-----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, F3qCsR/CWYGSHR87PGQGdXdE4AlFq8atih7xh9BJvEc2RLwfrjZuagBwZ/og/mPF iL1P1avR5EmZlb4TIOrWPA== 0001170918-02-000117.txt : 20021119 0001170918-02-000117.hdr.sgml : 20021119 20021119170745 ACCESSION NUMBER: 0001170918-02-000117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021119 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: 02833596 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 iec10q093002.txt FORM 10-Q 9/30/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 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 Nov. 15, 2002 ----- --------------------------------------- Common Stock, $0.001 par value 93,138,176 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q SEPTEMBER 30, 2002 TABLE OF CONTENTS -------------- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001.............................................. 3 Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2002 and 2001 (unaudited).................................................... 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2002 and 2001 (unaudited)........................................... 5 Notes to Condensed Consolidated Financial Statements (unaudited) ........................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................. 35 Item 4. Controls and Procedures....................................... 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 CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, ASSETS 2002 2001 - ------ --------- --------- Current Assets: (Unaudited) Cash .......................................... $ 488 $ 119 Trade receivables from related parties, net of allowances of $5,358 and $4,025, respectively ....................... 8,057 6,175 Trade receivables, net of allowances of $1,436 and $3,516, respectively ......... 1,147 3,312 Inventories ................................... 1,727 3,978 Prepaid licenses and royalties - current ...... 6,286 10,341 Other current assets .......................... 1,123 1,162 --------- --------- Total current assets ....................... 18,828 25,087 Property and equipment, net ...................... 3,520 5,038 Prepaid licenses and royalties - long term ....... 246 -- Other assets ..................................... -- 981 --------- --------- $ 22,594 $ 31,106 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current Liabilities: Current debt .................................. $ -- $ 1,576 Accounts payable .............................. 10,231 13,718 Accrued royalties ............................. 4,406 7,795 Other accrued liabilities ..................... 2,048 2,999 Advances from distributors and others ......... 101 12,792 Advances from related parties ................. 800 10,060 Loans from related parties .................... -- 3,218 Payables to related parties ................... 11,722 7,098 Note payable .................................. 2,051 -- --------- --------- Total current liabilities .................. 31,359 59,256 Commitments and contingencies Stockholders' Deficit: Series A preferred stock ...................... -- 11,753 Common stock .................................. 93 45 Paid-in capital ............................... 121,432 110,701 Accumulated deficit ........................... (130,425) (150,807) Accumulated other comprehensive income ........ 135 158 --------- --------- Total stockholders' deficit ................ (8,765) (28,150) --------- --------- $ 22,594 $ 31,106 ========= ========= See accompanying notes. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (In thousands, except per share amounts) Net revenues ................... $ 1,152 $ 1,937 $ 14,860 $ 29,322 Net revenues from related party distributors ................ 8,525 1,888 22,181 5,608 -------- -------- -------- -------- Total net revenues .......... 9,677 3,825 37,041 34,930 Cost of goods sold ............. 5,675 11,448 20,754 32,913 -------- -------- -------- -------- Gross profit ................ 4,002 (7,623) 16,287 2,017 Operating expenses: Marketing and sales ......... 965 3,778 5,328 15,282 General and administrative .. 1,010 2,638 5,816 9,196 Product development ......... 3,460 4,925 12,161 15,573 -------- -------- -------- -------- Total operating expenses . 5,435 11,341 23,305 40,051 -------- -------- -------- -------- Operating loss ................. (1,433) (18,964) (7,018) (38,034) Other income (expense): Interest expense ............ (352) (1,011) (2,181) (2,607) Gain on sale of Shiny ....... -- -- 28,781 -- Other ....................... (62) (673) 858 (797) -------- -------- -------- -------- Income (loss) before benefit for income taxes ............ (1,847) (20,648) 20,440 (41,438) Benefit for income taxes ....... -- -- 75 -- -------- -------- -------- -------- Net income (loss) .............. $ (1,847) $(20,648) $ 20,515 $(41,438) -------- -------- -------- -------- Cumulative dividend on participating preferred stock ....................... $ -- $ 228 $ 133 $ 828 Accretion of warrant ........... -- -- -- 266 -------- -------- -------- -------- Net income (loss) available to common stockholders ......... $ (1,847) $(20,876) $ 20,382 $(42,532) ======== ======== ======== ======== Net income (loss) per common share: Basic ....................... $ (0.02) $ (0.50) $ 0.25 $ (1.16) ======== ======== ======== ======== Diluted ..................... $ (0.02) $ (0.50) $ 0.25 $ (1.16) ======== ======== ======== ======== Shares used in calculating net income (loss) per common share: Basic ....................... 93,138 41,860 80,365 36,542 ======== ======== ======== ======== Diluted ..................... 93,138 41,860 80,365 36,542 ======== ======== ======== ======== See accompanying notes. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 -------- -------- Cash flows from operating activities: (In thousands) Net income (loss) ............................... $ 20,515 $(41,438) Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: Depreciation and amortization ................ 1,236 1,978 Noncash expense for stock options ............ 33 -- Non-cash interest expense .................... 1,829 142 Write-off of prepaid licenses and royalties ................................. 2,100 8,124 Gain on sale of Shiny ........................ (28,781) -- Other ........................................ (23) (109) Changes in operating assets and liabilities: Trade receivables from related parties ................................ (1,882) 16,928 Trade receivables, net .................... 2,162 8,087 Inventories ............................... 2,251 1,180 Prepaid licenses and royalties ............ 64 (1,717) Other current assets ...................... 26 (237) Accounts payable .......................... (4,787) 6,650 Accrued royalties ......................... (3,256) 2,976 Other accrued liabilities ................. (797) (2,902) Payables to related parties ............... 3,395 (3,287) Additions to resticted cash ............... -- (602) Advances from distributors and others ................................. (21,951) 5,895 -------- -------- Net cash (used in) provided by operating activities ................ (27,866) 1,668 -------- -------- Cash flows from investing activities: Purchase of property and equipment .............. (162) (1,681) Proceeds from sale of Shiny ..................... 33,102 -- -------- -------- Net cash provided by (used in) investing activities ................ 32,940 (1,681) -------- -------- Cash flows from financing activities: Net (payment) borrowings on line of credit ...... (1,576) 4,878 Net payment on previous line of credit .......... -- (24,433) Net payment on supplemental line of credit ...... -- (1,000) (Repayment) borrowings from former Chairman ..... (3,218) 3,000 Net proceeds from issuance of common stock ...... 3 11,847 Proceeds from exercise of stock options ......... 86 9 Proceeds from other advances .................... -- 5,000 Other ........................................... -- 125 -------- -------- Net cash used in financing activities .......................... (4,705) (574) -------- -------- Net increase (decrease) in cash .............. 369 (587) Cash, beginning of period .......................... 119 2,835 -------- -------- Cash, end of period ................................ $ 488 $ 2,248 ======== ======== Supplemental cash flow information: Cash paid for: Interest ............................... $ 327 $ 1,496 See accompanying notes. 5 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Interplay Entertainment Corp. and its subsidiaries (the "Company") 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. The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. 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, 2001 as filed with the Securities and Exchange Commission. FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN The Company has incurred substantial operating losses and at September 30, 2002, had a stockholders' deficit of $8.8 million and a working capital deficit of $12.5 million. The Company has historically funded its operations primarily from operations, through the use of lines of credit, royalty and distribution fee advances, cash generated by the private sale of securities, and proceeds of its initial public offering. To reduce its working capital needs, the Company has implemented various measures including a reduction of personnel, a reduction of fixed overhead commitments, cancellation or suspension of development on future titles, which management believes do not meet sufficient projected profit margins, and the scaling back of certain marketing programs. Management will continue to pursue various alternatives to improve future operating results, and further expense reductions, some of which may have a long-term adverse impact on the Company's ability to generate successful future business activities. In addition, the Company continues to seek and expects to require 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 the Company's long-term strategic objectives. In this regard, the Company completed the sale of its subsidiary Shiny Entertainment, Inc. ("Shiny") in April 2002, for approximately $47.2 million (Note 2). The Company used the proceeds from the sale of Shiny to fund operations and to pay existing obligations, including $11.5 million of prepaid advances that were accelerated as a condition of the transaction. Additionally, in August 2002, the Company's Board of Directors has approved and commenced the process of establishing a Special Committee comprised of directors that are independent of the Company's largest stockholder, Titus Interactive S.A. ("Titus"), to investigate strategic options, including raising capital from the sale of debt or equity securities and a sale of the Company. The Company has entered into a new three-year North American distribution agreement with Vivendi Universal Games, Inc. ("Vivendi"), which substantially replaces the August 2001 agreement with Vivendi. Under the new agreement, the Company receives cash payments from Vivendi for distributed products sooner than under the Company's August 2001 agreement with Vivendi (Note 5). If the Company's existing cash and operating revenues from future product releases are not sufficient to fund the Company's operations, no assurance can be given that alternative sources of funding could be obtained on acceptable terms, or at all. These conditions, combined with the Company's historical operating losses and its deficits in stockholders' equity and working capital, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. 6 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted 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. Significant estimates made in preparing the consolidated financial statements include sales returns and allowances, cash flows used to evaluate the recoverability of prepaid licenses and royalties and long-lived assets, and certain accrued liabilities related to restructuring activities and litigation. 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 license fees paid to intellectual property rights holders for use of their trademarks or copyrights. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. 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 in each region of the related title. The Company amortizes these amounts at a rate based upon the actual number of units shipped with a minimum amortization of 75 percent in the first month of release and a minimum of 5 percent for each of the next five months after release. This minimum amortization rate reflects the Company's typical product life cycle. Management evaluates the future realization of such costs quarterly and charges to cost of goods sold any amounts that management deems unlikely to be fully realized through future sales. Such costs are classified as current and noncurrent assets based upon estimated product release date. SOFTWARE DEVELOPMENT COSTS Research and development costs, which consist primarily of software development costs, are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed", provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for development costs that have alternative future uses. Under the Company's current practice of developing new products, the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model. The Company has not capitalized any software development costs on internal development projects, as the eligible costs were determined to be insignificant. ACCRUED ROYALTIES Accrued royalties consist of amounts due to outside developers and licensors 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. REVENUE RECOGNITION Revenues are recorded when products are delivered to customers in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and SEC Staff Accounting Bulletin No. 101, Revenue Recognition. With the signing of the Vivendi distribution agreement in August 2001, substantially all of the Company's sales are made by two related party distributors (Notes 5 and 10), Vivendi, which owns approximately 5 percent of the outstanding shares of the Company's common stock, and Virgin Interactive Entertainment Limited ("Virgin"), a subsidiary of Titus, the Company's largest stockholder. 7 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 The Company recognizes revenue from sales by distributors, net of sales commissions, only as the distributor recognizes sales of the Company's products to unaffiliated third parties. For those agreements that provide the customers the right to multiple copies of a product in exchange for guaranteed amounts, revenue is recognized at the delivery and acceptance of the product master. Per copy royalties on sales that exceed the guarantee are recognized as earned. Guaranteed minimum royalties on sales, where the guarantee is not recognizable upon delivery, 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, on a case by case negotiated basis, the Company permits customers to return or exchange product and may provide markdown allowances on products unsold by a customer. In accordance with SFAS No. 48, "Revenue Recognition when Right of Return Exists", revenue is recorded net of an allowance for estimated returns, exchanges, markdowns, price concessions and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. The amount of reserves ultimately required could differ materially in the near term from the amounts included in the accompanying condensed consolidated financial statements. Customer support provided by the Company is limited to telephone and Internet support. These costs are not significant and are charged to expenses as incurred. The Company also engages in the sale of licensing rights on certain products. The terms of the licensing rights differ, but normally include the right to develop and distribute a product on a specific video game platform. For these activities, revenue is recognized when the rights have been transferred and no other obligations exist. RECENT ACCOUNTING PRONOUNCEMENTS In April 2001, the Emerging Issues Task Force reached a consensus on Issue 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 Company adopted the provisions of EITF 00-25 on January 1, 2002 and, as a result, net revenues and marketing expenses were reduced by $0.3 million and $1.3 million for the three and nine months ended September 30, 2001, respectively. The adoption of EITF 00-25 did not impact the Company's net loss for the three and nine months ended September 30, 2001. 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 adopted the new rules on accounting for goodwill and other intangible assets on January 1, 2002. The adoption of SFAS No. 142 did not have a material impact on the Company's consolidated financial position or results of operations. Goodwill amortization for the three and nine months ended September 30, 2001 was $156,000 and $407,000, respectively. With the sale of Shiny, the Company no longer has any recorded goodwill assets. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002, with early application encouraged and generally are to be applied prospectively. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its consolidated financial position or results of operations. 8 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The Company adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its consolidated financial position or results of operations. NOTE 2. SALE OF SHINY ENTERTAINMENT, INC On April 30, 2002, the Company consummated the sale of Shiny, pursuant to the terms of a Stock Purchase Agreement, dated April 23, 2002, as amended, among the Company, Infogrames, Shiny, Shiny's president and Shiny Group, Inc. Pursuant to the purchase agreement, Infogrames acquired all of the outstanding common stock of Shiny for approximately $47.2 million, which was paid to or for the benefit of the Company as follows: o $3.0 million in cash paid to the Company at closing; o $10.8 million to be paid to the Company pursuant to a promissory note from Infogrames providing for scheduled payments with the final payment due July 31, 2002; o $26.1 million paid directly to third party creditors of the Company; and o $7.3 million paid to Shiny's president and Shiny Group for Shiny common stock that was issued to such parties to settle claims relating to the Company's original acquisition of Shiny. The promissory note receivable from Infogrames was paid in full in August 2002. The Company recognized a gain of $28.8 million on the sale of Shiny. The details of the sale are as follows: (In millions) Sale price of Shiny ...................................... $ 47.2 Net assets of Shiny at April 30, 2002 .................... 2.3 Transaction related costs: Cash payment to Warner Brothers for consent to transfer Matrix license ......................... 2.2 Note payable issued to Warner Brothers for consent to transfer Matrix license ................. 2.0 Payment to Shiny's President & Shiny Group ............ 7.1 Commission fees to Europlay I, LLC .................... 3.9 Legal fees ............................................ 0.9 ------- Gain on sale ............................................ $ 28.8 ======= 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 In addition, the Company recorded a tax provision of $150,000 in connection with the sale of Shiny. Concurrently with the closing of the sale, the Company settled a legal dispute with Vivendi, relating to the parties' August 2001 distribution agreement. The Company also settled legal disputes with its former bank and its former Chairman, relating to the Company's April 2001 credit facility with its former bank that was partially guaranteed by its former Chairman. The disputes with Vivendi, the bank and the former Chairman were settled and dismissed, with prejudice, following consummation of the sale. The Company issued to Warner Bros., a division of Time Warner Entertainment Company, L.P., a Secured Convertible Promissory Note bearing interest at 6 percent per annum, due April 30, 2003, in the principal amount of $2.0 million. The note was issued in partial payment of amounts due Warner Bros. under the parties' license agreement for the video game based on the motion picture THE MATRIX, which is being developed by Shiny. The note is secured by all of the Company's assets, and may be converted by the holder thereof into shares of the Company's common stock on the maturity date or, to the extent there is any proposed prepayment, within the 30 day period prior to such prepayment. The conversion price is equal to the lower of (a) $0.304 and (b) an amount equal to the average closing price of a share of the Company's common stock for the five business days ending on the day prior to the conversion date, provided that in no event can the note be converted into more than 18,600,000 shares. If any amount remains due following conversion of the note into 18,600,000 shares, the remaining amount will be payable in cash. The Company agreed to register with the Securities and Exchange Commission the shares of common stock to be issued in the event Warner Bros. exercises its conversion option. NOTE 3. INVENTORIES Inventories consist of the following: SEPTEMBER DECEMBER 30, 31, 2002 2001 ------ ------ (Dollars in thousands) Packaged software .............................. $1,355 $3,230 CD-ROMs, cartridges, manuals, packaging and supplies ................................ 372 748 ------ ------ $1,727 $3,978 ====== ====== NOTE 4. PREPAID LICENSES AND ROYALTIES Prepaid licenses and royalties consist of the following: SEPTEMBER DECEMBER 30, 31, 2002 2001 ------- ------- (Dollars in thousands) Prepaid royalties for titles in development ............................... $ 6,363 $ 7,539 Prepaid royalties for shipped titles, net of amortization ....................... 138 710 Prepaid licenses and trademarks, net of amortization .............................. 31 2,092 ------- ------- 6,532 10,341 Less: Prepaid royalties for titles to be released beyond one year ............... 246 -- ------- ------- $ 6,286 $10,341 ======= ======= Amortization of prepaid licenses and royalties is included in cost of goods sold and totaled $0.8 million and $6.5 million for the three months ended September 30, 2002 and 2001, respectively and $6.4 million and $12.8 million for the nine months ended September 30, 2002 and 2001, respectively. Included in the amortization of prepaid licenses and royalties are write-offs of development projects that were cancelled because they were not expected to meet the Company's desired profit requirements. These amounts totaled zero and $5.9 million for the three months ended September 30, 2002 and 2001, respectively, and totaled $2.1 million and $8.1 million for the nine months ended September 30, 2002 and 2001, respectively. In addition, $1.6 million of prepaid royalties for the Matrix license was included in the net assets of Shiny, which were sold to Infogrames (Note 2). 10 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 NOTE 5. ADVANCES FROM DISTRIBUTORS AND OTHERS Advances from distributors and OEMs consist of the following: SEPTEMBER DECEMBER 30, 31, 2002 2001 ------- ------- (Dollars in thousands) Advance from console hardware manufacturer ..... $ -- $ 5,000 Advances for distribution rights to a future title ................................ -- 4,000 Advances for other distribution rights 101 3,792 ------- ------- $ 101 $12,792 ======= ======= Net advance from Vivendi distribution agreements .................................. $ 800 $10,060 ------- ------- $ 800 $10,060 ======= ======= 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 $5.0 million. This advance was repaid with proceeds from the sale of Shiny. In July 2001, the Company entered into a distribution agreement with a distributor whereby the distributor would have the North American distribution rights to a future title. In return, the distributor paid the Company an advance of $4.0 million to be recouped against future amounts due to the Company based on net sales of the future title. In January 2002, the Company sold the publishing rights to this title to the distributor in connection with a settlement agreement entered into with the third party developer. The settlement agreement provided, among other things, that the Company assign its rights and obligations under the product agreement to the third party distributor. In consideration for assigning the product agreement to the distributor, the Company was not required to repay the $4.0 million advance nor repay $1.6 million related to past royalties and interest owed to the distributor. In addition, the Company agreed to forgive $0.6 million in advances previously paid to the developer. As a result, the Company recorded net revenues of $5.6 million and a related cost of sales of $0.6 million in the nine months ended September 30, 2002. Other advances from distributors are repayable as products covered by those agreements are sold. In April 2002, the Company entered into an agreement with Titus, pursuant to which, among other things, the Company sold to Titus all right, title and interest in the games "EarthWorm Jim", "Messiah", "Wild 9", "R/C Stunt Copter", "Sacrifice", "MDK", "MDK II", and "Kingpin", and Titus licensed from the Company the right to develop, publish, manufacture and distribute the games "Hunter I", "Hunter II", "Icewind Dale I", "Icewind Dale II", and "BG: Dark Alliance II" solely on the Nintendo Advance GameBoy game system for the life of the games. As consideration for these rights, Titus issued to the Company a promissory note in the principal amount of $3.5 million, which note bears interest at 6 percent per annum. The promissory note was due on August 31, 2002, and may be paid, at Titus' option, in cash or in shares of Titus common stock with a per share value equal to 90 percent of the average trading price of Titus' common stock over the 5 days immediately preceding the payment date. The Company has provided Titus with a guarantee under this agreement, which provides that in the event Titus does not achieve gross sales of at least $3.5 million by June 25, 2003, and the shortfall is not the result of Titus' failure to use best commercial efforts, the Company will pay to Titus the difference between $3.5 million and the actual gross sales achieved by Titus, not to exceed $2.0 million. The Company is in the later stages of negotiations with Titus to repurchase these assets for a purchase price payable by canceling the $3.5 million promissory note, and any unpaid accrued interest thereon. Concurrently, the Company and Titus would terminate any executory obligations relating to the original sale, including the Company's obligation to pay Titus up to $2 million if Titus does not achieve gross sales of at least $3.5 million by June 25, 2003. Due to the likelihood of consummating the repurchase of these assets, the accompanying condensed consolidated financial statements as of September 30, 2002 have been prepared as if the repurchase occurred on September 30, 2002. 