, then, if LaSalle so elects by notice to Borrowers, the obligation of LaSalle to make or continue, or to convert Prime Rate Loans into LIBOR Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect. 6. LOAN ADMINISTRATION. (1) Loan Requests. A request for a Revolving Loan shall be made or ------------- shall be deemed to be made, each in the following manner: (i) a Borrower shall give LaSalle same day notice, no later than 11:30 A.M. (Chicago time) of such day, of its intention to borrow a Revolving Loan, in which notice such Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date; provided, however, that no such request may be made at a time when there -------- ------- exists a Default or an Event of Default; and (ii) the coming due of any amount required to be paid under this Agreement or any Note, whether on account of interest or for any other Liability, shall be deemed irrevocably to be a request for a Revolving Loan on the due date thereof in the amount required to pay such interest or other Liability. As an accommodation to Borrowers, LaSalle may permit telephone requests for Revolving Loans and electronic transmittal of instructions, authorizations, agreements or reports to LaSalle by Borrowers. Unless Borrowers specifically direct LaSalle in writing not to accept or act upon telephonic or electronic communications from Borrowers, LaSalle shall have no liability to Borrowers for any loss or damage suffered by Borrowers as a result of LaSalle's good faith honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to LaSalle by Borrowers or any one of them and LaSalle shall have no duty to verify the origin of any such communication or the authority of the Person sending it. Each notice of borrowing shall be irrevocable by and binding on Borrowers. (2) Disbursement. Borrowers hereby irrevocably authorize LaSalle to ------------ disburse the proceeds of each Revolving Loan requested by any Borrower, or deemed to be requested by any Borrower, as follows: (i) the proceeds of each Revolving Loan requested under paragraph 6(a)(i) shall be disbursed by LaSalle in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrowers, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by Borrowers and LaSalle from time to time, or elsewhere if pursuant to a written direction from any Borrower; and (ii) the proceeds of each Revolving Loan requested under paragraph 6(a)(ii) shall be disbursed by LaSalle by way of ------------------ direct payment of the relevant interest or other Liability. 21 (3) Mandatory Prepayments for Sale, Damage, Destruction, etc. If any --------------------------------------------------------- Borrower sells any Equipment for $50,000 or more, or if any material portion of the Collateral is damaged, destroyed or taken by condemnation, Borrowers shall pay to Lender, unless otherwise specifically provided herein or otherwise agreed to by Lender, as and when received by any Borrower and as a mandatory prepayment of the Loans, to be applied first against the Revolving Loans, subject to Borrowers' ability to reborrow Revolving Loans in accordance with the terms hereof (or, at Lender's option, such of the other Liabilities of Borrower as Lender may elect), a sum equal to the proceeds received by any Borrower from (i) such sale or (ii) such damage, destruction or condemnation. 7. GRANT OF SECURITY INTEREST TO LASALLE. As security for the payment of all Loans now or in the future made by LaSalle to Borrowers hereunder and for the payment or other satisfaction of all other Liabilities, each of the Borrowers hereby assigns to LaSalle and grants to LaSalle a continuing security interest in the following property of Borrowers, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located: (a) all Accounts (whether or not Eligible Accounts) and all Goods whose sale, lease or other disposition by any Borrower has given rise to Accounts and have been returned to or repossessed or stopped in transit by any Borrower; (b) all Chattel Paper, Investment Property, Instruments, Documents and General Intangibles (including, without limitation, all patents, patent applications, trademarks, trademark applications, tradenames, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, contracts rights, security interests, security deposits and any rights to indemnification); (c) all Inventory; (d) all Goods (other than Inventory) including, without limitation, Equipment, vehicles and fixtures; (e) all deposits and cash and any other property of each Borrower now or hereafter in the possession, custody or control of LaSalle or any agent or any parent, affiliate or subsidiary of LaSalle or any participant with LaSalle in the Loans for any purpose (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise); and (f) all additions and accessions to, substitutions for, and replacements, products and proceeds of the foregoing property, including, without limitation, proceeds of all insurance policies insuring the foregoing property, and all of Borrowers' books and records relating to any of the foregoing and to Borrowers' business. 8. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN. Each Borrower shall, at LaSalle's request, at any time and from time to time, execute and deliver to LaSalle such financing statements, documents and other agreements and instruments (and pay the cost of filing or recording the same in all public offices deemed reasonably necessary or desirable by LaSalle) and do such other acts and things as LaSalle may reasonably deem necessary or desirable in order to establish and maintain a valid, attached and perfected security interest in the Collateral in favor of LaSalle (free and clear of all other liens, claims and rights of third parties whatsoever, whether voluntarily or involuntarily created, except Permitted Liens) to secure payment of the Liabilities, and in order to facilitate the collection of the Collateral. Each Borrower irrevocably hereby makes, constitutes and appoints LaSalle (and all Persons designated by LaSalle 22 for that purpose) as Borrower's true and lawful attorney and agent-in-fact to execute such financing statements, documents and other agreements and instruments and do such other reasonable acts and things as may be necessary to preserve and perfect LaSalle's security interest in the Collateral. Each Borrower further agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement shall be sufficient as a financing statement. 9. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until an Event of Default has occurred, each Borrower shall have the right, except as otherwise provided in this Agreement, in the ordinary course of each Borrower's business, to (a) sell, lease or furnish under contracts of service any of each Borrower's Inventory normally held by each Borrower for any such purpose, and (b) use and consume any raw materials, work in process or other materials normally held by each Borrower for such purpose; provided, however, that a sale in the ordinary course of business shall not include any transfer or sale in satisfaction, partial or complete, of a debt owed by any Borrower. 10. COLLECTIONS. (1) Each Borrower shall direct all of its Account Debtors to make all payments on the Accounts directly to a post office box ("Lock Box") with a financial institution reasonably acceptable to, and in the name and under exclusive control of, LaSalle. Each Borrower shall establish an account ("Blocked Account") in LaSalle's name for the benefit of such Borrower with a financial institution reasonably acceptable to LaSalle, into which all payments received in the Lock Box shall be deposited, and into which each Borrower will immediately deposit all payments made for Inventory or services sold or rendered by each Borrower and received by each Borrower in the identical form in which such payments were made, whether by cash or check. If any Borrower, any Affiliate or Subsidiary of Borrower, or any shareholder, officer, director, employee or agent of any Borrower or any Affiliate or Subsidiary, or any other Person acting for or in concert with any Borrower shall receive any monies, checks, notes, drafts or other payments relating to or as proceeds of Accounts or other Collateral, each Borrower and each such Person shall receive all such items in trust for, and as the sole and exclusive property of, LaSalle and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to the Blocked Account. Each financial institution with which a Lock Box and Blocked Account are established shall acknowledge and agree, in a manner reasonably satisfactory to LaSalle, that the amounts on deposit in such Lock Box and Blocked Account are the sole and exclusive property of LaSalle, that such financial institution has no right to setoff against such Lock Box or Blocked Account or against any other account maintained by such financial institution into which the contents of such Blocked Account are transferred, and that such financial institution shall wire, or otherwise transfer in immediately available funds in a manner reasonably satisfactory to LaSalle, funds deposited in the Blocked Account on a daily basis as such funds are collected. Each Borrower agrees that all payments made to the Blocked Account established by Borrowers or otherwise received by LaSalle, whether in respect of the Accounts of Borrowers or as proceeds of other Collateral of Borrowers or otherwise, will be applied on account of the Liabilities of Borrowers in accordance with the terms of this Agreement. Each Borrower agrees to pay all fees, costs and expenses which any Borrower incurs in connection with opening and maintaining a Lock Box and Blocked Account. All of such fees, costs 23 and expenses which remain unpaid by Borrowers pursuant to any Lock Box or Blocked Account Agreement with any Borrower, to the extent same shall have been paid by LaSalle hereunder, shall constitute Revolving Loans hereunder, shall be payable to LaSalle by Borrowers upon demand, and, until paid, shall bear interest at the highest rate then applicable to Revolving Loans hereunder. All checks, drafts, instruments and other items of payment or proceeds of Collateral delivered to LaSalle in kind shall be endorsed by any Borrower to LaSalle, and, if that endorsement of any such item shall not be made for any reason, LaSalle is hereby irrevocably authorized to endorse the same on each Borrower's behalf. For the purpose of this paragraph, each Borrower irrevocably hereby makes, constitutes and appoints LaSalle (and all Persons designated by LaSalle for that purpose) as each Borrower's true and lawful attorney and agent-in-fact (i) to endorse each Borrower's name upon said items of payment and/or proceeds of Collateral of any Borrower and upon any Chattel Paper, document, instrument, invoice or similar document or agreement relating to any Account of any Borrower or goods pertaining thereto; (ii) to take control in any manner of any item of payment or proceeds thereof; (iii) to have access to any lock box or postal box into which any of Borrower's mail is deposited; and (iv) open and process all mail addressed to any Borrower and deposited therein; provided, however, that -------- ------- LaSalle shall not exercise any such powers described in subparagraphs (i), (ii) ----------------------- (except for routine Lock Box payments/proceeds) and (iv) unless and until an Event of Default has occurred and is continuing. (2) LaSalle may, at any time and from time to time after the occurrence of and during the continuance of an Event of Default, whether before or after notification to any Account Debtor and whether before or after the maturity of any of the Liabilities, (i) enforce collection of any of Borrower's Accounts or contract rights by suit or otherwise; (ii) exercise all of any Borrower's rights and remedies with respect to proceedings brought to collect any Accounts; (iii) surrender, release or exchange all or any part of any Accounts of any Borrower, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any Account of any Borrower upon such terms, for such amount and at such time or times as LaSalle deems advisable; (v) prepare, file and sign each Borrower's name on any proof of claim in bankruptcy or other similar document against any Account Debtor indebted on an Account of any Borrower; and (vi) do all other acts and things which are necessary, in LaSalle's sole discretion, to fulfill any Borrower's obligations under this Agreement and to allow LaSalle to collect the Accounts. In addition to any other provision hereof, LaSalle may at any time on or after the occurrence of and during the continuance of an Event of Default, at Borrowers' expense, notify any parties obligated on any of the Accounts of any Borrower to make payment directly to LaSalle of any amounts due or to become due thereunder. (3) For the purpose of determining Borrowers' Borrowing Base hereunder, LaSalle shall, upon receipt by LaSalle at its office in Chicago, Illinois, of cash or other immediately available funds from collections of items of payment and proceeds of any Collateral, apply the whole or any part of such collections or proceeds against the Liabilities in such order as LaSalle shall determine in its sole discretion. (4) In its sole credit judgment, without waiving or releasing any obligation, liability or duty of Borrowers under this Agreement or the Other Agreements or any Event of Default, at any time or times hereafter, LaSalle may (but shall not be obligated to) pay, acquire or 24 accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person in, upon or against the Collateral. All sums paid by LaSalle in respect thereof and all costs, fees and expenses (including, without limitation, reasonable attorney fees for both inside and outside counsel, all court costs and all other charges relating thereto) incurred by LaSalle shall constitute Revolving Loans, payable by Borrowers to LaSalle on demand and, until paid, shall bear interest at the highest rate then applicable to Revolving Loans hereunder. (5) Immediately upon any Borrower's receipt of any portion of the Collateral evidenced by an agreement, Instrument or Document including, without limitation, any Chattel Paper, each Borrower shall deliver the original thereof to LaSalle together with an appropriate endorsement or other specific evidence of assignment thereof to LaSalle (in form and substance acceptable to LaSalle). If an endorsement or assignment of any such items shall not be made for any reason, LaSalle is hereby irrevocably authorized, as each Borrower's attorney and agent-in-fact, to endorse or assign the same on each Borrower's behalf. 