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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended May 2, 1999
[_] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
---- ----
Commission File Number: 0-21943
FOUR MEDIA COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 95-4599440
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2813 West Alameda Avenue, Burbank, CA 91505
(Address of Principal Executive Offices, Including Zip Code)
818-840-7000
(Registrant's Telephone Number, Including Area Code)
------------
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
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
------ ------
Number of shares of common stock, par value $0.01 per share, of the
registrant outstanding as of June 7, 1999: 19,693,629 shares.
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FOUR MEDIA COMPANY
FORM 10-Q
For the Quarter Ended May 2, 1999
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements Page
Number
------
Consolidated Balance Sheets as of August 2, 1998
and May 2, 1999........................................................... 3
Consolidated Statements of Operations for the Nine Months ended May 3, 1998
and May 2, 1999 and the Three Months Ended May 3, 1998 and
May 2, 1999................................................................ 4
Consolidated Statements of Cash Flows for the Nine Months ended May 3, 1998
and May 2, 1999............................................................ 5
Notes to Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview................................................................. 9
Three Months Ended May 2, 1999 Compared to
Three Months Ended May 3, 1998........................................... 10
Nine Months Ended May 2, 1999 Compared to
Nine Months Ended May 3, 1998............................................ 11
Liquidity and Capital Resources.......................................... 12
Year 2000 Compliance Issue............................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risks...................................................... 14
Foreign Currency Risks................................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 15
Item 2. Changes in Securities...................................................... 15
Item 3. Defaults Upon Senior Securities............................................ 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
Item 5. Other Information.......................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................... 15
Signature ........................................................................... 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 1. Financial Statements
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FOUR MEDIA COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
August 2, May 2,
1998 1999
---------- --------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash.............................................................................. $ 3,301 $ 8,098
Trade accounts receivable, net of allowance for doubtful accounts of $1,258 and
$1,666 as of August 2, 1998 and May 2, 1999, respectively........................ 31,657 39,055
Inventory......................................................................... 1,263 1,972
Prepaid expenses and other current assets......................................... 5,624 5,435
-------- --------
Total current assets............................................................ 41,845 54,560
Property, plant and equipment, net................................................. 124,230 163,815
Deferred taxes..................................................................... 6,572 6,572
Long-term receivable............................................................... 3,276 5,168
Goodwill, less accumulated amortization of $529 and $1,884 as of August 2, 1998
and May 2, 1999, respectively..................................................... 37,507 82,079
Other assets....................................................................... 2,914 3,888
-------- --------
Total assets.................................................................... $216,344 $316,082
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations................ $ 6,184 $ 6,638
Accounts payable.................................................................. 10,781 9,901
Accrued and other liabilities..................................................... 5,980 8,746
Deferred income taxes............................................................. 1,615 1,615
-------- --------
Total current liabilities....................................................... 24,560 26,900
Long-term debt and capital lease obligations....................................... 124,671 161,854
-------- --------
Total liabilities............................................................... 149,231 188,754
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, 150,000 Series A
Convertible shares issued and outstanding as of August 2, 1998 and 0 as of
May 2, 1999; liquidation preference $15,000,000................................ 2 -
Common stock, $.01 par value; 50,000,000 shares authorized, 9,876,770 shares
issued and outstanding as of August 2, 1998 and 19,693,629 as of May 2, 1999... 99 197
Additional paid-in capital........................................................ 59,577 112,596
Foreign currency translation adjustment........................................... (1,567) (1,450)
Retained earnings................................................................. 9,002 15,985
-------- --------
Total stockholders' equity...................................................... 67,113 127,328
-------- --------
Total liabilities and stockholders' equity...................................... $216,344 $316,082
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FOUR MEDIA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------------------- -------------------------------
May 3, May 2, May 3, May 2,
1998 1999 1998 1999
------------ ----------- ----------- -----------
Revenues:
<S> <C> <C> <C> <C>
Mastering and distribution.............. $25,715 $ 33,033 $ 9,108 $11,009
Broadcast and syndication............... 16,902 17,142 5,817 6,073
Television.............................. 44,740 94,221 19,318 32,178
Film and animation...................... 7,660 4,542 4,858 2,248
------- -------- ------- -------
Total revenues......................... 95,017 148,938 39,101 51,508
------- -------- ------- -------
Cost of services:
Personnel............................... 37,456 55,355 15,182 18,763
Material................................ 7,542 8,165 2,963 2,591
Facilities.............................. 4,713 6,888 1,831 2,397
Other................................... 10,571 15,636 3,918 5,748
------- -------- ------- -------
Total cost of services................. 60,282 86,044 23,894 29,499
------- -------- ------- -------
Gross profit.......................... 34,735 62,894 15,207 22,009
------- -------- ------- -------
Operating expenses:
Sales, general and administrative....... 13,719 24,936 5,969 8,296
Depreciation and amortization........... 13,541 20,521 5,558 7,830
------- -------- ------- -------
Total operating expenses............... 27,260 45,457 11,527 16,126
------- -------- ------- -------
Income from operations................ 7,475 17,437 3,680 5,883
Interest expense, net.................... 5,430 10,454 2,553 3,198
------- -------- ------- -------
Income before income tax.............. 2,045 6,983 1,127 2,685
Provision for income tax................. -- -- -- --
------- -------- ------- -------
Net income before extraordinary item.. 2,045 6,983 1,127 2,685
Extraordinary loss on early
extinguishment of debt.................. (2,449) -- (2,449) --
------- -------- ------- -------
Net Income (loss)........................ $ (404) $ 6,983 $(1,322) $ 2,685
======= ======== ======= =======
Earnings per common share:
Income before extraordinary item........ $ 0.22 $ 0.63 $ 0.12 $ 0.21
Extraordinary item...................... (0.26) -- (0.26) --
------- -------- ------- -------
Net income (loss) per common share...... $ (0.04) $ 0.63 $ (0.14) $ 0.21
======= ======== ======= =======
Earnings per common share - assuming
dilution:
Income before extraordinary item........ $ 0.19 $ 0.54 $ 0.10 $ 0.19
Extraordinary item...................... (0.23) -- (0.22) --
------- -------- ------- -------
Net income (loss) per common share...... $ (0.04) $ 0.54 $ (0.12) $ 0.19
======= ======== ======= =======
Weighted average common and common
equivalent shares outstanding:
Basic................................... 9,553 11,130 9,553 12,824
======= ======== ======= =======
Diluted................................. 10,526 13,037 11,212 14,386
======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FOUR MEDIA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------
May 3, May 2,
1998 1999
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (404) $ 6,983
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................... 13,541 20,521
Provision for doubtful accounts......................................... 417 741
Extraordinary loss on early extinguishment of debt...................... 2,449 --
Changes in operating assets and liabilities:
Restricted cash........................................................ 625 --
Trade and long term receivables........................................ (9,543) (1,701)
Inventory.............................................................. (171) (425)
Prepaid expenses and other current assets.............................. (3,123) (916)
Accounts payable....................................................... (2,961) (4,286)
Accrued and other liabilities.......................................... (4,736) (3,223)
-------- --------
Net cash (used in) provided by operating activities................... (3,906) 17,694
Cash flows from investing activities:
Purchases of property, plant and equipment................................ (21,245) (30,539)
Acquisition of businesses, net of cash acquired........................... (23,248) (51,506)
-------- --------
Net cash used in investing activities................................. (44,493) (82,045)
Cash flows from financing activities:
Net proceeds from Warburg transaction..................................... -- 50,985
Proceeds from mortgage loan............................................... 8,100 --
Repayments of mortgage loans.............................................. -- (85)
Proceeds from term loans.................................................. 102,000 45,000
Repayments of term loans.................................................. -- (563)
Proceeds from (repayment of) revolving credit facility.................... (5,287) (4,000)
Proceeds from equipment notes............................................. 5,599 --
Proceeds from preferred stock financing................................... 14,835 --
Repayment of equipment notes and capital lease obligations................ (80,637) (22,263)
-------- --------
Net cash provided by financing activities............................. 44,610 69,074
Effect of exchange rate changes on cash.................................... (212) 74
-------- --------
Net (decrease) increase in cash............................................ (4,001) 4,797
Cash at beginning of period................................................ 6,089 3,301
-------- --------
Cash at end of period...................................................... $ 2,088 $ 8,098
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 5,430 $ 10,454
Taxes.................................................................... 370 24
Non cash investing and financing activities:
Capital lease obligations incurred....................................... $ 9,049 $ --
Stock issued in connection with the Encore acquisition................... $ -- $ 2,131
Notes issued in connection with the POP acquisition...................... $ 3,140 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation
Four Media Company (the "Company") is a provider of technical and creative
services to owners, producers and distributors of television programming,
feature films and other entertainment content. The Company's services integrate
and apply a variety of systems and processes to enhance the creation and
distribution of entertainment content.
While the Company believes that it operates in one business segment, which
is providing services to the entertainment industry, the Company has organized
its activities into four divisions: mastering and distribution, broadcast and
syndication, television, and film and animation services. The mastering and
distribution division, located in Burbank, Universal City and San Francisco,
California and London, England, manages, formats and distributes content
worldwide. The broadcast and syndication division, located in Burbank and the
Republic of Singapore, assembles and distributes television programming via
satellite to viewers in the United States, Canada and Asia. The television
division, located in Burbank, Hollywood, Universal City, Santa Monica and San
Francisco, California, assembles film or video principal photography into a form
suitable for network, syndicated, cable or foreign television. The film and
animation division, located in Santa Monica, digitally creates and manipulates
images in high-resolution formats for use in feature films.
Organization. On February 2, 1998, the Company acquired all the outstanding
shares of capital stock of Visualize d/b/a Pacific Ocean Post ("POP"). The
purchase price of the transaction was $30.1 million, of which $25.4 million was
paid in cash, $1.2 million was represented by promissory notes, and $3.5 million
represented transaction costs.
On May 4, 1998, the Company, through its wholly owned subsidiary VSDD
Acquisition Corp., acquired all of the outstanding ownership interests in
Symphonic Video LLC and Digital Doctors LLC from their parent companies Video
Symphony, Inc. and Digital Doctors, Inc. (collectively "VSI"). In this
transaction, the Company effectively acquired all of the operations of VSI. The
purchase price of the transaction was $3.3 million, of which $3.1 million was
paid in the Company's common stock and $0.2 million represented transaction
costs.
On September 18, 1998, the Company acquired all the outstanding shares of
capital stock of MSCL, Inc. ("Encore") and the real estate occupied by Encore.
The purchase price of the transaction was approximately $46.0 million. This
amount includes $41.9 million paid in cash to the Encore shareholders (including
$11.2 million for the purchase of real estate), $2.0 million in estimated
transaction costs, and the issuance of 486,486 shares of Company common stock
valued at $4.38 per share.
On April 29, 1999, the Company acquired all of the outstanding shares of
capital stock of TVP Group Plc ("TVP"), a London based provider of
postproduction services for approximately $10.0 million in cash, including the
repayment of debt. In addition, the Company is required to pay the former
shareholders of TVP up to an additional $0.8 million (the "Deferred
Consideration") if, within the first twelve months following the TVP
acquisition, (1) the Company acquires another U.K. company engaged in a line of
business similar to that of TVP, or (2) TVP achieves certain operating results.
On May 25, 1999, the Company acquired all of the outstanding shares of
capital stock of TVi Limited ("TVi") from Carlton Communications Plc, a London
based provider of postproduction services, for approximately $10.1 million in
cash. Upon completion of the TVi acquisition, the Company paid out
approximately $0.4 million of the Deferred Consideration.
On April 8, 1999, Warburg, Pincus Equity Partners, L.P. and certain
affiliates ("Warburg, Pincus") acquired 10.2 million shares of the Company's
common stock, comprised of both newly issued shares and existing shares, for
approximately $80.0 million. Under the terms of the Agreement, Warburg, Pincus
acquired approximately 6.6 million common shares from the Company for $52.7
million and received a warrant to purchase 1.1 million shares with an exercise
price of $15.00 per share. In addition, Warburg, Pincus acquired 3.1 million of
the outstanding shares currently held by Technical Services Partners, L.P.
("TSP"), a limited partnership controlled by Steinhardt Management Company,
Inc., for approximately $23.4 million. An additional 498,000 shares were
purchased for approximately $4.0 million from the Company's founders, who have
entered into long-term employment contracts and who continue to have a
significant equity interest in the Company. Concurrently with the closing of
the transaction, the holder of all outstanding shares of the Company's preferred
stock converted all of its preferred shares into 2,250,000 shares of common
stock.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company, POP, VSI, Encore, TVP and TVi, and the Warburg,
Pincus transaction as if such transactions had occurred at the beginning of
fiscal 1998 after giving effect to certain adjustments, including amortization
of goodwill, revised depreciation based on estimated fair market values,
utilization of net operating losses, revised interest expense based on the terms
of the acquisition debt and equity financing and elimination of certain
acquisition related costs. The pro forma summary does not necessarily reflect
the results of operations that actually would have occurred had the foregoing
transactions been consummated on the dates set forth above (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
May 3, 1998 May 2, 1999
----------- -----------
<S> <C> <C>
Revenues.......................................... $178,611 $169,568
Net income........................................ 11,968 10,277
Earnings per common share
Basic........................................ $ 0.61 $ 0.52
Diluted...................................... 0.60 0.52
</TABLE>
6
<PAGE>
FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation (continued)
Basis of Presentation. The accompanying consolidated financial statements of
Four Media Company and its subsidiaries as of August 2, 1998 and May 2, 1999 and
for the nine and three month periods ended May 3, 1998 and May 2, 1999 have been
prepared in accordance with generally accepted accounting principles and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. The balance
sheet at August 2, 1998 was derived from audited financial statements included
in the Company's Form 10-K for the fiscal year ended August 2, 1998 (the "Form
10-K"). The financial statements at May 2, 1999 and for the nine and three month
periods ended May 3, 1998 and May 2, 1999 have not been audited by independent
accountants, but include all adjustments (consisting of normal recurring
adjustments) which are, in management's opinion, necessary for a fair
presentation of the financial condition, results of operations and cash flows
for such periods. However, these results are not necessarily indicative of
results for any other interim period or for the full year.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to requirements of the Securities and Exchange Commission.
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K.
The accompanying financial statements as of August 2, 1998 and for the nine
and three months ended May 3, 1998 and May 2, 1999 are presented on a
consolidated basis and include the accounts of Four Media Company and its wholly
owned subsidiaries 4MC-Burbank, Inc., Digital Magic Company, Four Media Company
Asia PTE Ltd, Anderson Video Company, Co3, Visualize (dba POP), POP Animation,
VSDD Acquisition Corp. MSCL, Inc. (dba Encore), and TVP. All material inter-
company accounts and transactions have been eliminated in consolidation.
2. Earnings Per Share
Effective with the period ended May 3, 1998, the Company adopted the
earnings per share calculation and disclosure requirements of SFAS No. 128,
"Earnings per Share". The table below demonstrates the earnings per share
calculations for the periods presented in thousands except per share data.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
May 3, 1998 May 2, 1999
----------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net income...................... $2,045 - $6,983 -
Basic EPS....................... 2,045 9,553 $0.22 6,983 11,130 $0.63
===== =====
Effects of Dilutive Securities:
Options and convertible
preferred stock............. - 973 - 1,907
------ ------ ------ ------
Diluted EPS.................... $2,045 10,526 $0.19 $6,983 13,037 $0.54
====== ====== ===== ====== ====== =====
Options and warrants omitted... 885 7,470
====== ======
</TABLE>
7
<PAGE>
FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Earnings Per Share (continued)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
May 3, 1998 May 2, 1999
----------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net income..................... $1,127 - $2,685 -
Basic EPS...................... 1,127 9,553 $0.12 2,685 12,824 $0.21
====== ===== ====== =====
Effects of Dilutive Securities:
Options and convertible
preferred stock........... - 1,659 - 1,562
------ ------ ------ ------
Diluted EPS.................... $1,127 11,212 $0.10 $2,685 14,386 $0.19
====== ====== ===== ====== ====== =====
Options and warrants omitted... 885 7,470
====== ======
</TABLE>
The Company incurred an extraordinary loss of $2.4 million for the three
and nine months ended May 3, 1998. This resulted in a net loss of $1.3 million
and $0.4 million for the three and nine months ended May 3, 1998, respectively.
Basis EPS and diluted EPS after the extraordinary loss was ($0.14) and ($0.12),
respectively, for the three months ended May 3, 1998 and ($0.04) and ($0.04),
respectively, for the nine months ended May 3, 1998.
Certain options were omitted in 1998 and 1999 because the exercise prices
(between $6.68 and $10.00) exceeded the average price during the periods.
3. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income
(SFAS No. 130)." The Company adopted SFAS No. 130 beginning in the first
quarter of fiscal 1999. Comprehensive income is defined as all changes in
shareholders' equity, except those resulting from investments by or
distributions to shareholders. The Company's comprehensive income is as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------------- ---------------------------------
May 3, May 2, May 3, May 2,
1998 1999 1998 1999
---------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Net income.......................... $(404) $6,983 $(1,322) $2,685
Foreign currency translation
Adjustments........................ (391) 117 570 (85)
----- ------ ------- ------
Comprehensive income (loss)......... $(795) $7,100 $ (752) $2,600
===== ====== ======= ======
</TABLE>
4. Foreign Exchange
Substantially all of the Company's foreign transactions are denominated in
foreign currencies, including the liabilities of its foreign subsidiaries, 4MC
Asia, TVP, and TVi. Although the Company's foreign transactions are not
generally subject to foreign exchange transaction gains or losses, the financial
statements of its foreign subsidiaries are translated into United States dollars
as part of the Company's consolidated financial reporting. Fluctuations in the
exchange rate therefore will affect the Company's consolidated balance sheets
and statements of operations. Until the recent Asian economic difficulties, the
Singapore dollar and British pound have been stable relative to the United
States dollar. However, during fiscal 1998, the Singapore dollar lost
approximately 20% of its value relative to the U.S. dollar.
5. Legal Proceedings
On March 16, 1999, the Company entered into a settlement agreement with the
International Alliance of Theatrical Stage Employees ("IATSE") relating to
several matters pending before the National Labor Relations Board ("NLRB").
Under the terms of the settlement agreement, the Company agreed to enter into a
collective bargaining agreement with IATSE which affects 110 employees and to
pay an aggregate of approximately $240,000 in claims for back pay from certain
current and former employees. In consideration therefor, IATSE has agreed to
cease all negative publicity against the Company and to dismiss all actions
pending before the NLRB.
8
<PAGE>
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Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
The following should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and
within the Company's Form 10-K for the fiscal year ended 1998. When used in the
following discussion, the words "believes", "anticipates", "intends",
"projects", "expects" and similar expressions are intended to identify forward-
looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof.
Overview
The Company is a leading provider of technical and creative services
to producers and distributors of television programming, television commercials,
feature films and other entertainment content, as well as to owners of film and
television libraries. These services include the processing, enhancement,
storage and distribution of film and video from the point it leaves the camera
until it is shown, in various formats, to audiences around the world. The
Company's customers include major television and film production studios such as
Paramount Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal
Pictures, The Walt Disney Company and Warner Bros., as well as independent
producers and distributors located in the United States, Europe and Asia.
While the Company believes that it operates in one business segment,
which is providing services to the entertainment industry, the Company has
organized its activities into four divisions: mastering and distribution,
broadcast and syndication, television and film and animation services. The
mastering and distribution division, located in Burbank, Universal City and San
Francisco, California and London, England, manages, formats and distributes
entertainment content worldwide. The broadcast and syndication division, located
in Burbank and the Republic of Singapore, assembles and distributes television
programming via satellite to viewers in the United States, Canada and Asia. The
television division, located in Burbank, Hollywood, Universal City, Santa
Monica, and San Francisco, California, assembles film or video principal
photography into a form suitable for network, syndicated, cable or foreign
television. The film and animation division, located in Santa Monica, digitally
creates and manipulates images in high-resolution formats for use in feature
films.
The Company believes that EBITDA is an important measure of its
financial performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges. The Company's investments in new infrastructure, machine
capacity and technology have produced a relatively high depreciation expense and
will remain a significant non-cash charge to earnings. It is the Company's
policy to depreciate equipment and other capitalized items over a period of
three to seven years. EBITDA is calculated before depreciation and amortization
charges and, in businesses with significant non-cash expenses, is widely used as
a measure of cash flow available to pay interest, repay debt, make acquisitions
or invest in capital equipment and new technologies. As a result, the Company
intends to report EBITDA as a measure of financial performance. EBITDA does not
represent cash generated from operating activities in accordance with generally
accepted accounting principles ("GAAP") and should not be considered in
isolation or as a substitute for other measures of performance prepared in
accordance with GAAP. EBITDA does not reflect that portion of the Company's
capital expenditures which may be required to maintain the Company's market
share, revenues and leadership position in its industry. Moreover, not all
EBITDA will be available to pay interest or repay debt. The Company's
presentation of EBITDA may not be comparable to similarly titled measures
reported by other companies.
9
<PAGE>
Three Months Ended May 2, 1999 Compared To Three Months Ended May 3, 1998.
Revenues. Total revenues for the three months ended May 2, 1999 increased
31.7% to $51.5 million compared to $39.1 million for the three months ended May
3, 1998. The revenue increase was attributable primarily to the factors set
forth below.
Mastering and distribution revenues for the three months ended May 2, 1999
increased 20.9% to $11.0 million compared to $9.1 million for the three months
ended May 3, 1998. The major components of this increase include increased
professional duplication revenues ($2.3 million) offset be decreased laboratory
revenues ($0.4 million). Of the total increase, $1.8 million relates to the
acquisition of Encore in September 1998.
Broadcast and syndication revenues for the three months ended May 2, 1999
increased 5.2% to $6.1 million compared to $5.8 million for the three months
ended May 3, 1998. This increase is attributed to revenues recognized by the
Company's Singapore operation for broadcast services provided to Nickelodeon
beginning in November 1998.
Television revenues for the three months ended May 2, 1999 increased 66.8%
to $32.2 million compared to $19.3 million for the three months ended May 3,
1998. The major components of this increase include telecine revenues ($4.0
million), editorial revenues ($6.6 million), visual effects revenues ($1.8
million), and duplication revenues ($0.5 million). These revenue increases are
primarily attributable to the addition of the sound editorial department ($0.6
million), VSI acquired in May 1998 ($1.4 million), and Encore acquired in
September 1998 ($11.3 million).
Film and animation revenues for the three months ended May 2, 1999
decreased 55.1% to $2.2 million compared to $4.9 million for the three months
ended May 3, 1998. This decrease is the result of a decline in the number of
feature film projects currently in the marketplace due to a delay by the major
studios in approving new production on large budget action and effects feature
films.
Gross Profit. Gross profit for the three months ended May 2, 1999
increased 44.7% to $22.0 million (42.7% of revenues) compared to $15.2 million
(38.9% of revenues) for the three months ended May 3, 1998. The increase of
3.8% in the Company's gross profit as a percent of revenues was attributable to
a 2.4% reduction in personnel costs, a 2.5% reduction in material costs, offset
by a 1.1% increase in outside service costs as a percentage of revenues. These
reductions are the result of the Company's continued ability to leverage its
existing cost structure to operate its expanded operations.
Sales, General, and Administrative Expenses. Sales, general, and
administrative expenses for the three months ended May 2, 1999 increased 38.3%
to $8.3 million (16.1% of revenues) compared to $6.0 million (15.3% of revenues)
for the three months ended May 3, 1998. The increase of 0.8% as a percent of
revenues was attributable to increased overhead costs associated with the Encore
acquisition.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the three months ended May 2, 1999 increased 39.3% to $7.8 million
compared to $5.6 million for the three months ended May 3, 1998. This increase
was primarily the result of capital expenditures added during fiscal 1998, the
acquisition of the equipment of POP, VSI, and Encore in February 1998, May 1998,
and September 1998, respectively, and the amortization of goodwill recorded as a
result of the POP, VSI, and Encore acquisitions.
Interest Expense. Interest expense for the three months ended May 2, 1999
increased 23.1% to $3.2 million compared to $2.6 million for the three months
ended May 3, 1998. This increase was attributable to additional long term
borrowings incurred by the Company to fund the POP and Encore acquisitions in
February 1998 and September 1998, respectively, pay loan fees and other costs
associated with the Company's debt refinancing, which occurred in February 1998,
and to fund capital expenditures in fiscal 1998 and fiscal 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA
for the three months ended May 2, 1999 increased 48.9% to $13.7 million compared
to $9.2 million for the three months ended May 3, 1998. The increase in EBITDA
results from an increase in revenues and gross profit offset by an increase in
selling, general, and administrative expenses. The increase in EBITDA includes
EBITDA contributed by VSI ($0.5 million), and Encore ($3.5 million).
10
<PAGE>
Nine Months Ended May 2, 1999 Compared To Nine Months Ended May 3, 1998.
Revenues. Total revenues for the nine months ended May 2, 1999 increased
56.7% to $148.9 million compared to $95.0 million for the nine months ended May
3, 1998. The revenue increase was attributable primarily to the factors set
forth below.
Mastering and distribution revenues for the nine months ended May 2, 1999
increased 28.4% to $33.0 million compared to $25.7 million for the nine months
ended May 3, 1998. The major components of this increase include increased
professional duplication revenues ($6.9 million), and laboratory revenues ($0.4
million). Of the total increase, $4.8 million relates to the acquisition of
Encore in September 1998.
Broadcast and syndication revenues for the nine months ended May 2, 1999
increased 1.2% to 17.1 million compared to $16.9 million for the nine months
ended May 3, 1998. This increase is attributed to revenues recognized by the
Company's Singapore operation for broadcast services provided to Nickelodeon
beginning in November 1998.
Television revenues for the nine months ended May 2, 1999 increased 110.7%
to $94.2 million compared to $44.7 million for the nine months ended May 3,
1998. The major components of this increase include increased sound revenues
($5.2 million), telecine revenues ($14.1 million), editorial revenues ($16.6
million), visual effects revenues ($10.0 million), and duplication revenues
($3.6 million). These revenue increases are primarily attributable to the
addition of the sound editorial department ($1.7 million), POP acquired in
February 1998 ($8.9 million), VSI acquired in May 1998 ($4.2 million), and
Encore acquired in September 1998 ($29.6 million).
Film and animation revenues for the nine months ended May 2, 1999 decreased
41.6% to $4.5 million compared to $7.7 million for the nine months ended May 3,
1998. This decrease is the result of a decline in the number of feature film
projects currently in the marketplace due to a delay by the major studios in
approving new production on large budget action and effects feature films.
Gross Profit. Gross profit for the nine months ended May 2, 1999 increased
81.3% to $62.9 million (42.2% of revenues) compared to $34.7 million (36.6% of
revenues) for the nine months ended May 3, 1998. The increase of 5.6% in the
Company's gross profit as a percent of revenues was attributable to a 2.3%
reduction in personnel costs, a 2.4% reduction in material costs, and a .9%
reduction in outside service costs as a percentage of revenues. These reductions
are the result of the Company's continued ability to leverage its existing cost
structure to operate its expanded operations.
Sales, General, and Administrative Expenses. Sales, general, and
administrative expenses for the nine months ended May 2, 1999 increased 81.8% to
$24.9 million (16.7% of revenues) compared to $13.7 million (14.4% of revenues)
for the nine months ended May 3, 1998. The increase of 2.3% as a percent of
revenues was attributable to increased overhead costs associated with the Encore
acquisition.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the nine months ended May 2, 1999 increased 51.9% to $20.5 million
compared to $13.5 million for the nine months ended May 3, 1998. This increase
was primarily the result of capital expenditures added during fiscal 1998, the
acquisition of the equipment of POP, VSI, and Encore in February 1998, May 1998,
and September 1998, respectively, and the amortization of goodwill recorded as a
result of the POP, VSI, and Encore acquisitions.
Interest Expense. Interest expense for the nine months ended May 2, 1999
increased 94.5% to $10.5 million compared to $5.4 million for the nine months
ended May 3, 1998. This increase was attributable to additional long term
borrowings incurred by the Company to fund the POP and Encore acquisitions in
February 1998 and September 1998, respectively, pay loan fees and other costs
associated with the Company's debt refinancing, which occurred in February 1998,
and to fund capital expenditures in fiscal 1998 and fiscal 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA
for the nine months ended May 2, 1999 increased 81.0% to $38.0 million compared
to $21.0 million for the nine months ended May 3, 1998. The increase in EBITDA
results from an increase in revenues and gross profit offset by an increase in
selling, general, and administrative expenses. The increase in EBITDA includes
EBITDA contributed by POP ($0.9 million), VSI ($1.9 million), and Encore ($9.5
million).
11
<PAGE>
Liquidity and Capital Resources
Net Cash Provided by (Used in) Operating Activities. The Company's net
cash provided by (used in) operating activities was $17.7 million for the nine
months ended May 2, 1999 compared to $(3.9) million for the nine months ended
May 3, 1998. The increase was primarily attributable to the increase in income
before depreciation and amortization for the nine months ended May 2, 1999.
Net Cash Provided by Financing Activities. The Company's net cash provided
by financing activities was $69.1 million for the nine months ended May 2, 1999
compared to $44.6 million for the nine months ended May 3, 1998. During the
nine month period ended May 2, 1999, the Company borrowed an additional $81.7
million under its existing credit facility. These funds were used to fund the
Encore acquisition (including the repayment of most of Encore's outstanding
debt), purchase a building in Burbank and for working capital purposes. In
addition, the Company received net proceeds of $51.0 million from the Warburg,
Pincus transaction. These funds were used to repay $43.7 million owed under the
existing credit facility and to fund the TVP acquisition.
The Company believes that the cash flow from operations, combined with the
Company's borrowing capabilities, will be sufficient to meet its anticipated
working capital and capital expenditure requirements through the end of 1999.
Year 2000 Compliance Issue
State of Readiness. The Company is currently working to resolve the
potential impact of the Year 2000 problem on its computer systems and
computerized equipment. The Year 2000 problem is a result of computer programs
having been written using two rather than four digits to identify an applicable
year. Any information technology systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
problem also extends to non-information technology systems that rely on embedded
chip systems.
The Company has divided the Year 2000 readiness task by the following
functional areas: information technology ("IT") infrastructure, business
systems, operational systems, facilities and business partners. IT
infrastructure includes the Company's wide area networks, local area networks,
servers, desktop computers and telephone systems. Business systems include
mainframe and midrange computer hardware and applications. Operational systems
include equipment used for the Company's day-to-day operations in the
postproduction business including telecine machines, satellite broadcasting
systems, editing and graphics equipment. Facilities include fire, life, and
safety equipment, elevators, alarm systems, and environmental monitoring
equipment. Business partners include suppliers and vendors, financial
institutions, benefit providers, payroll services, and customers. The Company
has appointed a task force chaired by its chief technology officer and
coordinated by its information systems manager. Representatives of each of the
Company's divisions are included on the task force, as well as an attorney from
its legal department.
The Company has developed a four phase approach to resolving the Year 2000
issues that are reasonably within its control. The program is being addressed
separately by each of the five functional Year 2000 areas of the Company. The
four phases of the program include inventory, assessment, remediation and
testing, and implementation. The inventory phase consists of a company wide
inventory of computer hardware, software, business applications, and operational
and facilities equipment. The inventory is then used to generate a master
assessment list and identify equipment vendors. The assessment phase consists
of identifying at-risk systems and products and ranking the products by
criticality to the business. Each product is then assigned to a task force
member to determine whether the product is in compliance and, if not, whether
the system should be upgraded or replaced. The remediation and testing phase
consists of developing a project plan, defining and implementing steps required
to bring the systems or products into compliance, defining a test plan to verify
compliance, and documenting the test results. The final phase is implementing
remediation on systems and products company wide.
The Company has been in the process of analyzing and upgrading its IT
systems (i.e., its IT infrastructure and business systems) since early 1998,
including upgrading all of its PC hardware, operating systems, and office
automation software. The Company's business applications, which include human
resources and financial software, as well as the software used for inventory,
scheduling, work orders and job management, has been fully upgraded to a Year
2000 compliant release. With respect to the remaining IT systems, as well as the
non-IT systems, the Company has completed its inventory and assessment phases
and has substantially completed its testing phase. The Company has targeted
September 30, 1999 for completion of all phases of its compliance program in
both IT and non-IT systems.
12
<PAGE>
Third Parties. Like every other business, the Company is at risk from
potential Year 2000 failures on the part of its major business counterparts,
including suppliers, vendors, financial institutions, benefit providers, payroll
services, and clients, as well as potential failures in public and private
infrastructure services, including electricity, water, transportation, and
communications. The Company has initiated communications with significant third
party businesses to assess their efforts in addressing Year 2000 issues and is
in the process of determining the Company's vulnerability if these third parties
fail to remediate their Year 2000 problems. There can be no guarantee that the
systems of third parties will be timely remediated, or that such parties'
failure to remediate Year 2000 issues would not have a material adverse effect
on the Company.