11 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 In August 2001, the Company entered into a distribution agreement with Vivendi providing for Vivendi to become the Company's distributor in North America through December 31, 2003 for substantially all of its products, with the exception of products with pre-existing distribution agreements. Under the terms of the agreement, as amended, Vivendi earns a distribution fee based on the net sales of the titles distributed. The agreement provided for three advance payments from Vivendi totaling $10.0 million. In amendments to the agreement, Vivendi agreed to advance the Company an additional $3.5 million. The distribution agreement, as amended, provides for the acceleration of the recoupment of the advances made to the Company, as defined. During the three months ended March 31, 2002, Vivendi advanced the Company an additional $3.0 million bringing the total amounts advanced to the Company under the distribution agreement with Vivendi to $16.5 million. In April 2002, the distribution agreement was further amended to provide for Vivendi to distribute substantially all of the Company's products through December 31, 2002, except certain future products, which Vivendi would have the right to distribute for one year from the date of release. As of August 1, 2002, all distribution advances relating to the August 2001 agreement from Vivendi were fully recouped or repaid. In August 2002, the Company entered into a new distribution agreement with Vivendi whereby Vivendi will distribute substantially all of the Company products in North America for a period of three years as a whole and two years with respect to each product giving a potential maximum term of five years. Under the August 2002 agreement, Vivendi will pay the Company sales proceeds less amounts for distribution fees, price concessions and returns. Vivendi is responsible for all manufacturing, marketing and distribution expenditures, and bears all credit, price concessions and inventory risk, including product returns. Upon the Company's delivery of a gold master to Vivendi, Vivendi will pay the Company as a minimum guarantee, a specified percent of the projected amount due the Company based on projected initial shipment sales, which are established by Vivendi in accordance with the terms of the agreement. The remaining amounts are due upon shipment of the titles to Vivendi's customers. Payments for future sales that exceed the projected initial shipment sales are paid on a monthly basis. As of September 30, 2002, Vivendi had advanced the Company $0.8 million related to future minimum guarantees on undelivered products. NOTE 6. COMMITMENTS AND CONTINGENCIES 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, results of operations or cash flows. On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8 million complaint for damages against both Infogrames, Inc. and the Company's subsidiary GamesOnline.com, Inc., alleging, among other things, breach of contract, misappropriation of trade secrets, breach of fiduciary duties and breach of implied covenant of good faith in connection with an electronic distribution agreement dated November 2001 between KBK and GamesOnline.com, Inc. KBK has alleged that GamesOnline.com failed to timely deliver to KBK assets to a product, and that it improperly disclosed confidential information about KBK to Infogrames. The Company believes this complaint is without merit and will vigorously defend its position. On October 9, 2002, the Company's common stock was delisted from The Nasdaq SmallCap Market due to the Company not meeting certain minimum listing requirements and began trading on the NASD-operated Over-the-Counter Bulletin Board. In June 2002, the Internal Revenue Service ("the IRS") concluded its examination of the Company's consolidated federal income tax returns for the years ended April 30, 1992 through 1997. In 2001, the Company established a reserve of $500,000, representing management's best estimate of amounts to be paid in settlement of the IRS claims. In the second quarter of 2002, the Company reached a settlement with the IRS and agreed to pay $275,000 to settle all outstanding issues. With the executed settlement, the Company has adjusted its reserve and, as a result, recorded an income tax benefit of $225,000 in the quarter ended June 30, 2002. 12 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 NOTE 7. STOCKHOLDERS' EQUITY In March 2002, Titus converted its remaining 383,354 shares of Series A Preferred Stock into 47,492,162 shares of common stock. This conversion did not include accrued and accumulated dividends of $2.0 million on the preferred stock, which Titus has elected to receive in cash. Subsequent to this conversion, Titus now owns 66,185,003 shares of the Company's common stock and had 71 percent of the total voting power of the Company's capital stock as of September 30, 2002. In July 2002, the Company paid Titus $1.0 million of the dividend payable, and Titus subsequently transferred the unpaid dividends payable of $1.0 million to Virgin for Virgin to use to settle amounts Virgin owes the Company in connection with the International Distribution Agreement with Virgin. In April 2001, the Company completed a private placement of 8,126,770 shares of its common stock. The transaction provided for registration rights with a registration statement to be filed by April 16, 2001 and an effective date no later than May 31, 2001. The registration statement was not declared effective by May 31, 2001 and in accordance with the terms of the agreement, the Company incurred a penalty of approximately $254,000 per month, payable in cash, until June 2002, when the registration statement was declared effective. During the nine months ended September 30, 2002, the Company recorded these penalties as interest expense of $1.8 million, and at September 30, 2002 had accrued penalties of $3.6 million, payable to these stockholders. The Company is currently involved in negotiations with certain of these investors with respect to payment of these penalties. NOTE 8. NET EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed as net earnings (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period and does not include the impact of any potentially dilutive securities. Diluted earnings per share is computed by dividing the net earnings attributable to the common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options and common stock warrants. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- (In thousands, except per share amounts) Net income (loss) available to common stockholders .............. $ (1,847) $(20,876) $ 20,382 $(42,532) -------- -------- -------- -------- Shares used to compute net income (loss) per share: Weighted-average common shares ... 93,138 41,860 80,365 36,542 Dilutive stock equivalents ....... -- -- -- -- -------- -------- -------- -------- Dilutive potential common shares ........................ 93,138 41,860 80,365 36,542 ======== ======== ======== ======== Net income (loss) per share: Basic ............................ $ (0.02) $ (0.50) $ 0.25 ($ 1.16) Diluted .......................... $ (0.02) $ (0.50) $ 0.25 ($ 1.16) -------- -------- -------- -------- There were options and warrants outstanding to purchase 11,264,231 shares of common stock at September 30, 2002, which were excluded from the earnings per share computation for the nine months ended September 30, 2002, as the exercise price was greater than the average market price of the common shares. Due to the net loss attributable for three months ended September 30, 2002 and the three and nine months ended September 30, 2001 on a diluted basis to common stockholders, stock options and warrants have been excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive. Had net income been reported for the nine months ended September 30, 2001, an additional 13,900,339 shares would have been added to dilute potential common shares. The weighted average exercise price of the outstanding stock options and common stock warrants at September 30, 2002 and 2001 was $2.05 and $2.12, respectively. 13 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 NOTE 9. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of the following: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in thousands) Net income (loss) ........... $ (1,847) $(20,648) $ 20,515 $(41,438) Other comprehensive loss, net of income taxes: Foreign currency transla- tion adjustments ...... (6) (63) (23) (109) -------- -------- -------- -------- Total comprehensive income (loss) ......... $ (1,853) $(20,711) $ 20,492 $(41,547) ======== ======== ======== ======== During the three and nine months ended September 30, 2002 and 2001, the net effect of income taxes on comprehensive loss was immaterial. NOTE 10. RELATED PARTIES Amounts receivable from and payable to related parties are as follows: SEPTEMBER DECEMBER 30, 2002 31, 2001 -------- -------- (Dollars in thousands) Receivables from related parties: Virgin ........................... $ 8,825 $ 7,503 Vivendi .......................... 4,417 2,437 Titus ............................ 173 260 Return allowance ................. (5,358) (4,025) -------- -------- Total ............................ $ 8,057 $ 6,175 ======== ======== Payables to related parties: Virgin ........................... $ 8,488 $ 5,790 Vivendi .......................... 2,884 -- Titus ............................ 350 1,308 -------- -------- Total ............................ $ 11,722 $ 7,098 ======== ======== DISTRIBUTION AND PUBLISHING AGREEMENTS TITUS INTERACTIVE S.A. In connection with the equity investments by Titus, the Company performs distribution services on behalf of Titus for a fee. In connection with such distribution services, the Company recognized fee income of $12,000 and zero for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, the Company recognized fee income of $31,000 and $25,000, respectively. Amounts due to Titus at December 31, 2001 include dividends payable of $0.7 million and $0.5 million for expenses incurred by Titus on behalf of the Company. At June 30, 2002, the Company owed Titus $2.0 million for dividends payable. During the fiscal third quarter, the Company paid $1.0 million of the dividends payable to Titus. Subsequently, Titus transferred the remaining unpaid $1.0 million to Virgin Interactive Entertainment Limited ("Virgin"), a wholly owned subsidiary of Titus, for Virgin to use to settle amounts Virgin owes the Company in connection with an International Distribution Agreement with Virgin. 14 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 VIRGIN INTERACTIVE ENTERTAINMENT LIMITED Under an International Distribution Agreement with Virgin, Virgin provides for the exclusive distribution of substantially all of the Company's products in Europe, Commonwealth of Independent States, Africa and the Middle East for a seven-year period, cancelable under certain conditions, subject to termination penalties and costs. Under the Agreement, the Company pays Virgin a distribution fee based on net sales, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on behalf of the Company. Under the terms of the amended International Distribution Agreement, the Company paid Virgin a monthly overhead fee of $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. In connection with the International Distribution Agreement, the Company incurred distribution commission expense of $0.2 million and $0.5 million for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, the Company incurred distribution expense of $0.5 million and $1.1 million, respectively. In addition, the Company recognized overhead fees of zero dollars and $0.3 million for the three months ended September 30, 2002 and 2001, respectively, and $0.5 million and $0.7 million for the nine months ended September 30, 2002 and 2001 respectively. Under a Product Publishing Agreement with Virgin, as amended, the Company has an exclusive license to publish and distribute one future product release within North America, Latin America and South America for a royalty based on net sales. In connection with the Product Publishing Agreement with Virgin, the Company earned $8,000 and $21,000 for performing publishing and distribution services on behalf of Virgin for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, the Company earned $47,000 and $36,000, respectively, for performing publishing and distribution services. In connection with the International Distribution Agreement, the Company subleases office space from Virgin. Rent expense paid to Virgin was $27,000 and $27,000 for the three months ended September 30, 2002 and 2001 and for the nine months ended September 30, 2002, the Company paid $81,000 and $81,000, respectively. During the fiscal third quarter, Titus transferred unpaid dividends payable of $1.0 million to Virgin for Virgin to use to settle amounts Virgin owes the Company in connection with the International Distribution Agreement with Virgin. VIVENDI UNIVERSAL GAMES, INC. In connection with the distribution agreement with Vivendi, the Company incurred distribution commission expense of $0.7 million and $3.3 million for the three and nine months ended September 30, 2002, respectively. NOTE 11. SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates in one principal business segment, which is managed primarily from the Company's U.S. headquarters. 15 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued SEPTEMBER 30, 2002 Net revenues by geographic regions were as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ ------------------------------------- 2002 2001 2002 2001 ---------------- ----------------- ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) North America $ 7,985 82% $ 769 20% $20,845 56% $23,990 69% Europe ...... 978 10 1,888 49 3,915 11 5,608 16 Rest of World 175 2 344 9 308 1 1,690 5 OEM, royalty and licensing 539 6 824 22 11,973 32 3,642 10 ------- ------- ------- ------- ------- ------- ------- ------- $ 9,677 100% $ 3,825 100% $37,041 100% $34,930 100% ======= ======= ======= ======= ======= ======= ======= =======
NOTE 12. OTHER EXPENSE, NET In April 2002, the Company entered into a settlement agreement with the landlord of an office facility in the United Kingdom, whereby the Company returned the property back to the landlord and was released from any further lease obligations. As a result of this settlement, the Company reduced its amounts accrued for this contractual cash obligation by $0.8 million for the nine months ended September 30, 2002. 16 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, 2001 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 and cost reduction measures are forward-looking statements and there can be no assurance that the Company will achieve its operating plans or generate positive cash flow in the future, arrange adequate financing 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. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the 17 following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements. REVENUE RECOGNITION We record revenues when we deliver products to customers in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition." and SEC Staff Accounting Bulletin No. 101, Revenue Recognition. Commencing in August 2001, substantially all of our sales are made by two related party distributors, Vivendi Universal Games, Inc. and Virgin Interactive Entertainment Ltd. We recognize revenue from sales by distributors, net of sales commissions, only as the distributor recognizes sales of our products to unaffiliated third parties. For those agreements that provide the customers the right to multiple copies of a product in exchange for guaranteed amounts, we recognize revenue at the delivery and acceptance of the product master. We recognize per copy royalties on sales that exceed the guarantee as copies are duplicated. We generally are not contractually obligated to accept returns, except for defective, shelf-worn and damaged products. However, on a case-by-case negotiated basis, we permit customers to return or exchange product and may provide price concessions to our retail distribution customers on unsold or slow moving products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," we record revenue net of a provision for estimated returns, exchanges, markdowns, price concessions, and warranty costs. We record such reserves based upon management's evaluation of historical experience, current industry trends and estimated costs. During 2001, we substantially increased our sales allowances as a result of the granting of price concessions to resellers on products in their inventory, in an effort to minimize product returns following the transition of our North American distribution rights to Vivendi. As a result, sales allowances as a percentage of our total accounts receivable increased to 44 percent at December 31, 2001 from 19 percent at December 31, 2000. The amount of reserves ultimately required could differ materially in the near term from the amounts provided in the accompanying consolidated financial statements. We provide customer support only via telephone and the Internet. Customer support costs are not significant and we charge such costs to expenses as we incur them. We also engage in the sale of licensing rights on certain products. The terms of the licensing rights differ, but normally include the right to develop and distribute a product on a specific video game platform. Revenue is recognized when the rights have been transferred and no other obligations exist. PREPAID LICENSES AND ROYALTIES Prepaid licenses and royalties consist of license fees paid to intellectual property rights holders for use of their trademarks or copyrights. Also included in prepaid royalties are prepayments made to independent software developers under developer arrangements that have alternative future uses. 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. We amortize the cost of licenses, prepaid royalties and other outside production costs to cost of goods sold over six months commencing with the initial shipment in each region of the related title. We amortize these amounts at a rate based upon the actual number of units shipped with a minimum amortization of 75 percent in the first month of release and a minimum of 5 percent for each of the next five months after release. This minimum amortization rate reflects our typical product life cycle. We evaluate the future realization of such costs quarterly and charge to cost of goods sold any amounts that we deem unlikely to be fully realized through future sales. Such costs are classified as current and noncurrent assets based upon estimated product release date. SOFTWARE DEVELOPMENT COSTS Our internal research and development costs, which consist primarily of software development costs, are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed", provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for development costs that have alternative future uses. Under our current practice of developing new products, the technological feasibility of the underlying software is not established until substantially all of the product development is complete. As a result, we have not capitalized any software development costs on internal development projects, as the eligible costs were determined to be insignificant. 18 OTHER SIGNIFICANT ACCOUNTING POLICIES Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. The policies related to consolidation and loss contingencies require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standard setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Also see Note 1 of Notes to Consolidated Financial Statements, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------ ----------------- ------------------------------------------ 2002 2001 2002 2001 ------------------- ------------------- ------------------- ------------------- % OF NET % OF NET % OF NET % OF NET AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Net revenues ................ $ 9,677 100% $ 3,825 100% $ 37,041 100% $ 34,930 100% Cost of goods sold .......... 5,675 59% 11,448 299% 20,754 56% 32,913 94% -------- -------- -------- -------- -------- -------- -------- -------- Gross profit ........... 4,002 41% (7,623) (199%) 16,287 44% 2,017 6% -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses: Marketing and sales .... 965 10% 3,778 99% 5,328 14% 15,282 44% General and adminis- trative ............. 1,010 10% 2,638 69% 5,816 16% 9,196 26% Product development .... 3,460 36% 4,925 129% 12,161 33% 15,573 45% -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses 5,435 56% 11,341 297% 23,305 63% 40,051 115% -------- -------- -------- -------- -------- -------- -------- -------- Operating loss .............. (1,433) (15%) (18,964) (496%) (7,018) (19%) (38,034) (109%) Gain on sale of Shiny ....... -- 0% -- 0% 28,781 78% -- 0% Other expense ............... (414) (4%) (1,684) (44%) (1,323) (4%) (3,404) (10%) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes .................... (1,847) (19%) (20,648) (540%) 20,440 55% (41,438) (119%) Benefit for income taxes .... -- 0% -- 0% (75) 0% -- 0% -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) ........... $ (1,847) (19%) $(20,648) (540%) $ 20,515 55% $(41,438) (119%) ======== ======== ======== ======== ======== ======== ======== ======== Net revenues by geographic region: North America .......... $ 7,985 82% $ 769 20% $ 20,845 56% $ 23,990 69% International .......... 1,153 12% 2,232 58% 4,223 12% 7,298 21% OEM, royalty and licensing ........... 539 6% 824 22% 11,973 32% 3,642 10% Net revenues by platform: Personal computer ...... $ 4,548 47% $ 2,700 70% $ 11,939 32% $ 26,720 77% Video game console ..... 4,590 47% 301 8% 13,129 36% 4,568 13% OEM, royalty and licensing ........... 539 6% 824 22% 11,973 32% 3,642 10%
NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES Net revenues for the three months ended September 30, 2002 were $9.7 million, an increase of 153 percent compared to the same period in 2001. This increase resulted from a 938 percent increase in North American net revenues offset by a 48 percent decrease in International net revenues and a 35 percent decrease in OEM, royalties and licensing revenues. North American net revenues for the three months ended September 30, 2002 were $8.0 million. The increase in North American net revenues in 2002 was mainly due to delivering three gold masters to three titles in 2002 compared to releasing zero titles in 2001, resulting in an increase in North American sales of $4.3 million and by a decrease in product returns and price concessions of $2.9 million as compared to the 2001 period. The decrease in 19 product returns and price concessions in 2002 as compared to 2001 is due to Vivendi assuming our distribution function in North America. In the 2001 period, our product returns and price concessions increased as we prepared for the transition of our distribution to Vivendi. In addition, the three gold masters to three titles released by Vivendi in the 2002 period were delivered under the terms of the new distribution agreement, whereby Vivendi pays us a lower per unit rate and in return assumes all credit, product return and price concession risks. International net revenues for the three months ended September 30, 2002 were $1.2 million. The decrease in International net revenues for the three months ended September 30, 2002 was mainly due to the reduction in back catalog sales which resulted in a $1.7 million decrease in revenue offset by a decrease in product returns and price concessions of $0.6 million compared to the 2001 period. OEM, royalty and licensing net revenues for the three months ended September 30, 2002 were $0.5 million, a decrease of $0.3 million as compared to the same period in 2001. OEM net revenues decreased by $0.1 million as compared to the 2001 period and licensing net revenues decreased by $0.2 million as compared to the 2001 period. Net revenues for the nine months ended September 30, 2002 were $37.0 million, an increase of 6 percent compared to the same period in 2001. This increase resulted from a 229 percent increase in OEM, royalties and licensing revenues, offset by a 13 percent decrease in North American net revenues and a 42 percent decrease in International net revenues. North American net revenues for the nine months ended September 30, 2002 were $20.8 million. The decrease in North American net revenues in 2002 was mainly due to releasing or delivering gold masters to Vivendi to four titles in 2002 compared to releasing seven titles in 2001, resulting in a decrease in North American sales of $8.7 million, partially offset by a decrease in product returns and price concessions of $5.5 million as compared to the 2001 period. The decrease in title releases across all platforms is a result of our emphasis on releasing fewer, higher quality titles. The decrease in product returns and price concessions in 2002 as compared to 2001 is due to the historically high product returns and price concessions in 2001 due to the transition of our North American distribution to Vivendi. In addition, three titles released in fiscal 2002 were delivered to Vivendi under the terms of our new August 2002 distribution agreement with Vivendi, whereby Vivendi is responsible for all manufacturing, marketing and distribution expenditures, and bears all credit, price concessions and inventory risk, including product returns. As a result, the Company receives a lower per unit sales amount than under the August 2001 agreement with Vivendi. International net revenues for the nine months ended September 30, 2002 were $4.2 million. The decrease in International net revenues for the nine months ended September 30, 2002 was mainly due to the reduction in title releases during the year which resulted in a $6.3 million decrease in revenue offset by a decrease in product returns and price concessions of $3.2 million compared to the 2001 period. Our product planning efforts during 2002 also contributed to the reduction of titles released in the International markets. We expect that both our North American and International publishing net revenues in fiscal 2002 will decrease compared to fiscal 2001, as a result of the new North American distribution agreement with Vivendi, which provides for payment to us of a lower per unit rate. We currently have two titles scheduled for release during the remainder of the year. OEM, royalty and licensing net revenues for the nine months ended September 30, 2002 were $12.0 million, an increase of $8.3 million as compared to the same period in 2001. The OEM business increased by $0.4 million compared to the same period in 2001. The nine months ended September 30, 2002 also included revenues related to the sale of publishing rights for one of our products and the recognition of deferred revenue for a licensing transaction. In January 2002, we sold the publishing rights to this title to the distributor in connection with a settlement agreement entered into with the third party developer. The settlement agreement provided, among other things, that we assign our rights and obligations under the product agreement to the third party distributor. As a result, we recorded net revenues of $5.6 million in the nine months ended September 30, 2002. In February 2002, a licensing transaction we entered into in 1999 expired and we recognized revenue of $1.2 million, the unearned portion of the minimum guarantee. Excluding the above transactions, our licensing revenues for the nine months ended September 30, 2002 increased by $1.1 million as compared to the 2001 period. We expect that OEM, royalty and licensing net revenues in fiscal 2002 will increase compared to fiscal 2001 as a result of these two transactions combined with a consistent level of OEM business. 