11. SCHEDULES AND REPORTS. Each Borrower shall furnish or cause to be furnished to LaSalle the following: (1) Daily Reports. Borrowers shall provide LaSalle with a written ------------- report each day hereafter, reflecting the activity of Borrowers with respect to sales, collections of Accounts and credits issued by Borrowers for the immediately preceding day. Such report shall be in a form and with such specificity as is satisfactory to LaSalle and shall contain such additional information as LaSalle may reasonably require concerning Accounts and Inventory included, described or referred to in such daily report and any other documents in connection therewith requested by LaSalle, including without limitation but only if specifically requested by LaSalle, copies of all invoices prepared in connection with such Accounts. (2) Monthly Financial Statements. Intentionally deleted. ---------------------------- (3) Monthly Reports. In addition to any other reports, as soon as --------------- practicable and in any event: (i) within fifteen (15) days after the end of each month, (a) a detailed trial balance of each Borrower's Accounts aged per invoice date, in form and substance reasonably satisfactory to LaSalle including, without limitation, the names and addresses of all Account Debtors of each Borrower, (b) a summary and detail of accounts payable (such Accounts and accounts payable divided into such time intervals as LaSalle may require in its sole discretion), including a listing of any held checks; and (2) within fifteen (15) days after the end of each month, the general ledger inventory account balance, a perpetual inventory report and LaSalle's standard form of Inventory report then in effect or the form most recently requested from each Borrower by LaSalle, for each Borrower by each category of Inventory, together with a description of the monthly change in each category of Inventory; and (c) a "flash" report of each of the Borrower's revenues and profit margins in form and substance reasonably satisfactory to LaSalle, substantially in the form of Exhibit C annexed hereto. - --------- 25 (4) Quarterly Financial Statements. As soon as practicable and in any ------------------------------ event within forty-five (45) days following the end of each calendar quarter: (1) consolidated statements of income and statements of cash flow of Borrowers for each such quarter and for the period from beginning of the then current Fiscal Year of Borrowers to the end of such quarter, (2) consolidated balance sheets of Borrowers as of the end of such quarter, and (3) with respect to such statements of income and balance sheets, in comparative form, figures for the corresponding periods in the preceding Fiscal Year of Borrowers, all in reasonable detail and certified by the chief financial officer of Borrowers that such statements fairly present the financial condition of Borrowers in accordance with GAAP, subject to changes resulting from normal year-end adjustments, including computations of each Borrowers/ compliance with the covenants set forth in this Agreement. (5) Annual Financial Statements. As soon as practicable and in any --------------------------- event within ninety (90) days after the end of each Fiscal Year of Borrowers: (a) consolidated statements of income of Borrowers for such Fiscal Year, and a consolidated balance sheet of Borrowers as of the end of such Fiscal Year, and (2) consolidated statements of cash flow of Borrowers for such Fiscal Year, such statements to be presented in accordance with GAAP and certified by independent certified public accountants of recognized national standing selected by Borrowers and satisfactory to LaSalle, whose opinion shall be unqualified, in form and substance reasonably satisfactory to LaSalle. Commencing with the Fiscal Year ending on December 31, 2001, such financial statements shall set forth in comparative form, corresponding figures for the period covered by the preceding annual audit and as of the end of the preceding Fiscal Year of Borrowers. (6) Annual Projections. As soon as practicable and in any event at ------------------ least thirty (30) days prior to the beginning of each Fiscal Year of each Borrower, projected balance sheets, statements of income and cash flow for each Borrower, for each of the twelve (12) months during such Fiscal Year, which shall include the assumptions used therein, together with appropriate supporting details as reasonably requested by LaSalle. (7) Accountant's Reports. As soon as practicable and in any event -------------------- within ten (10) days of delivery to Borrowers, a copy of any letter issued by Borrowers' independent public accountants or other management consultants with respect to each Borrower's financial or accounting systems or controls, including all so-called `management letters". (8) Explanation of Budgets and Projections. In conjunction with the -------------------------------------- delivery of the annual presentation of projections or budgets referred to in paragraph 11(e) above, a letter signed by the President or a Vice President of - --------------- each Borrower and by the Treasurer or Chief Financial Officer of each Borrower, describing, comparing and analyzing, in detail, all changes and developments between the anticipated financial results included in such projections or budgets and the historical financial statements of each Borrower. (9) Other Information. With reasonable promptness, such other ----------------- business or financial data, reports, appraisals and projections as LaSalle may reasonably request. (10) Accompanying Certificates. All financial statements delivered to ------------------------- LaSalle pursuant to the requirements of this paragraph (except where otherwise expressly indicated) shall be 26 prepared in accordance with GAAP as provided in this Agreement. Together with each delivery of financial statements required by paragraph 11(b) and (d) above, ----------------------- each Borrower shall deliver to LaSalle an officer's certificate in the form attached hereto as Exhibit B, which, in the case of quarterly and annual --------- statements, shall include a calculation of financial covenants in the schedule attached to such officer's certificate in form satisfactory to LaSalle. (11) Internal Revenue Service Audit. Simultaneously with the delivery ------------------------------ or receipt thereof, as applicable, all correspondence, filings, documents, findings, briefs, reports and all other communications between or among Borrowers, the Internal Revenue Service, Arthur Andersen, KPMG and counsel for Borrowers (to the extent such communication is not privileged) with respect to the pending Internal Revenue Service audit and investigation arising out of the Letters dated March 23, 1999. (12) Shareholder Reports, Etc. Promptly after sending or filing ------------------------ thereof, as the case may be, copies of any proxy statements, financial statements or reports which Borrower has made available to its shareholders and copies of any regular, periodic and special reports or registration statements which Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; (13) ERISA Reports. Upon request by LaSalle, copies of any annual ------------- report to be filed pursuant to the requirements of ERISA in connection with each plan subject thereto. 12. TERM. (1) This Agreement shall be in effect from the date hereof until April 30, 2004, provided, however, that LaSalle shall have the right to -------- ------- terminate this Agreement on or before April 30, 2002 and on any anniversary date thereof, in its sole discretion, upon notice to Borrowers, at which time the Term of this Agreement shall expire and all Liabilities shall be paid and satisfied in full ("Term"), unless the due date of the Liabilities is accelerated pursuant to paragraph 17 hereof. This Agreement shall terminate on ------------ the date that the Liabilities are paid in full; provided, however, that the -------- ------- security interests and liens created under this Agreement and the Other Agreements shall survive such termination until the date upon which payment and satisfaction in full of the Liabilities shall have occurred. At such time as Borrowers have repaid all of the Liabilities and this Agreement has terminated, (i) Borrowers shall deliver to LaSalle a release, in form and substance reasonably satisfactory to LaSalle, of all obligations and liabilities of LaSalle and its officers, directors, employees, agents, parents, subsidiaries and affiliates to Borrowers, and if any Borrower is obtaining new financing from another lender, such Borrower shall deliver such lender's indemnification of LaSalle, in form and substance reasonably satisfactory to LaSalle, for checks which LaSalle has credited to such Borrower's account, but which subsequently are dishonored for any reason and (ii) upon such Borrower's request, LaSalle shall deliver to such Borrower a release in form and substance reasonably satisfactory to such Borrower. (2) If, for any reason, this Agreement is terminated prior to the end of the Term including, in the sole discretion of LaSalle, if an effective termination results from Borrowers prepaying all or substantially all of the Liabilities, Borrowers agree to pay to LaSalle, as a 27 prepayment fee, in addition to the payment of all other Liabilities owing by Borrowers, an amount equal to: (i) two percent (2%) of the Total Credit Facility if this Agreement is terminated during the first year of the Original Term; (ii) one percent (1%) of the Total Credit Facility if this Agreement is terminated during the second year of the Original Term; and (iii) one-half of one percent (.5%) of the Total Credit Facility if this Agreement is terminated during the third year of the Term, provided, however, that if LaSalle terminates this -------- ------- Agreement on or before April 30, 2002, the amount of such fee shall be one percent (1%) of the Total Credit Facility. In light of the extreme difficulty of accurately calculating actual damages arising out of any early termination, LaSalle and Borrowers have agreed that the prepayment fee provided for above is a reasonable estimate of actual damages that would be incurred. 13. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby makes the following representations, warranties and covenants: (1) the consolidated financial statements delivered or to be delivered by Borrowers to LaSalle at or prior to the date of this Agreement including, but not limited to those dated December 31, 2000, taken as a whole and at all times subsequent thereto accurately reflect in all material respects the financial condition of Borrowers as of the respective dates thereof, and since the date of the Borrower's financial statements delivered to LaSalle most recently prior to the date of this Agreement, no event or condition has occurred which has had, or is reasonably likely to have, a Material Adverse Effect; (2) the office where Borrowers keeps their books, records and accounts (or copies thereof) concerning the Collateral, Borrowers' principal place of business and all of Borrowers' other places of business, locations of Collateral and post office boxes are as set forth in Exhibit A; each Borrower shall promptly (but in no event less than thirty (30) days prior thereto) advise LaSalle in writing of the proposed opening of any new place of business, the closing of any existing place of business, any change in the location of any Borrower's books, records and accounts (or copies thereof) or the opening or closing of any post office box of any Borrower; (3) the Collateral, including without limitation the Equipment (except any part thereof which prior to the date of this Agreement Borrowers shall have advised LaSalle in writing consists of Collateral normally used in more than one state) is and shall be kept, or, in the case of vehicles, based, only at the addresses set forth on the first page of this Agreement or on Exhibit A, and at other locations within the continental United States of which LaSalle has been advised by Borrowers in writing; (4) each Borrower shall immediately give written notice to LaSalle of any use of any such Goods by any Borrower in any state other than a state in which Borrowers have previously advised LaSalle such Goods shall be used, and such Goods shall not, unless LaSalle shall otherwise consent in writing, be used by any Borrower outside of the continental United States; 28 (5) no security agreement, financing statement or analogous instrument exists or shall exist with respect to any of the Collateral other than any security agreement, financing statement or analogous instrument evidencing Permitted Liens; (6) each Account or item of Inventory which Borrowers shall, expressly or by implication, request LaSalle to classify as an Eligible Account or as Eligible Inventory, respectively, shall, as of the time when such request is made, conform in all respects to the requirements of such classification as set forth in the respective definitions of Eligible Account and Eligible Inventory and as otherwise reasonably established by LaSalle from time to time, and Borrowers shall promptly notify LaSalle in writing if any such Eligible Account or Eligible Inventory shall subsequently become ineligible; (7) each Borrower is and shall at all times during the Term be the lawful owner of all Collateral now purportedly owned or hereafter purportedly acquired by each Borrower, free from all liens, claims, security interests and encumbrances whatsoever, whether voluntarily or involuntarily created and whether or not perfected, other than the Permitted Liens; (8) each Borrower has the right and power and is duly authorized and empowered to enter into, execute and deliver this Agreement and the Other Agreements and perform its obligations hereunder and thereunder; except with respect to Greyrock Capital f/k/a Greyrock Business Credit whose loans will be satisfied out of the proceeds of the Loans on the Closing Date, each Borrower's execution, delivery and performance of this Agreement and the Other Agreements does not and shall not conflict with the provisions of any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on such Borrower, and each Borrower's execution, delivery and performance of this Agreement and the Other Agreements shall not result in the imposition of any lien or other encumbrance upon any of Borrowers' property under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which any Borrower or any of its respective property may be bound or affected; (9) except as otherwise disclosed on Schedule 13 (i), there are no --------------- actions or proceedings which are pending or, to the best of either Borrower's knowledge, threatened against either Borrower which are reasonably likely to have a Material Adverse Effect and Borrowers shall, promptly upon becoming aware of any such pending or threatened action or proceeding, give written notice thereof to LaSalle; (10) each Borrower has obtained all governmental licenses, authorizations, approvals and permits, the lack of which would have a Material Adverse Effect on the operation of its business, and each Borrower is and shall remain in compliance in all material respects with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, Environmental Laws and statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, ERISA or employee health and safety), the failure to comply with which would have a Material Adverse Effect on its business, property, assets, operations or condition, financial or otherwise; 29 (11) all written information now, heretofore or hereafter furnished by Borrowers to LaSalle is and shall be true and correct in all material respects as of the date with respect to which such information was or is furnished (except for financial projections, which have been prepared in good faith based upon reasonable assumptions); (12) no Borrower is conducting, permitting or suffering to be conducted, nor shall any Borrower conduct, permit or suffer to be conducted, any activities pursuant to or in connection with which any of the Collateral is now, or will (while any Liabilities remain outstanding) be owned by any Affiliate (other than another Borrower); (13) each Borrower's name has always been as set forth on the first page of this Agreement and no Borrower uses any tradenames or division names in the operation of its business, except as otherwise disclosed in writing to LaSalle and set forth on Schedule 13(m); each Borrower shall notify LaSalle in -------------- writing within ten (10) days of the change of its name or the use of any tradenames or division names not previously disclosed to LaSalle in writing; (14) Schedule 13(n) is a correct and complete description of the name -------------- and ownership, to Borrowers' knowledge, of each of Borrower's capital stock in existence on the date hereof with respect to holders of five percent (5%) or more of each Borrower's stock. (15) this Agreement and the Other Agreements to which Borrowers are a party are the legal, valid and binding obligations of Borrowers and are enforceable against Borrowers in accordance with their respective terms; (16) each Borrower is solvent, is able to pay its debts as they become due and has capital sufficient to carry on its business, now owns property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts, and will not be rendered insolvent by the execution and delivery of this Agreement or any of the Other Agreements or by completion of the transactions contemplated hereunder or thereunder; (17) no Borrower is now obligated, whether directly or indirectly, for any loans or other indebtedness for borrowed money other than (i) the Liabilities; (ii) indebtedness disclosed to LaSalle on Schedule 13 (q); (iii) --------------- unsecured indebtedness to trade creditors arising in the ordinary course of each Borrower's business, (iv) unsecured indebtedness arising from the endorsement of drafts and other instruments for collection, in the ordinary course of each Borrower's business; (v) indebtedness secured by Permitted Liens, (vi) unsecured net indebtedness as between the Borrowers in the maximum amount of $2,000,000 outstanding at any time, approved in writing in advance by LaSalle, evidenced