Costs. Costs incurred to date in addressing the Year 2000 issue have not
been material and are being funded through operating cash flows. The Company
anticipates that it may incur significant costs associated with replacing non-
compliant systems and equipment. In addition, the Company anticipates that it
will incur additional costs in the form of redeployment of internal resources
from other activities. The Company does not expect these redeployments to have
a material adverse effect on other ongoing business operations of the Company.
Based upon the information currently available to the Company, costs associated
with addressing the Year 2000 issue are expected to be between $250,000 to
$500,000.
Risks. System failures resulting from the Year 2000 problem could
potentially affect operations and financial results in all aspects of the
Company's business. For example, failures could affect all aspects of the
Company's television, film and animation, manufacturing and distribution, and
broadcast and syndication operations, as well as inventory records, payroll
operations, security, billing, and collections. At this time the Company
believes that its most likely worst case scenario involves potential disruption
in areas in which the Company's operations must rely on third parties whose
systems may not work properly after January 1, 2000. As a result of Year 2000
related failures of the Company's or third parties' systems, the Company could
suffer a reduction in its operations. Such a reduction may result in a
fluctuation in the price of the Company's common stock.
Contingency Plan. The Company does not currently have a comprehensive
contingency plan with respect to the Year 2000 problem. However, the Company
has created a task force comprised of accounting, legal, and technical employees
that is prepared to address any Year 2000 issues as they arise. The Company
will continue to develop its contingency plan during 1999 as part of its ongoing
Year 2000 compliance effort.
POP Tax Audit
The Internal Revenue Service is currently auditing the 1994 and 1995 United
States federal income tax returns of one of the Company's subsidiaries, POP. The
Company believes that it has established adequate reserves on its books and
records for any additional tax liability that may result from such audit.
Further, the Company is in the process of preparing and intends to file
original United States federal and California income and franchise tax returns
for POP's 1997 taxable year and 1998 stub-period taxable year.
13
<PAGE>
- -------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------------------
Interest Rate Risks
As of May 2, 1999, the Company had fixed interest rate debt of
approximately $16.3 million and floating interest rate debt of approximately
$152.2 million. The floating interest rates are based upon the prevailing LIBOR
rate. For floating rate debt, interest rate changes do not generally effect the
market value of debt but do impact future earnings and cash flows, assuming
other factors are held constant. Conversely, for fixed rate debt, interest rate
changes do effect the market value of debt but do not impact earnings or cash
flows. A hypothetical one percentage change in the prevailing LIBOR rate would
impact earnings of the Company by $1.5 million per year. A similar change in the
interest rate would impact the total fair value of the Company's fixed rate debt
by less than $0.2 million.
Foreign Currency Risk
Substantially all of the Company's foreign transactions are denominated in
foreign currencies, including the liabilities of its foreign subsidiaries, 4MC
Asia, TVP, and TVi. Although the Company's foreign transactions are not
generally subject to foreign exchange transaction gains or losses, the financial
statements of its foreign subsidiaries are translated into United States dollars
as part of the Company's consolidated financial reporting. Fluctuations in the
exchange rate therefore will affect the Company's consolidated balance sheets
and statements of operations. Until the recent Asian economic difficulties,
the Singapore dollar and British pound have been stable relative to the United
States dollar. However, during fiscal 1998, the Singapore dollar lost
approximately 20% of its value relative to the U.S. dollar.
The Company's total revenues denominated in a currency other than U.S.
dollars for the nine months ended May 2, 1999 were approximately 5.5% of total
revenues. The Company's net assets maintained in a functional currency other
than U.S. dollars at May 2, 1999 were approximately 7.0% of total net assets.
14
<PAGE>
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PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings.
On March 16, 1999, the Company entered into a settlement
agreement with the International Alliance of Theatrical Stage
Employees ("IATSE") relating to several matters pending before the
National Labor Relations Board ("NLRB"). Each of these matters were
previously disclosed in the Company's Annual Report on Form 10-K
for the fiscal year ended August 2, 1998. Under the terms of the
settlement agreement, the Company agreed to enter into a collective
bargaining agreement with IATSE which effects 110 employees and to
pay an aggregate of approximately $240,000 in claims for back pay
from certain current and former employees. In consideration
therefor, IATSE has agreed to cease all negative publicity against
the Company and to dismiss all actions pending before the NLRB.
Item 2. Changes in Securities.
On April 8, 1999, the Company sold Warburg, Pincus 6,582,607
newly issued shares of its common stock for approximately $52.7
million and issued Warburg, Pincus a warrant to purchase an
additional 1,100,000 shares of common stock at an exercise price
of $15.00 per share. In addition, on April 8, 1999, in connection
with the Warburg, Pincus transaction, the Fleming Funds converted
150,000 shares of Series A Convertible Preferred Stock held by the
Fleming Funds into 2,250,000 shares of the Company's common stock.
Each of the foregoing were private placements to accredited
investors and therefore exempt from registration under Section 4(2)
of the Securities Act. The Company used the proceeds from the
Warburg, Pincus transaction to repay $43.7 million owed under its
revolving credit facility, and for other general corporate
purposes.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's special meeting of stockholders held on March
18, 1999, the Company's stockholders approved each of the proposals
relating to the Warburg, Pincus transaction. The voting results for
each of the proposals are as follows:
(i) Approval of the issuance to Warburg, Pincus of (A) 6,582,607
shares of common stock of the Company, (B) a warrant to purchase
1,100,000 additional shares of common stock and (C) the shares of
common stock issuable upon exercise of such warrant.
FOR: 7,360,416 AGAINST: 406,902
ABSTAIN: 23,210 NON-VOTES: 1,482,075
(ii) Approval of an amendment to the Company's 1997 Stock Plan to
(A) increase the number of shares of common stock authorized for
issuance thereunder, (B) change the annual increase in the maximum
number of shares authorized for issuance thereunder and (C) modify
the annual stock option award limits for Robert T. Walston, Jeffrey
J. Marcketta and John H. Donlon.
FOR: 5,785,029 AGAINST: 1,975,629
ABSTAIN: 29,060 NON-VOTES: 1,482,075
(iii) Ratification of the election of seven directors of the
Company, divided into three classes as follows:
Term Expiring in 2000 Term Expiring in 2001 Term Expiring in 2002
--------------------- --------------------- ---------------------
William Amon Jeffrey J. Marcketta Robert T. Walston
William C. Scott Eytan Shapiro Sidney Lapidus
David E. Libowitz
FOR: 8,833,791 AGAINST: 416,642
ABSTAIN: 21,360 NON-VOTES: 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
<S> <C>
a. Exhibits
2.1 Share Capital Sale and Purchase Agreement, dated as of April 29, 1999, by and
between Four Media Company (UK) Limited and TVP Group Plc (incorporated herein
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated
May 14, 1999).
*10.1 First Amendment to Four Media Company 1997 Stock Plan
*10.2 Employment Agreement by and between the Company and Robert T. Walston
*10.3 Employment Agreement by and between the Company and Jeffrey J. Marcketta
*10.4 Employment Agreement by and between the Company and Christopher Phillips
*10.5 Employment Agreement by and between the Company and John H. Donlon
*10.6 Employment Agreement by and between the Company and Gavin W. Schutz
*10.7 Employment Agreement by and between the Company and Robert Bailey
*10.8 Demand Promissory Note by and between the Company and Robert T. Walston
10.9 Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc
and Simon Paul Kay (incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated May 14, 1999).
10.10 Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc
and Nicholas Paul Pannaman (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated May 14, 1999).
10.11 Common Stock Purchase Warrant issued by the Company to Warburg, Pincus, dated
April 8, 1999 (incorporated herein by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated April 23, 1999).
10.12 Registration Rights Agreement between the Company and Fleming US Discovery
Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P., dated April
8, 1999 (incorporated herein by reference to Exhibit 99.9 to the Company's
Current Report on Form 8-K dated April 23, 1999).
10.13 Registration Rights Agreement between the Company and Warburg, Pincus Equity
Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands
Equity Partners III, dated as of April 8, 1999 (incorporated herein by
reference to Exhibit 99.10 to the Company's Current Report on Form 8-K dated
April 23, 1999).
16.1 Letter from PricewaterhouseCoopers LLP (incorporated herein by reference to
Exhibit 16.1 to the Company's Current Report on Form 8-K/A dated April 21,
1999, amending the Company's Current Report on Form 8-K dated April 15, 1999).
*27.1 Financial Data Schedule
* Filed herewith.
</TABLE>
b. Reports on Form 8-K
1. Form 8-K filed March 23. 1999 announcing stockholder
approval for the Warburg, Pincus transaction.
2. Form 8-K filed April 15, 1999 relating to the change
in the registrants certifying accountants.
3. Form 8-K-A filed April 21, 1999 relating to the
change in the registrants certifying accountants.
4. Form 8-K filed April 23, 1999 relating to the
completion of the Warburg, Pincus transaction.
5. Form 8-K filed May 14, 1999 announcing the
acquisition of TVP.
6. Form 8-K filed June 7, 1999 announcing the
acquisition of TVi.
7. Form 8-K/A filed June 10, 1999 relating to the TVP
acquisition.
15
<PAGE>
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.
FOUR MEDIA COMPANY
Date: June 10, 1999 By: /s/ Christopher M.R. Phillips
------------------------------------
Christopher M.R. Phillips
Executive Vice President and
Chief Financial Officer
16
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO
FOUR MEDIA COMPANY 1997 STOCK PLAN
THIS FIRST AMENDMENT TO FOUR MEDIA COMPANY 1997 STOCK PLAN, dated as of
January 18, 1999, is made and adopted by FOUR MEDIA COMPANY, a Delaware
corporation (the "Company"). Capitalized terms used but not otherwise defined
herein shall have the respective meanings ascribed to them in the 1997 Stock
Plan, as amended (as defined below).
RECITALS
WHEREAS, the Company maintains the Four Media Company 1997 Stock Plan (as
amended, the "1997 Stock Plan");
WHEREAS, the Company desires to amend the 1997 Stock Plan to, among other
things, increase the number of shares of common stock of the Company subject
thereto;
WHEREAS, this First Amendment was adopted by the Board of Directors of the
Company on January 17, 1999; and
WHEREAS, this First Amendment was approved by the stockholders of the
Company on March 18, 1999.
NOW, THEREFORE, in consideration of the foregoing, the Company hereby
amends the 1997 Stock Plan as follows:
1. The first paragraph of Section 3 of the 1997 Stock Plan is hereby
deleted in its entirety and replaced with the following paragraph:
"3. Stock Subject to the Plan. Subject to Section 12, the maximum
-------------------------
aggregate number of Shares which may be subject to option and sold under
the Plan is 6,271,464 Shares (the "Available Shares"); provided, however,
that beginning January 1, 2000, the number of Shares shall be increased
each January 1st by 650,000 Shares. In no event, except as subject to
Section 12, shall more than 1,650,000 Shares be available for issuance
pursuant to Incentive Stock Option grants under the Plan. Of the Available
Shares, the maximum aggregate number of Shares which may be subject to
Special Options (as defined below) granted pursuant to the Employment
Agreements (as defined below) is 3,200,000 Shares. For purposes of this
Plan, "Special Options" shall mean those Options granted to the Chief
Executive Officer of the Company, the President and Chief Administrative
Officer of the Company, and the President - Broadcast, Syndication and
Manufacturing of the Company (collectively, the "Executives"),
<PAGE>
pursuant to those certain Employment Agreements (the "Employment
Agreements"), each dated as of January 1, 1999, between the Company and
each of the Executives."
2. Paragraph 5(d)(i) of the 1997 Stock Plan is hereby deleted in its
entirety and replaced with the following paragraph:
"(i) Except with respect to the Special Options, no Employee shall be
granted, in any fiscal year of the Company, Options and Stock Purchase
Rights to purchase more than 175,000 Shares. With respect to the Special
Options, the Chief Executive Officer of the Company shall not be granted,
in the fiscal year of the Company ending August 1, 1999, Special Options to
purchase more than 2,500,000 Shares, the President and Chief Administrative
Officer of the Company shall not be granted, in the fiscal year of the
Company ending August 1, 1999, Special Options to purchase more than
500,000 Shares, and the President - Broadcast, Syndication and
Manufacturing of the Company shall not be granted, in the fiscal year of
the Company ending August 1, 1999, Special Options to purchase more than
200,000 Shares."
3. This First Amendment shall be and is hereby incorporated in and forms a
part of the 1997 Stock Plan.
4. All other terms and provisions of the 1997 Stock Plan shall remain
unchanged except as specifically modified herein.
5. The 1997 Stock Plan, as amended by this First Amendment, is hereby
ratified and confirmed.
6. This First Amendment shall be interpreted and enforced under the
internal laws of the State of California without regard to conflicts of laws
thereof.
[Signature Page to Follow]
2
<PAGE>
I hereby certify that the foregoing Amendment was duly adopted by the Board
of Directors of Four Media Company on January 17, 1999.
By: /s/ Robert T. Walston
-------------------------------
Robert T. Walston
Chairman and Chief Executive Officer
I hereby certify that the foregoing Amendment was approved by the
stockholders of Four Media Company on March 18, 1999.
By: /s/ Robert T. Walston
-------------------------------
Robert T. Walston
Chairman and Chief Executive Officer
S-1
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") shall be deemed dated as of January 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Robert T. Walston ("Executive").
INTRODUCTION
A. The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry.
B. The Company has executed a stock purchase agreement dated January 18,
1999 pursuant to which the Company has agreed to issue and an investor has
agreed to purchase 6,582,607 shares of the Company's common stock (the "Stock
Purchase Agreement").
C. The Company and Executive are both parties to that certain employment
contract dated October 1, 1996 (the "Original Agreement") a copy of which is
attached hereto as Exhibit A.
D. The Executive and Employee desire to (i) enter into a new employment
agreement upon the terms set forth in this Agreement and to (ii) terminate the
Original Agreement provided that the "Closing Date" (as such term is defined in
the Stock Purchase Agreement) has occurred on or before December 31, 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth, the
----------
Company hereby employs Executive, and Executive hereby accepts employment, as
Chief Executive Officer of the Company and, if so elected, Executive shall also
serve as Chairman of the Board.
1.2 Term. Subject to Article IV and Section 6.13 below, Executive's
----
employment hereunder shall be for a term of five (5) years commencing on the
date hereof and expiring at the close of business on the day prior to the fifth
anniversary of the date hereof (the "Term").
<PAGE>
1.3 Duties. During the Term, Executive shall perform such executive
------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of Directors
of the Company (the "Board"). Executive shall devote his entire productive
business time, attention and energies to the performance of his duties
hereunder. Executive shall use his best efforts to advance the interests and
business of the Company and its Affiliates. Executive shall abide by all rules,
regulations and policies of the Company, as may be in effect from time to time.
Notwithstanding the foregoing, Executive may act for his own account in passive-
type investments as provided in Section 5.3, or, with the consent of the Board,
as a member of other boards of directors, where the time allocated for those
activities does not materially interfere with or create a conflict of interest
with the discharge of his duties for the Company.
1.4 Reporting. All employees of the Company shall report to
---------
Executive and Executive shall report directly to the Board.
1.5 Exclusive Agreement. Executive represents and warrants to the
-------------------
Company that there are no agreements or arrangements, whether written or oral,
in effect which would prevent Executive from rendering his exclusive services to
the Company during the Term.
ARTICLE II
COMPENSATION
2.1 Compensation. For all services rendered by Executive hereunder
------------
and all covenants and conditions undertaken by him pursuant to this Agreement,
the Company shall pay, and Executive shall accept, as full compensation, the
amounts set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of
-----------
$500,000 ("Base Salary"), payable by the Company in accordance with the
Company's normal payroll practices applicable to senior executives but no less
frequently than monthly. The Base Salary shall be reviewed no less frequently
than annually during the Term for increase in the discretion of the Board. The
Base Salary shall not be decreased at any time, or for any purpose, during the
Term without Executive's prior written consent.
2.3 Annual Incentive Bonus. In addition to the Base Salary,
----------------------
Executive shall participate in an incentive bonus plan to be established and
administered by the Compensation Committee of the Board. The criteria on which
awards under such plan are based shall be set by the Board or the Compensation
Committee of the Board.
2.4 Deductions. The Company shall deduct from the compensation
----------
described in Sections 2.2 and 2.3 any federal, state or local withholding taxes,
social security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.
2
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2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.4) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
ARTICLE III
BENEFITS; EXPENSES
3.1 Benefits. During the Term, Executive shall be entitled to
--------
participate in such group life, health, accident, disability or hospitalization
insurance plans, pension plans and retirement plans as the Company may make
available to its other senior executive employees as a group, subject to the
terms and conditions of any such plans. Executive's participation in all such
plans shall be at a level, and on terms and conditions, that are commensurate
with his positions and responsibilities at the Company. During the Term, no
perquisite or special benefit made available to Executive as a senior executive
of the Company shall be materially reduced without his prior written consent.