20 PLATFORM NET REVENUES PC net revenues for the three months ended September 30, 2002 were $4.5 million, an increase of 68 percent compared to the same period in 2001. The increase in PC net revenues in 2002 was primarily due to delivering the gold master for one major title, Icewind Dale II, to Vivendi in 2002 as compared to releasing zero titles in 2001. Video game console net revenues were $4.6 million, an increase of 1,425 percent for the three months ended September 30, 2002 compared to the same period in 2001, due to delivering the gold masters for two titles, Run Like Hell (PlayStation 2) and Baldur's Gate: Dark Alliance (Xbox), to Vivendi, as well as continued sales of previously released console titles in 2002 as compared zero titles in 2001. PC net revenues for the nine months ended September 30, 2002 were $11.9 million, a decrease of 55 percent compared to the same period in 2001. The decrease in PC net revenues in 2002 was primarily due to delivering the gold master for one title to Vivendi in 2002 as compared to releasing six titles released in 2001. Video game console net revenues were $13.1 million, an increase of 187 percent for the nine months ended September 30, 2002 compared to the same period in 2001, due to releasing or delivering the gold master to three titles in 2002 as compared to one title in 2001. We expect our PC net revenues to decrease in 2002 as compared to 2001 as we do not expect to release any additional new titles during the rest of 2002 as we continue to focus more on next generation console products. We anticipate releasing two new console titles during the fourth quarter of 2002 and accordingly, expect net revenues to increase in fiscal 2002. COST OF GOODS SOLD; GROSS PROFIT MARGIN Our cost of goods sold decreased 50 percent to $5.7 million in the three months ended September 30, 2002 compared to the same period in 2001. The decrease was primarily due to the delivering the gold masters to three titles in the 2002 period under our new distribution agreement with Vivendi, where the only cost of goods element we incur is royalty expense. Under this new agreement, Vivendi pays us a lower per unit rate and in return is responsible for all manufacturing, marketing and distribution expenditures. In addition, in the 2001, period we incurred higher amortization of prepaid royalties on externally developed products, including approximately $5.9 million in write-offs of development projects that were canceled. Our gross margin increased to 41 percent for the 2002 period from negative 199 percent in the 2001 period. This was primarily due to a lower cost of goods in the 2002 period as the only cost of goods we incur under the new North American distribution agreement with Vivendi are expenses related to royalties due to third parties. In addition, the 2001 period had higher amortization of prepaid royalties on externally developed products as compared to the 2002 period. Our cost of goods sold decreased 37 percent to $20.8 million in the nine months ended September 30, 2002 compared to the same period in 2001. The decrease was primarily due to the decrease in overall product sales during the 2002 period and lower cost of goods expenditures as a result of the new North American distribution agreement with Vivendi. Our gross margin increased to 44 percent for fiscal 2002 from 6 percent in fiscal 2001. This was due to the publishing and licensing transactions in 2002, which did not bear any significant cost of goods, as well as lower cost of goods due to the new North American distribution agreement with Vivendi. Both periods were negatively impacted by higher amortization of prepaid royalties on externally developed products, including approximately $2.1 million in fiscal 2002 and $8.1 million in fiscal 2001 in write-offs of canceled development projects. We expect our gross profit margin and gross profit to increase in fiscal 2002 as compared to fiscal 2001 due to lower cost of goods in fiscal 2002 resulting from our new North American distribution agreement with Vivendi, and the absence in fiscal 2002 of significant, unusual product returns and price concessions and additional write-offs of prepaid royalties. 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. Marketing and sales expenses for the three months ended September 30, 2002 were $1.0 million, a 74 percent decrease as compared to the 2001 period. The decrease in marketing and sales expenses is due to a $1.5 million reduction in advertising and retail marketing support expenditures due to releasing three titles in the 2002 period under the terms of the new distribution agreement whereby Vivendi pays us a lower per unit rate and in return assumes all marketing 21 expenditures, and a $1.0 million decrease in personnel costs and general expenses due in part to our shift from a direct sales force for North America to a distribution arrangement with Vivendi. The decrease in marketing and sales expenses also reflected a $0.3 million decrease in overhead fees paid to Virgin under our April 2001 settlement with Virgin. Marketing and sales expenses for the nine months ended September 30, 2002 were $5.3 million, a 65 percent decrease as compared to the 2001 period. The decrease in marketing and sales expenses is due to a $6.0 million reduction in advertising and retail marketing support expenditures due to releasing fewer titles and due to releasing three titles in 2002 under the terms of the new distribution agreement whereby Vivendi pays us a lower per unit rate and in return assumes all marketing expenditures, and a $3.8 million decrease in personnel costs and general expenses due in part to our shift from a direct sales force for North America to a distribution arrangement with Vivendi. The decrease in marketing and sales expenses included a $0.2 million decrease in overhead fees paid to Virgin under our April 2001 settlement with Virgin. We expect our marketing and sales expenses to decrease in fiscal 2002 compared to fiscal 2001, due to fewer overall planned title releases in fiscal 2002 across all platforms, lower personnel costs from our reduced headcount, a reduction in overhead fees paid to Virgin pursuant to the April 2001 settlement and releasing titles under the terms of the new distribution agreement whereby Vivendi pays us a lower per unit rate and in return assumes all marketing expenditures. 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 September 30, 2002 were $1.0 million, a 62 percent decrease as compared to the same period in 2001. The decrease is due to a $1.6 million decrease in personnel costs and general expenses. General and administrative expenses for the nine months ended September 30, 2002 were $5.8 million, a 37 percent decrease as compared to the same period in 2001. The decrease is due a $3.4 million decrease in personnel costs and general expenses. In the 2002, period we incurred significant charges of $0.4 million in loan termination fees associated with the termination of our line of credit and $0.5 million in consulting expenses payable to our investment bankers, Europlay 1, LLC, incurred to assist us with the restructuring of the company. In the 2001, period significant charges of $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 which was terminated. We expect our general and administrative expenses to decrease in fiscal 2002 compared to fiscal 2001 primarily due to the reduction in headcount and the continued reduction in other related costs. PRODUCT DEVELOPMENT Product development expenses for the three months ended September 30, 2002 were $3.5 million, a 30 percent decrease as compared to the same period in 2001. This decrease is due to a $1.5 million decrease in personnel costs as a result of a reduction in headcount and the sale of Shiny Entertainment, Inc. in April 2002. Product development expenses for the nine months ended September 30, 2002 were $12.2 million, a 22 percent decrease as compared to the same period in 2001. This decrease is due to a $3.4 million decrease in personnel costs as a result of a reduction in headcount and the sale of Shiny. We expect our product development expenses to decrease in fiscal 2002 compared to fiscal 2001 as a result of lower headcount and the sale of Shiny. SALE OF SHINY ENTERTAINMENT, INC. In April 2002, we sold our former subsidiary Shiny Entertainment, Inc. to Infogrames for $47.2 million. We recognized a gain of $28.8 million on this sale. See Note 2 of Notes to Condensed Consolidated Financial Statements. 22 OTHER EXPENSE, NET Other expenses for the three months ended September 30, 2002 were $0.4 million, a 75 percent decrease as compared to the same period in 2001. The decrease was primarily due to a reduction in interest expense related to lower net borrowings. Other expenses for the nine months ended September 30, 2002 were $1.3 million, a 61 percent decrease as compared to the same period in 2001. The decrease was primarily due to a reduction in interest expense related to lower net borrowings and a $0.9 million gain in the settlement and termination of a building lease in the United Kingdom offset by an increase of $0.8 million penalty due to a delay in the effectiveness of a registration statement in connection with our private placement of our common stock. BENEFIT FROM INCOME TAXES In June 2002, the Internal Revenue Service concluded their examination of our consolidated federal income tax returns for the years ended April 30, 1992 through 1997. In fiscal 2001, we established a reserve of $500,000, representing management's best estimate of amounts to be paid in settlement of the IRS claims. In the second quarter of 2002, we reached a settlement with the IRS and agreed to pay $275,000 to settle all outstanding issues. With the executed settlement, we have adjusted our reserve and, as a result, recorded an income tax benefit of $225,000. This benefit was offset by an income tax provision of $150,000 associated with the gain on sale of Shiny. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date primarily through the use of borrowings, royalty and distribution fee advances, cash generated by the private sale of securities, proceeds of the initial public offering, the sale of assets and from results of operations. As of September 30, 2002, we had a working capital deficit of $12.5 million, and our cash balance was approximately $488,000. We anticipate our current cash reserves, plus our expected generation of cash from existing operations, will only be sufficient to fund our anticipated expenditures into the first quarter of fiscal 2003. Consequently, we expect that we will need to substantially reduce our working capital needs and/or raise additional financing. Along these lines, we have entered into a new distribution agreement with Vivendi, which accelerates cash collections through non-refundable minimum guarantees. If we do not receive sufficient financing we may (i) liquidate assets, (ii) sell the company (iii) seek protection from our creditors, and/or (iv) continue operations, but incur material harm to our business, operations or financial conditions. Our primary capital needs have historically been to fund working capital requirements necessary to fund our net losses, 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 $27.9 million during the nine months ended September 30, 2002, primarily attributable to payments for accounts payable and royalty liabilities, recoupment of advances received by distributors, and refund of advances received from Vivendi and a console hardware manufacturer for the development of titles for its console platform in connection with the sale of Shiny. These uses of cash in operating activities were partially offset by collections of accounts receivable, reductions of inventory and an increase in payables to related parties. Net cash used by financing activities of $4.7 million for the nine months ended September 30, 2002, consisted primarily of repayments of our working capital line of credit and repayments to our former Chairman. Cash provided by investing activities of $32.9 million for the nine months ended September 30, 2002 consisted of proceeds from the sale of Shiny, offset by 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. The following summarizes our contractual obligations under non-cancelable operating leases and other borrowings at September 30, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. 23 Less Than 1 - 3 After September 30, 2002 Total 1 Year Years 3 Years ------ ------ ------ ------ (In thousands) Contractual cash obligations - Non-cancelable operating lease obligations ................ $5,562 $1,386 $3,030 $1,146 ====== ====== ====== ====== In April 2002, we entered into a settlement agreement with the landlord of an office facility in the United Kingdom, whereby we returned the property back to the landlord and were released from any further lease obligations. This settlement reduced our total contractual cash obligations by $1.3 million through fiscal 2005. Our main source of capital is from the release of new titles. Historically, we have had some delays in the release of new titles and we anticipate that we may continue to incur delays in the release of future titles. These delays can have a negative impact on our short-term liquidity, but should not affect our overall liquidity. To reduce our working capital needs, we have implemented various measures including a reduction of personnel, a reduction of fixed overhead commitments, cancellation or suspension of development on future titles, which management believes do not meet sufficient projected profit margins, and the scaling back of certain marketing programs associated with the cancelled projects. Management will continue to pursue various alternatives to improve future operating results and further expense reductions, some of which may have a long-term adverse impact on our ability to generate successful future business activities. In addition, we continue to seek external sources of funding, including but not limited to, a sale or merger of the company, a private placement of our 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. In this regard, we completed the sale of Shiny in April 2002, for approximately $47.2 million. Additionally, in August 2002, our Board of Directors established a Special Committee comprised of directors that are independent of our largest stockholder, Titus Interactive S.A., to investigate strategic options, including raising capital from the sale of debt or equity securities and a sale of the company. In order to improve our cash flow, in August 2002, we entered into a new distribution arrangement with Vivendi, whereby, Vivendi will distribute substantially all of our products in North America for a period of three years as a whole and two years with respect to each product giving a potential maximum term of five years. Under the August 2002 agreement, Vivendi will pay us sales proceeds less amounts for distribution fees, price concessions and returns. Vivendi is responsible for all manufacturing, marketing and distribution expenditures, and bears all credit, price concessions and inventory risk, including product returns. Upon our delivery of a gold master to Vivendi, Vivendi will pay us, as a minimum guarantee, a specified percent of the projected amount due to us based on projected initial shipment sales, which are established by Vivendi in accordance with the terms of the agreement. The remaining amounts are due upon shipment of the titles to Vivendi's customers. Payments for future sales that exceed the projected initial shipment sales are paid on a monthly basis. We expect this new arrangement to improve our short-term liquidity, but should not impact our overall liquidity. If operating revenues from product releases are not sufficient to fund our operations, no assurance can be given that alternative sources of funding could be obtained on acceptable terms, or at all. These conditions, combined with our historical operating losses and deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. ACTIVITIES WITH RELATED PARTIES Our operations involve significant transactions with Titus, our majority stockholder, Virgin, a wholly-owned subsidiary of Titus, and Vivendi, an indirect owner of 5 percent of our common stock. In addition, we previously obtained financing from the former Chairman of the company. TRANSACTIONS WITH TITUS In March 2002, Titus converted its remaining 383,354 shares of Series A preferred stock into approximately 47.5 million shares of our common stock. Titus now owns approximately 66 million shares of common stock, which 24 represents approximately 71 percent of our outstanding common stock, our only voting security, following the conversion. Titus retained Europlay as consultants to assist with the restructuring of the company. This arrangement with Europlay is with Titus, however, we agreed to reimburse Titus for consulting expenses incurred on our behalf. In connection with the sale of Shiny, we agreed to pay Europlay directly for their services with the proceeds received from the sale, which Europlay received. We have also entered into a commission-based agreement with Europlay where Europlay will assist us with strategic transactions, such as debt or equity financing, the sale of assets or an acquisition of the company. Under this arrangement, Europlay assisted us with the sale of Shiny. In connection with the equity investments by Titus, we perform distribution services on behalf of Titus for a fee. In connection with such distribution services, we recognized fee income of $31,000 and $25,000 for the nine months ended September 30, 2002 and 2001, respectively. In March 2002, we entered into a distribution agreement with Titus pursuant to which we granted to Titus the exclusive right to distribute one of our products for the Sony Playstation console in North America, South America and Central America in exchange for a minimum guarantee of $100,000 for the first 71,942 units of the product sold, plus $.69 per unit on any product sold above the 71,942 units. As of September 30, 2002 and December 31, 2001, Titus owed us $0.2 million and $0.3 million, respectively, and we owed Titus $0.4 million and $1.3 million, respectively. Amounts due from Titus at September 30, 2002 consist of receivables. Amounts due to Titus at September 30, 2002, consist of payables. Amounts due to Titus at December 31, 2001 include dividends payable of $0.7 million and $0.5 million for services rendered by Europlay. In April 2002, we entered into an agreement with Titus, pursuant to which, among other things, we sold to Titus all right, title and interest in the games "EarthWorm Jim", "Messiah", "Wild 9", "R/C Stunt Copter", "Sacrifice", "MDK", "MDK II", and "Kingpin", and Titus licensed from us the right to develop, publish, manufacture and distribute the games "Hunter I", "Hunter II", "Icewind Dale I", "Icewind Dale II", and "BG: Dark Alliance II" solely on Nintendo Advance GameBoy game system for the life of the games. As consideration for these rights, Titus issued to us a promissory note in the principal amount of $3.5 million, which note bears interest at 6 percent per annum. The promissory note was due on August 31, 2002, and may be paid, at Titus' option, in cash or in shares of Titus common stock with a per share value equal to 90 percent of the average trading price of Titus' common stock over the 5 days immediately preceding the payment date. Pursuant to our April 26, 2002 agreement with Titus, on or before July 25, 2002, we had the right to solicit offers from and negotiate with third parties to sell the rights and licenses granted under the April 26, 2002 agreement. If we had entered into a binding agreement with a third party to sell these rights and licenses for an amount in excess $3.5 million, we would have rescinded the April 26, 2002 agreement with Titus and recovered all rights granted and released Titus from all obligations thereunder. The Company's efforts to enter into a binding agreement with a third party were unsuccessful. Moreover, we have provided Titus with a guarantee under this agreement, which provides that in the event Titus does not achieve gross sales of at least $3.5 million by June 25, 2003, and the shortfall is not the result of Titus' failure to use best commercial efforts, we will pay to Titus the difference between $3.5 million and the actual gross sales achieved by Titus, not to exceed $2 million. We are in the later stages of negotiations with Titus to repurchase these assets for a purchase price payable by canceling the $3.5 million promissory note, and any unpaid accrued interest thereon. Concurrently, Titus and us would terminate any executory obligations relating to the original sale, including our obligation to pay Titus up to $2 million if Titus does not achieve gross sales of at least $3.5 million by June 25, 2003. Due to the likelihood of consummating the repurchase of these assets, the accompanying condensed consolidated financial statements as of September 30, 2002 have been prepared as if the repurchase occurred on September 30, 2002. TRANSACTIONS WITH VIRGIN, A WHOLLY OWNED SUBSIDIARY OF TITUS In February 1999, we entered into an International Distribution Agreement with Virgin, which provides for the exclusive distribution of substantially all of our products in Europe, Commonwealth of Independent States, Africa and the Middle East for a seven-year period, cancelable under certain conditions, subject to termination penalties and costs. Under this agreement, as amended, we pay Virgin a distribution fee based on net sales, and Virgin provides certain market preparation, warehousing, sales and fulfillment services on our behalf. 25 Under the April 2001 settlement, we paid Virgin a monthly overhead fee of $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. In connection with the International Distribution Agreement, we incurred distribution commission expense of $0.5 million and $1.1 million for the nine months ended September 30, 2002 and 2001, respectively. In addition, we recognized overhead fees of $0.5 million and $0.7 million for the nine months ended September 30, 2002 and 2001, respectively. We have also entered into a Product Publishing Agreement with Virgin, which provides us with an exclusive license to publish and distribute substantially all of Virgin's products within North America, Latin America and South America for a royalty based on net sales. As part of terms of the April 2001 settlement between Virgin and us, the Product Publishing Agreement was amended to provide for us to publish only one future title developed by Virgin. In connection with the Product Publishing Agreement with Virgin, we earned $47,000 and $36,000 for performing publishing and distribution services on behalf of Virgin for the nine months ended September 30, 2002 and 2001, respectively. In connection with the International Distribution Agreement, we sublease office space from Virgin. Rent expense paid to Virgin was $81,000 and $81,000 for the nine months ended September 30, 2002 and 2001, respectively. As of September 30, 2002 and December 31, 2001, Virgin owed us $8.8 million and $7.5 million, and we owed Virgin $8.5 million and $5.8 million, respectively. TRANSACTIONS WITH VIVENDI In connection with our distribution agreements with Vivendi, which indirectly owns approximately 5 percent of our common stock at September 30, 2002 but does not have representation on our Board of Directors, Vivendi is our distributor in North America through August 2005 for substantially all of our products. Under the terms of our August 2001 agreement with Vivendi, as amended, Vivendi earns a distribution fee based on the net sales of the titles distributed under the agreement. Under this agreement, Vivendi made advance payments to us totaling $16.5 million, which were fully recouped by Vivendi as of August 1, 2002. Pursuant to an April 2002 agreement with Vivendi, Vivendi's distribution rights were terminated except with respect to specified titles. In connection with the August 2001 distribution agreement with Vivendi, we incurred distribution commission expense of $3.3 million and zero dollars for the nine months ended September 30, 2002 and 2001, respectively. As of September 30, 2002 and December 31, 2001, Vivendi owed us $4.4 million and $2.4 million, respectively. In August 2002, we entered into a new distribution arrangement with Vivendi whereby Vivendi will distribute substantially all of our products in North America for a period of three years as a whole and two years with respect to each product giving a potential maximum term of five years. Under the August 2002 agreement, Vivendi will pay us sales proceeds less amounts for distribution fees, price concessions and returns. Vivendi is responsible for all manufacturing, marketing and distribution expenditures, and bears all credit, price concessions and inventory risk, including product returns. Upon our delivery of a gold master to Vivendi, Vivendi will pay us, as a minimum guarantee, a specified percent of the projected amount due to us based on projected initial shipment sales, which are established by Vivendi in accordance with the terms of the agreement. The remaining amounts are due upon shipment of the titles to Vivendi's customers. Payments for future sales that exceed the projected initial shipment sales are paid on a monthly basis. We expect this new arrangement to improve our short-term liquidity, but should not impact our overall liquidity. TRANSACTIONS WITH A BRIAN FARGO, A FORMER OFFICER OF THE COMPANY In connection with our working capital line of credit obtained in April 2001, we obtained a $2 million personal guarantee in favor of the bank, secured by $1.0 million in cash, from Brian Fargo, the former Chairman of the company. In addition, Mr. Fargo provided us with a $3.0 million loan, payable in May 2002, with interest at 10 percent. In connection with the guarantee and loan, Mr. Fargo received warrants to purchase 500,000 shares of our common stock at $1.75 per share, expiring in April 2011. In January 2002, the bank redeemed the $1.0 million in cash pledged by Mr. Fargo in connection with his personal guarantee, and subsequently we agreed to pay that amount back to Mr. Fargo. The amount was fully paid in April 2002 in connection with the sale of Shiny. 26 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. We adopted the provision of EITF 00-25 on January 1, 2002 and as a result net revenues and marketing expenses were reduced by $1.3 million for the nine months ended September 30, 2001. The adoption of EITF 00-25 did not impact our net loss for the nine months ended September 30, 2001. 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. We adopted the new rules on accounting for goodwill and other intangible assets January 1, 2002. Adoption of FAS 142 did not have a material impact on our consolidated financial position or results of operations. Goodwill amortization for the nine months ended September 30, 2001 was $409,000. With the sale of Shiny, we no longer have any goodwill assets. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002, with early application encouraged and generally are to be applied prospectively. We do not expect the adoption of SFAS No. 143 to have a material impact on our consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). We adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We do not expect the adoption of SFAS No. 146 to have a material impact on our consolidated financial position or results of operations. 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. 27 As of September 30, 2002, our cash balance was approximately $0.5 million and our outstanding accounts payable and current debt totaled approximately $31.4 million, with approximately $8.7 million that can be offset against related party accounts receivable balances. 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. These measures could have a material adverse effect on our ability to continue as a going concern. Additionally, because of our financial condition, our Board of Directors has a duty to our creditors that may conflict with the interests of our stockholders. When a Delaware corporation is operating in the vicinity of insolvency, the Delaware courts have imposed upon the corporation's directors a fiduciary duty to the corporation's creditors. If we cannot obtain additional capital and become unable to pay our debts as they become due, our Board of Directors may be required to make decisions that favor the interests of creditors at the expense of our stockholders to fulfill its fiduciary duty. For instance, we may be required to preserve our assets to maximize the repayment of debts versus employing the assets to further grow our business and increase shareholder value. WE HAVE A HISTORY OF LOSSES, MAY NEVER GENERATE POSITIVE CASH FLOW FROM OPERATIONS AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY CURTAILING FUTURE OPERATIONS. For the nine months ended September 30, 2002, our net loss from operations was $7.0 million and for the year ended December 31, 2001, our net loss was $46.3 million. Since inception, we have incurred significant losses and negative cash flow, and as of September 30, 2002 we had an accumulated deficit of $8.8 million. Our ability to fund our capital requirements out of our available cash and cash generated from our operations depends on a number of factors. Some of these factors include the progress of our product development programs, the rate of growth of our business, and our products' commercial success. If we cannot generate positive cash flow from operations, we will have to continue to reduce our costs and raise working capital from other sources. These measures could include selling or consolidating certain operations, and delaying, canceling or scaling back product development and marketing programs. These measures could materially and adversely affect our ability to publish successful titles, and may not be enough to permit us to operate profitability, or at all. 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 or debt financing depends on a number of factors including our financial performance, the overall conditions in our industry, and our credit rating. If we cannot raise additional capital on favorable terms, we will have to reduce our costs and sell or consolidate operations. TITUS INTERACTIVE SA CONTROLS A MAJORITY OF OUR VOTING STOCK AND CAN ELECT A MAJORITY OF OUR BOARD OF DIRECTORS AND PREVENT AN ACQUISITION OF INTERPLAY THAT IS FAVORABLE TO OUR OTHER STOCKHOLDERS. On March 15, 2002, Titus converted its remaining 383,354 shares of Series A preferred stock into approximately 47.5 million shares of our common stock. At September 30, 2002, Titus owns approximately 66 million shares of common stock, which represents approximately 71 percent of our outstanding common stock, our only voting security. As a consequence, Titus 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. Three of the seven members of the Board are employees or directors of Titus, and Titus' Chief Executive Officer serves as our Chief Executive Officer and interim Chief Financial Officer. 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. A SIGNIFICANT PERCENTAGE OF OUR REVENUES DEPEND ON OUR DISTRIBUTORS' DILIGENT SALES EFFORTS AND OUR DISTRIBUTORS' AND RETAIL CUSTOMERS' TIMELY PAYMENTS TO US. Since February 1999, Virgin has been the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. Our agreement with Virgin expires in February 2006. In August 2002, we entered into a new Distribution Agreement with Vivendi Universal Games, Inc., (formerly known as Vivendi Universal Interactive Publishing North America), or "Vivendi," pursuant to which Vivendi distributes substantially all our products in North America, as well as in South America, South Africa, Korea, Taiwan and Australia. Our agreement with Vivendi expires in August 2005. 28 Virgin and Vivendi each have exclusive rights to distribute our products in substantial portions of the world. As a consequence, the distribution of our products by Virgin and Vivendi will generate a substantial majority of our revenues, and proceeds from Virgin and Vivendi from the distribution of our products will constitute a substantial majority of our operating cash flows. Therefore, our revenues and cash flows could fall significantly and our business and financial results could suffer material harm if: o either Virgin or Vivendi fails to deliver to us the full proceeds owed us from distribution of our products; o either Virgin or Vivendi fails to effectively distribute our products in their respective territories; or o either Virgin or Vivendi otherwise fails to perform under their respective distribution agreement. We typically sell to distributors and retailers on unsecured credit, with terms that vary depending upon the customer and the nature of the product. We confront the risk of non-payment from our customers, whether due to their financial inability to pay us, or otherwise. In addition, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could cause material harm to our business. THE TERMINATION OF OUR EXISTING CREDIT AGREEMENT HAS RESULTED IN A SUBSTANTIAL REDUCTION IN THE CASH AVAILABLE TO FINANCE OUR OPERATIONS. Since October 2001, we have been operating without a bank line of credit. We depend on a line of credit to fund our operations, and the absence of one has significantly impeded our ability to fund our operations and has caused material harm to our business. We will need to enter into a new credit agreement to help fund our operations. There can be no assurance that we will be able to enter into a new credit agreement or that if we do enter into a new credit agreement, it will be on terms favorable to us. THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE TO REMAIN DEPRESSED OR TO DECLINE FURTHER. 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: o demand for our products and our competitors' products; o the size and rate of growth of the market for interactive entertainment software; o changes in personal computer and video game console platforms; o 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; o changes in our product mix; o the number of our products that are returned; and o 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: o the uncertainties associated with the interactive entertainment software development process; o approvals required from content and technology licensors; and o the timing of the release and market penetration of new game hardware platforms. It is likely that in some future periods our operating results will not meet the expectations of the public or of public market analysts. Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause securities analysts and investors to revalue our stock and this may cause fluctuations in our stock price. THERE ARE HIGH FIXED COSTS TO DEVELOPING OUR PRODUCTS. IF OUR REVENUES DECLINE BECAUSE OF DELAYS IN THE INTRODUCTION OF OUR PRODUCTS, OR IF THERE ARE SIGNIFICANT DEFECTS OR DISSATISFACTION WITH OUR PRODUCTS, OUR BUSINESS COULD BE HARMED. 29 For the nine months ended September 30, 2002, our net loss from operations was $7.0 million. We have incurred significant net losses in recent periods, including a net loss of $46.3 million for the year ended December 31, 2001. Our losses stem partly from the significant costs we incur to develop our entertainment software products. Moreover, a significant portion of our operating expenses is 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. IF OUR PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR BUSINESS COULD BE HARMED SIGNIFICANTLY. Consumer preferences for interactive entertainment software are always changing and are extremely difficult to predict. Historically, few interactive entertainment software products have achieved continued market acceptance. Instead, a limited number of releases have become "hits" and have accounted for a substantial portion of revenues in our industry. Further, publishers with a history of producing hit titles have enjoyed a significant marketing advantage because of their heightened brand recognition and consumer loyalty. We expect the importance of introducing hit titles to increase in the future. We cannot assure you that our new products will achieve significant market acceptance, or that we will be able to sustain this acceptance for a significant length of time if we achieve it. We believe that our future revenue will continue to depend on the successful production of hit titles on a continuous basis. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of these products to achieve market acceptance could cause material harm to our business. Further, if our products 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 RELIANCE ON THIRD PARTY SOFTWARE DEVELOPERS SUBJECTS US TO THE RISKS THAT THESE DEVELOPERS WILL NOT SUPPLY US WITH HIGH QUALITY PRODUCTS IN A TIMELY MANNER OR ON ACCEPTABLE TERMS. Third party interactive entertainment software developers develop many of our software products. Since we depend on these developers in the aggregate, we remain subject to the following risks: o 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 o 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. Moreover, if the products subject to these arrangements, are not delivered timely, or with acceptable quality, or do not generate sufficient sales volumes to recover these royalty advances and guaranteed payments, we would have to write-off unrecovered portions of these payments, which could cause material harm to our business and financial results. IF WE FAIL TO ANTICIPATE CHANGES IN VIDEO GAME PLATFORMS AND TECHNOLOGY, OUR BUSINESS MAY BE HARMED. The interactive entertainment software industry is subject to rapid technological change. New technologies could render our current products or products in development obsolete or unmarketable. Some of these new technologies include: o operating systems such as Microsoft Windows XP; o technologies that support games with multi-player and online features; o new media formats such as online delivery and digital video disks, or DVDs; and o recent releases of new video game consoles such as the Sony Playstation 2, the Nintendo Gamecube and the Microsoft Xbox. 30 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 the 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 that gain widespread consumer acceptance. Our business and financial results may suffer material harm if we fail to: o anticipate future technologies and platforms and the rate of market penetration of those technologies and platforms; o obtain licenses to develop products for those platforms on favorable terms; or o 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 greater resources of our competitors permit them to pay higher fees than we can to licensors of desirable 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. and Activision, Inc. Many of these competitors have substantially greater financial, technical resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo, and Microsoft Corporation compete directly with us in the development of software titles for their respective platforms and they generally have 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. 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. We have mitigated this risk in North America under the new distribution arrangement with Vivendi, as this provides for a minimum sales guarantee and Vivendi assumes all risk of product returns. SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS MAY REDUCE THE PRICE OF OUR STOCK AND DILUTE EXISTING STOCKHOLDERS. We currently have effective registration statements covering a total of approximately 53 million shares of our common stock for the benefit of those shareholders. These shares are now eligible for immediate resale in the public market. Included in these registrations were shares of common stock owned by Universal Studios, Inc. (now owned 31 by Vivendi), which beneficially owns approximately 5 percent of our common stock, Titus Interactive S.A., which beneficially owns approximately 71 percent of our common stock, and investors that acquired shares of common stock in our April 2001 financing. Future sales of common stock by these holders could substantially increase the volume of shares being publicly traded and 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 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, and our ability to market products based on these licenses may be negatively impacted. Moreover, disputes regarding these license agreements may also negatively impact our ability to market products based on these licenses. Additionally, we may not be able to obtain new licenses, or maintain or renew existing licenses, on commercially reasonable terms, if at all. If we are unable to maintain current licenses or obtain new 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 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 MAINTAIN EXISTING LICENSES, OR 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 DEPEND 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, or their designated licensees, 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: o 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 o reorders of discs are expensive, reducing the gross margin we receive from software releases that have stronger sales than initially anticipated and that require the production of additional discs. As a result, video game console hardware licensors 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 lower per-unit 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. Our future success also will depend upon our ability to attract, motivate and retain qualified employees and contractors, particularly software design and development personnel. Competition 32 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 key personnel, including competent executive management, or to attract and retain additional qualified employees could cause material harm to our business. OUR INTERNATIONAL SALES EXPOSE US TO RISKS OF UNSTABLE FOREIGN ECONOMIES, DIFFICULTIES IN COLLECTION OF REVENUES, INCREASED COSTS OF ADMINISTERING INTERNATIONAL BUSINESS TRANSACTIONS AND FLUCTUATIONS IN EXCHANGE RATES. Our net revenues from international sales accounted for approximately 12 percent and 21 percent of our total net revenues for the nine months ended September 30 2002 and 2001, respectively. 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: o recessions in foreign economies may reduce purchases of our products; o translating and localizing products for international markets is time-consuming and expensive; o accounts receivable are more difficult to collect and when they are collectible, they may take longer to collect; o regulatory requirements may change unexpectedly; o it is difficult and costly to staff and manage foreign operations; o fluctuations in foreign currency exchange rates; o political and economic instability; o our dependence on Virgin as our exclusive distributor in Europe, the Commonwealth of Independent States, Africa and the Middle East; and o 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 currency exchange rate fluctuations. Because we do not engage in currency hedging activities, fluctuations in currency exchange rates have caused significant reductions in our net revenues from international sales and licensing due to the loss in value upon conversion into U.S. Dollars. We may suffer similar losses in the future. INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS COULD PREVENT US FROM ENFORCING OR DEFENDING OUR PROPRIETARY TECHNOLOGY. We regard our software as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various copyrights and trademarks, and hold the rights to one patent application related to one of our titles. While we provide "shrinkwrap" license agreements or limitations on use with our software, it is uncertain to what extent these agreements and limitations are enforceable. We are aware that some unauthorized copying occurs within the computer software industry, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, it could cause material harm to our business and financial results. Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in some international markets. Further, the laws of some countries where our 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. 33 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: o cease selling, incorporating or using products or services that incorporate the challenged intellectual property; o 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 o redesign our interactive entertainment software products, possibly in a manner that reduces their commercial appeal. Any of these actions may cause material harm to our business and financial results. OUR SOFTWARE MAY BE SUBJECT TO GOVERNMENTAL RESTRICTIONS OR RATING SYSTEMS. Legislation is periodically introduced at the state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. In addition, many foreign countries have laws that permit governmental entities to censor the content of interactive entertainment software. We believe that mandatory government-run rating systems eventually will be adopted in many countries that are significant markets or potential markets for our products. We may be required to modify our products to comply with new regulations, which could delay the release of our products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business. In addition to such regulations, certain retailers have in the past declined to stock some of our products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date these actions have not caused material harm to our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business. 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 5,000,000 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: o eliminate the ability of stockholders to act by written consent and to call a special meeting of stockholders; and o require stockholders to give advance notice if they wish to nominate directors or submit proposals for stockholder approval. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock has previously fluctuated 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: 34 o general conditions in the computer, software, entertainment, media or electronics industries; o changes in earnings estimates or buy/sell recommendations by analysts; o investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers; and o 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have any derivative financial instruments as of September 30, 2002. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our risk associated with foreign currency fluctuations. INTEREST RATE RISK Our interest rate risk is due to our working capital lines of credit typically having an interest rate based on either the bank's prime rate or LIBOR. Currently, we do not have a line of credit, but we anticipate establishing a line of credit in the future. With the consummation of the Shiny sale on April 30, 2002 we retired all of our outstanding interest bearing debt and provided a note payable with an interest rate of 6 percent per annum due in 2003 to a party to the transaction. 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 gains of $82,000 and losses of $51,000 during the nine months ended September 30, 2002 and 2001, respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable from Virgin. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES We maintain disclosure controls and procedures, which we have designed to ensure that material information related to Interplay Entertainment Corp., including our consolidated subsidiaries, is disclosed in our public filings on a regular basis. In response to recent legislation and proposed regulations, we reviewed our internal control structure and our disclosure controls and procedures. We believe our pre-existing disclosure controls and procedures are adequate to enable us to comply with our disclosure obligations. Within 90 days prior to the filing of this report, members of our management, including our Chief Executive Officer and interim Chief Financial Officer, Herve Caen, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, Mr. Caen concluded that our disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported by our management on a timely basis and to ensure that the quality and timeliness of our public disclosures complies with our SEC disclosure obligations. CHANGES IN CONTROLS AND PROCEDURES There were no significant changes in our internal controls or in other factors that could significantly affect these internal controls after the date of our most recent evaluation. 35 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are 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 our business, financial condition or results of operations. On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8 million complaint for damages against both Infogrames, Inc. and our subsidiary GamesOnline.com, Inc., alleging, among other things, breach of contract, misappropriation of trade secrets, breach of fiduciary duties and breach of implied covenant of good faith in connection with an electronic distribution agreement dated November 2001 between KBK and GamesOnline.com, Inc. KBK has alleged that GamesOnline.com, Inc. failed to timely deliver to KBK assets to a product, and that it improperly disclosed confidential information about KBK to Infogrames. We believe this complaint is without merit and will vigorously defend our position. ITEM 5. OTHER INFORMATION On October 9, 2002, our common stock was delisted from The Nasdaq SmallCap Market due to our failure to meet certain minimum listing requirements and began trading on the NASD-operated Over-the-Counter Bulletin Board. 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 Video Game Distribution Agreement by and between Vivendi Universal Games, Inc. and Interplay Entertainment Corp. dated August 9, 2002. * 10.2 Letter of Intent by and between Vivendi Universal Games, Inc. and Interplay Entertainment Corp. dated August 9, 2002. * 10.3 Letter Agreement and Amendment #2 by and between Vivendi Universal Games, Inc. and Interplay Entertainment Corp. dated August 29, 2002. * 10.4 Letter Agreement and Amendment #3 by and between Vivendi Universal Games, Inc. and Interplay Entertainment Corp. dated September 12, 2002. * 99.1 Management's certification of financial statements. * Certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for an order granting confidential treatment pursuant to Rule 406 of the General Rules and Regulations under the Securities Act of 1933, as amended. (b) Reports on Form 8-K None. 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: November 19, 2002 By: /s/ HERVE CAEN --------------------------------- Herve Caen, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive and Financial and Accounting Officer) 37 Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Herve Caen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Interplay Entertainment Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Herve Caen ----------------------- Herve Caen Chief Executive Officer 38 Certification of Interim CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Herve Caen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Interplay Entertainment Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Herve Caen ------------------------------- Herve Caen Interim Chief Financial Officer 39 EX-10 3 iec3q02ex10-1.txt EX-10.1 VUG DISTRIBUTION AGREEMENT EXHIBIT 10.1 VIDEO GAME DISTRIBUTION AGREEMENT This Video Game Distribution Agreement (this "AGREEMENT") is entered into as of August 9, 2002 (the "EFFECTIVE DATE") by and between Vivendi Universal Games, Inc., a Delaware corporation, with its principal place of business at 6080 Center Drive, Los Angeles, California 90045 ("VUG"), and Interplay Entertainment Corp., a Delaware corporation, with its principal place of business at 16815 Von Karman Avenue, Irvine, California 92606 ("INTERPLAY"). WHEREAS, Interplay has broad experience and unique talent and skill in the field of video game development and publishing, and VUG has broad experience and unique talent and skill in the field of video game reproduction, manufacture, marketing, promotion, distribution and sale; WHEREAS, Interplay is currently developing and owns or controls the video game products described in SECTION 3 of EXHIBIT B, attached hereto, and wishes to further develop and license these products to VUG, and VUG desires to receive such license from Interplay, on an exclusive basis for the purposes of reproduction, manufacture, marketing, promotion, distribution and sale, as provided herein; WHEREAS, VUG desires to utilize and rely on Interplay's broad experience, unique talent and skill and to receive from Interplay, and Interplay desires to utilize and rely on VUG's broad experience, unique talent and skill and to grant to VUG, an exclusive license to the products listed in SECTION 3 of EXHIBIT B for the purpose of reproduction, manufacture, marketing, promotion, distribution and sale, as set forth herein. NOW, THEREFORE, by reason of the foregoing premises and in consideration of the mutual covenants and premises hereinafter set forth and for other valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: 1.1 MINIMUM GUARANTEE has the meaning given to it in SECTION 1.1 of EXHIBIT A, attached hereto. 1.2 APPROVED GOLD MASTER means (i) with respect to PC Partner Products only, a Gold Candidate approved by VUG Customer Quality Care in accordance with SECTION 3 below, and (ii) with respect to Non-PC Partner Products, a Gold Candidate approved by the applicable Game Hardware Platform Licensor in accordance with SECTION 3 below. 1.3 AUTHORIZED CHANNEL means the distribution channel, as specified in SECTION 1 of EXHIBIT B, attached hereto, in which VUG is authorized to reproduce, manufacture, market, promote, distribute and sell Partner Products. 1.4 AUTHORIZED DEDUCTIONS shall have the meaning set forth in SECTION 3 of EXHIBIT A, attached hereto. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 1 Video Game Publishing Agreement 1.5 BETA VERSION means the version of a Partner Product which (a) is in all material respects feature complete, playable and testable; (b) contains opening credits and title screens; and (c) is substantially free of Program Errors and ready for fine tuning. 1.6 CONFIDENTIAL INFORMATION has the meaning given to it in SECTION 15.1 of this Agreement. 1.7 DEFAULT has the meaning given to it in SECTION 12.2 of this Agreement. 