by inter-company promissory notes pledged and delivered to LaSalle; and (vii) indebtedness to third parties hereafter arising provided that such indebtedness is unsecured and subordinate to the Liabilities pursuant to a subordination agreement in form and substance reasonably satisfactory to LaSalle and is approved in writing in advance by LaSalle. (18) no Borrower owns any margin securities, and none of the proceeds of the Loans hereunder shall be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any 30 margin securities or for any other purpose not permitted by Regulation G or Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time; (19) except as otherwise disclosed on Schedule 13(s), no Borrower has -------------- any Parents, Subsidiaries or divisions, nor is any Borrower engaged in any joint venture or partnership with any other Person; (20) no Borrower is duly organized and in good standing in its state of organization and each Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary, except for such other states in which the failure to so qualify would not have a Material Adverse Effect; (21) no Borrower is in default under any material contract, lease or commitment to which it is a party or by which it is bound, nor does any Borrower know of any dispute regarding any contract, lease or commitment which would result in a Material Adverse Effect on any Borrower; (22) there are no controversies pending or threatened between any Borrower and any of its employees, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material to the continued financial success and well-being of such Borrower, and each Borrower is in compliance in all material respects with all federal and state laws respecting employment and employment terms, conditions and practices including, but not limited to, health and other Benefit Plans specified on Schedule 13(v) -------------- attached hereto, except where the failure to so comply would not have a Material Adverse Effect; (23) Schedule 13(w) lists all of each Borrower's material licenses, -------------- patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and tradenames and Borrower shall continue to possess all adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and tradenames to continue to conduct its business as heretofore conducted by it. (24) except as set forth on Schedule 13(x), no Benefit Plan is in -------------- violation in any material respect of any of the provisions of ERISA or any of the qualification requirements of Section 401(a) of the IRC within the immediately preceding five (5) year period; no Prohibited Transaction or Reportable Event has occurred with respect to any Benefit Plan has been the subject of a waiver of the minimum funding standard under Section 412 of the IRC, no Benefit Plan has experienced an accumulated funding deficiency under Section 412 of the IRC, no lien has been imposed upon such Borrower or any ERISA Affiliate of such Borrower under Section 412(n) of the IRC, no Benefit Plan has been amended in such a way that the security requirements of Section 401(a)(29) of the IRC apply; no notice of intent to terminate a Benefit Plan has been distributed to affected parties or filed with the PBGC under Section 4041 of ERISA; the PBGC has not instituted proceedings to terminate, or appoint a trustee to administer, a Benefit Plan and no event has occurred or condition exists which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit plan; neither Borrowers nor any ERISA Affiliate of Borrowers would be liable for any amount in the aggregate in excess of $5,000 pursuant to Sections 4062, 4063 or 4064 of ERISA if all Benefit Plans terminated as of the most recent 31 valuation dates of such Benefit Plans; neither Borrowers nor any ERISA Affiliate of Borrowers maintains any employee welfare benefit plan, as defined in Section 3(1) of ERISA, which provides any benefits to an employee or the employee's dependents with respect to claims incurred after the employee separates from service other than is required by applicable law; and neither Borrowers nor any ERISA Affiliate of Borrowers has incurred or expects to incur any withdrawal liability to any Multiemployer Plan. (25) (i) no Borrower has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of the Borrowers comply in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder; (ii) there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other Person, nor is any pending or to the best of the Borrowers' knowledge threatened, and Borrowers shall immediately notify LaSalle upon becoming aware of any such investigation, proceeding, complaint, order, directive, claim, citation or notice and take prompt and appropriate actions to respond thereto, with respect to any non-compliance with or violation of the requirements of any Environmental Law by the Borrowers or the release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects the Borrowers or their respective businesses, operations or assets or any properties at which any Borrower has transported, stored, disposed of any Hazardous Materials; (iii) no Borrower has any material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials; and (iv) without limiting the generality of the foregoing, Borrowers shall, following the determination by LaSalle that there is non-compliance, or any condition which requires any action by or on behalf of any Borrower in order to avoid any non-compliance, with any Environmental Law, at Borrowers' expense, cause an independent environmental engineer acceptable to LaSalle to conduct such tests of the relevant site(s) as are appropriate and prepare and deliver a report setting forth the result of such tests, a proposed plan for remediation and an estimate of the costs thereof; and (26) except as otherwise disclosed on Schedule 13(z), all federal, -------------- state and local tax returns and other reports required by applicable law to be filed by each Borrower have been filed and all taxes, assessments and other governmental charges imposed upon each Borrower or on any property of each Borrower have been paid in full, except for taxes being contested in good faith and for which adequate reserves have been created on Borrowers' consolidated financial statements. Each Borrower represents, warrants and covenants to LaSalle that all representations, warranties and covenants of Borrowers contained in this Agreement (whether appearing in paragraphs 13 or 14 hereof or elsewhere) shall ------------------- be true at the time of Borrowers' execution of this Agreement, shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto, shall remain true until the repayment in full of all of the Liabilities and termination of this Agreement, and shall be remade by Borrowers at 32 the time each Revolving Loan is made and each Letter of Credit is issued pursuant to this Agreement. 14. COVENANTS. Until payment or satisfaction in full of all Liabilities and termination of this Agreement, unless Borrowers obtain LaSalle's prior written consent waiving or modifying any of Borrowers' covenants hereunder in any specific instance, each Borrower agrees as follows: (1) each Borrower shall at all times keep accurate and complete books, records and accounts with respect to all of such Borrower's business activities, in accordance with sound accounting practices and GAAP consistently applied, and shall keep such books, records and accounts, and any copies thereof, only at the addresses indicated for such purpose on Exhibit A; --------- (2) each Borrower agrees to deliver to LaSalle the financial information required in paragraph 11 hereof; (3) LaSalle, or any Persons designated by it, shall have the right, at any time (on reasonable notice to Borrowers prior to an Event of Default), in the exercise of its commercially reasonable credit judgment, to call at Borrowers' places of business at any reasonable times (during normal business hours prior to an Event of Default), and, without hindrance or delay, to inspect the Collateral and to inspect, audit, check and make extracts from Borrowers' books, records, journals, orders, receipts and any correspondence and other data relating to each Borrower's business, the Collateral or any transactions between the parties hereto, and shall have the right to make such verification concerning each Borrower's business as LaSalle may consider reasonable under the circumstances. Each Borrower shall furnish to LaSalle such information relevant to LaSalle's rights under this Agreement as LaSalle shall at any time and from time to time reasonably request. Each Borrower authorizes LaSalle to discuss the affairs, finances and business of Borrowers with any officers or directors of Borrowers or any Affiliate, or with those employees of Borrowers with whom LaSalle has determined in its commercially reasonable judgment to be necessary or desirable to converse, and to discuss the financial condition of Borrowers with Borrowers' independent public accountants. Any such discussions shall be without liability to LaSalle or to such accountants. Borrowers shall pay to or reimburse LaSalle for all reasonable fees, costs, and out-of-pocket expenses incurred by LaSalle in the exercise of its rights hereunder (in addition to the annual Collateral Management Fee payable by Borrowers pursuant to paragraph 5(h) -------------- hereof in connection with LaSalle's examination of Borrowers' books and records and Collateral) and all of such costs, fees and expenses shall constitute Revolving Loans hereunder, shall be payable on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (4) (i) each Borrower shall: keep the Collateral properly housed and shall keep the Collateral insured against such risks and in such amounts as are customarily insured against by Persons engaged in businesses similar to that of Borrowers with such companies, in such amounts and under policies in such form as shall be reasonably satisfactory to LaSalle. Originals or certified copies of such policies of insurance have been delivered to LaSalle together with evidence of payment of all premiums therefor, and shall contain an endorsement, in form and substance 33 acceptable to LaSalle, showing loss under such insurance policies payable to LaSalle as loss payee. Such endorsement, or an independent instrument furnished to LaSalle, shall provide that the insurance company shall give LaSalle at least thirty (30) days written notice before any such policy of insurance is altered or cancelled and that no act, whether willful or negligent, or default of any Borrower or any other Person shall affect the right of LaSalle to recover under such policy of insurance in case of loss or damage. Each Borrower hereby directs all insurers under such policies of insurance to pay all proceeds payable thereunder directly to LaSalle. Each Borrower irrevocably, makes, constitutes and appoints LaSalle (and all officers, employees or agents designated by LaSalle) as Borrower's true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of each Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with respect to such policies of insurance; provided, however, that LaSalle shall exercise such rights only upon -------- ------- the occurrence of an Event of Default; (1) each Borrower shall maintain, at its expense, such public liability and third party property damage insurance as is customary for Persons engaged in businesses similar to that of Borrowers with such companies and in such amounts, with such deductibles and under policies in such form as shall be reasonably satisfactory to LaSalle and originals or certified copies of such policies prior to the Closing Date, shall be, delivered to LaSalle together with evidence of payment of all premiums therefor; each such policy shall contain an endorsement showing LaSalle as additional insured thereunder and providing that the insurance company shall give LaSalle at least thirty (30) days written notice before any such policy shall be altered or cancelled; and (2) if any Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then LaSalle, without waiving or releasing any obligation or default by Borrowers hereunder, may (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premiums and take such other actions with respect thereto as LaSalle reasonably deems advisable. All sums disbursed by LaSalle in connection with any such actions, including, without limitation, court costs, expenses, other charges relating thereto and reasonable attorneys' fees, shall constitute Revolving Loans hereunder and, until paid, shall bear interest at the highest rate then applicable to Revolving Loans hereunder; (5) no Borrower shall use the Collateral, or any part thereof, in any unlawful business or for any unlawful purpose or use or maintain any of the Collateral in any manner that does or could result in material damage to the environment or a violation of any applicable environmental laws, rules or regulations; each Borrower shall keep the Collateral in good condition, repair and order, ordinary wear and tear excepted; neither Borrower shall permit the Collateral, or any part thereof, to be levied upon under execution, attachment, distraint or other legal process; neither Borrower shall sell, lease, grant a security interest in or otherwise dispose of any of the Collateral except as expressly permitted by this Agreement; and neither Borrower shall secrete or abandon any of the Collateral, or remove or permit removal of any of the Collateral from any of the locations listed on Exhibit A or in any written --------- notice to LaSalle pursuant to paragraph 13(c) hereof, except for the removal of --------------- Inventory sold in the ordinary course of each Borrower's business as permitted herein; 34 (6) all monies and other property obtained by Borrowers from LaSalle pursuant to this Agreement will be used solely for business purposes of Borrowers; (7) each Borrower shall, at the request of LaSalle, indicate on its records concerning the Collateral a notation, in form satisfactory to LaSalle, of the security interest of LaSalle hereunder, and neither Borrower shall maintain duplicates or copies of such records at any address other than in such Borrower's principal place of business set forth on the first page of this Agreement; provided, however, that each Borrower, in the ordinary course of its -------- ------- respective business, may furnish copies of such records to its accountants, attorneys and other agents or advisors as it may determine to be necessary or desirable, in the exercise of its commercially reasonable judgment; (8) each Borrower shall file all required tax returns and pay all of its taxes when due, including, without limitation, taxes imposed by federal, state or municipal agencies, and shall cause any liens for taxes to be promptly released; provided, that each Borrower shall have the right to contest the payment of such taxes in good faith by appropriate proceedings so long as (i) the amount so contested is disclosed on such Borrower's financial statements in accordance with GAAP, (ii) the contesting of any such payment does not give rise to a lien for taxes, (iii) upon the occurrence of an Event of Default, such Borrower keeps on deposit with LaSalle (such deposit to be held without interest) an amount of money which, in the reasonable judgment of LaSalle, is sufficient to pay such taxes and any interest or penalties that may accrue thereon, and (iv) if any Borrower fails to prosecute such contest with reasonable diligence, LaSalle may apply the money so deposited in payment of such taxes. If any Borrower fails to pay any such taxes and in the absence of any such contest by such Borrower, LaSalle may (but shall be under no obligation to) advance and pay any sums required to pay any such taxes and/or to secure the release of any lien therefor, and any sums so advanced by LaSalle shall constitute Revolving Loans hereunder, shall be payable by Borrowers to LaSalle on demand, and, until paid, shall bear interest at the highest rate then applicable to Revolving Loans hereunder; (9) no Borrower shall (i) incur, create, assume or suffer to exist any indebtedness other than (A) indebtedness arising under this Agreement, (B) unsecured indebtedness owing in the ordinary course of business to trade suppliers, and (C) any other indebtedness described in paragraph 13(q) hereof; --------------- or (ii) assume, guarantee or endorse, or otherwise become liable in connection with, the obligations of