3.2 Expenses. The Company agrees that Executive is authorized to
--------
incur reasonable expenses in the performance of his duties hereunder and in
promoting the business of the Company (including, without limitation, such
expenses incurred at the Lakeside Country Club). The Company shall from time to
time pay or reimburse Executive for the reasonable and necessary expenses
incurred by Executive in connection with the performance of his duties hereunder
if such expenses have been previously approved by the Company or if
reimbursement is otherwise appropriate in accordance with the Company's
established policies and if the Company receives such verification thereof as
the Company may require in order to qualify such expenses as deductible business
expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of
--------
four (4) work weeks of vacation per year following the date of this Agreement.
If Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by signing such applications and other written instruments as may
be required by the insurance companies to which application is made for such
insurance. Executive's failure to submit to such
3
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usual and customary medical and other examinations shall be deemed a material
breach of this Agreement.
3.5 Initial Stock Option Grant. Effective as of the date hereof, but
--------------------------
subject to the approval by the Company's shareholders of an amendment to the
Company's 1997 Stock Plan to increase the number of shares available for
issuance thereunder, the Company shall grant Executive an option (the "Option")
to purchase 2,500,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), at an exercise price of $8.00 per share. To the
extent not inconsistent with the terms of this Agreement, the Option shall be
subject to the terms of a stock option agreement in substantially the form
attached hereto as Exhibit B (the "Option Agreement"). The Option shall be
exercisable for ten (10) years after the date of grant except as otherwise
specifically provided herein.
The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):
(a) twenty percent (20%) of the shares covered by the Option
shall become exercisable on the first anniversary of the date of
grant;
(b) twenty percent (20%) of the shares covered by the Option
shall become exercisable on the second anniversary of the date of
grant;
(c) twenty percent (20%) of the shares covered by the Option
shall become exercisable on the third anniversary of the date of
grant;
(d) twenty percent (20%) of the shares covered by the Option
shall become exercisable on the fourth anniversary of the date of
grant; and
(e) twenty percent (20%) of the shares covered by the Option
shall become exercisable on the fifth anniversary of the date of
grant.
Notwithstanding the foregoing, all shares covered by the Option shall
vest and become exercisable upon the occurrence of any of the following events:
(i) a Termination Without Cause (as defined below), (ii) a Termination With Good
Reason (as defined below), (iii) a Change in Control (as defined below) of the
Company, or (iv) a termination due to death or Disability.
In the event that Executive incurs a termination of employment
for any reason other than a Termination With Cause or a resignation without Good
Reason prior to the expiration of the Term, any portion of the Option that has
become vested on or before the date of such termination (including without
limitation, any portion that becomes exercisable due to such termination) shall
remain exercisable for 180 days following the date of such termination. In the
event that Executive incurs a Termination With Cause or in the event Executive
resigns without Good Reason prior to the expiration of the Term, any portion of
the Option that has become vested on or before the date of such termination
(including without limitation, any portion that
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<PAGE>
becomes exercisable due to such termination) shall remain exercisable for ninety
(90) days following the date of such termination.
For the purposes of this Agreement, a "Change in Control" of the
Company shall be deemed to have occurred upon the happening of any one of the
following events:
(i) the acquisition by any Person (as defined below) of Beneficial
Ownership (as defined below) of fifty percent (50%) or more of
the combined voting power of the then outstanding voting
securities of the Company. For purpose of this Agreement, (A)
the term "Person" shall have the meaning set forth in Section
3(a)(9) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (I) the
Company or any of its subsidiaries, (II) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates (as defined in Rule 12b-2
promulgated under Section 12 of the Exchange Act), (III) an
underwriter temporarily holding securities pursuant to an
offering of such securities, (IV) a corporation owned, directly
or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
of the Company; or (V) any investment fund or other entity or
group of such funds or entities which control, are controlled
by, or are under common control with, E.M. Warburg, Pincus &
Co., LLC (collectively "Warburg").
(ii) the consummation by the Company of a reorganization, merger,
consolidation, (in each case, with respect to which persons who
were the stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own more than fifty percent (50%) of the combined
voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's
then outstanding voting securities) or a liquidation or
dissolution of the Company or the sale of all or substantially
all of the assets of the Company; or
(iii) the consummation by the Company of a Rule 13e-3 transaction (as
such term is defined under Rule 13c-3 of the Exchange Act) or a
transaction which otherwise results in the Company's Common
Stock ceasing to be required to be registered under the Exchange
Act;
provided, however, that, notwithstanding the foregoing, with respect to the
purchase by "Purchaser" (as such term is defined in the Stock Purchase
Agreement) of shares of the Company's Common Stock, pursuant to that certain
Securities Purchase Agreement by and between the Company and Purchaser, that
certain Stock Purchase Agreement by and between Purchaser, Technical Service
Partners, and Robert T. Walston, and that certain Stock Purchase Agreement by
and between Purchaser and John H. Donlon, Gavin W. Schutz, Robert Bailey, and
the estate of John Sabin (collectively, the "Purchase Agreements"), the
following provisions shall
5
<PAGE>
apply: (a) the signing of the Purchase Agreements shall not constitute a Change
of Control for purposes of this Agreement, (b) the approval by the Board or the
Company's shareholders of the transactions contemplated by the Purchase
Agreements shall not constitute a Change in Control for purposes of this
Agreement, and (c) the closing of the transactions contemplated by the Purchase
Agreements shall not constitute a Change of Control. Notwithstanding anything to
the contrary set forth in Section 3.5 so long as Warburg is the single largest
holder of the Company's outstanding voting securities, no "Change of Control"
shall be deemed to have occurred.
3.6 Other Long-Term Incentives. Executive shall be eligible for
--------------------------
other or additional long-term incentives in the discretion of the Board,
including without limitation additional stock option grants. Such incentive
awards shall be at a level, and on terms and conditions, that are commensurate
with his positions and responsibilities at the Company and appropriate in light
of corresponding awards to other senior executives of the Company.
3.7 Company Loan. The Company shall, on the Closing Date (as such
------------
term is defined in the Stock Purchase Agreement), loan Executive two million
dollars ($2,000,000) (the "Executive Loan"). The Executive Loan shall be
unsecured and shall bear interest at a rate set forth in the Note (as defined
below). The Executive Loan shall be evidenced by a promissory note (the "Note")
executed by Executive in favor of the Company in substantially the form attached
hereto as Exhibit C. The outstanding balance of the Executive Loan, if any, and
any accrued interest thereon shall be repaid no later than the date which is
thirty (30) days following the date of the fifth anniversary from the Closing
Date (as such term is defined in the Stock Purchase Agreement).
Notwithstanding the foregoing, the outstanding balance of the
Executive Loan, if any, and any accrued interest thereon shall automatically be
forgiven, and Executive shall have no payment obligation with respect thereto,
upon the occurrence of any of the following events:
(a) Executive incurs a Termination Without Cause or a Termination
With Good Reason during the Term or a termination for death or
disability; or
(b) a Change in Control of the Company occurs during the Term; or
(c) the Company achieves $327 million or more in Gross Operating
Revenues (as defined below) during the period beginning on the date of
the fourth anniversary of the Closing Date (as such term is defined in
the Stock Purchase Agreement) and ending 365 days thereafter (the
"Measurement Period"); or
(d) the Company achieves $87 million or more in Consolidated
EBITDA (as defined below) during the Measurement Period; or
(e) the Board, in its sole and absolute discretion, determines
that the Executive Loan shall be forgiven following the expiration of
the Measurement Period.
6
<PAGE>
For purposes of this Agreement, (i) "Gross Operating Revenues" shall
mean the aggregate gross revenues from operations (excluding revenues or losses
from any extraordinary nonrecurring events or transactions) of the Company and
its subsidiaries, determined in accordance with generally accepted accounting
principles consistently applied on a consolidated basis, and (ii) "Consolidated
EBITDA" shall mean the earnings before interest, taxes, depreciation and
amortization (excluding earnings or losses from any extraordinary nonrecurring
events or transactions) of the Company and its subsidiaries, determined in
accordance with generally accepted accounting principles consistently applied on
a consolidated basis.
Notwithstanding the foregoing, in the event of a Termination With
Cause or resignation without good reason during the Term, the outstanding
balance of the Executive Loan, if any, and any accrued interest thereon shall
automatically become immediately due and payable, without presentment, demand,
protest or other requirements of any kind.
3.8 Perquisites. During the Term, Executive shall participate in all
-----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his positions
and responsibilities at the Company, including, without limitation, first-class
travel accommodations on all commercial carriers for travel related to the
business of the Company, and shall receive such additional fringe benefits and
perquisites as the Company may, in its discretion, from time-to-time provide.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").
Notwithstanding the foregoing, no purported Termination With Cause
pursuant to (a), (b) or (c) of this Section 4.1 shall be effective unless all of
the following provisions shall have been complied with: (i) Executive shall be
given written notice by the Board of the intention to effect a Termination With
Cause, such notice (A) to state in detail the particular circumstances that
constitute the grounds on which the proposed Termination With Cause is based and
(B) to be given no later than 180 days after the Board first learns of such
circumstances; (ii) Executive shall have 15 days after receiving such notice in
which to cure such grounds, to the extent such
7
<PAGE>
cure is possible; (iii) if Executive fails to cure such grounds, he shall then
be entitled to a hearing before the Board, such hearing to be held within 20
days of his receiving such notice, provided that he requests such hearing within
15 days of receiving such notice; and (iv) if, within five days following such
hearing, the Board gives written notice to Executive confirming that, in the
judgment of at least a majority of the members of the Board, grounds for the
Termination With Cause set forth in the original notice exist, he shall
thereupon incur a Termination With Cause.
4.2 Termination of Employment Without Cause. During the Term, the
---------------------------------------
Company may at any time, in its sole discretion, terminate the employment of
Executive hereunder for reasons other than those set forth in Section 4.1 (a
"Termination Without Cause") by written notice to him. In such event, the
Company shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of
termination;
(b) an amount equal to Executive's monthly Base Salary in effect
on the date of termination for the remainder of the Term, payable as
and when such amounts would have been due and payable hereunder had
such termination not occurred (the "Severance Period"); and
(c) any reimbursement for expenses incurred in accordance with
Section 3.2.
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination. If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.
Executive acknowledges that the payments and benefits referred to in
this Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.3 Termination of Employment With Good Reason. In addition to any
------------------------------------------
other remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of Executive, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the
8
<PAGE>
assignment to Executive of duties that are materially inconsistent with or
materially impair his ability to perform the duties set forth herein; or (b) a
material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of employment to a
location more than 50 miles from such principal place of employment; or (d) a
breach by the Company of any material provision of this Agreement (a
"Termination With Good Reason").
In the event that a Termination With Good Reason occurs, Executive
shall have the same entitlements to the amounts and benefits as provided under
Section 4.2 for a Termination Without Cause.
Executive acknowledges that the payments and benefits referred to in
this Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.3, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.4 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with
Section 3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect
on such termination date for the lesser of (i) six (6) months or (ii)
the remainder of the Term, payable as and when such amounts would have
been due and payable hereunder had such termination not occurred. The
monthly Base Salary with respect to any period during which Executive
is Disabled shall be reduced by amounts payable to him under any
insurance plan sponsored by the Company, provided that Executive's
aggregate compensation during the period of Disability shall be equal
to 100% of his monthly Base Salary then in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties
hereunder for 180 consecutive days, and (b) he has utilized any and all benefits
available to him under state and federal laws and is either (i) unable to
reasonably and effectively carry out his duties with reasonable accommodations
by the Company or (ii) unable to reasonably and effectively carry out his duties
because any reasonable
9
<PAGE>
accommodation which may be required would cause the Company undue hardship. In
the event of a disagreement concerning Executive's perceived Disability,
Executive shall submit to such examinations as are deemed appropriate by three
practicing physicians specializing in the area of Executive's Disability, one
selected by Executive, one selected by the Company, and one selected by both
such physicians. The majority decision of such three physicians shall be final
and binding on the parties. Nothing in this paragraph is intended to limit the
Company's right to invoke the provisions of this paragraph with respect to any
perceived Disability of Executive.
Executive acknowledges that the payments referred to in this Section
4.4, together with any rights or benefits under any written plan or agreement
which have vested on or prior to the termination date of Executive's employment
under this Section 4.4, constitute the only payments to which Executive (or his
legal representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or obligation to him (or his legal representatives, as the case may
be) hereunder or otherwise in respect of his employment.
4.5 No Mitigation by Executive; No Offset by Company. Except as
------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.
4.6 Continued Compliance. Executive and the Company hereby
--------------------
acknowledge that the amounts or benefits payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) are part of the consideration for Executive's
undertakings under Article V below. Such amounts and benefits are subject to
Executive's continued compliance with the provisions of Article V. If Executive
violates the provisions of Article V, then the Company will have no obligation
to make any of the payments that remain payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) on or after the date of such violation.
10
<PAGE>
ARTICLE V
OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
NON-DISCLOSURE; NON-COMPETITION
5.1 Ownership of Proceeds of Employment. The Company shall be the
-----------------------------------
sole and exclusive owner throughout the universe in perpetuity of all of the
results and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing arrangements, business
strategies, pricing information, product development, intellectual, artistic,
literary, dramatic or musical rights, works, or other materials of any kind or
nature (whether or not entitled to protection under applicable copyright laws,
or reduced to or embodied in any medium or tangible form), including without
limitation, all copyrights, patents, trademarks, service marks, trade secrets,
contract rights, titles, themes, stories, treatments, ideas, concepts,
technologies, art work, logos, hardware, software, and may be embodied in any
and all computer programs, tapes, diskettes, disks, mailing lists, lists of
actual or prospective customers and/or suppliers, notebooks, documents,
memoranda, reports, files, correspondence, charts, lists and all other written,
printed or otherwise recorded material of any kind whatsoever and any other
information, whether or not reduced to writing, including "know-how", ideas,
concepts, research, processes, and plans. "Confidential Information" does not
include information that is in the public domain, information that is generally
known in the trade, or information that Executive can prove he acquired wholly
independently of his employment with the Company. Executive shall not, at any
time during the Term or thereafter, directly or indirectly, disclose or furnish
to any other person, firm or corporation any Confidential Information, except in
the course of the proper performance of his duties hereunder or as required by
law (in which event Executive shall give prior written notice to Company and
shall cooperate with Company and Company's counsel in complying with such legal
requirements). Promptly upon the expiration or termination of Executive's
employment hereunder for any reason or whenever the Company so requests,
Executive shall surrender to the Company all documents, drawings, work papers,
lists, memoranda, records and other data (including all copies) constituting or
pertaining in any way to any of the Confidential Information.
5.3 Non-Competition. For so long as he is entitled to compensation
---------------
under or pursuant to this Agreement (whether or not he is actively employed by
the Company hereunder), Executive shall not, except with the prior written
consent of the Company, directly or indirectly: (a) compete with the Company; or
(b) be interested in, employed by, engaged in or participate in
11
<PAGE>
the ownership, management, operation or control of, or act in any advisory or
other capacity for, any Competing Entity which conducts its business within the
Territory (as such terms are hereinafter defined); provided, however, that
notwithstanding the foregoing, Executive may make solely passive investments in
any Competing Entity the common stock of which is "publicly held," and of which
Executive shall not own or control, directly or indirectly, in the aggregate
securities which constitute more than one (1%) percent of the voting rights or
equity ownership of such Competing Entity; or (c) solicit or divert any business
or any customer from the Company or assist any person, firm or corporation in
doing so or attempting to do so; or (d) cause or seek to cause any person, firm
or corporation to refrain from dealing or doing business with the Company or
assist any person, firm or corporation in doing so or attempting to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity"
shall mean any entity which presently or during the period referred to above
engages in any business activity the Company is then engaged in or proposes to
be engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2)
----------------
years from the date of any termination or expiration of his employment
hereunder, directly or indirectly: (a) solicit or hire, or attempt to solicit
or hire, any employee of the Company, or assist any person, firm or corporation
in doing so or attempting to do so; or (b) plan for, acquire any financial
interest in or perform any services for himself or any other entity in
connection with a business in which Executive's interest, duties or activities
would inherently require Executive to reveal any Confidential Information; or
(c) solicit or cause to be solicited the disclosure of or disclose any
Confidential Information for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach
--------------------
any of the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.