1.8 DELETION NOTICE has the meaning given to it in SECTION 12.5. 1.9 DISCLOSING PARTY has the meaning given to it in SECTION 15.1 of this Agreement. 1.10 DOUBTFUL PRODUCT NOTICE has the meaning given to it in SECTION 12.5. 1.11 END-USER(S) means a person or entity that acquires the Partner Product(s) for use rather than resale or distribution. 1.12 FINAL GROSS SALES PROJECTION has the meaning given to it in SECTION 1.2 of EXHIBIT A. 1.13 GAME HARDWARE PLATFORM LICENSOR means a manufacturer of the platform hardware upon which a Non-PC Partner Product is designed to play (e.g., Sega for Dreamcast, Sony for PlayStation 2, Nintendo for Game Cube and Game Boy Advance, and Microsoft for Xbox). 1.14 GENERAL RESERVE has the meaning given to it in SECTION 3 of EXHIBIT A. 1.15 GOLD CANDIDATE(S) means: (i) For PC-Partner Products, a master copy of the object code and all Related Assets of and relating to the Partner Product(s) once submitted to VUG Customer Quality Care in accordance with SECTION 3 below and from which multiple copies of the Partner Product(s) may be reproduced; and (ii) for Non-PC Partner Products, a master copy of the object code and Related Assets that has been submitted to VUG Customer Quality Care in accordance with SECTION 3 below and which has been submitted for approval by the applicable Game Hardware Platform Licensor. 1.16 GROSS SALES REVENUES means the aggregate price of all Partner Product Units shipped by or for VUG. 1.17 INDEMNIFIED PARTY has the meaning given to it in SECTION 19.3 of this Agreement. 1.18 INDEMNIFYING PARTY has the meaning given to it in SECTION 19.3 of this Agreement. 1.19 INITIAL MINIMUM GUARANTEE has the meaning given to it in SECTION 1.1(I) of EXHIBIT A. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 2 Video Game Publishing Agreement 1.20 INITIAL SHIPMENT means the period commencing from the first commercial shipment of a Partner Product to VUG's various retailers and expiring *** business days thereafter. 1.21 INTERPLAY PROCEEDS has the meaning given to it in SECTION 2.1 of EXHIBIT A. 1.22 IP RIGHTS has the meaning given to it in SECTION 13 of this Agreement. 1.23 LICENSE has the meaning given to it in SECTION 2.1 of this Agreement. 1.24 LICENSED TERRITORY means that geographic region described in SECTION 2 of EXHIBIT B. 1.25 NET SALES has the meaning given to it in SECTION 2.2 of EXHIBIT A, attached hereto. 1.26 NON-PC PARTNER PRODUCT means a Partner Product designed for play on a Platform other than a personal computer system (e.g., PlayStation 2, Game Cube, Game Boy Advance, Xbox). 1.27 PARTNER PRODUCT(S) means (i) Interplay's computer and/or video game software product SKUs stated in SECTION 3 of EXHIBIT B, AND (II) any and all additional computer and/or video game products developed by or on behalf of Interplay in its sole discretion and completed during the three (3) year period following the Effective Date, including any and all sequels, new titles or derivative works of previously published titles, together with all Related Assets and any and all Program Error Corrections but only if and to the extent that as of the Effective Date no third party already possesses such rights (or such party subsequently waives such rights in their sole discretion). For purposes of clarification, Partner Products shall not include computer and/or video game products which are both developed and distributed/published by third parties under sale or license from Interplay. 1.28 PC PARTNER PRODUCT means a Partner Product designed for play on personal computer systems (e.g., IBM and Macintosh personal computers). 1.29 PARTNER PRODUCT CONCEPT AND DESCRIPTION DOCUMENT means, with respect to each Partner Product, the document to be provided to VUG by Interplay no later than the Six Month Evaluation, which sets forth the fundamental product concept and description for such Partner Product. 1.30 PARTNER PRODUCT REQUIREMENTS DOCUMENT means, with respect to each Partner Product, the document to be provided to VUG by Interplay no later than the Six Month Evaluation, which sets forth the fundamental technology requirements of such Partner Product. 1.31 PERIOD has the meaning given to it in SECTION 11.5 of this Agreement. 1.32 PLATFORM means each of the following: personal computers or "PC's" (regardless of manufacturer or operating system), PlayStation, PlayStation 2, N64, GameCube, Game Boy, Game Boy Color, Game Boy Advance and Xbox. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 3 Video Game Publishing Agreement 1.33 PROGRAM ERROR(S) means any case where a Partner Product abnormally and materially ceases functioning, produces material incorrect or misleading information or erroneously interprets material information given to it or does not function substantially in accordance with its technical specifications described in the Partner Product Requirements Document; provided, however that minor "bugs" generally acceptable within industry standards shall not be considered Program Errors under this Agreement. 1.34 PROGRAM ERROR CORRECTION means a modification of, addition to or deletion from any software component of a Partner Product (whether during development or by patch available after commercial release) that had been experiencing a Program Error, that causes such component to perform substantially (i.e, within acceptable industry standards) in accordance with the Partner Product's technical specifications described in the Partner Product Requirements Document. 1.35 RECEIVING PARTY has the meaning given to it in SECTION 15.1 of this Agreement. 1.36 RELATED ASSETS means all art assets, system specification information, manual text and other ancillary materials necessary for VUG to create the Partner Product packaging and manual. 1.37 ROYALTIES has the meaning given to it in SECTION 2 of EXHIBIT A. 1.38 SECONDARY MINIMUM GUARANTEE has the meaning given to it in SECTION 1.1(II) of EXHIBIT A. 1.39 SELL-OFF PERIOD has the meaning given to it in SECTION 12.4(C). 1.40 SIX MONTH EVALUATION means a preliminary evaluation (in accordance with SECTION 3) of the development of a Partner Product six (6) months prior to the Submission Date for such Partner Product. During this evaluation, Interplay shall submit to VUG the Partner Product Concept and Description Document and the Partner Product Requirements Document for such Partner Product. Based on the delivery of these items, VUG and Interplay shall cooperate in good faith regarding the progress and development schedule of the Partner Product. Furthermore, at this time, and in accordance with SECTION 1.2 of EXHIBIT A and SECTION 6, respectively, VUG shall formulate its initial Net Sales projections and initial marketing budget at Initial Shipment for such Partner Product. 1.41 SKU means, a version of a video game designed to operate on a particular Platform. An example of a SKU is a version of a game designed to play on the Sony PlayStation 2 Platform. 1.42 STATEMENT has the meaning given to it in SECTION 11.4 of this Agreement. An example of such Statement is attached hereto and referred to as EXHIBIT E. 1.43 SUBMISSION DATE has the meaning given to it in SECTION 3.1. 1.44 TERM has the meaning given to it in SECTION 12.1. 1.45 TERMINATION NOTICE has the meaning given to it in SECTION 12.5. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 4 Video Game Publishing Agreement 1.46 THREE MONTH EVALUATION means the final evaluation (in accordance with SECTION 3) of the development of the Partner Product to occur three (3) months prior to the Submission Date for such Partner Product. During this evaluation, Interplay shall submit to VUG a Beta Version for the Partner Product. Based on the Beta Version and other meaningful consultation and cooperation between the parties with respect to the progress of the Partner Product, VUG will at such time submit to Interplay VUG's marketing strategy with respect to such Partner Product and commit to a marketing budget with respect to such Partner Product (in accordance with SECTION 6). 1.47 THREE MONTH GROSS SALES PROJECTION has the meaning given to it in SECTION 1.2 of EXHIBIT A. 1.48 THIRD PARTY LICENSOR means any licensors or owner (other than Interplay or VUG) of intellectual property that is used in any Partner Product. For purposes of clarification, a Third Party Licensor may include a third-party developer hired by Interplay to develop a Partner Product and which retains certain credit rights, marketing approval rights, or other rights with respect to the Partner Product. 1.49 THIRD PARTY LICENSE means any license by a Third Party Licensor of intellectual property that is used in any Product. 1.50 VUG CUSTOMER QUALITY CARE means VUG's department or group that reviews product compatibility and that shall ultimately be responsible for accepting or rejecting Gold Candidates of PC Partner Products in accordance with SECTIONS 3 and 4. 1.51 VUG AFFILIATE means a wholly-owned subsidiary or parent company of VUG, provided such wholly-owned subsidiary or parent company of VUG is in the interactive entertainment software business. 2. GRANT OF RIGHTS. 2.1 LICENSE TO DISTRIBUTE. Subject to the terms and conditions contained in this Agreement, Interplay hereby grants to VUG and VUG hereby accepts, the exclusive right, license and obligation during the Term and any Sell-Off Period, to reproduce, manufacture (except during any Sell-Off Period), market and promote (in any and all forms and media, including print, digital, optical, and public performance and display), distribute copies of, and sell, the Partner Product(s), on an individual-unit (i.e., non-bundled) and packaged-goods basis via the Authorized Channels throughout the Licensed Territory on terms that are reasonable and customary in the interactive entertainment software industry, with the additional right to subcontract any or all of the foregoing rights in accordance with SECTION 20.2 below (the above grant of rights being hereinafter referred to as the "LICENSE"). 2.2 ***. 2.3 EXCLUSIVE LICENSE. Subject to the terms and conditions contained in this Agreement (including SECTIONS 2.6, 2.7 and 2.8), Interplay shall provide the License set forth in SECTION 2.1 exclusively to VUG during the Term. Therefore, none of the rights Interplay provides under the License shall be assigned, licensed, offered, transferred or otherwise provided *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 5 Video Game Publishing Agreement by Interplay to any third parties nor shall they be exercised by Interplay except as expressly permitted by this Agreement. 2.4 TRADEMARK LICENSE. Subject to the terms and conditions contained in this Agreement (including SECTION 2.8 below), Interplay hereby grants to VUG and VUG hereby accepts a non-exclusive, non-transferable right and license in the Licensed Territory to reproduce and use the trademarks associated with the Partner Product(s) solely in connection with the reproduction, manufacturing, marketing, promotion, distribution and sale of the Partner Product(s) during the Term and any Sell-Off Period. 2.5 MANUFACTURING RIGHTS. With respect to all PC Partner Products, in its capacity as distributor of each PC Partner Product, VUG will be solely responsible for, and will pay all costs of (i) manufacturing the PC Partner Product units to be distributed pursuant to this Agreement, including CD- and DVD-materials (and any other component materials) and pressing, packaging materials, printing of packaging and inserts, and pack-out, (ii) assembly of finished-goods PC Partner Product units, and (iii) shipping, and securing delivery of, completed finished-goods units of PC Partner Products to VUG's distribution center, VUG's customers and/or End-Users. Subject to SECTION 3.2, herein, with respect to all Non-PC Partner Products, VUG will be solely responsible for all costs of (i) manufacturing the Non-PC Partner Product units to be distributed pursuant to this Agreement, including CD- and DVD-materials (and any other component materials) and pressing, Game Hardware Platform Licensor royalties, packaging materials, printing of packaging and inserts, and pack-out, (ii) assembly of finished-goods Non-PC Partner Product units (to the extent the Game Hardware Platform Licensor allows VUG to, and VUG elects to, perform any such assembly), and (iii) shipping, and securing delivery of, completed finished-goods units of Non-PC Partner Products to VUG's distribution center, VUG's customers and/or End-Users. 2.6 RESERVED RIGHTS. All rights not expressly granted to VUG in this Agreement, including all rights outside the Licensed Territory, any electric transmission rights (such as through cable, the Internet and any on-line services), and all merchandizing rights of any kind whatsoever, are specifically excluded from this Agreement and are retained and reserved by Interplay. Interplay also reserves the right, without obligation, to publish trailers and demos of the Partner Products (which trailers and demos will be made available to VUG for its use hereunder in marketing the Partner Products) in combination with other entertainment software products that are not Partner Products under this Agreement. Any use by Interplay (or any licensee of Interplay) of such reserved rights, or any portion thereof, shall not be deemed unfair competition, nor interference with nor infringement of VUG's rights hereunder. Without limiting the generality of the foregoing, Interplay specifically reserves the right to authorize third parties to distribute Partner Products with third-party software and/or hardware in the form of a single combined product and selling such combined products in or outside of the Licensed Territory and as a premium to augment the value of non-computer related products and so-called "covermounts" in and outside the Licensed Territory ("OEM LICENSES"); PROVIDED, HOWEVER, that Interplay agrees that it will not, without the prior written approval of VUG, grant any OEM Licenses with respect to any Partner Product that authorize distribution of any combined product that includes such Partner Product to commence earlier than *** following Initial Shipment of such Partner Product by VUG hereunder. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 6 Video Game Publishing Agreement 2.7 INTERPLAY DIRECT SALES AND ONLINE SALES. Notwithstanding anything to the contrary in this Agreement, Interplay shall be entitled to sell Partner Products directly to End-Users through (i) Interplay's own direct sales program, including offering the Partner Products for sale direct to End-Users through Interplay's direct mailing programs, Interplay's telemarketing programs, Interplay's websites and Interplay's on-line stores (and Interplay may engage third-party subcontractors to fulfill orders that Interplay has itself received directly from End-Users), and/or (ii) third-parties hired by Interplay to sell the Partner Products online through their websites (e.g., Yahoo, Amazon). Interplay shall have the right to purchase from VUG on a royalty-free basis, via delivery to VUG of a standard purchase order finished-goods Partner Product units at a price equal to VUG's actual manufacturing and shipping costs plus *** ($***) per unit . VUG shall be entitled to deduct amounts due VUG under this Section from the Interplay Proceeds. VUG shall use its commercially reasonable efforts to promptly fulfill Interplay's purchase orders. 2.8 APPROVAL BY LICENSORS. Notwithstanding any other provision of this Agreement to the contrary, VUG's rights and obligations under this Agreement with respect to each Partner Product will be (i) conditioned upon such Partner Product having been approved for distribution in the Licensed Territory by the appropriate Game Hardware Platform Licensor, if any, and by any applicable content licensors (including any Third Party Licensors) and other entities whose approval is legally or contractually required to allow the distribution by VUG of the Partner Products and use by VUG of the trademarks associated with the Partner Product, in the Licensed Territory; and Interplay will use its diligent good faith efforts to secure such necessary approvals so that the Partner Products may be marketed and distributed as provided in this Agreement, and (ii) subject to any conditions and restrictions contained in any Third Party Licenses. 3. DEVELOPMENT AND DELIVERY; RELEASE. 3.1 DELIVERY OF GOLD MASTERS. Interplay shall develop at its own cost and deliver to VUG the Gold Candidate with respect to each Partner Product(s) for acceptance in accordance with the dates set forth in EXHIBIT B (the "SUBMISSION DATES"), or with respect to Partner Products where no Submission Date is set forth in EXHIBIT B, then such Submission Date shall be agreed upon by the parties in good faith. By the respective Submission Date for any Gold Candidate of a PC Partner Product, such Gold Candidate shall substantially conform to the technical specifications and descriptions set forth in the corresponding Partner Product Requirements Document and the Partner Product Concept and Description Document, and shall be free from material Program Errors, and VUG has the right to test and approve or reject the Gold Candidate accordingly and in accordance with the procedure described in SECTION 3.3 below in order to determine if such Gold Candidate will be re-classified as an Approved Gold Master. Interplay understands that during the process of developing the Partner Product(s), Interplay shall be expected to meet with VUG on a regular basis to discuss progress on the Partner Product(s) and receive feedback and suggestions. With respect to Non-PC Partner Products, and after delivery of the Gold Candidate, Interplay's only obligation to make changes to such Gold Candidates (which Interplay shall perform at its own cost and expense) shall be as required by the various Game Hardware Platform Licensors in order to obtain such Game Hardware Platform Licensors' approvals, and, upon receipt of such approval in accordance with SECTION 3.2 below, such Gold Candidate shall be deemed an Approved Gold Master. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 7 Video Game Publishing Agreement 3.2 OBTAINMENT OF NECESSARY CONSENTS AND LICENSES. Interplay shall, at its sole cost and expense (except with respect to royalties due to Game Hardware Platform Licensors, which costs shall be VUG's sole responsibility), obtain any and all necessary consents and licenses relating to the development of the Partner Product(s) and their use by VUG, its customers and End-User as contemplated by this Agreement, including any and all consents and licenses required for any music, voices, names or likeness of characters or third party copyrighted works or trademarks which are embodied in the Partner Product(s). Interplay shall be solely responsible for making all necessary submissions of the Gold Candidates of Non-PC Partner Products to the applicable Game Hardware Platform Licensors for approvals, and Interplay shall provide VUG with copies of all Game Hardware Platform Licensors' written feedback and/or final approvals in a timely manner. 3.3 ACCEPTANCE OF GOLD CANDIDATES. Any Gold Candidate of a PC Partner Product shall be accepted by VUG (and subsequently re-classified as an Approved Gold Master) provided it substantially conforms to the technical specifications and descriptions in its corresponding Partner Product Requirements Documents and Partner Product Concept and Description Documents, and such Gold Candidate shall be free from material Program Errors. After Interplay submits to VUG a Gold Candidate of a PC Partner Product, VUG shall have *** business days to (a) examine and test such Gold Candidate to determine whether, in its reasonable judgment, it meets the acceptance criteria for such Gold Candidate set forth in the preceding sentence, and (b) to notify Interplay in writing of VUG's acceptance or rejection of such Gold Candidate. In the case of any rejection, VUG shall provide Interplay along with such written rejection a reasonable detailed written list of deficiencies in such Gold Candidate and (if applicable) an explanation of why, in VUG's reasonable judgment, such Gold Candidate will not be viewed by VUG as an Approved Gold Master. If VUG fails to notify Interplay of VUG's acceptance or rejection within such *** business day period, then such Gold Candidate shall be deemed approved by VUG and shall be considered an Approved Gold Master. VUG and Interplay acknowledge and agree that such *** day period and the acceptance or rejection of the Gold Candidate as described herein shall not apply with respect to Gold Candidates of the Non-PC Partner Products where the respective Game Hardware Platform Licensor shall grant or withhold such approval. In no event shall a Gold Candidate of a Non-PC Product be deemed approved without the express written approval of the applicable Game Hardware Platform Licensor. In the case of a rejection of any Gold Candidate of a PC Partner Product by VUG in accordance herewith (or of a Non-PC Partner Product by the applicable Game Hardware Platform Licensor), Interplay shall use its best efforts to consult with VUG in order to correct the deficiencies to the reasonable satisfaction of VUG (or the applicable Game Hardware Platform Licensor) and shall resubmit the Gold Candidate, as corrected, within *** business days of VUG's rejection (or such longer period as to which VUG may agree in writing and in its reasonable discretion based on the nature of the rejection and extent of changes required) (or within such time as required by the applicable Game Hardware Platform Licensor). This procedure shall iterate until VUG (or the applicable Game Hardware Platform Licensor) accepts the Gold Candidate; provided, however, that with respect to rejected Gold Candidate(s), in the event that (i) Interplay fails to deliver a corrected acceptable Gold Candidate of a PC Partner Product in a commercially reasonable time period following at least *** rejections in accordance with the procedure described hereinabove, such that VUG shall have sufficient time to examine, test and accept the corrected Gold Candidate through its standard compliance testing process, or (ii) Interplay fails to obtain final Game Hardware Platform Licensor approval within in a *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 8 Video Game Publishing Agreement commercially reasonable time period following at least *** rejections in accordance with the procedure described hereinabove, then either VUG or Interplay may terminate this Agreement with respect to such Partner Product only, and without any liability therefor. In the event VUG elects to so terminate the Partner Product, Interplay's sole liability with respect to such terminated Partner Product shall be to reimburse VUG for its actual unrecouped expenditures with respect to such Partner Product incurred through the date of termination. 3.4 TIMELY MANUFACTURING/DISTRIBUTION OF PARTNER PRODUCTS. Subject to VUG's receipt of any and all necessary Interplay and Third Party Licensor approvals, and unless otherwise agreed to by Interplay in its reasonable discretion, VUG agrees to commercially release each PC Partner Product within *** days of VUG's receipt of the Approved Gold Master of such PC Partner Product. Solely with respect to Non-PC Partner Products, VUG shall use commercially reasonable efforts to (i) commence manufacturing in a timely manner, but in no event later than *** days (subject to extension for any delays caused by Interplay and/or the Game Hardware Platform Licensor) following receipt of an Approved Gold Master, and (ii) release each Non-PC Partner Product in a timely manner following receipt of substantially all manufactured units of such Non-PC Partner Product, but in no event later than *** days of receipt of substantially all manufactured units with respect to such Non-PC Partner Product. For purposes of the foregoing sentence, "substantially" shall mean *** percent (***%) or more of the units ordered for manufacture under a given purchase order. Notwithstanding the foregoing, if Interplay has (for any reason) delivered a Gold Candidate or Approved Gold Master after the dates set forth on EXHIBIT B (or such date as has been agreed upon pursuant to SECTION 3.1 or extended pursuant to SECTION 4.3 below), then VUG agrees to: (i) with respect to PC Partner Products, commercially release such PC Partner Product within *** days of VUG's receipt of the Approved Gold Master for such PC Partner Product; or (ii) with respect to Non-PC Partner Products, commence manufacturing in a timely manner, but in no event later than *** days (subject to extension for any delays caused either by Interplay, if Interplay is required by the Game Hardware Platform Licensor to commence manufacturing directly with the Game Hardware Platform Licensor, and/or the Game Hardware Platform Licensor) following receipt of an Approved Gold Master and commercially release each late Non-PC Partner Product no later than *** days of receipt of substantially all manufactured units with respect to such Non-PC Partner Product. 3.5 NO MODIFICATIONS OF PARTNER PRODUCT CODE BY VUG. In no event shall VUG have the right to itself modify the Partner Product code in any manner, and in no event shall VUG have the right to localize or require that Interplay localize the Partner Product into any language (including French for French Canadian End-Users). 4. PROGRAM ERRORS. 4.1 DURING DEVELOPMENT. Interplay shall use diligent good faith efforts to deliver each Gold Candidate free of material Program Errors, and to provide Program Error Corrections for any material Program Errors identified by VUG in writing during VUG's testing of any Gold Candidate of a PC Partner Product in accordance with SECTION 3 above. Interplay acknowledges and agrees that Interplay shall bear the sole cost and expense associated with such Program Error Corrections. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 9 Video Game Publishing Agreement 4.2 FOLLOWING APPROVAL OF GOLD CANDIDATE. Interplay warrants that each Gold Candidate shall be free from significant Program Errors. At VUG's request, Interplay shall promptly investigate and use commercially reasonable efforts to correct all material Program Errors in any Approved Gold Master PC Partner Product(s) reported in writing by VUG, and deliver to VUG, at no charge to VUG and as soon as practicable, an avoidance procedure or work-around to solve or avoid any significant Program Error until a correction is achieved (if commercially reasonable). Interplay shall continue to use its commercially reasonable efforts to develop a Program Error Correction for any such material Program Error, and when a Program Error Correction is achieved, Interplay shall deliver to VUG all modifications necessary to implement such correction. 