any Person, except by endorsement of instruments for deposit or collection or similar transactions in the ordinary course of business; (10) no Borrower shall enter into any merger or consolidation, or sell, lease or otherwise dispose of all or substantially all of its respective assets; neither Borrower shall create any new Subsidiary or Affiliate or issue any shares of, or warrants or other rights to receive or purchase any shares of, any class of its stock; neither Borrower shall enter into any transaction outside the ordinary course of such Borrower's business; (11) no Borrower shall (i) declare or pay any dividend (other than dividends paid wholly in shares of a Borrower's stock) or other distribution (whether in cash or in kind) on, purchase, redeem or retire any shares of any class of its stock, or make any payment on account of, or set apart assets for the repurchase, redemption, defeasance or retirement of, any class of its stock; 35 or (ii) make any optional payment or prepayment on or redemption (including without limitation by making payments to a sinking fund or analogous fund) or repurchase of any indebtedness for borrowed money other than indebtedness pursuant to this Agreement. (12) Except as expressly permitted under this Agreement, no Borrower shall make any loans to, or investment in, any Person, whether in cash, securities or other property of any kind, other than investments that are direct obligations of the United States; (13) no Borrower shall amend its organizational documents or change its Fiscal Year; (14) each Borrower shall maintain and keep in full force and effect each of the financial covenants set forth below. The calculation and determination of each such financial covenant, and all accounting terms contained therein, shall be so calculated and construed in accordance with GAAP, applied on a basis consistent with the financial statements of Borrowers delivered on or before the Closing Date: (1) Tangible Consolidated Net Worth. Borrowers and their ------------------------------- Subsidiaries, on a consolidated basis, shall, on a pro forma basis, have a Tangible Consolidated Net Worth of no less than ($4,000,000.00) as of March 31, 2001. Said covenant shall be set by the parties for all subsequent periods no later than April 25, 2001. (2) Consolidated Interest Coverage Ratio. Borrowers and their ------------------------------------ Subsidiaries, on a consolidated basis, shall maintain as of the end of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2001, calculated on a rolling twelve (12) month basis thereafter, an Interest Coverage Ratio of not less than 1.25 to 1.00; (3) Consolidated Capital Expenditures. Borrowers and their --------------------------------- Subsidiaries, on a consolidated basis, shall not make Capital Expenditures in an aggregate amount of more than $2,500,000.00 in any Fiscal Year of Borrowers; (4) Minimum EBITDA. Borrowers and their Subsidiaries, on a -------------- consolidated basis, shall maintain EBITDA of at least the following amounts for the following time periods: [a] six (6) month period from January 1, 2001 through June ($7,239,000) 30, 2001 [b] nine (9) month period from January 1, 2001 through ($3,516,000) September 30, 2001 [c] during any consecutive twelve (12) month period from $ 7,687,000 and after January 1, 2001 (for calendar year 2002, to be determined by LaSalle after receipt of the Borrowers' 2001 audited financial statements); 36 (15) Borrowers shall reimburse LaSalle for all costs and expenses including, without limitation, legal expenses and reasonable attorneys' fees (both in-house and outside counsel), incurred by LaSalle in connection with the documentation and consummation of this transaction and any amendments or modifications of this Agreement or the Other Agreements or other transactions between Borrowers and LaSalle, including, without limitation, Uniform Commercial Code and other public record searches, lien filings, Federal Express or similar express or messenger delivery, appraisal costs, surveys, title insurance and environmental audit or review costs, and in seeking to collect, protect or enforce any rights in or to the Collateral or incurred by LaSalle in seeking to collect any Liabilities and to administer and enforce any of LaSalle's rights under this Agreement. Borrowers shall also pay all normal service charges with respect to accounts maintained by LaSalle for the benefit of any Borrower. All such costs, expenses and charges shall constitute Revolving Loans hereunder, shall be payable by Borrowers to LaSalle on demand, and, until paid, shall bear interest at the highest rate then applicable to Revolving Loans hereunder; (16) neither Borrower shall pay any management or consulting fees to any Persons, or make any loan to any Person except travel advances made to employees in the ordinary course of business and loans to employees not exceeding One Hundred Thousand Dollars ($100,000) to any single Person and Five Hundred Thousand Dollars ($500,000) in the aggregate outstanding for all Persons at any one time; provided, that no Event of Default shall have occurred prior -------- to, or would occur as a result of, any such payment; (17) neither Borrower shall enter into or be a party to, or permit any Subsidiary to enter into or be a party to, any transaction with any Affiliate of either Borrower except in the ordinary course of business in a manner and to an extent consistent with past practices of Borrowers and necessary or desirable for the prudent operation of their respective businesses, for fair consideration and on terms no less favorable to Borrowers or such Subsidiary as are available from unaffiliated third parties; and (18) Borrowers shall promptly advise LaSalle in writing of any Material Adverse Effect or the occurrence of any Default or Event of Default. 15. CONDITIONS PRECEDENT. (1) The obligation of LaSalle to fund the initial Revolving Loan and to co-sign as applicant for the initial Letter of Credit, is subject to the satisfaction or waiver on or before the Closing Date of the following conditions precedent: (1) LaSalle shall have received each of the agreements, opinions, reports, approvals, consents, certificates and other documents set forth on the closing document list attached hereto as Schedule 15(a)(i) (the ----------------- "Closing Agenda"); (2) Since December 31, 2000, no event shall have occurred which has had or could reasonably be expected to have a Material Adverse Effect, as determined by LaSalle in its sole discretion; 37 (3) LaSalle shall have received payment in full of all fees and expenses payable to it by Borrowers on or before the Closing Date; (4) LaSalle shall have determined that immediately after giving effect to (A) the making of the initial Loans requested to be made on the Closing Date, (B) the issuance of the initial Letter of Credit, if any, requested to be made on the Closing Date and (C) the payment or reimbursement by Borrowers of LaSalle for all closing costs and expenses incurred in connection with the transactions contemplated hereby, on a pro forma basis the Excess --- ----- Availability of Borrowers shall not be less than One Million Seven Hundred Thousand Dollars ($1,700,000); (5) LaSalle shall have received a certificate from each Borrower's chief executive officer or chief financial officer, pursuant to which such officer shall certify that in calculating the Excess Availability described in clause (iv) above, each Borrower's outstanding trade payables were (and are) current and not more than ninety (90) days past invoice date; (6) The Obligors shall have executed and delivered to LaSalle all documents which LaSalle determines are reasonably necessary to consummate the transactions contemplated hereby, including, without limitation, Guarantor's execution and delivery of the Guaranty; (7) LaSalle shall have received proof, satisfactory to it, in its sole discretion, that (x) the net proceeds, in the aggregate, of Borrowers' private placement, in the amount of not less than $10,700,000.00, (y) proceeds of an advance from Microsoft Corporation in the amount of $5,000,000.00 and (z) $3,000,000.00 from Brian Fargo to satisfy all of Borrowers' obligations to Titus Interactive SA have all been received by Borrowers; and (8) LaSalle shall have received all subordination and intercreditor agreements from all Subordinating Creditors in form and substance satisfactory to LaSalle; (2) After the Closing Date, the obligation of LaSalle to make any requested Revolving Loan or to co-sign as applicant for any requested Letter of Credit is subject to the satisfaction of the conditions precedent set forth below. Each such request shall constitute a representation and warranty that such conditions are satisfied: (1) All representations and warranties contained in this Agreement and the Other Agreements shall be true and correct on and as of the date of such request, as if then made, other than representations and warranties that relate solely to an earlier date; and (2) No Default or Event of Default shall have occurred, or would result from the making of the requested Revolving Loan or the issuance of the requested Letter of Credit, which has not been waived; 16. DEFAULT. 38 The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (1) the failure of any Obligor to pay when due, declared due, or demanded by LaSalle in accordance with the terms hereof, any of the Liabilities; (2) the failure of any Obligor to perform, keep or observe any of the covenants, conditions, promises, agreements or obligations of such Obligor under this Agreement or any of the Other Agreements; (3) the making or furnishing by any Obligor to LaSalle of any representation, warranty, certificate, schedule, report or other communication within or in connection with this Agreement or the Other Agreements or in connection with any other agreement between such Obligor and LaSalle, which is untrue or misleading in any respect, or the failure of any Obligor to perform, keep or observe any of the covenants, conditions, promises, agreement of such Obligor under any other agreement with any Person if such failure has or is reasonably likely to have a Material Adverse Effect; (4) the creation (whether voluntary or involuntary) of, or any attempt to create, any lien or other encumbrance upon any of the Collateral, other than the Permitted Liens, or the making or any attempt to make any levy, seizure or attachment thereof; (5) the commencement of any proceedings (i) in bankruptcy by or against any Obligor, (ii) for the liquidation or reorganization of any Obligor, (iii) alleging that such Obligor is insolvent or unable to pay its debts as they mature, or (iv) for the readjustment or arrangement of any Obligor's debts, whether under the United States Bankruptcy Code or under any other law, whether state or federal, now or hereafter existing for the relief of debtors, or the commencement of any analogous statutory or non-statutory proceedings involving any Obligor; provided, however, that if such commencement of proceedings against ------- such Obligor is involuntary, such action shall not constitute an Event of Default unless such proceedings are not dismissed within forty-five (45) days after the commencement of such proceedings; (6) the appointment of a receiver or trustee for any Obligor, for any of the Collateral or for any substantial part of any Obligor's assets or the institution of any proceedings for the dissolution, or the full or partial liquidation, or the merger or consolidation, of any Obligor which is a corporation or a partnership; provided, however, that if such appointment or -------- ------- commencement of proceedings against such Obligor is involuntary, such action shall not constitute an Event of Default unless such appointment is not revoked or such proceedings are not dismissed within forty-five (45) days after the commencement of such proceedings; (7) the entry of any judgment or order in excess of $100,000 against any Obligor which remains unsatisfied or undischarged and in effect for forty- five (45) days after such entry without a stay of enforcement or execution; 39 (8) the occurrence of an event of default under, or the revocation or termination of, any agreement, instrument or document executed and delivered by any Person to LaSalle pursuant to which such Person has guaranteed to LaSalle the payment of all or any of the Liabilities or has granted LaSalle a security interest in or lien upon some or all of such Person's real and/or personal property to secure the payment of all or any of the Liabilities; (9) the occurrence of an event of default under any other agreement or instrument evidencing indebtedness for borrowed money in excess of $100,000 executed or delivered by either Borrower or pursuant to which agreement or instrument either Borrower or its respective properties is or may be bound; (10) a Change of Control shall have occurred; or (11) if any Reportable Event shall have occurred or any Benefit Plan shall be terminated within the meaning of title IV of ERISA, or a trustee shall be appointed by the appropriate United States District Court to administer any Benefit Plan, the PBGC shall institute proceedings to terminate any Benefit Plan, or there shall be a withdrawal from any Multiemployer Plan, and there shall be a Material Adverse Effect in the case of any event described in this paragraph 16(k); - --------------- (12) the occurrence of any event or condition which has or is reasonably likely to have a Material Adverse Effect; or (13) Borrowers do not upgrade or replace their current Platinum computer business applications software with new software reasonably satisfactory to LaSalle within one year from the Closing Date. 17. REMEDIES UPON AN EVENT OF DEFAULT. (1) Upon the occurrence of an Event of Default described in paragraph --------- 16(e) hereof, all of the Liabilities shall immediately and automatically become - ----- due and payable, without notice of any kind. Upon the occurrence of any other Event of Default, all of the Liabilities may, at the option of LaSalle, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable. (2) Upon the occurrence of an Event of Default, LaSalle may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any of the Other Agreements and all of LaSalle's rights and remedies shall be cumulative and non-exclusive to the extent permitted by law. In particular, but not by way of limitation of the foregoing, LaSalle may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which it already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may enter into any of Borrowers' premises where any of the Collateral may be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or 40 otherwise disposed of, and LaSalle shall have the right to store the same at any of Borrowers' premises without cost to LaSalle. At LaSalle's request, Borrowers shall, at Borrowers' expense, assemble the Collateral and make it available to LaSalle at one or more places to be designated by LaSalle and reasonably convenient to LaSalle and Borrowers. Borrowers recognize that if Borrowers fail to perform, observe or discharge any of their respective obligations under this Agreement or the Other Agreements, no remedy at law will provide adequate relief to LaSalle, and Borrowers agree that LaSalle shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Any notification of intended disposition of any of the Collateral required by law will be deemed reasonably and properly given if given at least ten (10) calendar days before such disposition. Any proceeds of any disposition by LaSalle of any of the Collateral may be applied by LaSalle to the payment of expenses in connection with the Collateral including, without limitation, legal expenses and reasonable attorneys' fees (both in-house and outside counsel) and any balance of such proceeds may be applied by LaSalle toward the payment of such of the Liabilities, and in such order of application, as LaSalle may from time to time elect. 