5.6 Reasonable Restrictions. The parties acknowledge that the
-----------------------
foregoing restrictions, the duration and the territorial scope thereof as set
forth in this Article V, are under all of the circumstances reasonable and
necessary for the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company"
----------
shall be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
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ARTICLE VI
MISCELLANEOUS
6.1 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and
-------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for mailing by first class registered or certified
mail, return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:
(a) If to the Company:
Four Media Company
_______________________________
_______________________________
_______________________________
Fax No.: (818) 846-5197
With a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Michael W. Sturrock
Fax No.: (213) 891-8763
(b) If to Executive:
Mr. Robert T. Walston
9010 Briarcrest Lane
Beverly Hills, CA 90210
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With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.
6.4 Confidentiality. The parties hereto agree that they will not,
---------------
during the Term or thereafter, disclose to any other person or entity the terms
or conditions of this Agreement (excluding the financial terms hereof) without
the prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or
-----------
in any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration administered by the
American Arbitration Association under its National Rules for Resolution of
Employment Disputes ("Rules") which are in effect at the time of the arbitration
or the demand therefor. The Rules are hereby incorporated by reference.
California Code of Civil Procedure (S)1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference. In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement. The arbitration shall be commenced and heard in Los Angeles
County, California. The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted. Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s). The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.
14
<PAGE>
6.6 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of
-------------------------------
this Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between the parties with respect to the subject matter hereof, and
supersedes any and all prior agreements or understanding between the Company and
Executive, whether written or oral, fully or partially performed relating to any
or all matters covered by and contained or otherwise dealt with in this
Agreement. This Agreement does not constitute a commitment of the Company with
regard to Executive's employment, express or implied, other than to the extent
expressly provided for herein.
6.9 Amendment. No modification, change or amendment of this
---------
Agreement or any of its provisions shall be valid unless in writing and signed
by the party against whom such claimed modification, change or amendment is
sought to be enforced.
6.10 Authority. The parties each represent and warrant that they
---------
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.
6.12 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
6.13 Effective Date. Until the Closing Date (as such term is defined
--------------
under the Stock Purchase Agreement) has occurred, Executive and the Company's
obligations (including by way of illustration and not as a limitation the
payment of compensation) shall be governed by the terms of the Original
Agreement. Upon the Closing Date the Original Agreement shall be deemed
terminated and of no further force or effect (except for obligations which are
intended to survive termination) and this Agreement shall be deemed effective as
of the date of this Agreement. Notwithstanding the foregoing, upon the Closing
Date Executive shall be paid an
15
<PAGE>
amount equal to the difference between base compensation due to Executive under
the Original Agreement and the base compensation due to Executive under this
Agreement for the period between the date of this Agreement and the actual
Closing Date. If the Closing Date does not occur on or before December 31, 1999
then this Agreement shall automatically, and without notice, terminate without
any obligation due to the other party (i.e., there shall be no compensation or
options due Executive as provided for in this Agreement). In such event, the
parties respective obligations shall be governed by the terms of the Original
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ Jeffrey J. Marketta
------------------------------
Name: Jeffrey J. Marketta
Title: President
"EXECUTIVE"
/s/ Robert T. Walston
---------------------------------
Robert T. Walston
16
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") shall be deemed dated as of January 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Jeffrey J. Marcketta ("Executive").
INTRODUCTION
A. The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry. The Company desires to employ Executive, and Executive
desires to accept such employment, under the terms and conditions set forth
herein.
B. The term "Stock Purchase Agreement" shall mean that certain stock
purchase agreement dated January 18, 1999 pursuant to which the Company has
agreed to sell and an investor has agreed to purchase 6,582,607 shares of the
Company's common stock.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth, the
----------
Company hereby employs Executive, and Executive hereby accepts employment, as
President and Chief Administrative Officer of the Company.
1.2 Term. Subject to Article IV below, Executive's employment hereunder
----
shall be for a term of five (5) years commencing on the date hereof and expiring
at the close of business on the day prior to the fifth anniversary of the date
hereof (the "Term").
1.3 Duties. During the Term, Executive shall perform such executive
------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of Directors
of the Company (the "Board"). Executive shall devote his entire productive
business time, attention and energies to the performance of his duties
hereunder. Executive shall use his best efforts to advance the interests and
business of the Company and its Affiliates. Executive shall abide by all rules,
regulations and policies of the Company, as may be in effect from time to time.
Notwithstanding the foregoing, Executive may act for his own account in passive-
type investments as provided in Section 5.3, or, with the
<PAGE>
consent of the Board, as a member of other boards of directors, where the time
allocated for those activities does not materially interfere with or create a
conflict of interest with the discharge of his duties for the Company.
1.4 Reporting. Executive shall report directly to the Chief Executive
---------
Officer of the Company.
1.5 Exclusive Agreement. Executive represents and warrants to the Company
-------------------
that there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering his exclusive services to the
Company during the Term.
ARTICLE II
COMPENSATION
2.1 Compensation. For all services rendered by Executive hereunder and
------------
all covenants and conditions undertaken by him pursuant to this Agreement, the
Company shall pay, and Executive shall accept, as full compensation, the amounts
set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of $350,000
-----------
("Base Salary"), payable by the Company in accordance with the Company's normal
payroll practices applicable to senior executives but no less frequently than
monthly. The Base Salary shall be reviewed no less frequently than annually
during the Term for increase in the discretion of the Board. The Base Salary
shall not be decreased at any time, or for any purpose, during the Term without
Executive's prior written consent.
2.3 Annual Incentive Bonus. In addition to the Base Salary, Executive
----------------------
shall participate in an incentive bonus plan to be established and administered
by the Compensation Committee of the Board. The criteria on which awards under
such plan are based shall be set by the Board or the Compensation Committee of
the Board.
2.4 Deductions. The Company shall deduct from the compensation described
----------
in Sections 2.2 and 2.3 any federal, state or local withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.4) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
2
<PAGE>
ARTICLE III
BENEFITS; EXPENSES
3.1 Benefits. During the Term, Executive shall be entitled to participate
--------
in such group life, health, accident, disability or hospitalization insurance
plans, pension plans and retirement plans as the Company may make available to
its other senior executive employees as a group, subject to the terms and
conditions of any such plans. Executive's participation in all such plans shall
be at a level, and on terms and conditions, that are commensurate with his
positions and responsibilities at the Company. During the Term, no perquisite
or special benefit made available to Executive as a senior executive of the
Company shall be materially reduced without his prior written consent.
3.2 Expenses. The Company agrees that Executive is authorized to incur
--------
reasonable expenses in the performance of his duties hereunder and in promoting
the business of the Company. The Company shall from time to time pay or
reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of four
--------
(4) work weeks of vacation per year following the date of this Agreement. If
Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by signing such applications and other written instruments as may
be required by the insurance companies to which application is made for such
insurance. Executive's failure to submit to such usual and customary medical and
other examinations shall be deemed a material breach of this Agreement.
3.5 Initial Stock Option Grant. Effective as of the date hereof, the
--------------------------
Company shall grant Executive an option (the "Option") to purchase 500,000
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), at an exercise price of $8.00 per share
3
<PAGE>
pursuant to the Company's current stock option plan. To the extent not
inconsistent with the terms of this Agreement, the Option shall be subject to
the terms of a stock option agreement in substantially the form attached hereto
as Exhibit A (the "Option Agreement").
The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):
(a) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the first anniversary of the date of grant;
(b) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the second anniversary of the date of grant;
(c) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the third anniversary of the date of grant;
(d) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fourth anniversary of the date of grant; and
(e) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fifth anniversary of the date of grant.
Notwithstanding the foregoing, all shares covered by the Option shall vest
and become exercisable upon the occurrence of any of the following events: (i) a
Termination Without Cause (as defined below), (ii) a Termination With Good
Reason (as defined below), (iii) a Change in Control (as defined below) of the
Company, or (iv) a termination due to death or disability in accordance with
Section 4.4.
In the event that Executive incurs a termination of employment for any
reason other than a Termination With Cause or a resignation without Good Reason
prior to the expiration of the Term, any portion of the Option that has become
vested on or before the date of such termination (including without limitation,
any portion that becomes exercisable due to such termination) shall remain
exercisable for 365 days following the date of such termination. In the event
that Executive incurs a Termination With Cause or in the event Executive resigns
without Good Reason prior to the expiration of the Term, any portion of the
Option that has become vested on or before the date of such termination
(including without limitation, any portion that becomes exercisable due to such
termination) shall remain exercisable for ninety (90) days following the date of
such termination. Following the natural expiration of the Term of this
Agreement, Executive shall have 180 days following the last day of employment
with the Company to exercise the Options; provided, however, that
notwithstanding the foregoing, the Options shall terminate on December 31, 2008,
if not already expired.
For the purposes of this Agreement, a "Change in Control" of the Company
shall be deemed to have occurred upon the happening of any one of the following
events:
4
<PAGE>
(i) the acquisition by any Person (as defined below) of Beneficial
Ownership (as defined below) of fifty percent (50%) or more of
the combined voting power of the then outstanding voting
securities of the Company. For purpose of this Agreement, (A)
the term "Person" shall have the meaning set forth in Section
3(a)(9) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (I) the
Company or any of its subsidiaries, (II) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates (as defined in Rule 12b-2
promulgated under Section 12 of the Exchange Act), (III) an
underwriter temporarily holding securities pursuant to an
offering of such securities, (IV) a corporation owned, directly
or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
of the Company; or (V) any investment fund or other entity or
group of such funds or entities which control, are controlled
by, or are under common control with, E.M. Warburg, Pincus &
Co., LLC (collectively "Warburg").
(ii) the consummation by the Company of a reorganization, merger,
consolidation, (in each case, with respect to which persons who
were the stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own more than fifty percent (50%) of the combined
voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's
then outstanding voting securities) or a liquidation or
dissolution of the Company or the sale of all or substantially
all of the assets of the Company; or
(iii) the consummation by the Company of a Rule 13e-3 transaction (as
such term is defined under Rule 13c-3 of the Exchange Act) or a
transaction which otherwise results in the Company's Common
Stock ceasing to be required to be registered under the Exchange
Act;
provided, however, that, notwithstanding the foregoing, with respect to the
purchase by "Purchaser" (as such term is defined in the Stock Purchase
Agreement) of shares of the Company's Common Stock, pursuant to that certain
Securities Purchase Agreement by and between the Company and Purchaser, that
certain Stock Purchase Agreement by and between Purchaser, Technical Service
Partners, and Robert T. Walston, and that certain Stock Purchase Agreement by
and between Purchaser and John H. Donlon, Gavin W. Schutz, Robert Bailey, and
the estate of John Sabin (collectively, the "Purchase Agreements"), the
following provisions shall apply: (a) the signing of the Purchase Agreements
shall not constitute a Change of Control for purposes of this Agreement, (b) the
approval by the Board or the Company's shareholders of the transactions
contemplated by the Purchase Agreements shall not constitute a Change in Control
5
<PAGE>
for purposes of this Agreement, and (c) the closing of the transactions
contemplated by the Purchase Agreements shall not constitute a Change of
Control. Notwithstanding anything to the contrary set forth in Section 3.5 so
long as Warburg is the single largest holder of the Company's outstanding voting
securities, no "Change of Control" shall be deemed to have occurred.
3.6 Other Long-Term Incentives. Executive shall be eligible for
--------------------------
other or additional long-term incentives in the discretion of the Board,
including without limitation additional stock option grants. Such incentive
awards shall be at a level, and on terms and conditions, that are commensurate
with his positions and responsibilities at the Company and appropriate in light
of corresponding awards to other senior executives of the Company.
3.7 Perquisites. During the Term, Executive shall participate in all
-----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his positions
and responsibilities at the Company, including, without limitation, first-class
travel accommodations on all commercial carriers for travel related to the
business of the Company, and shall receive such additional fringe benefits and
perquisites as the Company may, in its discretion, from time-to-time provide.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").
Notwithstanding the foregoing, no purported Termination With Cause
pursuant to (a), (b) or (c) of this Section 4.1 shall be effective unless all of
the following provisions shall have been complied with: (i) Executive shall be
given written notice by the Board of the intention to effect a Termination With
Cause, such notice (A) to state in detail the particular circumstances that
constitute the grounds on which the proposed Termination With Cause is based and
(B) to be given no later than 180 days after the Board first learns of such
circumstances; (ii) Executive shall have 15 days after receiving such notice in
which to cure such grounds, to the extent such cure is possible; (iii) if
Executive fails to cure such grounds, he shall then be entitled to a hearing
before the Board, such hearing to be held within 20 days of his receiving such
notice, provided that he requests such hearing within 15 days of receiving such
notice; and (iv) if, within five days
6
<PAGE>
following such hearing, the Board gives written notice to Executive confirming
that, in the judgment of at least a majority of the members of the Board,
grounds for the Termination With Cause set forth in the original notice exist,
he shall thereupon incur a Termination With Cause.
4.2 Termination of Employment Without Cause. During the Term, the
---------------------------------------
Company may at any time, in its sole discretion, terminate the employment of
Executive hereunder for reasons other than those set forth in Section 4.1 (a
"Termination Without Cause") by written notice to him. In such event, the
Company shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of
termination;
(b) an amount equal to Executive's monthly Base Salary in effect
on the date of termination for the remainder of the Term, payable as
and when such amounts would have been due and payable hereunder had
such termination not occurred (the "Severance Period"); and
(c) any reimbursement for expenses incurred in accordance with
Section 3.2.
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination. If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.
Executive acknowledges that the payments and benefits referred to in
this Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.3 Termination of Employment With Good Reason. In addition to any
------------------------------------------
other remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of Executive, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the assignment to Executive of duties that are materially inconsistent
with or materially impair his ability to perform the duties set forth herein; or
(b) a material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of
7
<PAGE>
employment to a location more than 50 miles from such principal place of
employment; or (d) a breach by the Company of any material provision of this
Agreement (a "Termination With Good Reason").
In the event that a Termination With Good Reason occurs, Executive
shall have the same entitlements to the amounts and benefits as provided under
Section 4.2 for a Termination Without Cause.
Executive acknowledges that the payments and benefits referred to in
this Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.3, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.4 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with
Section 3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect
on such termination date for the lesser of (i) six (6) months or (ii)
the remainder of the Term, payable as and when such amounts would have
been due and payable hereunder had such termination not occurred. The
monthly Base Salary with respect to any period during which Executive
is Disabled shall be reduced by amounts payable to him under any
insurance plan sponsored by the Company, provided that Executive's
aggregate compensation during the period of Disability shall be equal
to 100% of his monthly Base Salary then in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties
hereunder for 180 consecutive days, and (b) he has utilized any and all benefits
available to him under state and federal laws and is either (i) unable to
reasonably and effectively carry out his duties with reasonable accommodations
by the Company or (ii) unable to reasonably and effectively carry out his duties
because any reasonable accommodation which may be required would cause the
Company undue hardship. In the event of a disagreement concerning Executive's
perceived Disability, Executive shall submit to such examinations as are deemed
appropriate by three practicing physicians specializing in the area of
8
<PAGE>
Executive's Disability, one selected by Executive, one selected by the Company,
and one selected by both such physicians. The majority decision of such three
physicians shall be final and binding on the parties. Nothing in this paragraph
is intended to limit the Company's right to invoke the provisions of this
paragraph with respect to any perceived Disability of Executive.
Executive acknowledges that the payments referred to in this Section
4.4, together with any rights or benefits under any written plan or agreement
which have vested on or prior to the termination date of Executive's employment
under this Section 4.4, constitute the only payments to which Executive (or his
legal representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or obligation to him (or his legal representatives, as the case may
be) hereunder or otherwise in respect of his employment.
4.5 No Mitigation by Executive; No Offset by Company. Except as
------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.
4.6 Continued Compliance. Executive and the Company hereby
--------------------
acknowledge that the amounts or benefits payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) are part of the consideration for Executive's
undertakings under Article V below. Such amounts and benefits are subject to
Executive's continued compliance with the provisions of Article V. If Executive
violates the provisions of Article V, then the Company will have no obligation
to make any of the payments that remain payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) on or after the date of such violation.