4.3 *** NON-DELIVERY OF GOLD CANDIDATE. At or prior to the Six Month Evaluation for a particular Partner Product under development, Interplay and VUG shall consult in good faith regarding the progress of Interplay's development of the Partner Product and, at Interplay's request, attempt to agree upon a reasonable extension of the applicable Gold Candidate Submission Date and Gold Master Approval Date set forth in SECTION 3 of EXHIBIT B hereto. In the event the parties are unable to mutually agree upon the extension requested by Interplay, however, Interplay shall have the right to extend each such date *** for a maximum of ***. Thereafter but prior to the then scheduled date for the Three Month Evaluation date, if, notwithstanding Interplay's diligent efforts to timely meet its delivery date obligations, Interplay anticipates it will require additional extensions, Interplay shall so notify VUG and the parties shall again in good faith attempt to agree upon a reasonable additional extension. In the event that a Gold Candidate has not been received by VUG on or before the respective dates set forth in SECTION 3 of EXHIBIT B (as they may have been extended in accordance with this SECTION 4.3), VUG shall, in its sole discretion and as its sole remedies, and until such time as it receives the Gold Candidate, have the right to either (i) ***, or (ii) ***. 5. RESERVED. 6. MARKETING/MARKETING SUPPORT. As between VUG and Interplay, and subject to the terms and conditions contained in this Agreement (including SECTIONS 2.6, 2.7 and 2.8), VUG shall ***, at its sole cost and expense, be *** responsible for all sales, marketing and public relations with respect to the distribution of the Partner Products via the Authorized Channels within the Licensed Territories. VUG will use commercially reasonable, good-faith efforts, but in no event less than efforts substantially equivalent to those employed by VUG in the marketing and distribution of VUG-published products of like sales potential and demographic target, to market and distribute the Partner Products, and solicit and support sales of the Partner Products, throughout the Licensed Territory. VUG will make all reasonable, good faith efforts to keep Interplay's sales team apprised of VUG's sales force efforts and level of success in selling the Partner Products. VUG acknowledges and agrees that with respect to each Partner Product it shall spend an amount equal to the final marketing budget as determined in the Three Month Evaluation; provided that, VUG agrees that the final marketing budget for each Partner Product shall, at a minimum, allocate (and VUG shall spend): (i) ***, and (ii) ***. By way of clarification, Interplay acknowledges that such marketing expenditures and final strategy committed to by VUG shall include the format, components, assets and calendar as detailed in the Three Month Evaluation, to be presented in form and substance as detailed in the attached EXHIBIT D. Interplay acknowledges and agrees that VUG shall have no obligation to pay for any *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 10 Video Game Publishing Agreement marketing expenses incurred directly by Interplay unless such expense has been explicitly approved in writing by VUG. Notwithstanding the foregoing, Interplay shall provide VUG with reasonable cooperation and support in VUG's efforts to market and promote the Partner Products; provided that, unless expressly specified herein, such support shall not require any out-of-pocket expenditures by Interplay. 6.1 WEB SITE PROMOTION. With respect to each Partner Product, as long as the Partner Product is being marketed by VUG, Interplay shall (at its own cost and expense) include a continuous, prominent promotional banner on each relevant Interplay web site, with a direct link to VUG's Partner Product marketing site; and 6.2 ASSETS. Subject to any conditions or restrictions in any applicable Third Party License and the cooperation of any applicable Third Party Licensor, Interplay shall provide assets, such as product information, screen shots, company/employee bios, etc. as reasonably requested by VUG, for use by VUG in support of VUG's sales, marketing and public relations efforts related to the Partner Products, no later than *** days after VUG's request. In the event that Interplay does not disclose any such conditions or restrictions on or prior to the Three Month Evaluation, then VUG shall be entitled to deduct any actual out-of-pocket costs and/or expenses incurred by VUG due to Interplay's failure to disclose such conditions or restrictions from the Interplay Proceeds otherwise payable to Interplay with respect to such Partner Product. 6.3 CONSUMER/TRADE SHOWS. For consumer/trade shows at which VUG decides to maintain a display booth, VUG shall so notify Interplay promptly after VUG has made such decision. In the event that Interplay thereafter gives VUG a timely written request (in no event shall Interplay have less than *** days after receipt of VUG's notice in which to reply, unless VUG's initial decision is made within ***days of the scheduled consumer/trade show) to display the Partner Products at VUG's display booth, VUG will, at its cost, provide a reasonable amount of space in its booth for Interplay to display and promote the Partner Products. All travel, accommodation, equipment, and other expenses incurred by Interplay will be at Interplay's sole expense. In the event Interplay does not desire to personally display the Partner Products at the VUG display booth, VUG shall display and promote the Partner Products as VUG deems appropriate (but consistent with its handling of VUG-published products of like sales potential and demographic target) on a non-dedicated space basis at VUG's expense. 7. PARTNER PRODUCT TESTING. Interplay shall use all commercially reasonable efforts to ensure that each PC Partner Product runs in the various hardware and software configurations in which the Partner Product is designed to run, and with all peripherals with which the PC Partner Product is designed to work, in a manner that is consistent with: (a) the Partner Product Requirements Document, (b) the Partner Product Concept and Description Document, and (c) the Partner Product's documentation prepared by Interplay. ***. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 11 Video Game Publishing Agreement 8. INSURANCE ***. 8.1 LIABILITY INSURANCE. During the Term, Interplay and VUG each shall at all times maintain at its own cost at least *** Dollars ($***) of general liability insurance coverage available to cover claims against the Partner Products. Each party shall furnish to the other certificates and/or other reliable information evidencing such insurance coverage. 8.2 *** 8.3 NO INTENTION TO CREATE A SINGLE REMEDY. The parties agree that VUG and Interplay may exercise any or all of their available remedies at law, in equity or pursuant to this Agreement, and that except as otherwise expressly limited by this Agreement, under no circumstance shall VUG and Interplay be limited to any single remedy available to it. 9. ANTI-PIRACY EFFORTS. Interplay and VUG shall cooperate in all commercially reasonable ways in anti-piracy and anti-counterfeiting efforts with respect to the Partner Products and all intellectual property associated therewith. Immediately upon discovery of any third-party infringement of such intellectual property, the discovering party shall notify the other party of such infringement, and the parties shall cooperate in prosecuting any action to stop or otherwise mitigate the infringement. Interplay agrees to cooperate with VUG's anti-piracy and anti-counterfeiting efforts by: (a) using good faith efforts to obtain intellectual property registrations to the intellectual property rights owned by Interplay and relating to the Partner Products, as requested by VUG , (b) providing to VUG the name of a designated officer of Interplay who shall serve as Interplay's primary point of contact for cooperating with VUG in its anti-piracy efforts; and (c) causing such officer of Interplay to execute such additional documents as may be reasonably requested by VUG from time to time in connection with VUG's anti-piracy efforts with respect to the Partner Products. 10. PACKAGING, MARKETING MATERIALS AND LOGOS. 10.1 PRODUCTION OF SALES AND MARKETING MATERIALS. VUG shall be responsible, at its sole cost and expense, for the production of all sales and marketing materials and shall use commercially reasonable good faith efforts to produce such materials of a quality consistent with similar products published by VUG. Notwithstanding the foregoing, Interplay shall aid, assist and provide VUG with any necessary documentation and information reasonably needed for VUG to develop such materials, as set forth in SECTION 6. 10.2 PLACEMENT OF PROPER LABELS. (a) COPYRIGHT AND TRADEMARK NOTICE. VUG agrees that it shall cause to appear on each Partner Product unit label and the Partner Product packaging, co-op advertising slicks, sell-sheets, and other sales and marketing materials, the appropriate copyright and trademark notice provided to VUG by Interplay (which notices shall contain applicable VUG references, subject to VUG's reasonable approval) . In the event, because of the size of VUG's marketing materials, VUG requests an abbreviated notice on such marketing materials (excluding, however, the Partner Product unit label and packaging, for which there shall be no such abbreviation), Interplay shall reasonably approve such request. Interplay shall further *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 12 Video Game Publishing Agreement provide VUG with any required Third Party Licensor credits/artwork to be included with respect to Partner Product label, packaging and marketing materials. (b) ESRB LABELS. Interplay shall have the sole right and responsibility to register the Partner Product(s) with the Entertainment Software Rating Board ("ESRB"), and Interplay will provide VUG with a copy of the ESRB's final rating determinations. VUG shall be required to place the appropriate ESRB rating on all packaging, marketing and any other materials for the Partner Product(s) as recommended and/or required by the ESRB. Notwithstanding the foregoing, VUG shall assist Interplay in the registration process to the extent reasonably requested by Interplay. 10.3 PLACEMENT OF VUG LOGO(S). Unless otherwise prohibited or limited by the applicable Game Hardware Platform Licensor or pre-existing rights of any applicable Third Party Licensor, Interplay acknowledges and agrees that in its role as distributor of the Partner Products, VUG (or any VUG Affiliate, in VUG's discretion) may include its name and logo (or such name and logo as reasonably indicated by VUG which is intended to inform customers that VUG is the distributor of the Partner Products) (i) on the back of the outside packaging of the Partner Products and (ii) on all Partner Product marketing materials, in a form and manner reasonably determined by VUG; provided, however that such VUG name and logo (i) do not obscure the title of the Partner Product, or Interplay's or its Third Party Licensors' names or logos, and (ii) are reasonable in size compared to the size of the packaging, and, in any case, appear less prominently than Interplay's and/or any required Third Party Licensors' name or logo. VUG will also be entitled to include the URL of VUG's online store and web site on the Partner Product packaging and/or marketing materials. 10.4 WARRANTIES. VUG will distribute the Partner Products and manual (and any other Partner Product documentation) with warranties and disclaimers intact as provided by Interplay. VUG will not alter, erase, deface or overprint any notice on any item provided by Interplay. 10.5 INTERPLAY APPROVALS. Notwithstanding anything to the contrary in this Agreement, Interplay (and, as applicable, its Third Party Licensors in accordance with the terms of their respective Third Party Licenses) shall have the right to review and approve all final Partner Product labels, packaging, documentation, sales and marketing materials with respect to all trademark, copyright, ESRB and other credits and notices, and all warranties and disclaimers. 11. PRICE, PAYMENTS, ROYALTY STATEMENTS AND RISK OF LOSS/BAD DEBT. 11.1 INTERPLAY PROCEEDS AND MINIMUM GUARANTEES. As consideration for the grant of License and the further obligations of Interplay as described hereunder, VUG shall pay Interplay the Interplay Proceeds and Minimum Guarantees defined in EXHIBIT A. 11.2 CURRENCY. All payments rendered hereunder by VUG to Interplay shall be in United States currency only, and VUG payments shall be made by wire transfer to Interplay's account. 11.3 NOT-FOR-RESALE COPIES OF THE PARTNER PRODUCT(S). Notwithstanding anything to the contrary, VUG may manufacture and distribute a reasonable number of not-for-resale copies of the Partner Product(s) (not to exceed *** units per SKU without Interplay's advance approval, *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 13 Video Game Publishing Agreement not to be unreasonably withheld) for promotional purposes only at VUG's sole expense but with no royalty payment obligation whatsoever to Interplay resulting from the manufacture or distribution of such units. Interplay may reasonably request up to *** copies of each Partner Product for promotional purposes free of charge and on a royalty-free basis from VUG. In the event that Interplay reasonably requests more than *** copies of such Partner Product, then Partner shall pay VUG's actual cost of goods for such units beyond the initial *** units. Such excess units shall also be on a royalty-free basis. 11.4 PAYMENTS AND STATEMENTS. VUG shall account to Interplay with regard to the distribution of the Partner Product(s) within *** days following the conclusion of each VUG accounting month *** hereunder. Each such accounting ("STATEMENT") shall be in writing and substantially in the form of the statement attached hereto in EXHIBIT E, and shall contain the appropriate calculations relating to the computation of Interplay Proceeds under this Agreement. VUG agrees to include in such Statements any/all information (including COGS, and advertising/marketing expenses) which may be necessary for Interplay to properly calculate royalties owed by Interplay to its Third Party Licensors and/or developers. Subject to VUG's recoupment of all Minimum Guarantees (as provided in SECTION 1.3 of EXHIBIT A hereto), any Interplay Proceeds owed for the corresponding Statement period shall be remitted and paid to Interplay by wire transfer on or before the date the Statement is due. VUG agrees to provide Interplay at least ***-days advance notice of any change in its accounting month. 11.5 BOOKS OF ACCOUNT AND AUDITS. VUG shall keep books of account relating to this Agreement and the licensing and distribution of the Partner Product(s) on the same basis and in the same manner and for the same periods as such records are customarily kept by VUG and reasonably sufficient for Interplay to verify VUG's Statements and the Interplay Proceeds due hereunder. Interplay may, upon *** business days' prior written notice to VUG, audit such records, at VUG's offices and at Interplay's expense, with respect to such period as Interplay specifies in its written notice (the "PERIOD"), in order to verify the accuracy of the applicable Statement(s) rendered hereunder for such Period. Any such audit *** shall take place only during reasonable business hours and in a manner so as not to unreasonably interfere with VUG's normal business activities. In that regard, ***. In no event (unless unreasonable delay is caused by VUG or its representatives) shall any audit continue on-site at VUG's offices for longer than *** consecutive business days nor shall such audit continue for more than *** days in the aggregate. Audits shall not be made hereunder more frequently than *** per VUG fiscal year and with a minimum of *** months between each audit, nor shall the records supporting any Statement be audited more than ***. Except to the extent necessary to enforce Interplay's rights hereunder, Interplay and its auditor shall keep all of the information contained in VUG's books and records confidential, shall not use such information for any purpose except verifying the accuracy of the Statements, and shall not reveal such information to any person other than employees, agents and/or representatives of Interplay or its auditor who need to know such information in order for Interplay to verify the accuracy of the Statements and who have agreed to keep such information confidential in accordance herewith. Therefore, VUG may require Interplay's auditor to execute a reasonable non-disclosure agreement before permitting such auditor access to VUG's records. Interplay shall furnish VUG with a copy of Interplay's auditor's report within *** days after the completion of such report. Within *** business days following VUG's receipt of the auditor's report, VUG shall promptly pay to Interplay any underpayment of Interplay Proceeds previously payable under this Agreement, and Interplay *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 14 Video Game Publishing Agreement shall promptly pay to VUG any overpayment of Interplay Proceeds previously paid to Interplay under this Agreement. In addition, VUG shall reimburse Interplay for all reasonable documented costs incurred by Interplay to its auditor to conduct such examination should an underpayment by VUG for the Period exceed both of the following thresholds: (i) *** and (ii) ***.Furthermore, and ***, Interplay shall be entitled to conduct an additional follow-up audit within the *** month period following the first audit, without otherwise affecting Interplay's audit rights for the fiscal year in which the follow-up audit is conducted. Notwithstanding anything contained herein to the contrary, the audit rights described in this SECTION 11.5 shall expire *** following the expiration or termination of this Agreement; except that in the event of any federal or state tax audit of Interplay within the *** following the expiration or termination of this Agreement, Interplay shall be entitled to conduct an audit of VUG only if and to the extent necessary for purposes of such audit. 11.6 TITLE AND RISK OF LOSS. As between VUG and Interplay, and subject to Interplay's and any Third Party Licensor's ownership of the IP Rights, title to all finished goods Partner Product units (except those purchased and received by Interplay pursuant to SECTION 2.7 above), and all risk of loss and damage thereto, shall at all times remain with VUG. 11.7 ***. ***, and, in accordance with its customary business practices and in its best business judgment, VUG may, following delivery of notice thereof to Interplay in each instance, ***. Notwithstanding the foregoing, at the time of the Initial Shipment of each Partner Product, in order to convey to consumers the high quality of such Partner Product, VUG will *** interactive entertainment software products of comparable quality and sales potential. 11.8 COLLECTIONS AND BAD DEBT. By way of clarification, VUG will be responsible for all risk of collection of amounts owed by VUG's customers as a result of VUG's activities under this Agreement, and VUG will not deduct any bad debt expenses or associated write-offs incurred as a result of its activities under this Agreement. Similarly, VUG will be entitled to retain 100% of any early payment discounts allowed by VUG's subcontractors as a result of VUG's activities under this Agreement, and Interplay will not be entitled to share in such discounts granted to VUG. 11.9 REPORTS AND FORECASTS. To the extent, and with the frequency, that VUG routinely compiles or receives sales information reports with respect to VUG-published products on an account-by-account basis, VUG will provide Interplay with such reports, to the same extent and frequency, with respect to each Partner Product. Such reports will provide such information as VUG's current inventory of each Partner Product, a summary of all unit sales of each Partner Product sold during the prior period, and whatever competitive product and market analysis information as may be available to VUG and which VUG may disclose without breaching any confidentiality obligation to any third party. VUG will provide Interplay with weekly sell-through and inventory reports, to the extent that such reports are routinely compiled by VUG for VUG-published products. Any reports provided to Interplay hereunder shall be deemed to be the property of Interplay and Confidential Information of Interplay (as provided in SECTION 15.1 below); provided, however, that Interplay agrees to abide by any confidentiality restrictions imposed on VUG by third parties furnishing any information in such reports, when such restrictions have been communicated to Interplay. VUG will also provide Interplay on a monthly basis with a three-month rolling forecast of VUG's sales of Partner Products. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 15 Video Game Publishing Agreement 12. TERM AND TERMINATION. 12.1 TERM. This Agreement shall become effective on the Effective Date, and shall expire three (3) years thereafter. Notwithstanding the foregoing, with respect to each particular Partner Product, this Agreement shall continue in full force for a period of two (2) years following VUG's first commercial release of the Partner Product, regardless of whether such two (2) year period goes beyond the three (3) year period stated herein. Collectively, such three (3) year period plus the balance of any applicable two (2) year period extending beyond such three (3) year period shall be collectively referred to as the "TERM" with respect to each particular Partner Product. 12.2 TERMINATION BY EITHER PARTY FOR MATERIAL BREACH. Unless otherwise specified in this Agreement, this Agreement may be terminated by a non-breaching party upon ***business days written notice to the breaching party of the occurrence of a material breach of any of the material terms, covenants, representations and/or warranties of this Agreement which breach is not remedied by the breaching party to the non-breaching party's reasonable satisfaction within such *** business day notice period; provided, however, that except with respect to a payment breach hereunder, if the nature of the breach is such that it cannot reasonably be cured within such ***-business day period, the breaching party shall have up to *** days to cure such breach (a "DEFAULT"). No such termination shall be effective unless and until the party electing to terminate delivers a notice of termination following expiration of the *** business day (or otherwise herein specified) cure period, provided the Defaulting party does not cure such Default prior to receipt of such termination notice. A material breach under this SECTION 12.2 shall include a party's instituting or having instituted against it any proceeding in bankruptcy or in reorganization or for the appointment of a receiver or trustee or any other proceeding under any law for the relief of debtors or if Interplay shall make an assignment for the benefit of creditors, provided, however, that such proceeding is not dismissed within *** days of its being filed. 12.3 TERMINATION OF AGREEMENT OR PARTNER PRODUCT. Upon any Default, and unless otherwise expressly provided in this Agreement, the non-Defaulting party may, in its sole discretion, terminate this Agreement (i) in its entirety, or (ii) with respect only to the particular Partner Product(s) associated with the Default. 12.4 EFFECTS OF TERMINATION OR EXPIRATION. Upon any termination or expiration of this Agreement in its entirety or with respect to a particular Partner Product: (a) CONTINUING OBLIGATION TO PAY AMOUNTS DUE. Each party's obligation to pay the other party any amounts due hereunder, other than then unpaid Minimum Guarantees with respect to the terminated Partner Product(s), shall continue (e.g., VUG shall continue to timely pay Interplay all Minimum Guarantees and Interplay Proceeds due with respect to any/all Partner Product(s) not so terminated, and VUG shall continue to pay Interplay all Interplay Proceeds due during any Sell-Off Period with respect to the terminated Partner Product(s)). (b) REFUND OF UNRECOUPED MINIMUM GUARANTEES. In the event this Agreement (or a particular Partner Product) is terminated due to Interplay's Default or rejected by Interplay pursuant to the U.S. Bankruptcy Code, in addition to any rights and remedies available to VUG, Interplay shall refund to VUG any and all unrecouped Minimum Guarantees *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 16 Video Game Publishing Agreement with respect to such terminated Partner Product(s), provided that VUG is unable to further exploit the particular Partner Product for which the Minimum Guarantee was paid; (c) SELL OFF PERIOD. Subject to SECTION 20.1, herein, upon termination or expiration of this Agreement (or a particular Partner Product), VUG and VUG's customers shall retain the non-exclusive right, subject to all the other terms and conditions hereof, to sell off their remaining inventories of the Partner Product(s) for a period of one hundred and eighty (180) days following the expiration or termination of this Agreement (or the particular Partner Product) (the "SELL-OFF PERIOD"); provided, however, that upon termination of this Agreement (or a particular Partner Product) by Interplay for a VUG Default, (i) Interplay shall have the right at any time during the Sell-Off Period to purchase VUG's existing inventory from VUG at VUG's actual out-of-pocket cost of goods therefor, which purchase may be of some or all of such units, in Interplay's sole discretion. (d) CANCELLATION OR LOSS OF RIGHTS. Subject to VUG's rights under SECTION 18.3 below, in the event that Interplay cancels and/or loses the right to grant to VUG the rights to distribute and sell any Partner Product, such Partner Product shall be deleted from coverage under this Agreement and VUG's sole remedy shall be to withhold from the Interplay Proceeds for any Partner Product VUG's actual unrecouped expenditures, including any unrecouped Minimum Guarantees, with respect to such cancelled and/or lost Partner Product(s). Solely by way of clarification, nothing contained herein or in this Agreement shall be deemed to give Interplay the unilateral right to cancel VUG's rights granted herein with respect to any Partner Product that has been commercially released by VUG. Notwithstanding the foregoing, VUG acknowledges and agrees that Interplay may be forced to cancel VUG's rights due to obligations under various Third Party Licenses. Furthermore, VUG acknowledges and agrees that Interplay (in its own discretion) may cancel any Partner Product in development by Interplay prior to delivery to VUG of an Approved Gold Master. However, in such event, Interplay acknowledges and agrees that VUG shall be entitled to withhold from the Interplay Proceeds with respect to any other Partner Products an amount equal to VUG's actual, out of pocket expenditures with respect to such cancelled Partner Product. Interplay expressly acknowledges and agrees that with respect to any Partner Product cancelled by Interplay, as contemplated in this SECTION 12.4(D), Interplay shall not publish or commercially release, or authorize any third party to publish or commercially release such cancelled Partner Product during the Term of this Agreement; provided, however, that with respect to a Partner Product cancelled by Interplay during development, and notwithstanding anything to the contrary herein, Interplay shall not be prohibited from selling its ownership rights in the cancelled Partner Product to a third party. 