18. INDEMNIFICATION. Borrowers agree to defend (with counsel reasonably satisfactory to LaSalle), protect, indemnify and hold harmless LaSalle, each affiliate or subsidiary of LaSalle, and each of their respective officers, directors, employees, attorneys and agents (each an "Indemnified Party") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Party shall be designated a party thereto), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations including, without limitation, securities, environmental and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any Other Agreement, or any act, event or transaction related or attendant thereto, the making and the management of the Loans or any Letters of Credit or the use or intended use of the proceeds of the Loans or any Letters of Credit; provided, however, that Borrowers shall not have any obligation -------- ------- hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Borrowers shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall, together with interest thereon at the highest rate then applicable to Revolving Loans hereunder from the date incurred by each Indemnified Party until paid by Borrowers, be added to the Liabilities of Borrowers and be secured by the Collateral. The provisions of this paragraph 18 shall survive the satisfaction and payment of the other Liabilities and the termination of this Agreement. 41 19. NOTICES. All written notices and other written communications with respect to this Agreement shall be sent by ordinary, certified or overnight mail, by telecopy or delivered in person, and in the case of LaSalle shall be sent to it at 565 Fifth Avenue, 27th Floor, New York, New York 10017, Attention: District Credit Manager (if by telecopy to (212) 986-4205), and in the case of Borrowers shall be sent to Borrowers at their principal place of business as set forth on the first page of this Agreement, Attn: Chief Executive Officer and Chief Financial Officer (if by telecopy to (949) 252-0667). 20. CHOICE OF GOVERNING LAW AND CONSTRUCTION This Agreement and the Other Agreements are submitted by Borrowers to LaSalle for LaSalle's acceptance or rejection at LaSalle's principal place of business as an offer by Borrowers to borrow monies from LaSalle now and from time to time hereafter, and shall not be binding upon LaSalle or become effective until accepted by LaSalle, in writing, at said place of business. If so accepted by LaSalle, this Agreement and the Other Agreements shall be deemed to have been made at said place of business. THIS AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN THE COLLATERAL, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or remaining provisions of this Agreement. 21. FORUM SELECTION AND SERVICE OF PROCESS. To induce LaSalle to accept this Agreement, each Borrower irrevocably agrees that, subject to LaSalle's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. EACH BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE. Each Borrower hereby irrevocably appoints and designates the Secretary of State of Illinois, whose address is Springfield, Illinois (or any other person having and maintaining a place of business in such state whom Borrowers may from time to time hereafter designate upon ten (10) days written notice to LaSalle and who LaSalle has agreed in its sole discretion in writing is satisfactory and who has executed an agreement in form and substance satisfactory to LaSalle agreeing to act as such attorney and agent), as such Borrower's true and lawful attorney and duly authorized agent for acceptance of service of legal process. Each Borrower 42 agrees that service of such process upon such person shall constitute personal service of such process upon such Borrower. EACH BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY LASALLE IN ACCORDANCE WITH THIS PARAGRAPH. 22. MODIFICATION AND BENEFIT OF AGREEMENT This Agreement and the Other Agreements may not be modified, altered or amended except by an agreement in writing signed by Borrowers and LaSalle. Borrowers may not sell, assign or transfer this Agreement, or the Other Agreements or any portion thereof including, without limitation, Borrowers' rights, titles, interest, remedies, powers or duties thereunder. Each Borrower hereby consents to LaSalle's sale, assignment, transfer or other disposition, at any time and from time to time hereafter, of this Agreement, or the Other Agreements, or of any portion thereof, or participations therein including, without limitation, LaSalle's rights, titles, interest, remedies, powers and/or duties thereunder. Each Borrower agrees that it shall execute and deliver such documents as LaSalle may request in connection with any such sale, assignment, transfer or other disposition. 23. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this Agreement are for convenience of reference only, and shall not govern the interpretation of any of the provisions of this Agreement. 24. POWER OF ATTORNEY. Each Borrower acknowledges and agrees that its appointment of LaSalle as its attorney and agent-in-fact for the purposes specified in this Agreement is an appointment coupled with an interest and shall be irrevocable until all of the Liabilities are paid in full and this Agreement is terminated. 25. WAIVER OF JURY TRIAL; OTHER WAIVERS; CONFIDENTIALITY. (1) LASALLE AND EACH BORROWER HEREBY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT OF ANY BORROWER OR LASALLE OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN ANY BORROWER AND LASALLE. IN NO EVENT SHALL LASALLE BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. (2) EACH BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY LASALLE OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF BORROWERS OR ANY ONE OF THEM WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. 43 (3) Each Borrower hereby waives demand, presentment, protest and notice of nonpayment, and further waives the benefit of all valuation, appraisal and exemption laws. (4) LaSalle's failure, at any time or times hereafter, to require strict performance by Borrowers of any provision of this Agreement or any of the Other Agreements shall not waive, affect or diminish any right of LaSalle thereafter to demand strict compliance and performance therewith. Any suspension or waiver by LaSalle of an Event of Default under this Agreement or any default under any of the Other Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the Other Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. No delay on the part of LaSalle in the exercise of any right or remedy under this Agreement or any Other Agreement shall preclude other or further exercise thereof or the exercise of any right or remedy. None of the undertakings, agreements, warranties, covenants and representations of Borrowers contained in this Agreement or any of the Other Agreements and no Event of Default under this Agreement or default under any of the Other Agreements shall be deemed to have been suspended or waived by LaSalle unless such suspension or waiver is in writing, signed by a duly authorized officer of LaSalle and directed to Borrowers specifying such suspension or waiver. (5) Each Borrower has furnished and will furnish to LaSalle certain information concerning such Borrower which such Borrower has advised is non- public, proprietary or confidential in nature ("Confidential Information"). ------------------------ LaSalle confirms to the Borrowers that it is LaSalle's policy and practice to maintain in confidence all Confidential Information which is provided to it under agreements providing for the extension of credit and which is identified to it as such, and that it will protect the confidentiality of Confidential Information submitted to it with respect to Borrowers under this Agreement, commensurate with its efforts to maintain the confidentiality of its own Confidential Information, provided, however, that (i) nothing contained herein -------- ------- shall prevent LaSalle from disclosing Confidential Information (A) to its Affiliates and their respective directors, officers, and employees and to any legal counsel, auditors, appraisers, consultants or other persons retained by it or its Affiliates as professional advisors, on the condition that such information not be further disclosed except in compliance with this paragraph --------- 25(e); (B) under color of legal authority, including, without limitation, to any - ----- regulatory authority having jurisdiction over it or its operations or to, or under the authority of, any court deemed by it to be of competent jurisdiction; (C) to any actual or potential assignee of or participant in LaSalle's rights and obligations under this Agreement to the extent such actual potential assignee or participant has agreed to maintain such information in confidence on the basis set forth in this paragraph 25(e); and (D) as necessary in connection --------------- with the exercise of its remedies under this Agreement or any of the Other Agreements; (ii) the terms of this paragraph 25(e) shall be inapplicable to any --------------- information furnished to it which is in possession prior to the delivery to it of such information by Borrowers or any other authorized Person, or otherwise has been obtained by it on a non-confidential basis, or which was or becomes available to the public or otherwise part of the public domain (other than as a result of LaSalle's failure or any prospective participant's or assignee's failure to abide hereby), or which was not non-public, proprietary or confidential when Borrowers or any other authorized Person delivered it to LaSalle; and (iii) the determination by LaSalle as to the application of any of 44 the circumstances described in the foregoing clauses (i) and (ii) will be conclusive and binding if made in good faith. (6) Notwithstanding subparagraph (e) above, Borrowers consent to ---------------- LaSalle publishing a tombstone or similar advertising material relating to the financing transaction contemplated by this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 45 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day first above written. LaSALLE BUSINESS CREDIT, INC. By:____________________________ Name: Mary Ellen Nixon-Moore Title: Vice President INTERPLAY ENTERTAINMENT CORP. By:_____________________________ Name: Manuel Marrero Title: Authorized Signatory INTERPLAY OEM, INC. By:_____________________________ Name: Manuel Marrero Title: Authorized Signatory GAMESONLINE.COM, INC. By:_____________________________ Name: Manuel Marrero Title: Authorized Signatory 46 EXHIBIT A BUSINESS AND COLLATERAL LOCATIONS FOR BORROWERS: A. The principal business location and location of where all originals and copies of books, records and accounts are kept as follows: B. The other locations of Collateral are only as follows: EXHIBIT B OFFICER'S CERTIFICATE THIS CERTIFICATE is submitted pursuant to paragraph 11(i) of the Loan and Security Agreement dated March ___, 2001 ("Loan Agreement") among LaSalle Business Credit, Inc. ("LaSalle") and Interplay Entertainment Corp., a Delaware corporation and Interplay OEM, Inc., a California corporation, and GamesOnline.com, Inc., a Delaware corporation (collectively and individually, as the context case may require, "Borrower"). The undersigned hereby certifies to LaSalle that as of the date of this Agreement: 1. The undersigned is the __________ of the Borrower. 2. There exits no event or circumstance which is or which with the passage of time, the giving of notice, or both would constitute an Event of Default, as that term is defined in the Loan Agreement, or , if such an event or circumstance exists, a writing attached hereto specifies the nature thereof, the period of existence thereof and the action that Borrower has taken or proposes to take with respect thereto. 3. No material adverse change in the condition, financial or otherwise, business, property, or results of operations of Borrower has occurred since ____________________, or, if such a change has occurred, a writing attached hereto specifies the nature thereof and the action that Borrower has taken or proposes to take with respect thereto. 4. All insurance premiums due as of such date have been paid. 5. All taxes due as of such date have been paid or, for those taxes which have not been paid, a writing attached hereto describes the nature and amount of such taxes, and sets forth Borrower's rationale for not paying such taxes and the action that Borrower has taken or proposes to take with respect thereto. 6. To the best of the undersigned's knowledge, after appropriate inquiry, except as previously disclosed to LaSalle in writing, no litigation, investigation or proceeding, or injunction writ or restraining order is pending or threatened against the Borrower or, if any litigation, investigation or proceeding, or injunction, writ or restraining order is pending or threatened against the Borrower, a writing attached hereto specifies the nature thereof and the action that Borrower has taken or proposes to take with respect thereto. 7. Borrower is in compliance with the representations, warranties and covenants in the Loan Agreement, or, if Borrower is not in compliance with any representations, warranties or covenants in the Loan Agreement, a writing attached hereto specifies the nature thereof, the period of existence thereof and the action that Borrower has taken or proposes to take with respect thereto. 8. Attached hereto is a true and correct calculation of the financial covenants contained in paragraph 14(n) of the Loan Agreement. --------------- 9. Borrower is solvent and is able to pay its debts as they become due. ----------------------------------- Name: Title: [ATTACH FINANCIAL COVENANT CALCULATIONS] SCHEDULE 1 (a) - PERMITTED LIENS SCHEDULE 13(i) - LITIGATION SCHEDULE 13(n) - STOCKHOLDERS SCHEDULE 13(q) -INDEBTEDNESS SCHEDULE 13 (s) - PARENTS, SUBSIDIARIES, JOINT VENTURES AND PARTNERSHIPS SCHEDULE 13(v) - HEALTH BENEFIT PLANS SCHEDULE 13(w) - TRADEMARKS, ETC. SCHEDULE 13(x) - BENEFIT PLANS - NON-COMPLIANCE SCHEDULE 13(z) - EXCEPTIONS TO TAX COMPLIANCE SCHEDULE 15(a)(i) - CLOSING AGENDA EX-10.2 4 dex102.txt WARRANT Exhibit 10.2 THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") NOR QUALIFIED UNDER THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS AMENDED, (THE "CALIFORNIA SECURITIES LAW"). THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT AND THE SECURITIES LAW. THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH THE CALIFORNIA SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION AND COMPLIANCE ARE NOT REQUIRED. Warrant to Purchase 500,000 Shares of Common Stock As Herein Described WARRANT TO PURCHASE COMMON STOCK OF INTERPLAY ENTERTAINMENT CORP. This is to certify that, for value received, Brian Fargo, or a proper assignee (in case, the "Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Interplay Entertainment Corp., a Delaware corporation (the "Company"), having its principal place of business at 16815 Von Karman Avenue, Irvine, California 92606, at any time during the period from the date hereof to 5:00 p.m., California time, on the third anniversary of the date hereof (the "Expiration Date") at which time this Warrant shall expire and become void, five hundred thousand (500,000) shares ("Warrant Shares") of the Company's Common Stock (the "Common Stock"). This Warrant shall be exercisable at One and 75/100 Dollars ($1.75) per share (the "Exercise Price"). The number of shares of Common Stock to be received upon exercise of this Warrant and the Exercise Price shall be adjusted from time to time as set forth below. This Warrant also is subject to the following terms and conditions: 1. Exercise and Payment; Exchange. ------------------------------ 1.1 This Warrant may be exercised in whole or in part at any time from and after the date hereof and before the Expiration Date, but if such date is a day on which federal or state chartered banking institutions located in the State of California are authorized to close, then on the next succeeding day which shall not be such a day. Exercise shall be by presentation and surrender to the Company at its principal office, or at the office of any transfer agent designated by the Company, of (i) this Warrant, (ii) the attached exercise form properly executed, and (iii) either (A) a certified or official bank check for the Exercise Price for the number of Warrant Shares specified in the exercise form; or (B) other securities of the Company owned by the Holder and having a fair market value determined as set forth in Section 3 hereof equal to the Exercise Price for the number of Warrant Shares specified in the exercise form or (C) any combination of the consideration specified in the foregoing clauses (A) and (B). If this Warrant is exercised in part only, the Company or its transfer agent shall, upon surrender of the Warrant, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the remaining number of Warrant Shares purchasable hereunder. Upon receipt by the Company of this Warrant in proper form for exercise, accompanied by payment as aforesaid, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered by the Holder. 