9
<PAGE>
ARTICLE V
OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
NON-DISCLOSURE; NON-COMPETITION
5.1 Ownership of Proceeds of Employment. The Company shall be the
-----------------------------------
sole and exclusive owner throughout the universe in perpetuity of all of the
results and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing arrangements, business
strategies, pricing information, product development, intellectual, artistic,
literary, dramatic or musical rights, works, or other materials of any kind or
nature (whether or not entitled to protection under applicable copyright laws,
or reduced to or embodied in any medium or tangible form), including without
limitation, all copyrights, patents, trademarks, service marks, trade secrets,
contract rights, titles, themes, stories, treatments, ideas, concepts,
technologies, art work, logos, hardware, software, and may be embodied in any
and all computer programs, tapes, diskettes, disks, mailing lists, lists of
actual or prospective customers and/or suppliers, notebooks, documents,
memoranda, reports, files, correspondence, charts, lists and all other written,
printed or otherwise recorded material of any kind whatsoever and any other
information, whether or not reduced to writing, including "know-how", ideas,
concepts, research, processes, and plans. "Confidential Information" does not
include information that is in the public domain, information that is generally
known in the trade, or information that Executive can prove he acquired wholly
independently of his employment with the Company. Executive shall not, at any
time during the Term or thereafter, directly or indirectly, disclose or furnish
to any other person, firm or corporation any Confidential Information, except in
the course of the proper performance of his duties hereunder or as required by
law (in which event Executive shall give prior written notice to Company and
shall cooperate with Company and Company's counsel in complying with such legal
requirements). Promptly upon the expiration or termination of Executive's
employment hereunder for any reason or whenever the Company so requests,
Executive shall surrender to the Company all documents, drawings, work papers,
lists, memoranda, records and other data (including all copies) constituting or
pertaining in any way to any of the Confidential Information.
5.3 Non-Competition. For so long as he is entitled to compensation
---------------
under or pursuant to this Agreement (whether or not he is actively employed by
the Company hereunder), Executive shall not, except with the prior written
consent of the Company, directly or indirectly: (a) compete with the Company; or
(b) be interested in, employed by, engaged in or participate in
10
<PAGE>
the ownership, management, operation or control of, or act in any advisory or
other capacity for, any Competing Entity which conducts its business within the
Territory (as such terms are hereinafter defined); provided, however, that
notwithstanding the foregoing, Executive may make solely passive investments in
any Competing Entity the common stock of which is "publicly held," and of which
Executive shall not own or control, directly or indirectly, in the aggregate
securities which constitute more than one (1%) percent of the voting rights or
equity ownership of such Competing Entity; or (c) solicit or divert any business
or any customer from the Company or assist any person, firm or corporation in
doing so or attempting to do so; or (d) cause or seek to cause any person, firm
or corporation to refrain from dealing or doing business with the Company or
assist any person, firm or corporation in doing so or attempting to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity"
shall mean any entity which presently or during the period referred to above
engages in any business activity the Company is then engaged in or proposes to
be engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2)
----------------
years from the date of any termination or expiration of his employment
hereunder, directly or indirectly: (a) solicit or hire, or attempt to solicit
or hire, any employee of the Company, or assist any person, firm or corporation
in doing so or attempting to do so; or (b) plan for, acquire any financial
interest in or perform any services for himself or any other entity in
connection with a business in which Executive's interest, duties or activities
would inherently require Executive to reveal any Confidential Information; or
(c) solicit or cause to be solicited the disclosure of or disclose any
Confidential Information for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach
--------------------
any of the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.
5.6 Reasonable Restrictions. The parties acknowledge that the
-----------------------
foregoing restrictions, the duration and the territorial scope thereof as set
forth in this Article V, are under all of the circumstances reasonable and
necessary for the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company"
----------
shall be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
11
<PAGE>
ARTICLE VI
MISCELLANEOUS
6.1 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and
-------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for mailing by first class registered or certified
mail, return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:
(a) If to the Company:
Four Media Company
_______________________________
_______________________________
_______________________________
Fax No.: (818) 846-5197
With a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Michael W. Sturrock
Fax No.: (213) 891-8763
(b) If to Executive:
Mr. Jeff Marcketta
_______________________________
_______________________________
12
<PAGE>
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.
6.4 Confidentiality. The parties hereto agree that they will not,
---------------
during the Term or thereafter, disclose to any other person or entity the terms
or conditions of this Agreement (excluding the financial terms hereof) without
the prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or
-----------
in any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration administered by the
American Arbitration Association under its National Rules for Resolution of
Employment Disputes ("Rules") which are in effect at the time of the arbitration
or the demand therefor. The Rules are hereby incorporated by reference.
California Code of Civil Procedure (S)1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference. In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement. The arbitration shall be commenced and heard in Los Angeles
County, California. The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted. Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s). The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.
13
<PAGE>
6.6 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of
-------------------------------
this Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between the parties with respect to the subject matter hereof, and
supersedes any and all prior agreements or understanding between the Company and
Executive, whether written or oral, fully or partially performed relating to any
or all matters covered by and contained or otherwise dealt with in this
Agreement. This Agreement does not constitute a commitment of the Company with
regard to Executive's employment, express or implied, other than to the extent
expressly provided for herein.
6.9 Amendment. No modification, change or amendment of this
---------
Agreement or any of its provisions shall be valid unless in writing and signed
by the party against whom such claimed modification, change or amendment is
sought to be enforced.
6.10 Authority. The parties each represent and warrant that they
---------
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.
14
<PAGE>
6.12 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ Robert T. Walston
------------------------------
Name: Robert T. Walston
Title: CEO
"EXECUTIVE"
/s/ Jeffrey J. Marcketta
---------------------------------
Jeffrey J. Marcketta
15
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") shall be deemed dated as of February 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Christopher Phillips ("Executive").
INTRODUCTION
A. The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry.
B. The Executive and Company desire to enter into an employment agreement
upon the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth, the
----------
Company hereby employs Executive, and Executive hereby accepts employment, as
the Company's Chief Financial Officer.
1.2 Term. Subject to Article IV below and this Section 1.2, Executive's
----
employment hereunder shall be for a term of three (3) years commencing on the
earlier of (i) April 1, 1999 or (ii) such date as designated by Executive in
writing to the President of the Company (provided that such date shall not occur
after April 1, 1999, nor before receipt of the Consent (as such term is defined
below) (the "Commencement Date")) and expiring at the close of business on the
day prior to the third anniversary of the Commencement Date (the "Term").
Notwithstanding anything to the contrary set forth in this Agreement, all
obligations of the Company are subject to and contingent upon receiving the
written consent (the "Consent") and approval of both Warburg, Pincus Equity
Partners, L.P. and the Company's Board of Directors of this Agreement and the
grant of options contemplated hereunder, within twenty (20) days following the
date of this Agreement. If such Consent is not obtained within said time period
then this Agreement shall be deemed terminated and neither party shall have any
obligation to the other to perform any of the covenants provided for in this
Agreement.
1.3 Duties. During the Term, Executive shall perform such executive
------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him
<PAGE>
from time to time by the President of the Company. Executive shall devote his
entire productive business time, attention and energies to the performance of
his duties hereunder. Executive shall use his best efforts to advance the
interests and business of the Company and its Affiliates. Executive shall abide
by all rules, regulations and policies of the Company, as may be in effect from
time to time. Notwithstanding the foregoing, Executive may act for his own
account in passive-type investments as provided in Section 5.3, or, with the
consent of the Company's Board of Directors ("Board"), as a member of other
boards of directors, where the time allocated for those activities does not
materially interfere with or create a conflict of interest with the discharge of
his duties for the Company.
1.4 Reporting. Executive shall report directly to the President of the
---------
Company.
1.5 Exclusive Agreement. Executive represents and warrants to the
-------------------
Company that there are no agreements or arrangements, whether written or oral,
in effect which would prevent Executive from rendering his exclusive services to
the Company during the Term.
ARTICLE II
COMPENSATION
2.1 Compensation. For all services rendered by Executive hereunder and
------------
all covenants and conditions undertaken by him pursuant to this Agreement, the
Company shall pay, and Executive shall accept, as full compensation, the amounts
set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of $200,000
-----------
("Base Salary"), payable by the Company in accordance with the Company's normal
payroll practices applicable to senior executives but no less frequently than
monthly.
2.3 Annual Incentive Bonus. In addition to the Base Salary, Executive
----------------------
shall be entitled to participate in an incentive bonus plan to be established
and administered by the Compensation Committee of the Board. The criteria on
which awards under such plan are based shall be set by the Board or the
Compensation Committee of the Board.
2.4 Deductions. The Company shall deduct from the compensation described
----------
in Sections 2.2 and 2.3 any federal, state or local withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.4) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
2
<PAGE>
ARTICLE III
BENEFITS; EXPENSES
3.1 Benefits. During the Term, Executive shall be entitled to
--------
participate in such group life, health, accident, disability or hospitalization
insurance plans, pension plans and retirement plans as the Company may make
available to its other senior executives as a group, subject to the terms and
conditions of any such plans. Executive's participation in all such plans shall
be at a level, and on terms and conditions, that are commensurate with his
position and responsibilities at the Company. During the Term, no perquisite or
special benefit made available to Executive as a senior executive of the Company
shall be materially reduced without his prior written consent.
3.2 Expenses. The Company agrees that Executive is authorized to incur
--------
reasonable expenses in the performance of his duties hereunder and in
promoting the business of the Company. The Company shall from time to time pay
or reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of four
--------
(4) work weeks of vacation per year following the date of this Agreement.
If Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by signing such applications and other written instruments as may
be required by the insurance companies to which application is made for such
insurance. Executive's failure to submit to such usual and customary medical and
other examinations shall be deemed a material breach of this Agreement.
3.5 Initial Stock Option Grant. Effective as of the Commencement Date,
--------------------------
but subject to the approval by the Company's shareholders ("Shareholders")
of an amendment to the Company's 1997 Stock Plan to increase the number of
shares available for issuance thereunder and subject to the approval of the
Board, the Company shall grant Executive an option (the
3
<PAGE>
"Option") to purchase 150,000 shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), at an exercise price equal to the greater
of (i) $8.00 per share or (ii) the closing trading price of the Company's
publicly traded Common Stock upon the later of (a) the date such grant is
approved by a resolution of the Board or (b) the Commencement Date. To the
extent not inconsistent with the terms of this Agreement, the Option shall be
subject to the terms of a stock option agreement in substantially the form
attached hereto as Exhibit A (the "Option Agreement") subject to amendment by
the Shareholders.
The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):
(a) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the first anniversary of the Commencement Date;
(b) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the second anniversary of the Commencement Date;
(c) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the third anniversary of the Commencement Date;
(d) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fourth anniversary of the Commencement Date; and
(e) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fifth anniversary of the Commencement Date.
Notwithstanding the foregoing, all shares covered by the Option shall vest
and become exercisable upon the occurrence of any of the following events: (i) a
Termination Without Cause (as defined below), or (ii) a Termination With Good
Reason (as defined below).
In the event that Executive incurs a termination of employment for any
reason other than a Termination With Cause or a resignation without Good Reason
prior to the expiration of the Term, any portion of the Option that has become
vested on or before the date of such termination (including without limitation,
any portion that becomes exercisable due to such termination) shall remain
exercisable for 180 days following the date of such termination. In the event
that Executive incurs a Termination With Cause or in the event Executive resigns
without Good Reason prior to the expiration of the Term, any portion of the
Option that has become vested on or before the date of such termination
(including without limitation, any portion that becomes exercisable due to such
termination) shall remain exercisable for ninety (90) days following the date of
such termination. Following the natural expiration of the Term of this
Agreement, Executive shall have 180 days following the last day of employment
with the Company to exercise the Options; provided, however, that
notwithstanding the foregoing, the Options shall terminate on the tenth
anniversary from the date of this Agreement, if not already expired.
4
<PAGE>
3.6 Other Long-Term Incentives. Executive shall be eligible for other or
--------------------------
additional long-term incentives in the discretion of the Board, including
without limitation additional stock option grants. Such incentive awards shall
be at a level, and on terms and conditions, that are commensurate with his
position and responsibilities at the Company and appropriate in light of
corresponding awards to other senior executives of the Company.
3.7 Perquisites. During the Term, Executive shall participate in all
-----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his position and
responsibilities at the Company, and shall receive such additional fringe
benefits and perquisites as the Company may, in its discretion, from time-to-
time provide.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").
Notwithstanding the foregoing, no purported Termination With Cause
pursuant to (a), (b) or (c) of this Section 4.1 shall be effective unless all of
the following provisions shall have been complied with: (i) Executive shall be
given written notice by the Board of the intention to effect a Termination With
Cause, such notice (A) to state in detail the particular circumstances that
constitute the grounds on which the proposed Termination With Cause is based and
(B) to be given no later than 180 days after the Board first learns of such
circumstances; (ii) Executive shall have 15 days after receiving such notice in
which to cure such grounds, to the extent such cure is possible; and (iii) if
Executive fails to cure such grounds, he shall, upon written notice by the
Board, incur a Termination With Cause.
4.2 Termination of Employment Without Cause. During the Term, the
---------------------------------------
Company may at any time, in its sole discretion, terminate the employment of
Executive hereunder for reasons other than those set forth in Section 4.1 (a
"Termination Without Cause") by written notice to him. In such event, the
Company shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of termination;
5
<PAGE>
(b) an amount equal to Executive's monthly Base Salary in effect on
the date of termination for the lesser of (i) eighteen (18) months or (ii)
the remainder of the Term, payable as and when such amounts would have been
due and payable hereunder had such termination not occurred (the "Severance
Period"); and
(c) any reimbursement for expenses incurred in accordance with Section
3.2.
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination. If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.
Executive acknowledges that the payments and benefits referred to in this
Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.3 Termination of Employment With Good Reason. In addition to any
------------------------------------------
other remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of the Company, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the assignment to Executive of duties that are materially inconsistent
with or materially impair his ability to perform the duties set forth herein; or
(b) a material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of employment to a
location more than 50 miles from such principal place of employment; or (d) a
breach by the Company of any material provision of this Agreement (a
"Termination With Good Reason").
In the event that a Termination With Good Reason occurs, Executive shall
have the same entitlements to the amounts and benefits as provided under Section
4.2 for a Termination Without Cause.
Executive acknowledges that the payments and benefits referred to in this
Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in
6
<PAGE>
the event of any termination of his employment pursuant to this Section 4.3, and
that except for such payments or benefits the Company shall have no further
liability or obligation to him hereunder or otherwise in respect of his
employment.
4.4 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with Section
3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect on
such termination date for the lesser of (i) six (6) months or (ii) the
remainder of the Term, payable as and when such amounts would have been due
and payable hereunder had such termination not occurred. The monthly Base
Salary with respect to any period during which Executive is Disabled shall
be reduced by amounts payable to him under any insurance plan sponsored by
the Company, provided that Executive's aggregate compensation during the
period of Disability shall be equal to 100% of his monthly Base Salary then
in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties
hereunder for 180 consecutive days, and (b) he has utilized any and all benefits
available to him under state and federal laws and is either (i) unable to
reasonably and effectively carry out his duties with reasonable accommodations
by the Company or (ii) unable to reasonably and effectively carry out his duties
because any reasonable accommodation which may be required would cause the
Company undue hardship. In the event of a disagreement concerning Executive's
perceived Disability, Executive shall submit to such examinations as are deemed
appropriate by three practicing physicians specializing in the area of
Executive's Disability, one selected by Executive, one selected by the Company,
and one selected by both such physicians. The majority decision of such three
physicians shall be final and binding on the parties. Nothing in this paragraph
is intended to limit the Company's right to invoke the provisions of this
paragraph with respect to any perceived Disability of Executive.
Executive acknowledges that the payments referred to in this Section 4.4,
together with any rights or benefits under any written plan or agreement which
have vested on or prior to the termination date of Executive's employment under
this Section 4.4, constitute the only payments to which Executive (or his legal
representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or obligation to him (or his legal representatives, as the case may
be) hereunder or otherwise in respect of his employment.
7
<PAGE>
4.5 No Mitigation by Executive; No Offset by Company. Except as
------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.
4.6 Continued Compliance. Executive and the Company hereby acknowledge
--------------------
that the amounts or benefits payable by the Company under Sections 4.2(b), 4.3,
and 4.4(c) are part of the consideration for Executive's undertakings under
Article V below. Such amounts and benefits are subject to Executive's continued
compliance with the provisions of Article V. If Executive violates the
provisions of Article V, then the Company will have no obligation to make any of
the payments that remain payable by the Company under Sections 4.2(b), 4.3, and
4.4(c) on or after the date of such violation.
ARTICLE V
OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
NON-DISCLOSURE; NON-COMPETITION
5.1 Ownership of Proceeds of Employment. The Company shall be the sole
-----------------------------------
and exclusive owner throughout the universe in perpetuity of all of the results
and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing arrangements, business
strategies, pricing information, product development, intellectual, artistic,
literary, dramatic or musical rights, works, or other materials of any kind or
nature (whether or not entitled to protection under applicable copyright laws,
or reduced to or embodied in any
8
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medium or tangible form), including without limitation, all copyrights, patents,
trademarks, service marks, trade secrets, contract rights, titles, themes,
stories, treatments, ideas, concepts, technologies, art work, logos, hardware,
software, and may be embodied in any and all computer programs, tapes,
diskettes, disks, mailing lists, lists of actual or prospective customers and/or
suppliers, notebooks, documents, memoranda, reports, files, correspondence,
charts, lists and all other written, printed or otherwise recorded material of
any kind whatsoever and any other information, whether or not reduced to
writing, including "know-how", ideas, concepts, research, processes, and plans.