12.5 INITIAL SHIPMENT MINIMUM UNIT REQUIREMENT. Notwithstanding anything to the contrary in this Agreement, with respect to each Partner Product specifically identified in EXHIBIT B attached hereto, if VUG receives an Approved Gold Master from Interplay, but projects (in its Final Gross Sales Projection) an Initial Shipment of less than ***units of that Partner Product, VUG shall notify Interplay of this determination in writing along with delivery to Interplay of its Final Gross Sales Projection (such notice, a "DOUBTFUL PRODUCT NOTICE"). Within *** of receiving a Doubtful Product Notice, Interplay shall have the right, in its sole discretion, to delete such Partner Product from this Agreement (as further described below) by giving VUG written notice of deletion (a "DELETION NOTICE") within such *** following Interplay's receipt of the corresponding Doubtful Product Notice. For each Partner Product so deleted, Interplay's sole *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 17 Video Game Publishing Agreement monetary obligation shall be to reimburse VUG for its actual unrecouped expenditures with respect to such deleted Partner Product incurred by or on behalf of VUG through the date of deletion, such unrecouped expenditures to be payable to VUG within *** following VUG's receipt of the corresponding Deletion Notice. Further, if Interplay so deletes *** Partner Products within any consecutive *** period, then Interplay shall have the right, in its sole discretion, to terminate this Agreement in its entirety by, delivering to VUG along with Interplay's third or any subsequent Deletion Notice within any consecutive *** period, written notice of such termination (a "TERMINATION NOTICE"). *** In the event Interplay elects to so terminate the Agreement, Interplay's sole monetary obligation to VUG shall be to reimburse VUG for its actual unrecouped expenditures incurred by or on behalf of VUG through the date of termination with respect to any then-unreleased Partner Products. Deleting a Partner Product from this Agreement means that VUG shall no longer have the right to reproduce, manufacture, market and promote, distribute copies of, and/or sell that particular deleted Partner Product. For purposes of clarification, Interplay's deletion rights under this SECTION 12.5 shall only apply to Partner Product titles specifically identified in EXHIBIT B attached hereto; provided, however, that any termination by Interplay of the Agreement in its entirety pursuant to a Termination Notice delivered in accordance with this SECTION 12.5 shall apply to all Partner Products under the Agreement. 13. INTERPLAY TRADEMARKS AND COPYRIGHTS. VUG acknowledges that other than the licenses and rights set forth in this Agreement, as between VUG and Interplay, Interplay retains all right, title and interest in and to the Partner Product(s), and all intellectual property rights embodied therein (other than VUG logos, copyrights, trademarks and intellectual property that are included in the Partner Product packaging and/or manual), including all rights to the titles, names, copyrights, trademarks, trade names, trade secrets, logos, characters, artwork and code (collectively, the "IP RIGHTS") and agrees that other than as expressly permitted by this Agreement VUG shall not at any time during or after the Term of this Agreement assert or claim any interest in or do anything that may adversely affect the validity or enforceability of any IP Rights belonging to or licensed to Interplay with respect to the Partner Products or which Interplay otherwise has provided to VUG pursuant to this Agreement. VUG shall not exploit the intellectual property contained in the Partner Product(s) except as specifically authorized by this Agreement, and VUG agrees that it will neither apply for nor seek to obtain trademark registration for the Partner Products. If VUG may be entitled to claim any ownership interest in the Partner Products or any IP Rights associated therewith under any applicable law, then VUG hereby assigns and agrees to assign exclusively to Interplay (or any designee of Interplay), any and all of VUG's right, title and interest therein. Any assignment of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights" (collectively "MORAL RIGHTS"). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, VUG hereby waives such Moral Rights and consents to any action of Interplay (or its designee) that would violate such Moral Rights in the absence of such consent. Notwithstanding the foregoing, VUG shall have title to all inventory of Partner Product units and VUG shall retain title and intellectual property rights to trademarks and trade names of VUG that are used in connection with the packaging, marketing, promotion and distribution of the Partner Products. 14. SUPPORT. Interplay shall be responsible for rendering technical support to End-Users regarding the Partner Product(s). Such support shall be equal to efforts employed by Interplay to *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 18 Video Game Publishing Agreement support other comparable Interplay products distributed by third parties. The documentation for each Partner Product will specify Interplay's customer support phone number and/or Internet site address for technical support inquiries. 15. CONFIDENTIALITY. 15.1 CONFIDENTIAL INFORMATION. In the course of this Agreement, it is anticipated that one party (the "RECEIVING PARTY") shall obtain confidential or proprietary information (the "CONFIDENTIAL INFORMATION") belonging to the other party (the "DISCLOSING PARTY"). The Receiving Party shall, in accordance with SECTION 15.2 below, keep confidential and, except for the purpose of fulfilling its obligations under this Agreement, refrain from using this Confidential Information and any other information which the Receiving Party may acquire with respect to the Disclosing Party's business, including, but not limited to, information developed and relating to new products, pricing, know-how, trade secrets, processes, and practices, design elements, character profiles, unpublished copyrighted material, release dates, marketing, sales and promotional strategies, computer code, data, manuals, specifications, processes, methods, and the terms and conditions of this Agreement, unless and until such Confidential Information: (i) becomes generally known or available by publication, commercial use or otherwise through no fault of the Receiving Party; (ii) is known by Receiving Party at the time of disclosure without violation of any confidentiality restriction and without any restriction on Receiving Party's further use or disclosure; (iii) is independently developed by Receiving Party with reasonable documentation evidencing such development; or (iv) is required to be disclosed by administrative or judicial/legal action, provided that the Receiving Party, immediately after receiving notice of such action, notifies Disclosing Party of such action to give Disclosing Party the opportunity to seek any other legal remedies to maintain such confidential information in confidence. Receiving Party shall not disclose to others, without Disclosing Party's consent, the subject of this relationship without first providing Disclosing Party with the opportunity to review and approve the contemplated publication. This undertaking to restrain from use and keep information confidential shall survive the expiration or termination of this Agreement. Receiving Party shall require each of its employees performing services relating to this Agreement to execute a similar confidentiality agreement. At the earlier of the expiration or termination of this Agreement, Receiving Party shall cease all further use of the Disclosing Party's Confidential Information, and shall, at the Disclosing Party's option, promptly either return to Disclosing Party or destroy all Confidential Information that is in tangible form, including all drawings, specifications, manuals and other printed or reproduced material (including information stored on machine readable media) provided by Disclosing Party. 15.2 DUTY TO MAINTAIN CONFIDENTIALITY. Except as expressly approved by the Disclosing Party, the Receiving Party agrees: (i) to hold the Disclosing Party's Confidential Information in strict confidence as a fiduciary, and to take all reasonable precautions to protect such Confidential Information; (ii) not to divulge any such Confidential Information or any information derived therefrom to any third person, other than its directors, officers, employees, affiliates, attorneys, auditors, financial advisors, consultants, or prospective investors or lenders, and, in the case of VUG, permitted third-party subcontractors (collectively, the "REPRESENTATIVES"); provided, that in each case such Representative shall be given access to the Confidential Information only on a "need-to-know" basis and shall expressly agree in writing to retain the Confidential Information in strictest of confidence; (iii) not to make any use whatsoever at any time of such Disclosing Party's Confidential Information for the benefit of any person other than *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 19 Video Game Publishing Agreement the Disclosing Party or as expressly contemplated by the Disclosing Party, and (iv) not to copy, reproduce or directly or indirectly reverse engineer all or any part of such Disclosing Party's Confidential Information. Notwithstanding anything to the contrary herein, nothing in this SECTION 15 shall (i) prevent either party from making any disclosure required by a public stock exchange, the Securities and Exchange Commission or similar governmental or regulatory body, or (ii) prevent Interplay from disclosing to its Third Party Licensors such information (e.g., sales figures, COGS and marketing expenses incurred by VUG) necessary for Interplay to satisfy its contractual reporting obligations and to remit royalties due its Third Party Licensors with respect to the Partner Products. 16. COMPETING PRODUCTS. Interplay (subject to VUG's rights under SECTION 5 above) and VUG each understands and agrees that the other may enter into similar agreements with third parties, including agreements relating to products that may be deemed competing with the Partner Products. Interplay and VUG each represents and warrants to the other that no such agreements shall interfere with or cause such party to violate any of its other representations, warranties and/or covenants made under this Agreement, and VUG represents and warrants to Interplay that VUG shall throughout the Term and any Sell-Off Period treat the Partner Products on at least an equal basis with such competing products. 17. LIMITATION OF LIABILITY. THE LIABILITY OF EITHER PARTY, IF ANY, FOR DAMAGES FOR ANY CLAIM OF ANY KIND WHATSOEVER AND REGARDLESS OF THE LEGAL THEORY, SHALL NOT INCLUDE COMPENSATION, REIMBURSEMENT OR DAMAGES ON ACCOUNT OF THE LOSS OF PRESENT OR PROSPECTIVE PROFITS, EXPENDITURES, INVESTMENTS OR COMMITMENTS, WHETHER MADE IN ESTABLISHMENT, DEVELOPMENT OR MAINTENANCE OF REPUTATION OR GOODWILL OR FOR ANY OTHER REASON WHATSOEVER. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING. 18. REPRESENTATIONS, WARRANTIES AND COVENANTS. 18.1 REPRESENTATIONS AND WARRANTIES BY VUG. VUG warrants and represents that: (a) VUG (and the officers executing on its behalf) has full right and power to enter into this Agreement; (b) neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate any agreement VUG has with any third party or any constitution, statute, regulation, rule, injunction, judgment, order, decree ruling, law, charge or other restriction of any government, governmental agency, or court to which VUG is subject or any provision of its charter or bylaws; (c) any and all marketing materials, sales and packaging of the Partner Product(s) shall not contain any libelous or otherwise unlawful material or violate or infringe upon any personal or proprietary right of any person or entity, including any copyright, patent, trademark or other intellectual property rights (and VUG hereby acknowledges that no approval by Interplay of the product packaging and related marketing materials shall constitute an approval of any such infringement); (d) VUG shall not distribute Partner Product(s) other than as specifically provided herein; (e) VUG shall comply with all applicable laws, statutes, regulations and rules related to its performance hereunder (including product safety and advertising laws); (f) so long as this Agreement remains in effect, and subject to SECTION 16 above, VUG shall not commit any act or enter into any agreement with any *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 20 Video Game Publishing Agreement third party which is inconsistent or in conflict with this Agreement; and (g) with the exception of *** VUG's inventory of the Partner Products, VUG will not cause or allow any liens or encumbrances to be placed against, nor grant any security interest in, the Partner Products. 18.2 REPRESENTATIONS AND WARRANTIES BY INTERPLAY. Interplay warrants and represents that: (a) Subject to SECTION 20.13, Interplay (and the officers executing on its behalf) has full right and power to enter into this Agreement; (b) neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate any agreement Interplay has with any third party or any constitution, statute, regulation, rule, injunction, judgment, order, decree ruling, law, charge or other restriction of any government, governmental agency, or court to which Interplay is subject or any provision of its charter or bylaws; (c) so long as this Agreement remains in effect, and subject to SECTION 16 above, Interplay shall not commit any act or enter into any agreement with any third party which is inconsistent or in conflict with this Agreement; (c) the Partner Product(s) and any and all other materials delivered by Interplay to VUG shall be original or under a valid license to Interplay with right to provide the exclusive License as set forth herein to VUG; (d) neither the execution and performance of this Agreement by Interplay nor the Interplay transactions contemplated herein, infringes, misuses, misappropriates or conflicts with the rights, including copyright, patent and other intellectual property rights or contract rights, licensed to or from, or owned by, a party other than Interplay; (e) the Partner Product(s) and other materials delivered by Interplay to VUG shall not contain any libelous or otherwise unlawful material or violate any commercial rights to one's name and likeness, or any privacy or personal rights of any third party; and (f) Interplay shall comply with all applicable laws (including product safety laws, but only with respect to the Partner Product game code and associated gameplay), statutes, regulations and rules related to its performance hereunder. 18.3 ADDITIONAL COVENANTS BY INTERPLAY. Interplay represents and warrants to VUG that it is capable of and intends to be the developer (whether such development is done in-house or by Third Party Licensors or subcontractors) of the Partner Product(s), and that Interplay is responsible for all obligations attendant upon such role. Accordingly, and subject to the terms of this Agreement: (a) COVENANT TO COMPETENTLY COMPLETE AND DELIVER PARTNER PRODUCT(S). Interplay covenants and agrees the Partner Product(s): (i) shall upon completion be marketable and have been prepared and developed with reasonable diligence and skill; (ii) shall upon completion be of high quality in all material respects; (iii) shall upon completion, and in accordance with SECTION 3 above, comply in all material respects to the Partner Product Requirements Documents, the Partner Product Concept and Description Documents, and other specifications and descriptions contained in the written materials accompanying them that have been provided by Interplay; (iv) would not receive a rating of "AO" if submitted to the Entertainment Software Rating Board for evaluation and rating and (v) subject to SECTION 4.3 above, shall be delivered in accordance with all milestones, schedules or timelines and that Interplay shall immediately notify VUG in the event that Interplay has reason to believe that any Partner Product is not likely not to be in compliance with all schedules or timelines, or is not likely to be compliant with the agreed upon specifications; (b) BREACH OF THIRD PARTY AGREEMENTS. Interplay further represents, covenants and agrees that it shall not become in default of, and shall promptly provide VUG with written *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 21 Video Game Publishing Agreement notice should Interplay discover that it is or it anticipates or it has been noticed to be in breach or in default of, any of its contracts, agreements or obligations to which its Partner Product assets are bound or with any of its Third Party Licensors relating to the licensing of any know-how, intellectual property, component, tool, software, technology or documentation required to develop the Partner Product(s). In the event Interplay becomes in default (beyond any applicable cure period) under any such third party agreement (thereby breaching this representation, warranty and covenent) and loses distribution rights to the applicable Partner Product as a result thereof (thereby causing VUG to lose its rights to the Partner Product), then VUG's sole remedy shall be to recover from Interplay an amount equal to (and VUG shall have the option to withhold from all Interplay Proceeds otherwise due to Interplay under this Agreement an amount equal to) VUG's actual unrecouped expenditures and unrecouped Minimum Guarantees (including Initial Minimum Guarantees and Secondary Minimum Guarantees) owed to VUG solely with respect to such lost Partner Product; in no event, however, shall VUG have the right to terminate this Agreement as a result of Interplay's breach of its representation, warranty or covenant made under this SECTION 18.3(B). In the event that Interplay, in its sole discretion, requests VUG to cure any such breach or default of a third party agreement described in this SECTION 18.3(B), and, in the event VUG, in its sole discretion and upon advance notification to Interplay, thereafter agrees to attempt to cure such breach or default on behalf of Interplay, then (i) any such attempt by VUG to cure such breach or default shall not release Interplay from any liability to VUG under this Agreement, and (ii) Interplay shall repay to VUG, within *** days following VUG's payment thereof, VUG's costs and expenses related to the cure by VUG of such breach or default in accordance with this SECTION 18.3(B), and in the event Interplay fails to timely do so, VUG shall have the right to pursue collection of such amount from Interplay (and VUG shall have the option to withhold from all Interplay Proceeds otherwise due to Interplay under this Agreement an amount equal to VUG's costs and expenses related to the cure by VUG of such breach or default). 18.4 LIMITATION. EXCEPT FOR ANY WARRANTIES EXPRESSLY PROVIDED IN THIS AGREEMENT, THE WARRANTIES STATED IN THIS SECTION 18 ARE THE SOLE AND EXCLUSIVE WARRANTIES OF THE PARTIES HERETO, AND EACH PARTY HEREBY DISCLAIMS ANY OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE. 19. INDEMNIFICATION. 19.1 INDEMNITY. VUG and Interplay each shall defend, indemnify and hold harmless the other, its parent, affiliated companies and partners and their respective officers, directors, employees and agents from and against any and all liabilities, damages costs and fees (including reasonable attorney's fees) for any third party claims or actions arising out of or relating to any breach of its representations, warranties and covenants made hereunder. 19.2 ENJOINED DISTRIBUTION. In the event that VUG is enjoined from manufacturing and/or distributing any Partner Product(s) due to a claim for which Interplay is obligated to indemnify VUG pursuant to this Section, Interplay shall, at Interplay's option: (i) ***; (ii) ***; or (iii) ***; or (iv) ***. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 22 Video Game Publishing Agreement 19.3 INDEMNIFIED ACTIONS. If any action shall be brought against one of the parties hereto in respect to which indemnity may be sought against the other party (the "INDEMNIFYING PARTY") pursuant to SECTION 19.1, the Indemnifying Party's obligation to provide such indemnification shall be conditioned on prompt notice of such claim (including the nature of the claim and the amount of damages and nature of other relief sought) being provided to the Indemnifying Party by the party against which such action is brought (the "INDEMNIFIED PARTY"). The Indemnified Party shall cooperate with the Indemnifying Party in all reasonable respects in connection with the defense of any such action at the expense of the Indemnifying Party. The Indemnifying Party may, upon written notice to the Indemnified Party, undertake to conduct all proceedings or negotiations in connection with the action, assume the defense thereof, including settlement negotiations in connection with the action, and shall be responsible for the costs of such defense, negotiations and proceedings. The Indemnifying Party shall have sole control of the defense and settlement of any claims for which it provides indemnification hereunder, provided that the Indemnifying Party shall not enter into any settlement of such claim without the prior approval of the Indemnified Party, which approval shall not be unreasonably withheld. The Indemnified Party shall have the right to retain separate counsel and participate in the defense of the action or claim at its own expense. In the event that the Indemnifying Party refuses or does not promptly agree to assume control of the defense and settlement of any claim for which it must provide indemnification hereunder, then the Indemnified Party shall have sole control of the defense and settlement of such claim, and shall have the right to enter into any settlement of such claim without the prior approval of the Indemnifying Party. 20. GENERAL PROVISIONS. 20.1 ASSIGNMENT. This Agreement is personal to Interplay and VUG. Neither Interplay nor VUG may assign its rights or obligations under this Agreement, by operation of law or otherwise, without the express written consent of the other, which shall not be unreasonably withheld. Notwithstanding the foregoing, either party may transfer or assign its rights and obligations hereunder to any person acquiring such party by merger or acquiring all or substantially all of such party's assets, without requiring the consent of the other party; provided, however, that in the event of any such transfer or assignment, ***, either party may, in their sole discretion, ***. ***, both parties acknowledge and agree that in the event that***. Any attempted assignment except as allowed in this paragraph shall be null and void. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. 20.2 DELEGATION OF DUTIES. Subject to SECTION 20.1, VUG may delegate any or all of its duties to one or more of its VUG Affiliates or sub-contractors; provided that in each case such VUG Affiliates and sub-contractors shall be acting on VUG's behalf and VUG shall remain primarily responsible for its duties delegated under this Agreement. 20.3 INDEPENDENT CONTRACTOR. Nothing herein contained shall be deemed to establish or otherwise create a relationship of partnership or joint venture between Interplay and VUG (and/or its sub-contractors); it is understood that both parties are independent contractors who cannot and shall not be deemed an agent of the other party for any purpose whatsoever, and neither party nor any of its agents or employees shall have any right or authority to assume or create obligations of any kind, whether express or implied, on behalf of the other party. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 23 Video Game Publishing Agreement 20.4 GOVERNING LAW. This Agreement shall be construed in accordance with the substantive law of the State of California without regard to its conflicts of law principles. The parties agree that any disputes arising out of this agreement shall be resolved in the state or federal courts located within Los Angeles County and the parties expressly consent to the personal jurisdiction thereof. 20.5 NOTICES. All notices required or permitted under this Agreement shall be in writing, shall reference this Agreement and shall be deemed given: (i) when sent by facsimile to the facsimile number set forth below and confirmed by machine printed receipt with a copy of the notice sent by registered or certified mail; (ii) five (5) working days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) one (1) working day after deposit with a commercial overnight carrier, with written verification of receipt. All communications shall be sent to the address set forth below, or to such other address as may be designated by a party by giving written notice to the other party pursuant to this SECTION 20.5: IF TO INTERPLAY: WITH A COPY TO: Interplay Entertainment Corp. Interplay Entertainment Corp. Attention: Chief Executive Officer Attention: Legal Dept. 16815 Von Karman Avenue 16815 Von Karman Avenue Irvine, California 92606 Irvine, California 92606 Telephone: (949) 553-6655 Telephone: (949) 553-6655 Facsimile: (949) 252-0667 Facsimile: (949) 252-0667 IF TO UNIVERSAL: WITH A COPY TO: Vivendi Universal Games, Inc. Vivendi Universal Games, Inc. Attention: Chief Operating Officer Attention: Senior Counsel 6080 Center Drive 6080 Center Drive Los Angeles, California, 90045 Los Angeles, California, 90045 Telephone: 310-431-4000 Telephone: 310-431-4000 Facsimile: 310-431-2443 Facsimile: 310-431-2443 20.6 SURVIVAL. The rights and obligations set forth in Sections 1, 11.5, 12, 13, 15, 17, 19, and 20 shall survive the termination or expiration of this Agreement or any determination that this Agreement or any portion hereof or exhibit hereto is void or voidable. 20.7 FORCE MAJEURE. Neither party shall be liable for any delay in any of its obligations pursuant to this Agreement resulting from any cause beyond its reasonable control or caused by acts of God, fire, sabotage, terrorism, acts of civil or military authorities, priorities, fires, strikes, floods, epidemics, governmental action, rules or regulations, war, riot, delays in transportation or shortages. 20.8 WAIVER. No waiver of any default or breach of this Agreement by either party shall be deemed a continuing waiver or a waiver of any other breach or default, no matter how similar. 20.9 SEVERABILITY. If a provision herein contained shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, the parties shall first request that such court "blue line" such provision to make it enforceable and carry out the parties' intent. If such remedy is not available, such provision shall be of no force or effect while such infirmity shall exist, but such infirmity shall have no effect whatsoever upon the binding force or effectiveness of any of the other provisions hereof, it being the intention of the parties hereto that had they, or *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 24 Video Game Publishing Agreement either of them, known of such infirmity, they would have entered into a contract, each with the other, containing all of the other provisions hereof. In the event the infirmed provision causes the contract to fail of its essential purpose, then the entire Agreement shall fail and become void. 20.10 PARAGRAPH HEADINGS; INTERPRETATION. The headings in this Agreement are inserted for convenience only and are not deemed a part of this Agreement and shall not be considered in interpreting this Agreement. The word "include" or "including" used in this Agreement shall describe examples of the antecedent clause, and shall not be construed to limit the scope of such clause. Unless specifically stated otherwise, any reference to a particular period of days herein shall be interpreted as reference to calendar days; provided, however, that if such period would otherwise end on a Saturday, Sunday or generally recognized U.S. public holiday, then the period shall be deemed to end on the next business day. Whenever reference is made herein to a particular Section of this Agreement, it shall mean and include all subsections and subparts thereof. 