1.2 Exchange of Warrant for Common Stock. In addition to and without ------------------------------------ limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right, upon its written request delivered or transmitted to the Company together with this Warrant, to exchange this Warrant, in whole or in part at any time or from time to time from and after the date hereof and on or prior to the Expiration Date, for the number of shares of Common Stock having an aggregate fair market value (determined as set forth in Section 3 hereof) on the date of such exchange equal to the difference between (i) the aggregate fair market value on the date of such exchange (determined as set forth in Section 3 hereof) of a number of Warrant Shares designated by the Holder and (ii) the aggregate Exercise Price the Holder would have paid to the Company to purchase such designated number of Warrant Shares, and, if a balance of purchasable Warrant Shares remains after such exchange, the Company shall execute and deliver to the Holder a new Warrant evidencing the right of the Holder to purchase such balance of Warrant Shares. No payment of any cash or other consideration shall be required. Such exchange shall be effective upon the date of receipt by the Company of the original Warrant surrendered for cancellation and a written request from the Holder that the exchange pursuant to this Subsection be made, or at such later date as may be specified in such request. Upon receipt by the Company of this Warrant in proper form for exchange, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such exchange, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered by the Holder. 1.3 Conditions to Exercise or Exchange. The restrictions in Section 7 ---------------------------------- shall apply, to the extent applicable by their terms, to any exercise or exchange of this Warrant permitted by this Section 1. 2. Reservation of Shares. The Company shall, at all times until the --------------------- expiration of this Warrant, reserve for issuance and delivery upon exercise of this Warrant the number of Warrant Shares which shall be required for issuance and delivery upon exercise of this Warrant. 3. Fractional Interests. The Company shall not issue any fractional -------------------- shares or script representing fractional shares upon the exercise or exchange of this Warrant. With respect to any fraction of a share resulting from the exercise or exchange hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current fair market value per share of Common Stock, determined as follows: 3.1 If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or is listed on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the current fair market value shall be the last reported sale price of the Common Stock on such exchange or NASDAQ on the last business 2 day prior to the date of exercise of this Warrant or if no such sale is made on such day, the mean of the closing bid and asked prices for such day on such exchange or NASDAQ; 3.2 If the Common Stock is not so listed or admitted to unlisted trading privileges or quoted on NASDAQ, the current fair market value shall be the mean of the last bid and asked prices reported on the last business day prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if reports are unavailable under clause (i) above, by the National Quotation Bureau Incorporated; or 3.3 If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current fair market value shall be an amount, not less than book value, determined in such reasonable manner as may be prescribed by the Company's Board of Directors in good faith. 4. No Rights as Stockholders. This Warrant shall not entitle the Holder ------------------------- to any rights as a stockholder of the Company, either at law or in equity. The rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 5. Adjustments in Number and Exercise Price of Warrant Shares. ---------------------------------------------------------- 5.1 The number of shares of Common Stock for which this Warrant may be exercised and the Exercise Price therefor shall be subject to adjustments as follows: (a) If the Company is recapitalized through the subdivision or combination of its outstanding shares of Common Stock into a larger or smaller number of shares, the number of shares of Common Stock for which this Warrant may be exercised shall be increased or reduced, as of the record date for such recapitalization in the same proportion as the increase or decrease in the outstanding shares of Common Stock, and the Exercise Price shall be adjusted so that the aggregate amount payable for the purchase of all of the Warrant Shares issuable hereunder immediately after the record date for such recapitalization shall equal the aggregate amount so payable immediately before such record date. (b) If the Company declares a dividend on Common Stock payable in Common Stock or securities convertible into Common Stock, the number of shares of Common Stock for which this Warrant may be exercised shall be increased as of the record date for determining which holders of Common Stock shall be entitled to receive such dividend, in proportion to the increase in the number of outstanding shares (and shares of Common Stock issuable upon conversion of all such securities convertible into Common Stock) of Common Stock as a result of such dividend, and the Exercise Price shall be adjusted so that the aggregate amount payable for the purchase of all the Warrant Shares issuable hereunder immediately after the record date for such dividend shall equal the aggregate amount so payable immediately before such record date. (c) If the Company distributes to holders of its Common Stock, other than as part of its dissolution or liquidation or the winding up of its affairs, any shares of its capital stock, any evidence of indebtedness or any of its assets (other than cash, Common Stock or securities convertible into Common Stock), the Company shall give written notice to the Holder of any such 3 distribution at least thirty (30) days prior to the proposed record date in order to permit the Holder to exercise this Warrant on or before the record date. There shall be no adjustment in the number of shares of Common Stock for which this Warrant may be exercised, or in the Exercise Price, by virtue of any such distribution. (d) If the Company offers rights or warrants to the holders of Common Stock which entitle them to subscribe to or purchase additional Common Stock or securities convertible into Common Stock, the Company shall give written notice of any such proposed offering to the Holder at least thirty (30) days prior to the proposed record date in order to permit the Holder to exercise this Warrant on or before such record date. There shall be no adjustment in the number of shares of Common Stock for which this Warrant may be exercised, or in the Exercise Price, by virtue of any such distribution. (e) If the event, as a result of which an adjustment is made under paragraph (a) or (b) above, does not occur, then any adjustments in the Exercise Price or number of shares issuable that were made in accordance with such paragraph (a) or (b) shall be adjusted to the Exercise Price and number of shares as were in effect immediately prior to the record date for such event. 5.2 In the event of any reorganization or reclassification of the outstanding shares of Common Stock (other than a change in par value or from no par value to par value, or from par value to no par value, or as a result of a subdivision or combination) or in the event of any consolidation or merger of the Company with another entity after which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise (any such transaction, a "Reorganization"), at any time prior to the expiration of this Warrant, upon subsequent exercise of this Warrant the Holder shall have the right to receive the same kind and number of shares of Common Stock and other securities, cash or other property as would have been distributed to the Holder upon such reorganization, reclassification, consolidation or merger had the Holder exercised this Warrant immediately prior to such reorganization, reclassification, consolidation or merger, appropriately adjusted for any subsequent event described in this Section 5. The Holder shall pay upon such exercise the Exercise Price that otherwise would have been payable pursuant to the terms of this Warrant. If any such reorganization, reclassification, consolidation or merger results in a cash distribution in excess of the then applicable Exercise Price, the holder may, at the Holder's option exercise this Warrant without making payment of the Exercise Price, and in such case the Company shall, upon distribution to the Holder, consider the Exercise Price to have been paid in full, and in making settlement to the Holder, shall deduct an amount equal to the Exercise Price from the amount payable to the Holder. In the event of any such reorganization, merger or consolidation, the corporation formed by such consolidation or merger or the corporation which shall have acquired the assets of the Company shall execute and deliver a supplement hereto to the foregoing effect, which supplement shall also provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Warrant. 5.3 If the Company shall, at any time before the expiration of this Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the right to receive upon exercise of this Warrant, in lieu of the shares of Common Stock of the Company that the Holder otherwise would have been entitled to receive, the same kind and amount of assets as would have been issued, 4 distributed or paid to the Holder upon any such dissolution, liquidation or winding up with respect to such Common Stock receivable upon exercise of this Warrant on the date for determining those entitled to receive any such distribution. If any such dissolution, liquidation or winding up results in any cash distribution in excess of the Exercise Price provided by this Warrant, the Holder may, at the Holder's option, exercise this Warrant without making payment of the Exercise Price and, in such case, the Company shall, upon distribution to the Holder, consider the Exercise Price to have been paid in full and, in making settlement to the Holder, shall deduct an amount equal to the Exercise Price from the amount payable to the Holder. 5.4 Whenever this Warrant shall be adjusted as required by the provisions of this Section 5, the Company forthwith shall file in the custody of its secretary or an assistant secretary, at its principal office, an officer's certificate showing the adjusted number of Warrant Shares and Exercise Price and setting forth in reasonable detail the circumstances requiring the adjustment. Each such officer's certificate shall be made available at all reasonable times during reasonable hours for inspection by the Holder. 6. Notices to Holder. So long as this Warrant shall be outstanding (a) if ----------------- the Company shall pay any dividends or make any distribution upon the Common Stock otherwise than in cash or (b) if the Company shall offer generally to the holders of Common Stock the right to subscribe to or purchase any shares of any class of Common Stock or securities convertible into Common Stock or any similar rights or (c) if there shall be any capital reorganization of the Company in which the Company is not the surviving entity, recapitalization of the capital stock of the Company, any Reorganization, any sale, lease or other transfer of all or substantially all of the property and assets of the Company, or voluntary or involuntary dissolution, liquidation or winding up of the Company, then in such event, the Company shall cause to be mailed to the Holder, at least thirty (30) days prior to the relevant date described below (or such shorter period as is reasonably possible if thirty days is not reasonably possible), a notice containing a description of the proposed action and stating the date or expected date on which a record of the Company's shareholders is to be taken for the purpose of any such dividend, distribution of rights, or such reclassification, reorganization, consolidation, merger, conveyance, lease or transfer, dissolution, liquidation or winding up is to take place and the date or expected date, if any is to be fixed, as of which the holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such event. 7. Transfer, Exercise, Exchange, Assignment or Loss of Warrant, Warrant -------------------------------------------------------------------- Shares or Other Securities. - -------------------------- 7.1 This Warrant may be transferred, exercised, exchanged or assigned ("transferred"), in whole or in part, subject to the following restrictions. This Warrant and the Warrant Shares or any other securities ("Other Securities") received upon exercise of this Warrant shall be subject to restrictions on transferability until registered under the Securities Act of 1933, as amended (the "Securities Act"), unless an exemption from registration is available. Until this Warrant and the Warrant Shares or Other Securities are so registered, this Warrant and any certificate for Warrant Shares or Other Securities issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, stating that this Warrant, the Warrant Shares or Other Securities may not be sold, transferred or otherwise disposed of unless, in the opinion of counsel satisfactory to the Company, which may be counsel to the Company, that the Warrant, the Warrant Shares or Other Securities may 5 be transferred without such registration. This Warrant and the Warrant Shares or Other Securities may also be subject to restrictions on transferability under applicable state securities or blue sky laws. 7.2 Until this Warrant, the Warrant Shares or Other Securities are registered under the Securities Act, the Company may require, as a condition of transfer of this Warrant, the Warrant Shares, or Other Securities that the transferee (who may be the Holder in the case of an exercise or exchange) represent that the securities being transferred are being acquired for investment purposes and for the transferee's own account and not with a view to or for sale in connection with any distribution of the security. The Company may also require that transferee provide written information adequate to establish that the transferee is an "accredited investor" within the meaning of Regulation D issued under the Securities Act, a purchaser meeting the requirements of Section 25102(f) of the California Securities Law, or otherwise meets all qualifications necessary to comply with exemptions to the Securities Act and California Securities Law, all as determined by counsel to the Company. 7.3 Any transfer permitted hereunder shall be made by surrender of this Warrant to the Company at its principal office or to the Transfer Agent at its offices with a duly executed request to transfer the Warrant, which shall provide adequate information to effect such transfer and shall be accompanied by funds sufficient to pay any transfer taxes applicable. Upon satisfaction of all transfer conditions, the Company or Transfer Agent shall, without charge, execute and deliver a new Warrant in the name of the transferee named in such transfer request, and this Warrant promptly shall be cancelled. 7.4 Upon receipt by the Company of evidence satisfactory to it of loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of reasonable satisfactory indemnification, or, in the case of mutilation, upon surrender of this Warrant, the Company will execute and deliver, or instruct the Transfer Agent to execute and deliver, a new Warrant of like tenor and date, any such lost, stolen or destroyed Warrant thereupon shall become void. 7.5 Each Holder of this Warrant, the Warrant Shares and any Other Securities shall indemnify and hold harmless the Company, its directors and officers, and each other person, if any, who controls the Company, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer or any such person may become subject under the Securities Act, California Securities Law or any statute or common law, insofar as such losses, claims, damages or liabilities, or actions in respect thereof, arise out of or are based upon the disposition by such Holder by such Holder of the Warrant, the Warrant Shares or Other Securities in violation of this Warrant. 