"Confidential Information" does not include information that is in the public
domain, information that is generally known in the trade, or information that
Executive can prove he acquired wholly independently of his employment with the
Company. Executive shall not, at any time during the Term or thereafter,
directly or indirectly, disclose or furnish to any other person, firm or
corporation any Confidential Information, except in the course of the proper
performance of his duties hereunder or as required by law (in which event
Executive shall give prior written notice to Company and shall cooperate with
Company and Company's counsel in complying with such legal requirements).
Promptly upon the expiration or termination of Executive's employment hereunder
for any reason or whenever the Company so requests, Executive shall surrender to
the Company all documents, drawings, work papers, lists, memoranda, records and
other data (including all copies) constituting or pertaining in any way to any
of the Confidential Information.
5.3 Non-Competition. For so long as he is entitled to compensation under
---------------
or pursuant to this Agreement (whether or not he is actively employed by the
Company hereunder), Executive shall not, except with the prior written consent
of the Company, directly or indirectly: (a) compete with the Company; or (b) be
interested in, employed by, engaged in or participate in the ownership,
management, operation or control of, or act in any advisory or other capacity
for, any Competing Entity which conducts its business within the Territory (as
such terms are hereinafter defined); provided, however, that notwithstanding the
foregoing, Executive may make solely passive investments in any Competing Entity
the common stock of which is "publicly held," and of which Executive shall not
own or control, directly or indirectly, in the aggregate securities which
constitute more than one (1%) percent of the voting rights or equity ownership
of such Competing Entity; or (c) solicit or divert any business or any customer
from the Company or assist any person, firm or corporation in doing so or
attempting to do so; or (d) cause or seek to cause any person, firm or
corporation to refrain from dealing or doing business with the Company or assist
any person, firm or corporation in doing so or attempting to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity" shall
mean any entity which presently or during the period referred to above engages
in any business activity the Company is then engaged in or proposes to be
engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2) years
----------------
from the date of any termination or expiration of his employment hereunder,
directly or indirectly: (a) solicit or hire, or attempt to solicit or hire, any
employee of the Company, or assist any person, firm or corporation in doing so
or attempting to do so; or (b) plan for, acquire any financial interest in or
perform any services for himself or any other entity in connection with a
business in which
9
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Executive's interest, duties or activities would inherently require Executive to
reveal any Confidential Information; or (c) solicit or cause to be solicited the
disclosure of or disclose any Confidential Information for any purpose
whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach any
--------------------
of the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.
5.6 Reasonable Restrictions. The parties acknowledge that the foregoing
-----------------------
restrictions, the duration and the territorial scope thereof as set forth in
this Article V, are under all of the circumstances reasonable and necessary for
the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company" shall
----------
be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
ARTICLE VI
MISCELLANEOUS
6.1 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and
-------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for mailing by first class registered or certified
mail, return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:
(a) If to the Company:
Jeffrey J. Marcketta
President, Chief Administrative Officer
Four Media Company
625 Arizona Avenue
Santa Monica, CA 90401
Fax No.: (310) 587-1277
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With a copy to:
William E. Niles, Esq.
General Counsel
Vice President Business Affairs
Four Media Company
625 Arizona Avenue
Santa Monica, CA 90401
Fax No.: (310) 587-1277
(b) If to Executive:
Christopher Phillips
5150 Veloz Avenue
Tarzana, CA 91356
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.
6.4 Confidentiality. The parties hereto agree that they will not, during
---------------
the Term or thereafter, disclose to any other person or entity the terms or
conditions of this Agreement (excluding the financial terms hereof) without the
prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or in
-----------
any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration
11
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administered by the American Arbitration Association under its National Rules
for Resolution of Employment Disputes ("Rules") which are in effect at the time
of the arbitration or the demand therefor. The Rules are hereby incorporated by
reference. California Code of Civil Procedure (S)1283.05, which provides for
certain discovery rights, shall apply to any such arbitration, and said code
section is also hereby incorporated by reference. In reaching a decision, the
arbitrator shall have no authority to change, extend, modify or suspend any of
the terms of this Agreement. The arbitration shall be commenced and heard in Los
Angeles County, California. The arbitrator(s) shall apply the substantive law
(and the law of remedies, if applicable) of California or federal law, or both,
as applicable to the claim(s) asserted. Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s). The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.
6.6 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of
-------------------------------
this Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between the parties with respect to the subject matter hereof, and
supersedes any and all prior agreements or understanding between the Company and
Executive, whether written or oral, fully or partially performed relating to any
or all matters covered by and contained or otherwise dealt with in this
Agreement. This Agreement does not constitute a commitment of the Company with
regard to Executive's employment, express or implied, other than to the extent
expressly provided for herein.
6.9 Amendment. No modification, change or amendment of this
---------
Agreement or any of its provisions shall be valid unless in writing and signed
by the party against whom such claimed modification, change or amendment is
sought to be enforced.
6.10 Authority. The parties each represent and warrant that they
---------
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms, covenants and conditions hereof.
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6.11 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.
6.12 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY,
a Delaware corporation
By: /s/ Jeffrey J. Marcketta
-----------------------------------------
Jeffrey J. Marcketta
Title: President, Chief Administrative Officer
"EXECUTIVE"
/s/ Christopher Phillips
--------------------------------------------
Christopher Phillips
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<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") shall be deemed dated as of January 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and John H. Donlon ("Executive").
INTRODUCTION
A. The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry.
B. The Company has executed a stock purchase agreement dated January 18,
1999 pursuant to which the Company has agreed to issue and an investor has
agreed to purchase 6,582,607 shares of the Company's common stock (the "Stock
Purchase Agreement").
C. The Company and Executive are both parties to that certain employment
contract dated October 1, 1996 (the "Original Agreement" a copy of which is
attached hereto as Exhibit A).
D. The Executive and Employee desire to (i) enter into a new employment
agreement upon the terms set forth in this Agreement and to (ii) terminate the
Original Agreement provided that the "Closing Date" (as such term is defined in
the Stock Purchase Agreement) has occurred on or before September 30, 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth, the
----------
Company hereby employs Executive, and Executive hereby accepts employment, as
President - Broadcast, Syndication and Manufacturing of the Company and as
President of the Company's Foreign Operations Division.
1.2 Term. Subject to Article IV below, Executive's employment hereunder
----
shall be for a term of five (5) years commencing on the date hereof and expiring
at the close of business on the day prior to the fifth anniversary of the date
hereof (the "Term").
<PAGE>
1.3 Duties. During the Term, Executive shall perform such executive
------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of Directors
of the Company (the "Board"). Executive shall devote his entire productive
business time, attention and energies to the performance of his duties
hereunder. Executive shall use his best efforts to advance the interests and
business of the Company and its Affiliates. Executive shall abide by all rules,
regulations and policies of the Company, as may be in effect from time to time.
Notwithstanding the foregoing, Executive may act for his own account in passive-
type investments as provided in Section 5.3, or, with the consent of the Board,
as a member of other boards of directors, where the time allocated for those
activities does not materially interfere with or create a conflict of interest
with the discharge of his duties for the Company.
1.4 Reporting. Executive shall report directly to the Chief Executive
---------
Officer of the Company.
1.5 Exclusive Agreement. Executive represents and warrants to the Company
-------------------
that there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering his exclusive services to the
Company during the Term.
ARTICLE II
COMPENSATION
2.1 Compensation. For all services rendered by Executive hereunder and
------------
all covenants and conditions undertaken by him pursuant to this Agreement, the
Company shall pay, and Executive shall accept, as full compensation, the amounts
set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of $325,000
-----------
("Base Salary"), payable by the Company in accordance with the Company's normal
payroll practices applicable to senior executives but no less frequently than
monthly.
2.3 Annual Incentive Bonus. In addition to the Base Salary, Executive
----------------------
shall participate in an incentive bonus plan to be established and administered
by the Compensation Committee of the Board. The criteria on which awards under
such plan are based shall be set by the Board or the Compensation Committee of
the Board.
2.4 Deductions. The Company shall deduct from the compensation described
----------
in Sections 2.2 and 2.3 any federal, state or local withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as
2
<PAGE>
contemplated in Section 4.4) shall be reduced by any amounts payable to
Executive for loss of earnings or the like under any insurance plan or policy
sponsored by the Company.
ARTICLE III
BENEFITS; EXPENSES
3.1 Benefits. During the Term, Executive shall be entitled to participate
--------
in such group life, health, accident, disability or hospitalization insurance
plans, pension plans and retirement plans as the Company may make available to
its other senior executive employees as a group, subject to the terms and
conditions of any such plans. Executive's participation in all such plans shall
be at a level, and on terms and conditions, that are commensurate with his
positions and responsibilities at the Company. During the Term, no perquisite or
special benefit made available to Executive as a senior executive of the Company
shall be materially reduced without his prior written consent.
3.2 Expenses. The Company agrees that Executive is authorized to incur
--------
reasonable expenses in the performance of his duties hereunder and in promoting
the business of the Company. The Company shall from time to time pay or
reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of four
--------
(4) work weeks of vacation per year following the date of this Agreement. If
Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive on
a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by signing such applications and other written instruments as may
be required by the insurance companies to which application is made for such
insurance. Executive's failure to submit to such usual and customary medical and
other examinations shall be deemed a material breach of this Agreement.
3
<PAGE>
3.5 Initial Stock Option Grant. Effective as of the date hereof, but
--------------------------
subject to the approval by the Company's shareholders of an amendment to the
Company's 1997 Stock Plan to increase the number of shares available for
issuance thereunder, the Company shall grant Executive an option (the "Option")
to purchase 200,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), at an exercise price of $8.00 per share. To the
extent not inconsistent with the terms of this Agreement, the Option shall be
subject to the terms of a stock option agreement in substantially the form
attached hereto as Exhibit B (the "Option Agreement").
The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):
(a) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the first anniversary of the date of grant;
(b) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the second anniversary of the date of grant;
(c) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the third anniversary of the date of grant;
(d) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fourth anniversary of the date of grant; and
(e) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fifth anniversary of the date of grant.
Notwithstanding the foregoing, all shares covered by the Option shall vest
and become exercisable upon the occurrence of any of the following events: (i) a
Termination Without Cause (as defined below), or (ii) a Termination With Good
Reason (as defined below).
In the event that Executive incurs a termination of employment for any
reason other than a Termination With Cause or a resignation without Good Reason
prior to the expiration of the Term, any portion of the Option that has become
vested on or before the date of such termination (including without limitation,
any portion that becomes exercisable due to such termination) shall remain
exercisable for 180 days following the date of such termination. In the event
that Executive incurs a Termination With Cause or in the event Executive resigns
without Good Reason prior to the expiration of the Term, any portion of the
Option that has become vested on or before the date of such termination
(including without limitation, any portion that becomes exercisable due to such
termination) shall remain exercisable for ninety (90) days following the date of
such termination. Following the natural expiration of the Term of this
Agreement, Executive shall have 180 days following the last day of employment
with the Company to exercise the Options; provided, however, that
notwithstanding the foregoing, the Options shall terminate on December 31, 2008,
if not already expired.
4
<PAGE>
3.6 Other Long-Term Incentives. Executive shall be eligible for other or
--------------------------
additional long-term incentives in the discretion of the Board, including
without limitation additional stock option grants. Such incentive awards shall
be at a level, and on terms and conditions, that are commensurate with his
positions and responsibilities at the Company and appropriate in light of
corresponding awards to other senior executives of the Company.
3.7 Perquisites. During the Term, Executive shall participate in all
-----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his positions
and responsibilities at the Company, and shall receive such additional fringe
benefits and perquisites as the Company may, in its discretion, from time-to-
time provide.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").
Notwithstanding the foregoing, no purported Termination With Cause pursuant
to (a), (b) or (c) of this Section 4.1 shall be effective unless all of the
following provisions shall have been complied with: (i) Executive shall be given
written notice by the Board of the intention to effect a Termination With Cause,
such notice (A) to state in detail the particular circumstances that constitute
the grounds on which the proposed Termination With Cause is based and (B) to be
given no later than 180 days after the Board first learns of such circumstances;
(ii) Executive shall have 15 days after receiving such notice in which to cure
such grounds, to the extent such cure is possible; and (iii) if Executive fails
to cure such grounds, he shall, upon written notice by the Board, incur a
Termination With Cause.
4.2 Termination of Employment Without Cause. During the Term, the Company
---------------------------------------
may at any time, in its sole discretion, terminate the employment of Executive
hereunder for reasons other than those set forth in Section 4.1 (a "Termination
Without Cause") by written notice to him. In such event, the Company shall pay
Executive an amount equal to the sum of the following:
5
<PAGE>
(a) any Base Salary accrued but unpaid as of the date of termination;
(b) an amount equal to Executive's monthly Base Salary in effect on
the date of termination for twenty-four (24) months payable as and when
such amounts would have been due and payable hereunder had such termination
not occurred (the "Severance Period"); and
(c) any reimbursement for expenses incurred in accordance with Section
3.2.
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination. If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.
Executive acknowledges that the payments and benefits referred to in this
Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.3 Termination of Employment With Good Reason. In addition to any other
------------------------------------------
remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of Executive, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the assignment to Executive of duties that are materially inconsistent
with or materially impair his ability to perform the duties set forth herein; or
(b) a material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of employment to a
location more than 50 miles from such principal place of employment; or (d) a
breach by the Company of any material provision of this Agreement (a
"Termination With Good Reason").
In the event that a Termination With Good Reason occurs, Executive shall
have the same entitlements to the amounts and benefits as provided under Section
4.2 for a Termination Without Cause.
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<PAGE>
Executive acknowledges that the payments and benefits referred to in this
Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.3, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.4 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with Section
3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect on
such termination date for the lesser of (i) six (6) months or (ii) the
remainder of the Term, payable as and when such amounts would have been due
and payable hereunder had such termination not occurred. The monthly Base
Salary with respect to any period during which Executive is Disabled shall
be reduced by amounts payable to him under any insurance plan sponsored by
the Company, provided that Executive's aggregate compensation during the
period of Disability shall be equal to 100% of his monthly Base Salary then
in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties hereunder
for 180 consecutive days, and (b) he has utilized any and all benefits available
to him under state and federal laws and is either (i) unable to reasonably and
effectively carry out his duties with reasonable accommodations by the Company
or (ii) unable to reasonably and effectively carry out his duties because any
reasonable accommodation which may be required would cause the Company undue
hardship. In the event of a disagreement concerning Executive's perceived
Disability, Executive shall submit to such examinations as are deemed
appropriate by three practicing physicians specializing in the area of
Executive's Disability, one selected by Executive, one selected by the Company,
and one selected by both such physicians. The majority decision of such three
physicians shall be final and binding on the parties. Nothing in this paragraph
is intended to limit the Company's right to invoke the provisions of this
paragraph with respect to any perceived Disability of Executive.
Executive acknowledges that the payments referred to in this Section 4.4,
together with any rights or benefits under any written plan or agreement which
have vested on or prior to the termination date of Executive's employment under
this Section 4.4, constitute the only payments
7
<PAGE>
to which Executive (or his legal representative, as the case may be) shall be
entitled to receive from the Company hereunder in the event of a termination of
his employment for death or Disability, and that except for such payments the
Company shall have no further liability or obligation to him (or his legal
representatives, as the case may be) hereunder or otherwise in respect of his
employment.
4.5 No Mitigation by Executive; No Offset by Company. Except as
------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.
4.6 Continued Compliance. Executive and the Company hereby acknowledge
--------------------
that the amounts or benefits payable by the Company under Sections 4.2(b), 4.3,
and 4.4(c) [and 4.__(b)] are part of the consideration for Executive's
undertakings under Article V below. Such amounts and benefits are subject to
Executive's continued compliance with the provisions of Article V. If Executive
violates the provisions of Article V, then the Company will have no obligation
to make any of the payments that remain payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) on or after the date of such violation.