20.11 ATTORNEY'S FEES. In the event of any litigation between the parties hereto, the prevailing party shall be entitled to recover reasonable attorney's fees in addition to other relief as the court may award. 20.12 EQUITABLE RELIEF. The parties acknowledge that each party's performance of its respective obligations hereunder, the Partner Product(s) and the intellectual property comprising such Partner Product(s), and the rights and licenses granted to VUG hereunder are of a unique, unusual, extraordinary and intellectual character which gives them a special value, the loss of and/or damage to which may not be reasonably or adequately compensated in damages in an action at law, that a material breach by either party of this Agreement may cause the non-breaching party great and irreparable injury and damage and, therefore, that the non-breaching party shall be entitled to seek injunctive relief to prevent such injury or damage. 20.13 BOARD APPROVAL. Interplay and VUG acknowledge and agree that a condition precedent to the effectiveness of this Agreement is the approval and ratification of this Agreement by Interplay's Board of Directors. Such board approval (or rejection, as applicable) shall be provided to VUG on or before August 9, 2002. 20.14 NO OFFSET. Except as otherwise expressly provided in this Agreement, any amounts due under this Agreement shall be paid with no right of offset against any other amounts due under this Agreement. In no event shall any amounts due under this Agreement be paid by offset against any amounts due under any other agreements which may exist between the parties. 20.15 REQUESTS, CONSENTS AND APPROVALS. Unless otherwise expressly provided in this Agreement, any consents and/or approvals requested of either party pursuant to this Agreement shall not be unreasonably withheld, conditioned or delayed. Without limitation, VUG acknowledges and agrees that it shall be deemed "reasonable" for Interplay to withhold, condition and/or delay its consent and/or approval as and when necessary for Interplay to comply with the terms of any Third Party Licenses. 20.16 NO THIRD PARTY BENEFICIARIES. No person other than the parties hereto and their permitted successors and assigns shall receive any benefits of this Agreement. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 25 Video Game Publishing Agreement 20.17 ENTIRE AGREEMENT. This Agreement, including all Exhibits, constitutes and contains the entire agreement between the parties with respect to the subject matter hereof and supersedes any prior oral or written agreements with respect to the subject matter hereof (for purposes of clarification, this Agreement shall have no affect on the Existing Distribution Agreement, which shall remain in full force and effect in accordance with its terms). Nothing herein contained shall be binding upon the parties until this Agreement has been executed by each and has been delivered to the parties. This Agreement may not be changed, modified, amended or supplemented, except in writing signed by all parties to this Agreement. Each of the parties acknowledges and agrees that the other has not made any representations, warranties or agreements of any kind, except as may be expressly set forth herein. This Agreement may be executed in counterparts and delivered by facsimile. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. VIVENDI UNIVERSAL GAMES, INC. INTERPLAY ENTERTAINMENT CORP. BY: /s/ Phil O'Neil BY: /s/ Herve Caen -------------------- -------------------- NAME: Phil O'Neil NAME: Herve Caen TITLE: President, PPG TITLE: CEO & President DATE: 8/9/02 DATE: 8/9/02 ACCOUNTING ACCOUNTING CONTACT CONTACT *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 26 Video Game Publishing Agreement EXHIBIT A INTERPLAY PROCEEDS AND MINIMUM GUARANTEES 1. MINIMUM GUARANTEE. 1.1 PAYMENT. With respect to each Partner Product, VUG shall pay Interplay recoupable (solely in accordance with SECTION 1.1(ii) immediately hereinbelow), but non-refundable (unless otherwise expressly provided in this Agreement), minimum guarantee payment(s) (the "MINIMUM GUARANTEE(S)") (on a per title basis) against future Interplay Proceeds otherwise due to Interplay, as follows: (i) within *** business days of receipt of an Approved Gold Master, VUG shall pay to Interplay an amount equal to the product of *** of (i) *** (with respect to Non-PC Partner Products) or (ii) *** (with respect to PC Partner Products). *** of VUG's Final Gross Sales Projection (as determined by VUG upon delivery of an Approved Gold Master and in accordance with SECTION 1.2 of this EXHIBIT A) for such Partner Product, multiplied by *** (as set forth in SECTION 2.1 of this EXHIBIT A) (the "INITIAL MINIMUM GUARANTEE"); and (ii) within *** business days after the Initial Shipment of a Partner Product, and in the event that the product of ***(with respect to Non-PC Partner Products) or ***(with respect to PC Partner Products) of VUG's actual Gross Sales Revenue on Initial Shipment of the Partner Product, multiplied by *** (as set forth in SECTION 2.1 of this EXHIBIT A), exceeds the Initial Minimum Guarantee paid for such Partner Product, then VUG shall pay to Interplay such difference (the "SECONDARY MINIMUM Guarantee"). 1.2 PROJECTED GROSS SALES REVENUE. Interplay acknowledges and agrees that, subject to SECTION 11.7 of the Agreement and the terms below in this SECTION 1.2 of EXHIBIT A, final projected Gross Sales Revenues at Initial Shipment (the "FINAL GROSS SALES PROJECTION") will be determined *** upon receipt from Interplay of the Approved Gold Master. Notwithstanding the foregoing, VUG will use good faith efforts in determining the Final Gross Sales Projection for each Partner Product and will consult with Interplay in making such projection(s). Projected Gross Sales Revenue for a Partner Product shall be initially determined by VUG at the Six Month Evaluation. Following the Six Month Evaluation, VUG shall at the Three Month Evaluation make a subsequent determination of the projected Gross Sales Revenues at Initial Shipment (the "THREE MONTH GROSS SALES PROJECTION"). VUG's Three Month Gross Sales Projection shall be based on the anticipated marketing spend and strategy for the Partner Product, VUG's assessment of the sales potential of that Partner Product (based on the Beta Version), pricing in accordance with SECTION 11.7 of the Agreement, prevailing market conditions and other relevant considerations which might reasonably and customarily affect VUG's projected sales with respect to a Partner Product. ***. 1.3 RECOUPMENT. The Minimum Guarantee for a particular Partner Product shall be recoupable by VUG as follows: unless and until VUG recoups the Minimum *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 27 Video Game Publishing Agreement Guarantee, VUG shall be entitled to deduct *** from the Interplay Proceeds with respect to such Partner Product. The parties agree that (i) such recoupment is not to be construed as a set-off, and that (ii) except as expressly provided in this agreement, the Minimum Guarantee(s) for one Partner Product shall not be recoupable against Interplay Proceeds accrued for any/all other Partner Products (i.e., there shall be no cross-collateralization). 2. DISTRIBUTION FEE. 2.1 PERCENT OF NET SALES PER PARTNER PRODUCT UNIT. Subject to VUG's right of recoupment of all Minimum Guarantees paid by VUG to Interplay, as set forth in SECTION 1.3 of EXHIBIT A, VUG shall pay Interplay the "Interplay Proceeds." For the purposes of this agreement, the "Interplay Proceeds" shall be defined as the Gross Sales Revenues less the General Reserve, less the following distribution fee (which VUG shall be deemed to have earned as compensation for the services provided herein (the "DISTRIBUTION Fee"))* from Net Sales of Partner Products distributed to third parties as provided herein: TITLE PLATFORM DISTRIBUTION FEE - ------------------------- ----------------- ---------------------- 1. PC *** - ------------------------- ----------------- ---------------------- 2. Non-PC *** * Solely with respect to distribution of Partner Products via rental channels (i.e., Blockbuster, Hollywood Video, etc.), VUG shall pay Interplay *** of gross proceeds received by VUG. For purposes of clarification, there shall be no General Reserve taken by VUG in calculating Interplay Proceeds on rental revenues. 2.2 DEFINITION OF NET SALES. For the purposes of this Agreement, "NET SALES" shall be defined as Gross Sales Revenues from the Partner Product(s), less the General Reserve (as defined in SECTION 3 of this EXHIBIT A). 3. GENERAL RESERVE. VUG will deduct the following amounts (the "GENERAL RESERVE") against (i) returns, (ii) price protections, and (iii) post-sale markdowns extended by VUG to its customers in the normal course (collectively (i), (ii) and (iii), the "AUTHORIZED DEDUCTIONS") in the amount of *** of Gross Sales Revenues with respect to all Non-PC Partner Products and *** with respect to all PC Partner Products. ***. ***. ***. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 28 Video Game Publishing Agreement EXHIBIT B 1. AUTHORIZED CHANNEL(S): 1.1 Retail (including all rental revenue); and 1.2 Direct-to-consumer (including receiving orders over the Internet, but delivering on a physical, packed-goods basis). 2. LICENSED TERRITORY: United States and Canada. 3. PARTNER PRODUCTS/DELIVERY DATES: Submission Date(s) Approved Gold TITLE Platform: for delivery of Master Delivery the Gold Candidate: Date: - ------------------- ------------------- ------------------- -------------------- - ------------------- ------------------- ------------------- -------------------- - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- *** *** *** *** - ------------------- ------------------- ------------------- -------------------- + *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 29 Video Game Publishing Agreement EXHIBIT C [RESERVED] *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 30 Video Game Publishing Agreement EXHIBIT D FORM OF VUG FINAL MARKETING STRATEGY STATEMENT *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 31 Video Game Publishing Agreement EXHIBIT E SAMPLE ROYALTY STATEMENT *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 32 Video Game Publishing Agreement EXHIBIT F SAMPLE MINIMUM GUARANTEE CALCULATIONS *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. Vivendi Universal Games, Inc. Page 33 Video Game Publishing Agreement EX-10 4 iec3q02ex10-2.txt EX-10.2 LETTER OF INTENT EXHIBIT 10.2 LETTER OF INTENT This Letter of Intent ("LOI") is made this 9th day of August, 2002 by and between Vivendi Universal Games, Inc. (formerly Vivendi Universal Interactive Publishing North America, Inc.) ("VIVENDI"), a Delaware corporation with offices at 6080 Center Drive, Los Angeles, California, 90045, and INTERPLAY ENTERTAINMENT CORP., a Delaware corporation with offices at 16815 Von Karman Avenue, Irvine, California 92606 ("INTERPLAY"). WHEREAS, Vivendi and Interplay previously have entered into that certain Distribution Agreement, dated August 23, 2001, as amended (the "OLD DISTRIBUTION AGREEMENT"), which agreement, among other things, includes the product entitled "***" ("***"); WHERAS, concurrently with the execution of this Agreement, Vivendi and Interplay are entering into a separate Video Game Distribution Agreement dated as of August 9, 2002 (the "NEW DISTRIBUTION AGREEMENT"); WHEREAS, Vivendi and Interplay desire to amend both the Old Distribution Agreement and the New Distribution Agreement to (i) remove *** from the Old Distribution Agreement and add it to the New Distribution Agreement, and (ii) allow Vivendi to offset amounts due to Interplay under the New Distribution Agreement against any/all amounts which may be due from Interplay to Vivendi under the Old Distribution Agreement with respect to "true-ups" of the general reserve under SECTION 6.8 of the Old Distribution Agreement; WHEREAS, while Vivendi and Interplay expect to and shall use their good faith efforts to enter into a more detailed written and mutually satisfactory amendment to the Old Distribution Agreement and the New Distribution Agreement (the "DEFINITIVE Agreement"), the parties now desire to enter into this BINDING LOI to facilitate timely execution of the New Distribution Agreement. Unless otherwise specified herein, all capitalized terms shall have the meanings set forth in the New Distribution Agreement. NOW THEREFORE, in consideration of the mutual terms, conditions and covenants hereinafter set forth, the parties agree as follows: CONDITION PRECEDENT The obligations of the parties contained herein are conditioned on the mutual execution and delivery of the New Distribution Agreement. REMOVAL OF *** FROM The parties shall amend the Old Distribution THE OLD DISTRIBUTION Agreement to remove *** therefrom, and the parties AGREEMENT AND ADDITION shall amend the New Distribution Agreement to add OF *** TO THE NEW *** as a Partner Product on EXHIBIT B thereto. DISTRIBUTION AGREEMENT *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. 1 RIGHT OF OFFSET The parties shall amend the Old Distribution Agreement and/or the New Distribution Agreement, as applicable, to provide that Vivendi shall have the right to deduct from any/all Interplay Proceeds (including any Minimum Guarantee payments) owed to Interplay under the New Distribution Agreement any/all amounts which may be owed from Interplay to Vivendi or a permitted affiliate thereof under the Old Distribution Agreement with respect to and upon "true-ups" of the General Reserve performed in accordance with and defined in SECTION 6.8 of the Old Distribution Agreement. With respect to the *** period commencing in ***, and for each *** period thereafter, such amendment shall also reduce the settlement period of such General Reserve "true-ups" as provided under the Old Distribution Agreement under Section 6.8(b) from *** after each *** period to *** after each *** period. (For purposes of clarification, the "true-up" for the *** period ending *** shall still be subject to a *** settlement period.) OLD DISTRIBUTION Subject to the foregoing, all other terms and AGREEMENT AND NEW conditions of the Old Distribution Agreement and DISTRIBUTION AGREEMENT the New Distribution shall remain unchanged and in TO REMAIN UNCHANGED full force and effect. IN ALL OTHER RESPECTS INTERPLAY ENTERTAINMENT CORP. VIVENDI UNIVERSAL GAMES, INC. By: /s/ Phil O'Neil By: /s/ Herve Caen ---------------------------- ------------------------------------ Title: President, PPG Title: CEO & President ------------------------- --------------------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. 2 EX-10 5 iec3q02ex10-3.txt EX-10.3 LETTER OF AGREEMENT & AMENDMENT #2 EXHIBIT 10.3 August 29, 2002 Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, CA 92606 Attention: Chief Executive Officer Attention: Legal Department Re: Letter Agreement and Amendment to Distribution Agreement dated August 23, 2001 and Video Game Distribution Agreement dated August 9, 2002. Dear Sir or Madam: This letter will serve as the second amendment ("Amendment #2") to confirm the agreements we have reached in connection with the Video Game Distribution Agreement dated August 9, 2002, between Vivendi Universal Games, Inc. ("VUG") and Interplay Entertainment Corp. ("Interplay"), as amended by that Letter of Intent dated August 9, 2002 (the "LOI") (collectively, the "New Distribution Agreement"), and as an amendment to the Distribution Agreement dated August 23, 2001, as amended, between VUG and Interplay (the "Old Distribution Agreement"). The provisions contained herein shall serve to amend the New Distribution Agreement and the Old Distribution Agreement only as stated herein, and all other terms and conditions contained in the those agreements shall remain in full force and effect. All capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the New Distribution Agreement. 1. REMOVAL OF ICEWIND DALE 2 (PC) FROM THE OLD DISTRIBUTION AGREEMENT AND ADDITION OF SUCH TITLE TO THE NEW DISTRIBUTION AGREEMENT. i. Section 3 of Exhibit B to the New Distribution Agreement shall be modified by adding the following Partner Product and related information to the New Distribution Agreement: Submission Date(s) Approved Gold TITLE Platform: for delivery of Master Delivery the Gold Candidate: Date: - ------------------- ------------------- ------------------- -------------------- IceWind Dale 2 PC August 28, 2002 August 28, 2002 - ------------------- ------------------- ------------------- -------------------- ii. Accordingly, the Old Distribution Agreement is hereby amended to delete IceWind Dale 2 (PC) therefrom. iii. VUG acknowledges that, as of the date of this Amendment #2, Interplay has delivered to VUG the Approved Gold Master of IceWind Dale 2. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. iv. As both Run Like Hell (PS2) (pursuant to the LOI) and IceWind Dale 2 (PC version) (pursuant to this Amendment #2) have been moved to the New Distribution Agreement from the Old Distribution Agreement, and as the Old Distribution Agreement entitled VUG to charge Interplay for certain marketing and advertising expenses incurred by VUG in connection with such products, and because the New Distribution Agreement does not permit VUG to charge Interplay for such costs, VUG hereby agrees to credit Interplay, in the August royalty statement due from VUG under the Old Distribution Agreement, for the amount of any/all such marketing and advertising expenses previously charged to Interplay by VUG in connection with Run Like Hell (PS2) and IceWind Dale 2 (PC version). For purposes of clarification, VUG acknowledges that from and after the date of this Amendment #2, VUG shall not be entitled to charge Interplay for any such Run Like Hell (PS2) and/or IceWind Dale 2 (PC) marketing/advertising expenses previously incurred/committed to by VUG but not previously charged to Interplay. 2. OFFSET RIGHTS. In addition to the modifications in the LOI to Section 20.14 of the Agreement, Section 20.14 shall further be modified to include the following: "Interplay expressly acknowledges and agrees that VUG shall be entitled to offset the Interplay Proceeds against any amounts due from Interplay to VUG pursuant to any other agreement between the parties hereto, including but not limited to, the Old Distribution Agreement. Solely by way of clarification, VUG acknowledges that such offset shall not be against any Minimum Guarantee amounts payable to Interplay as provided in the New Distribution Agreement, but shall be limited solely to any Interplay Proceeds otherwise payable to Interplay following the recoupment of such Minimum Guarantees. Notwithstanding anything to the contrary herein, at such time as all "true-ups" pursuant to the Old Distribution Agreement have been achieved and and Interplay has satisfied its payment obligations to VUG under the Old Distribution Agreement, VUG shall promptly release its security interest(s) in Interplay's property (which security interest was granted to VUTG pursuant to Paragraph 3 of Amendment #2 of the Old Distribution Agreement, dated November 20, 2001) and prepare, execute and/or file all documents necessary to release any/all applicable financing or continuation statements, copyright mortgages, trademark mortgages or similar instruments or documents. By way of clarification, nothing contained in the immediately preceding sentence shall be deemed to impair, amend or otherwise alter any security interest(s) VUG may have obtained pursuant to the New Distribution Agreement. " 3. MINIMUM GUARANTEE. Section 1.1(i) and Section 1.1(ii) of Exhibit A of the Agreement shall be modified to include the following language at the beginning of each such Section: "except as otherwise stated in Section 4 of Exhibit B, hereto," The remainder of such Sections shall remain unchanged. *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. 2 4. PERCENT OF NET SALES PER PARTNER PRODUCT UNIT. The first sentence of Section 2.1 of Exhibit A shall be modified to read as follows: "Except as otherwise stated in Section 4 of Exhibit B hereto and subject to VUG's right of recoupment of all Minimum Guarantees paid by VUG to Interplay, as set forth in Section 1.3 of Exhibit A, VUG shall pay Interplay the "Interplay Proceeds." The remainder of such Section shall remain unchanged. 5. The following Section 4 of Exhibit B shall be inserted and shall read as follows: "IceWind Dale 2 Distribution Fee/Minimum Guarantee(s). Solely with respect to the PC Platform version of IceWind Dale 2, VUG's Distribution Fee shall be *** of Net Sales until ***. Effective ***, VUG's Distribution Fee shall increase to ***of Net Sales. Notwithstanding the foregoing, in the event that Interplay submits Gold Candidates for ***and ***to the appropriate Game Hardware Platform Licensor for approval on or before ***, then effective ***, VUG's Distribution Fee with respect to ***shall be***. VUG shall pay Interplay *** of the Minimum Guarantee otherwise due to Interplay (as provided in Section 1 of Exhibit A) with respect to IceWind Dale 2 (PC version) within ***business days of the complete execution of this Amendment #2 (but in no event later than Friday, August 30, 2002, 12:00 p.m., PST) and the remainder of such Minimum Guarantees within ***days of commercial release of IceWind Dale 2 (PC version)." If you agree to the provisions set forth in this letter agreement, please so indicate by signing the enclosed copy and returning it to me via facsimile, followed by an original copy in the mail. As stated herein, nothing contained in this letter shall affect the terms and conditions stated in the Agreement, except as specifically stated herein. Sincerely yours, /s/ Phil O'Neil ----------------------------------- Phil O'Neil President, Partner Publishing Group Vivendi Universal Games, Inc. I agree to the provisions of this letter agreement. Dated: 8/29/02 /s/ Jeff Gonzalez ------------------------ --------------------------- Name: Jeff Gonzalez Title: CFO *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. 3 EX-10 6 iec3q02ex10-4.txt EX-10.4 LETTER OF AGREEMENT & AMENDMENT #3 EXHIBIT 10.4 September 12, 2002 Interplay Entertainment Corp. 16815 Von Karman Avenue Irvine, CA 92606 Attention: Chief Executive Officer Attention: Legal Department Re: LETTER AGREEMENT AND AMENDMENT TO VIDEO GAME DISTRIBUTION AGREEMENT DATED AUGUST 9, 2002. Dear Sir or Madam: This letter will serve as the third amendment ("Amendment #3") to confirm the agreements we have reached in connection with the Video Game Distribution Agreement dated August 9, 2002, between Vivendi Universal Games, Inc. ("VUG") and Interplay Entertainment Corp. ("Interplay"), as amended by that Letter of Intent dated August 9, 2002 (the "LOI") and the Letter Agreement and Amendment #2 dated August 29, 2002 ("Amendment #2") (collectively, the "Distribution Agreement"). The provisions contained herein shall serve to amend the Distribution Agreement only as stated herein, and all other terms and conditions contained in the those agreements shall remain in full force and effect. All capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the New Distribution Agreement. 1. ADDITION OF RUN LIKE HELL (XBOX) TO THE DISTRIBUTION AGREEMENT. SECTION 3 of EXHIBIT B to the Distribution Agreement shall be modified by adding the following Partner Product and related information to the Distribution Agreement: Submission Date(s) Approved Gold TITLE Platform: for delivery of Master Delivery the Gold Candidate: Date: - ------------------- ------------------- ------------------- -------------------- Run Like Hell Xbox *** *** - ------------------- ------------------- ------------------- -------------------- 2. The following shall be added to SECTION 4 of EXHIBIT B: "RUN LIKE HELL (XBOX) DISTRIBUTION FEE/MINIMUM GUARANTEE(S). Solely with respect to the Xbox Platform version of Run Like Hell ("RLH Xbox"), VUG's Distribution Fee shall be ***of Net Sales. VUG shall pay Interplay a Minimum Guarantee with respect to RLH Xbox in the amount of ***within three (3) business days of the complete execution of this Amendment #3. Further, in the event that VUG sells in between ***and ***units of the PlayStation 2 version of Run Like Hell, then VUG shall pay an additional ***Minimum Guarantee to Interplay to be attributed to RLH Xbox. In the event that *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission (`SEC") and have been filed separately with the SEC. VUG sells in over ***units of the PlayStation 2 version of Run Like Hell, then VUG shall pay another additional ***Minimum Guarantee to Interplay to be attributed to RLH Xbox. Solely by way of clarification, each of the two additional Minimum Guarantees described herein shall be subject to all of the terms and conditions stated in the Distribution Agreement, including, without limitation, VUG's right of recoupment, offset and security interest and furthermore, Interplay expressly acknowledges and agrees that the Minimum Guarantee stated herein shall be in lieu of any Minimum Guarantees with respect to RLH Xbox that would otherwise be due to Interplay as part of the Distribution Agreement (i.e., pursuant to Section 1 of Exhibit A)." The remainder of such Section shall be unchanged in all aspects. If you agree to the provisions set forth in this letter agreement, please so indicate by signing the enclosed copy and returning it to me via facsimile, followed by an original copy in the mail. As stated herein, nothing contained in this letter shall affect the terms and conditions stated in the Agreement, except as specifically stated herein. Sincerely yours, /s/ Phil O'Neil ----------------------------------- Phil O'Neil President, Partner Publishing Group Vivendi Universal Games, Inc. I agree to the provisions of this letter agreement. Dated: 9/11/02 /s/ Jeff Gonzalez ------------------------ --------------------------- Name: Jeff Gonzalez Title: CFO *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission ("SEC") and have been filed separately with the SEC. 2 EX-99 7 ex991-093002.txt EX-99.1 CEO/CFO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2002 (the "Report") by Interplay Entertainment Corp. ("Registrant"), the undersigned hereby certifies that, to the best of the undersigned's knowledge: 1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. Dated: November 19, 2002 /s/ Herve Caen ------------------------------- Herve Caen Chief Executive Officer Dated: November 19, 2002 /s/ Herve Caen ------------------------------- Herve Caen Interim Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----