8. No Dilution or Impairment. The Company will not, by amendment of its ------------------------- Certificate of Incorporation or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times, in good faith, take all such action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. 9. Market Stand-Off. If requested by the Company and an underwriter of ---------------- Common Stock (or other securities) of the Company, a Holder shall not sell or otherwise transfer or dispose of any Warrant Shares or Other Securities held by such Holder (other than those included in the 6 registration, if any) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act (other than a registration statement relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the Warrant Shares or Other Securities subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 10. Notices. All notices and other communications required or permitted ------- hereunder shall be in writing and shall be deemed effectively given upon personal delivery or facsimile transmission to the party to be notified, or one (1) day after deposit with a nationally recognized overnight delivery service, all delivery charges paid, or three (3) days after deposit with the United States mail, by registered or certified mail, postage prepaid, in any such case addressed (a) if to Holder, at the address of Holder appearing on the records of the Company, or at such other address as Holder shall have furnished to the Company in writing in accordance with this Section 10, or (b) if to the Company, at its principal office set forth above, or any other address which the Company shall have furnished to Holder in writing in accordance with this Section 10. 11. Amendment. Any provision of this Warrant may be amended or the --------- observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holder. 12. Governing Law. This Warrant shall be governed by and construed in -------------- accordance with the laws of the State of California. IN WITNESS WHEREOF, the Company has executed this Warrant as of April 11, 2001. Interplay Entertainment Corp. By: _________________________________ Manuel Marrero Chief Financial Officer 7 Annex A ------- [FORM OF EXERCISE] (To be executed upon exercise of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase __________ shares of Common Stock and herewith tenders payment for such shares of Common Stock to the order of Interplay Entertainment Corp. the amount of $__________ in accordance with the terms hereof. The undersigned requests that a certificate for such shares of Common Stock be registered in the name of _______________________________ whose address is ___________________________________. If said number of shares of Common Stock is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of the shares of Common Stock be registered in the name of __________________________ whose address is _____________________________ and that such Warrant Certificate be delivered to ________________________, whose address is _________________________________. Dated: Signature: ______________________________________ (Signature must conform in all respects to name of holders as specified on the face of the Warrant Certificate.) _____________________________ (Insert Social Security or Taxpayer Identification Number of Holder.) EX-10.3 5 dex103.txt SECURITY AGREEMENT EXHIBIT 10.3 SECURITY AGREEMENT This SECURITY AGREEMENT (this "Agreement"), dated as of April __, 2001, is entered into by and between INTERPLAY ENTERTAINMENT CORP., a Delaware corporation ("Debtor"), and Brian Fargo, an individual ("Fargo"). WHEREAS, Debtor has executed that certain Secured Promissory Note of even date herewith in the amount of $3,000,000 held by Fargo (the "Note"); and WHEREAS, as a condition to Fargo's making the loans evidenced by the Note, Debtor has agreed to enter into this Agreement with Fargo, securing the obligations of Debtor under the Note; and NOW, THEREFORE, in consideration of the premises contained herein, Debtor hereby warrants and represents to, and covenants and agrees with, Fargo, as follows: 1. Definitions and Construction. (a) Definitions. As used in this Agreement: ----------- "Account Debtor" shall have the meaning ascribed thereto in the Code. -------------- "Accounts" shall mean all of Debtor's presently existing and hereafter -------- arising: (a) accounts (including all "accounts" as such term is defined in the Code); (b) chattel paper (including all "chattel paper" as such term is defined in the Code), including certificated securities (as such term is defined in the Code) and instruments (as such term is defined in the Code constituting part of "chattel paper" as such term is defined in of the Code; (c) contract rights; (d) documents (including all "documents" as such term is defined in the Code), irrespective of whether negotiable; and (e) credit insurance, guaranties, and letters of credit with respect to which Debtor is the beneficiary together with any security for any of the foregoing. "Agreement" shall mean this Security Agreement. --------- "Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978 (11 U.S.C. --------------- (S)(S)101-1330), as amended or supplemented from time to time, and any successor statute, and all of the rules issued or promulgated in connection therewith. "Books and Records" shall mean all of Debtor's books and records, including ----------------- accounting journals and ledgers, deposit account statements, computer programs, disc or tape files, printouts, and other computer-prepared information, which in each case summarizes, evidences, provides information concerning, or is used in connection with, all or any part of the Collateral. "Code" shall mean the California Uniform Commercial Code, as amended or ---- supplemented from time to time. "Collateral" shall mean the Accounts, the Books and Records, the Equipment, ---------- the General Intangibles, the Inventory, the Pledged Collateral, and the Proceeds. "Debtor" shall have the meaning ascribed thereto in the preamble of this ------ Agreement. "Equipment" shall mean all of Debtor's presently existing or hereafter --------- acquired or created equipment (including all "equipment," as such term is defined in the Code) all of its forms, wherever located, and all parts thereof and all accessions thereto and documents therefor, including fixtures, furnishings, furniture, heavy equipment, jibs, machinery, molds, motors, pallets, tooling, tools, and trade fixtures, and all cars, forklifts, rolling stock, tractors, trucks, and other vehicles, and any and all spare and replacement parts and supplies used in connection with the maintenance or operation of any one or more of the foregoing. "Event of Default" shall have the meaning ascribed thereto in Section 6 ---------------- below. "Fargo" shall have the meaning ascribed thereto in the preamble of this ----- Agreement. "General Intangibles" shall mean all of Debtor's presently existing and ------------------- hereafter arising general intangibles (including all "general intangibles," as such term is defined in the Code) and other personal property (including all: blueprints; catalogs; choses or things in action; computer disks; computer programs; computer tapes; computer code; computer software; customer lists; deposit accounts (including all "deposit accounts," as such term is defined in the Code); drawings; goodwill; literature; monies due or recoverable from pension funds; money; patents; patent rights; purchase orders; reports; route lists; service marks; service mark rights; software; tax refunds; tax refund claims; trade names; trade name rights; trademarks; trademark rights; copyrights; maskwork rights; rights to receive and interests in insurance settlement proceeds; rights under licensing, distribution, representation, agency, sales, and other contracts or agreements; claims for damages to persons or assets; interests in and rights to receive distributions of assets with respect to general partnerships, limited partnerships, joint ventures, trusts, estates of deceased persons (irrespective of whether in probate), and unincorporated associations; rights to payment and other rights under any guaranty, indemnity, or right of contribution or subrogation; rights with respect to any approval, certification, license, or permit issued by or under the authority of any governmental entity, or any subdivision, department, or agency thereof, including to the maximum extent permitted by law; and rights in and to all security agreements, leases, or other contracts securing or otherwise relating to any of the foregoing or any Account or any Pledged Collateral) other than Accounts, Equipment, Inventory, and Pledged Collateral. "Insolvency Proceeding" shall mean any proceeding commenced by or against --------------------- any person or entity under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Inventory" shall mean all of Debtor's presently existing or hereafter --------- acquired or created inventory (including all "inventory" as such term is defined in the Code) in all of its forms, wherever located (whether in the possession of Debtor or a bailee or other person for storage, transit, or otherwise), including: (a) all "goods," as such term is defined in the Code, manufactured or assembled or held for sale or lease or to be furnished under any contract of service; (b) raw materials; (c) work in process; (d) finished goods; (e) all merchandise or "goods" as such term is defined in the Code, which are returned to or repossessed by Debtor; (f) all materials used or consumed in Debtor's business; and (g) all additions and accessions to any of the foregoing and all replacements and products of any of the foregoing together with all containers, packing, packaging, or shipping materials related thereto. "LaSalle Credit Facility" shall mean the credit facility evidenced by that ----------------------- certain Loan and Security Agreement dated April ___, 2001 among Debtor, Interplay OEM, Inc., GamesOnline.com, Inc. and LaSalle Business Credit, Inc. "Note" shall have the meaning ascribed thereto in the recitals of this ---- Agreement. "Pledged Collateral" shall mean all presently existing and hereafter ------------------ acquired or created indebtedness held by Debtor, and all evidences of such indebtedness, including all instruments (including all "instruments" as such term is defined in the Code), cash, and other assets from time to time received, receivable, or otherwise distributed in respect of, in exchange for, or on account of such indebtedness. "Proceeds" shall mean all proceeds (including proceeds of proceeds) of the -------- Collateral, including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash (including cash or other forms of payment received in return for services rendered), Accounts, Equipment, General Intangibles, Inventory, Pledged Collateral, and other assets from time to time received, receivable, or otherwise distributed in respect of, or in exchange for, or as a replacement of or a substitution for, any of the Collateral; (b) "proceeds," as such term is defined in the Code; (c) proceeds of any insurance, indemnity, warranty, or guaranty (including guaranties of delivery) payable from time to time with respect to any of the Collateral; (d) payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure, or forfeiture of all or any part of the Collateral; and (e) other amounts from time to time paid or payable under or in connection with any of the Collateral. "pro-rata" shall mean equally and ratably in accordance with the respective -------- proportions of outstanding principal and interest under the Note. "Secured Obligations" shall mean all liabilities, obligations, or ------------------- undertakings owing by Debtor to Fargo of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Note or this Agreement, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest which accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Debtor is required to pay pursuant to any of the foregoing, by law, or otherwise. (b) Construction. ------------ (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the part includes the whole, the terms "include" and "including" are not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. (ii) Any reference in this Agreement to any of the following documents includes any and all alterations, amendments, extensions, modifications, renewals, restatements, or supplements thereto or thereof, as applicable: this Agreement and the Note. (iii) Neither this Agreement nor any uncertainty or ambiguity contained herein shall be construed or resolved against Fargo or Debtor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties hereto and its counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 2. Security. -------- (a) Grant of Security Interest. Debtor hereby grants to Fargo a -------------------------- security interest in all of Debtor's right, title, and interest in and to the Collateral in order to secure the prompt payment and performance in full by Debtor when due, whether at stated maturity, by acceleration, or otherwise, of all of the Secured Obligations. (b) Continuing Security Interest. This Agreement shall create a ---------------------------- continuing security interest in the Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations which are monetary in nature with respect to payment of principal and interest pursuant to the Note; (ii) be binding upon Debtor, its successors and assigns; and (iii) inure to the benefit of Fargo and his successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations which are monetary in nature with respect to payment of principal and interest pursuant to the Note which are monetary in nature, the security interests granted hereby shall automatically terminate. Upon any such termination, Fargo will, at Debtor's expense, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination; such documents shall be prepared by Debtor and shall be in form and substance reasonably satisfactory to Fargo. 3. Subordination. The Secured Obligations shall be junior to the ------------- obligations of the Debtor to LaSalle Business Credit, Inc. ("LaSalle") pursuant to the LaSalle Credit Facility in accordance with the terms of the Subordination Agreement dated April ___, 2001 among Fargo, LaSalle and Debtor ("Subordination Agreement") and ") the Intercreditor Agreement dated April __, 2001 by and among the , LaSalle, and the Company and Microsoft Corporation ("Intercreditor Agreement"). 4. Further Assurances. ------------------ (a) Debtor agrees that from time to time, at the expense of Debtor, to the extent permitted by the LaSalle Credit Facility, Debtor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable or that Fargo may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Fargo to exercise and enforce his rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Debtor will: (i) at the request Fargo, mark conspicuously chattel paper included in the Accounts; (ii) at the request of Fargo, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Fargo, indicating that such Collateral is subject to the security interest granted hereby; (iii) except for instruments and items being processed for collection in the ordinary course of Debtor's business, if any Collateral or Pledged Collateral shall be evidenced by a promissory note or other instrument, deliver and pledge to Fargo such note or instrument duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to Fargo; (iv) execute and file such financing or continuation statements, or amendments thereto, and such other documents, instruments, or notices, as may be necessary or reasonably desirable, or as Fargo may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (v) allow inspection of the Collateral by Fargo or persons designated by Fargo; and (vi) appear in and defend any action or proceeding that may affect Debtor's title to or Fargo's security interest in any or all of the Collateral. (b) Debtor hereby authorizes Fargo to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Debtor. A carbon, photographic, photostatic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where not prohibited by law; provided, however, that nothing contained in this Agreement shall relieve Debtor of its obligations to file all necessary financing and continuation statements in order to perfect and protect the security interests granted or purported to be granted hereby, and Fargo shall have no responsibility to do such filing. 5. Permitted Activity. Notwithstanding anything to the contrary ------------------ contained herein, nothing in this Agreement shall be deemed to prohibit Debtor from retaining, using, licensing, moving, selling or disposing of or otherwise taking any actions with respect to the Collateral or the Pledged Collateral (a) in the ordinary course of business or (b) to raise funds to pay a Secured Obligation. 6. Events of Default. Either (a) the taking of any action by the Debtor ----------------- to disclaim or nullify the security interest granted to Fargo hereunder, or (b) the occurrence of an Event of Default (as such term is defined in the Note) under the Note, or both, shall constitute an Event of Default under this Agreement. 7. Remedies upon Default. Upon the occurrence and during the continuance --------------------- of an Event of Default, Fargo shall have, with respect to the Collateral, in addition to other rights and remedies provided for herein or otherwise available to them, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Collateral), and Fargo may also without notice (except as specified below) sell or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board, or elsewhere, for cash, on credit, or for future delivery, at such time or times and at such price or prices and upon such other terms as Fargo may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Collateral. To the maximum extent permitted by applicable law, Fargo may be the purchasers of any or all of the Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply on a pro-rata basis all or any part of the Secured Obligations owed to Fargo or represented by such credit bidding party as a credit on account of the purchase price of any Collateral payable by Fargo at such sale. 8. Application of Proceeds. After the occurrence and during the ----------------------- continuance of an Event of Default, any cash held by Fargo as Collateral and all cash Proceeds received by Fargo in respect of any sale of, collection from, or other realization upon all or any part of the Collateral pursuant to the exercise by Fargo of his remedies as a secured creditor as provided in Section 6 of this Agreement shall be applied from time to time by Fargo to the Secured Obligations on a pro-rata basis. 9. Fargo's Duties. The powers conferred on Fargo hereunder are solely to -------------- protect his interest in the Collateral and shall not impose on him any duty to exercise such powers. Except as provided in the Code, Fargo shall have no duty with respect to the Collateral or any responsibility for taking any necessary steps to preserve rights against any persons with respect to any Collateral. 10. CHOICE OF LAW. CONSENT TO JURISDICTION, AND SERVICE OF PROCESS. --------------------------------------------------------------- (a) THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO, SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. (b) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST DEBTOR WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, DEBTOR ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS ASSETS, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. DEBTOR AND FARGO IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS NOTICE ADDRESS SPECIFIED ON THE SIGNATURE PAGES HEREOF, SUCH SERVICE TO BECOME EFFECTIVE UPON RECEIPT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF FARGO TO BRING PROCEEDINGS AGAINST DEBTOR IN THE COURTS OF ANY OTHER JURISDICTION. 11. Notices. Unless otherwise specifically provided herein, any notice or ------- other communication herein required or permitted to be given shall be in writing and may be personally served, sent by telefacsimile, telecopied, telexed, or sent by courier service or United States mail and shall be deemed to have been given when delivered in person or by courier service, upon receipt of a telefacsimile or telex or four (4) business days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 11) shall be as set forth below each party's name on the signature pages hereof, or, as to each party, at such other address as may be designated by such party in a written notice to the other party. 12. Headings. Section and subsection headings in this Agreement are -------- included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 13. Severability. In case any provision in or obligation under this ------------ Agreement shall be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality, and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 14. Counterparts. This Agreement may be executed in one or more ------------ counterparts or duplicates, each of which shall be deemed an original. All of such counterparts, taken together, shall constitute one and the same Agreement. 15. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH OF -------------------- THE PARTIES HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY ACTION, CAUSE OF ACTION, CLAIM, DEMAND, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS AGREEMENT, OR IN ANY WAY CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE DEALINGS OF THE PARTIES WITH RESPECT TO THIS AGREEMENT, OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY AGREES THAT ANY SUCH ACTION, CAUSE OF ACTION, CLAIM, DEMAND, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY AND THAT EITHER PARTY MAY FILE AN ORIGINAL COUNTERPART OF THIS SECTION WITH ANY COURT OR OTHER TRIBUNAL AS WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. 16. Amendment; Waiver. Any term of this Agreement may be amended and the ----------------- observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Debtor and Fargo. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Debtor and Fargo have caused this Agreement to be duly executed and delivered by their officers hereunto duly authorized as of the date first written above. "DEBTOR" ------ INTERPLAY ENTERTAINMENT CORP. a Delaware corporation By:_________________________________________________ Manuel Marrero, Chief Financial Officer and Secretary ADDRESS: Interplay Entertainment Corp. - -------- 16915 Von Karman Avenue Irvine, California 92606 Attn: Chief Financial Officer "FARGO" ----- _________________________________________ Brian Fargo ADDRESS: - -------- EX-10.4 6 dex104.txt SECURED PROMISSORY NOTE EXHIBIT 10.4 THE INDEBTEDNESS EVIDENCED BY THIS NOTE IS SUBORDINATED TO CERTAIN INDEBTEDNESS OF THE COMPANY TO LASALLE BUSINESS CREDIT, INC. PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED APRIL ___, 2001 AMONG THE HOLDER, LASALLE AND THE COMPANY AND INTERCREDITOR AGREEMENT DATED APRIL __, 2001 AMONG MICROSOFT, LASALLE AND THE COMPANY. INTERPLAY ENTERTAINMENT CORP. a Delaware corporation SECURED PROMISSORY NOTE $3,000,000 April__, 2001 FOR VALUE RECEIVED, Interplay Entertainment Corp., a Delaware corporation (the "Company"), hereby promises to pay to Brian Fargo or registered assigns (hereinafter referred to as the "Holder"), on May 1, 2002 (the "Maturity Date"), the principal sum of Three Million Dollars ($3,000,000.00), or such part thereof as then remains unpaid, and to pay interest from the date hereof on the whole amount of said principal sum remaining unpaid at a fixed rate per annum equal to the lesser of (a) six percent (6.0%) per annum, or (b) the maximum rate permitted by California law. Interest shall accrue from the date hereof and all accrued and unpaid interest shall be due and payable on the Maturity Date. Principal and interest shall be payable at the principal residence of the Holder, located at 426 Harbor Island Drive, Newport Beach, California 92660, or at such other place as Holder may designate from time to time in writing to the Company. Interest shall be computed on the basis of the actual number of days elapsed over a 360-day year. This Note may be prepaid at any time in full or in part by the Company at any time without penalty or premium. 1. Security Agreement; Subordination Agreement. The obligations of the ------------------------------------------- Company under this Note are secured pursuant to and this Note is entitled to the benefits and subject to the conditions of that certain Security Agreement of even date herewith between the Company and Holder, as the same may be amended from time to time (the "Security Agreement"). The obligations of the Company under this Note are subordinated to certain obligations of the Company to LaSalle Business Credit, Inc.("LaSalle") pursuant to the terms of that certain Subordination Agreement dated April ___, 2001 among the Holder, LaSalle and the Company (the "Subordination Agreement") and the Intercreditor Agreement dated April __, 2001 by and among Microsoft Corporation, LaSalle, and the Company ("Intercreditor Agreement"). Holder, and its successors and assigns, by its acceptance hereof, agrees to be bound by the provisions of the Security Agreement and the Subordination Agreement, copies of which may be inspected by Holder at the principal office of the Company. 2. Default. If any of the following events (hereafter called "Events of ------- Default") shall occur: (a) If the Company shall default in the payment of any principal or interest due under this Note when the same shall become due and payable, whether at maturity or by acceleration or otherwise; or (b) If the Company shall make a general assignment for the benefit of creditors; or (c) If the Company shall file a voluntary petition in bankruptcy, or shall be adjudicated bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or other applicable federal, state or other statute, law or regulation, or shall file any answer admitting the material allegation of a petition filed against the Company in such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of the Company of all or any substantial part of the properties of the Company, or the Company shall commence the winding up or the dissolution or liquidation of the Company; or (d) If, within sixty (60) days after a court of competent jurisdiction shall have entered an order, judgment or decree approving any complaint or petition against the Company seeking reorganization, dissolution or similar relief under the present or any future federal bankruptcy act or other applicable federal, state or other statute, law or regulation, such order, judgment or decree shall not have been dismissed or stayed pending appeal, or if, within sixty (60) days after the appointment, without the consent or acquiescence of the Company, of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated or stayed pending appeal, or if, within sixty (60) days after the expiration of any such stay, shall not have been vacated; or (e) If the Company should breach any of the covenants, representations, warranties, terms or conditions contained in the Security Agreement or in any statement or certificate at any time given or made to Holder pursuant hereto or in connection herewith and, if such breach is of a type that is curable, such breach is not cured within thirty (30) days after the Company becomes aware of such breach, or such longer period as required to cure such breach, not to exceed sixty (60) days, provided the cure of such breach is diligently pursued; or (f) If the Company shall fail to pay when due (whether upon acceleration or otherwise) and after passage of any applicable notice and cure periods, any payment due with respect to indebtedness for borrowed money having an aggregate principal amount of at least $15,000,000; or (g) If the Company shall fail to comply in any material way with (i) any agreement pursuant to which the Company shall be liable for an amount in excess of $1,000,000 upon any default thereof, or (ii) any indenture, mortgage, deed of trust, or other agreement binding on it or affecting its properties, and in any such case such failure continues after the applicable grace or notice period, if any, specified in such agreement on the date of such failure; or (h) If any judgment, writ, warrant or attachment or execution or similar process which calls for payment or presents liability in excess of $1,000,000 shall be rendered, issued or levied against the Company or its property and such process shall not be waived, stayed, vacated or fully bonded within thirty (30) days after its issuance or levy, unless such judgment is covered by insurance and the insurer has acknowledged coverage in writing with respect thereto; then, and in each and every such case, the Holder of this Note may by notice in writing to the Company declare all amounts under this Note to be forthwith due and payable (except that, in the case of an Event of Default under Sections 2(b), 2(c) or Section 2(d), this Note shall become 2 immediately due and payable without notice) and thereupon the balance shall become so due and payable, without presentation, protest or further demand or notice of any kind, all of which are hereby expressly waived. 3. Merger, Consolidation or Sale. ----------------------------- (a) Acceleration on Merger, Consolidation or Sale. In the event of --------------------------------------------- (i) any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization in which the Company shall not be the continuing or surviving entity, or any transaction or series of related transactions by the Company in which in excess of 50% of the Company's voting power is issued for the purpose of combining with or acquisition by one or more corporations or other entities or persons; or (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Company, then, at the election of the Holder of this Note made by written notice given to the Company, the principal and accrued interest on this Note shall be due and payable at the closing of any such transaction. (b) Notices. The Company shall give Holder written notice of such ------- impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 4 and the Company shall thereafter give Holder prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Company has given the first notice provided for herein nor sooner than ten (10) days after the Company has given the notice provided for herein of any material changes, provided, however, that such periods may be shortened upon the written consent of the Holder. 4. Transfer. Upon surrender of this Note for transfer or exchange, a new -------- Note or new Notes of the same tenor, dated the date to which interest has been paid on the surrendered Note and in an aggregate principal amount equal to the unpaid principal amount of the Note so surrendered, will be issued to and registered in the name of the transferee or transferees. The Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payments and for all other purposes. 5. Note Register. This Note is transferable only upon the books of the -------------- Company which it shall cause to be maintained for such purpose. The Company may treat the registered holder of this Note as he or it appears on the Company's books at any time as the Holder for all purposes. 6. Loss, Etc., of Note. Upon receipt of evidence satisfactory to the -------------------- Company of the loss, theft, destruction or mutilation of this Note, and of indemnity reasonably satisfactory to the Company if lost, stolen or destroyed, and upon surrender and cancellation of this Note if mutilated, the Company shall execute and deliver to the Holder a new Note of like date, tenor and denomination. 7. Amendment, Waiver Etc., By Holder. The terms of this Note may be --------------------------------- amended or waived only upon the written consent of the Company and the Holder. 3 8. Miscellaneous. This Note shall be governed by and construed in ------------- accordance with the laws of the State of California. The Company hereby waives presentment, demand, notice of nonpayment, protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement of this Note. If an action is brought for collection under this Note, the Holder shall be entitled to receive all costs of collection, including, but not limited to, its reasonable attorneys' fees. INTERPLAY ENTERTAINMENT CORP. a Delaware corporation By: --------------------------------------- Manuel Marrero, Chief Financial Officer and Secretary 4 -----END PRIVACY-ENHANCED MESSAGE-----