ARTICLE V
OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
NON-DISCLOSURE; NON-COMPETITION
5.1 Ownership of Proceeds of Employment. The Company shall be the sole
-----------------------------------
and exclusive owner throughout the universe in perpetuity of all of the results
and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
8
<PAGE>
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
Information" means any and all information affecting or relating to the business
of the Company and its Affiliates, including without limitation, financial data,
customer lists and data, licensing arrangements, business strategies, pricing
information, product development, intellectual, artistic, literary, dramatic or
musical rights, works, or other materials of any kind or nature (whether or not
entitled to protection under applicable copyright laws, or reduced to or
embodied in any medium or tangible form), including without limitation, all
copyrights, patents, trademarks, service marks, trade secrets, contract rights,
titles, themes, stories, treatments, ideas, concepts, technologies, art work,
logos, hardware, software, and may be embodied in any and all computer programs,
tapes, diskettes, disks, mailing lists, lists of actual or prospective customers
and/or suppliers, notebooks, documents, memoranda, reports, files,
correspondence, charts, lists and all other written, printed or otherwise
recorded material of any kind whatsoever and any other information, whether or
not reduced to writing, including "know-how", ideas, concepts, research,
processes, and plans. "Confidential Information" does not include information
that is in the public domain, information that is generally known in the trade,
or information that Executive can prove he acquired wholly independently of his
employment with the Company. Executive shall not, at any time during the Term or
thereafter, directly or indirectly, disclose or furnish to any other person,
firm or corporation any Confidential Information, except in the course of the
proper performance of his duties hereunder or as required by law (in which event
Executive shall give prior written notice to Company and shall cooperate with
Company and Company's counsel in complying with such legal requirements).
Promptly upon the expiration or termination of Executive's employment hereunder
for any reason or whenever the Company so requests, Executive shall surrender to
the Company all documents, drawings, work papers, lists, memoranda, records and
other data (including all copies) constituting or pertaining in any way to any
of the Confidential Information.
5.3 Non-Competition. For so long as he is entitled to compensation under
---------------
or pursuant to this Agreement (whether or not he is actively employed by the
Company hereunder), Executive shall not, except with the prior written consent
of the Company, directly or indirectly: (a) compete with the Company; or (b) be
interested in, employed by, engaged in or participate in the ownership,
management, operation or control of, or act in any advisory or other capacity
for, any Competing Entity which conducts its business within the Territory (as
such terms are hereinafter defined); provided, however, that notwithstanding the
foregoing, Executive may make solely passive investments in any Competing Entity
the common stock of which is "publicly held," and of which Executive shall not
own or control, directly or indirectly, in the aggregate securities which
constitute more than one (1%) percent of the voting rights or equity ownership
of such Competing Entity; or (c) solicit or divert any business or any customer
from the Company or assist any person, firm or corporation in doing so or
attempting to do so; or (d) cause or seek to cause any person, firm or
corporation to refrain from dealing or doing business with the Company or assist
any person, firm or corporation in doing so or attempting to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity" shall
mean any entity which presently or during the period referred to above engages
in any business activity the
9
<PAGE>
Company is then engaged in or proposes to be engaged in; and (ii) the term
"Territory" shall mean any geographic area in which the Company conducts
business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2) years
----------------
from the date of any termination or expiration of his employment hereunder,
directly or indirectly: (a) solicit or hire, or attempt to solicit or hire, any
employee of the Company, or assist any person, firm or corporation in doing so
or attempting to do so; or (b) plan for, acquire any financial interest in or
perform any services for himself or any other entity in connection with a
business in which Executive's interest, duties or activities would inherently
require Executive to reveal any Confidential Information; or (c) solicit or
cause to be solicited the disclosure of or disclose any Confidential Information
for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach any of
--------------------
the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.
5.6 Reasonable Restrictions. The parties acknowledge that the
-----------------------
foregoing restrictions, the duration and the territorial scope thereof as set
forth in this Article V, are under all of the circumstances reasonable and
necessary for the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company" shall
----------
be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
ARTICLE VI
MISCELLANEOUS
6.1 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and
-------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for mailing by first class registered or certified
mail, return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:
10
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(a) If to the Company:
Four Media Company
_______________________________
_______________________________
_______________________________
Fax No.: (818) 846-5197
With a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Michael W. Sturrock
Fax No.: (213) 891-8763
(b) If to Executive:
Mr. John H. Donlon
_______________________________
_______________________________
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.
6.4 Confidentiality. The parties hereto agree that they will not,
---------------
during the Term or thereafter, disclose to any other person or entity the terms
or conditions of this Agreement (excluding the financial terms hereof) without
the prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
11
<PAGE>
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or in
-----------
any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration administered by the
American Arbitration Association under its National Rules for Resolution of
Employment Disputes ("Rules") which are in effect at the time of the arbitration
or the demand therefor. The Rules are hereby incorporated by reference.
California Code of Civil Procedure (S)1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference. In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement. The arbitration shall be commenced and heard in Los Angeles
County, California. The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted. Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s). The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.
6.6 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of this
-------------------------------
Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements or understanding between the Company and Executive,
whether written or oral, fully or partially performed relating to any or all
matters covered by and contained or otherwise dealt with in this Agreement. This
Agreement does not constitute a commitment of the Company with regard to
Executive's employment, express or implied, other than to the extent expressly
provided for herein.
12
<PAGE>
6.9 Amendment. No modification, change or amendment of this Agreement
---------
or any of its provisions shall be valid unless in writing and signed by the
party against whom such claimed modification, change or amendment is sought to
be enforced.
6.10 Authority. The parties each represent and warrant that they
---------
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.
6.12 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
6.13 Effective Date. Until the Closing Date (as such term is defined
--------------
under the Stock Purchase Agreement) has occurred, Executive and the Company's
obligations (including by way of illustration and not as a limitation the
payment of compensation) shall, except as modified by Section 6.14 below, be
governed by the terms of the Original Agreement. Upon the Closing Date the
Original Agreement shall be deemed terminated and of no further force or effect
(except for obligations which are intended to survive termination) and this
Agreement shall be deemed effective as of the date of this Agreement.
Notwithstanding the foregoing, upon the Closing Date Executive shall be paid an
amount equal to the difference between base compensation due to Executive under
the Original Agreement and the base compensation due to Executive under this
Agreement for the period between the date of this Agreement and the actual
Closing Date. If the Closing Date does not occur on or before September 30,
1999 then this Agreement shall automatically, and without notice, terminate
without any obligation due to the other party (i.e., there shall be no
compensation or options due Executive as provided for in this Agreement). In
such event, the parties respective obligations shall be governed by the terms of
the Original Agreement.
6.14 Amendment. Section 1.2 of the Original Agreement is hereby amended
---------
and restated in its entirety to provide that
"subject to Section 4.1, Executives Employment hereunder shall
terminate on September 30, 1999."
[Signature Page to Follow]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ Robert T. Walston
------------------------------------
Name: Robert T. Walston
Title: CEO
"EXECUTIVE"
/s/ John H. Donlon
---------------------------------------
John H. Donlon
S-1
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") shall be deemed dated as of January 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Gavin W. Schutz ("Executive").
INTRODUCTION
A. The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry.
B. The Company has executed a stock purchase agreement dated January 18,
1999 pursuant to which the Company has agreed to issue and an investor has
agreed to purchase 6,582,607 shares of the Company's common stock (the "Stock
Purchase Agreement").
C. The Company and Executive are both parties to that certain employment
contract dated October 1, 1996 (the "Original Agreement" a copy of which is
attached as Exhibit A).
D. The Executive and Employee desire to (i) enter into a new employment
agreement upon the terms set forth in this Agreement and to (ii) terminate the
Original Agreement provided that the "Closing Date" (as such term is defined in
the Stock Purchase Agreement) has occurred on or before September 30, 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth,
----------
the Company hereby employs Executive, and Executive hereby accepts employment,
as Executive Vice President and Chief Technology Officer of the Company.
1.2 Term. Subject to Article IV below, Executive's employment
----
hereunder shall be for a term of five (5) years commencing on the date hereof
and expiring at the close of business on the day prior to the fifth anniversary
of the date hereof (the "Term").
1.3 Duties. During the Term, Executive shall perform such executive
------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him
<PAGE>
from time to time by the Board of Directors of the Company (the "Board").
Executive shall devote his entire productive business time, attention and
energies to the performance of his duties hereunder. Executive shall use his
best efforts to advance the interests and business of the Company and its
Affiliates. Executive shall abide by all rules, regulations and policies of the
Company, as may be in effect from time to time. Notwithstanding the foregoing,
Executive may act for his own account in passive-type investments as provided in
Section 5.3, or, with the consent of the Board, as a member of other boards of
directors, where the time allocated for those activities does not materially
interfere with or create a conflict of interest with the discharge of his duties
for the Company.
1.4 Reporting. Executive shall report directly to the President of
---------
the Company.
1.5 Exclusive Agreement. Executive represents and warrants to the
-------------------
Company that there are no agreements or arrangements, whether written or oral,
in effect which would prevent Executive from rendering his exclusive services to
the Company during the Term.
ARTICLE II
COMPENSATION
2.1 Compensation. For all services rendered by Executive hereunder
------------
and all covenants and conditions undertaken by him pursuant to this Agreement,
the Company shall pay, and Executive shall accept, as full compensation, the
amounts set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of
-----------
$275,000 ("Base Salary"), payable by the Company in accordance with the
Company's normal payroll practices applicable to senior executives but no less
frequently than monthly.
2.3 Annual Incentive Bonus. In addition to the Base Salary,
----------------------
Executive shall participate in an incentive bonus plan to be established and
administered by the Compensation Committee of the Board. The criteria on which
awards under such plan are based shall be set by the Board or the Compensation
Committee of the Board.
2.4 Deductions. The Company shall deduct from the compensation
----------
described in Sections 2.2 and 2.3 any federal, state or local withholding taxes,
social security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.4) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
2
<PAGE>
ARTICLE III
BENEFITS; EXPENSES
3.1 Benefits. During the Term, Executive shall be entitled to
--------
participate in such group life, health, accident, disability or hospitalization
insurance plans, pension plans and retirement plans as the Company may make
available to its other senior executive employees as a group, subject to the
terms and conditions of any such plans. Executive's participation in all such
plans shall be at a level, and on terms and conditions, that are commensurate
with his positions and responsibilities at the Company. During the Term, no
perquisite or special benefit made available to Executive as a senior executive
of the Company shall be materially reduced without his prior written consent.
3.2 Expenses. The Company agrees that Executive is authorized to
--------
incur reasonable expenses in the performance of his duties hereunder and in
promoting the business of the Company. The Company shall from time to time pay
or reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of
--------
four (4) work weeks of vacation per year following the date of this Agreement.
If Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by signing such applications and other written instruments as may
be required by the insurance companies to which application is made for such
insurance. Executive's failure to submit to such usual and customary medical and
other examinations shall be deemed a material breach of this Agreement.
3.5 Initial Stock Option Grant. Effective as of the date hereof, but
--------------------------
subject to the approval by the Company's shareholders of an amendment to the
Company's 1997 Stock Plan to increase the number of shares available for
issuance thereunder, the Company shall grant
3
<PAGE>
Executive an option (the "Option") to purchase 150,000 shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), at an exercise
price of $8.00 per share. To the extent not inconsistent with the terms of this
Agreement, the Option shall be subject to the terms of a stock option agreement
in substantially the form attached hereto as Exhibit B (the "Option Agreement").
The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):
(a) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the first anniversary of the date of grant;
(b) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the second anniversary of the date of grant;
(c) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the third anniversary of the date of grant;
(d) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fourth anniversary of the date of grant; and
(e) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fifth anniversary of the date of grant.
Notwithstanding the foregoing, all shares covered by the Option shall vest
and become exercisable upon the occurrence of any of the following events: (i) a
Termination Without Cause (as defined below), or (ii) a Termination With Good
Reason (as defined below).
In the event that Executive incurs a termination of employment for any
reason other than a Termination With Cause or a resignation without Good Reason
prior to the expiration of the Term, any portion of the Option that has become
vested on or before the date of such termination (including without limitation,
any portion that becomes exercisable due to such termination) shall remain
exercisable for 180 days following the date of such termination. In the event
that Executive incurs a Termination With Cause or in the event Executive resigns
without Good Reason prior to the expiration of the Term, any portion of the
Option that has become vested on or before the date of such termination
(including without limitation, any portion that becomes exercisable due to such
termination) shall remain exercisable for ninety (90) days following the date of
such termination. Following the natural expiration of the Term of this
Agreement, Executive shall have 180 days following the last day of employment
with the Company to exercise the Options; provided, however, that
notwithstanding the foregoing, the Options shall terminate on December 31, 2008,
if not already expired.
3.6 Other Long-Term Incentives. Executive shall be eligible for
--------------------------
other or additional long-term incentives in the discretion of the Board,
including without limitation additional stock
4
<PAGE>
option grants. Such incentive awards shall be at a level, and on terms and
conditions, that are commensurate with his positions and responsibilities at the
Company and appropriate in light of corresponding awards to other senior
executives of the Company.
3.7 Perquisites. During the Term, Executive shall participate in all
-----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his positions
and responsibilities at the Company, and shall receive such additional fringe
benefits and perquisites as the Company may, in its discretion, from time-to-
time provide.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").
Notwithstanding the foregoing, no purported Termination With Cause
pursuant to (a), (b) or (c) of this Section 4.1 shall be effective unless all of
the following provisions shall have been complied with: (i) Executive shall be
given written notice by the Board of the intention to effect a Termination With
Cause, such notice (A) to state in detail the particular circumstances that
constitute the grounds on which the proposed Termination With Cause is based and
(B) to be given no later than 180 days after the Board first learns of such
circumstances; (ii) Executive shall have 15 days after receiving such notice in
which to cure such grounds, to the extent such cure is possible; and (iii) if
Executive fails to cure such grounds, he shall, upon written notice by the
Board, incur a Termination With Cause.
4.2 Termination of Employment Without Cause. During the Term, the
---------------------------------------
Company may at any time, in its sole discretion, terminate the employment of
Executive hereunder for reasons other than those set forth in Section 4.1 (a
"Termination Without Cause") by written notice to him. In such event, the
Company shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of termination;
5
<PAGE>
(b) an amount equal to Executive's monthly Base Salary in effect on
the date of termination for the lesser of (i) eighteen (18) months or (ii)
the remainder of the Term, payable as and when such amounts would have been
due and payable hereunder had such termination not occurred (the "Severance
Period"); and
(c) any reimbursement for expenses incurred in accordance with Section
3.2.
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination. If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.
Executive acknowledges that the payments and benefits referred to in
this Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.3 Termination of Employment With Good Reason. In addition to any
------------------------------------------
other remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of Executive, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the assignment to Executive of duties that are materially inconsistent
with or materially impair his ability to perform the duties set forth herein; or
(b) a material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of employment to a
location more than 50 miles from such principal place of employment; or (d) a
breach by the Company of any material provision of this Agreement (a
"Termination With Good Reason").
In the event that a Termination With Good Reason occurs, Executive
shall have the same entitlements to the amounts and benefits as provided under
Section 4.2 for a Termination Without Cause.
Executive acknowledges that the payments and benefits referred to in
this Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in
6
<PAGE>
the event of any termination of his employment pursuant to this Section 4.3, and
that except for such payments or benefits the Company shall have no further
liability or obligation to him hereunder or otherwise in respect of his
employment.
4.4 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with Section
3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect on
such termination date for the lesser of (i) six (6) months or (ii) the
remainder of the Term, payable as and when such amounts would have been due
and payable hereunder had such termination not occurred. The monthly Base
Salary with respect to any period during which Executive is Disabled shall
be reduced by amounts payable to him under any insurance plan sponsored by
the Company, provided that Executive's aggregate compensation during the
period of Disability shall be equal to 100% of his monthly Base Salary then
in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties
hereunder for 180 consecutive days, and (b) he has utilized any and all benefits
available to him under state and federal laws and is either (i) unable to
reasonably and effectively carry out his duties with reasonable accommodations
by the Company or (ii) unable to reasonably and effectively carry out his duties
because any reasonable accommodation which may be required would cause the
Company undue hardship. In the event of a disagreement concerning Executive's
perceived Disability, Executive shall submit to such examinations as are deemed
appropriate by three practicing physicians specializing in the area of
Executive's Disability, one selected by Executive, one selected by the Company,
and one selected by both such physicians. The majority decision of such three
physicians shall be final and binding on the parties. Nothing in this paragraph
is intended to limit the Company's right to invoke the provisions of this
paragraph with respect to any perceived Disability of Executive.
Executive acknowledges that the payments referred to in this Section
4.4, together with any rights or benefits under any written plan or agreement
which have vested on or prior to the termination date of Executive's employment
under this Section 4.4, constitute the only payments to which Executive (or his
legal representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or
7
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obligation to him (or his legal representatives, as the case may be) hereunder
or otherwise in respect of his employment.
4.5 No Mitigation by Executive; No Offset by Company. Except as
------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.
4.6 Continued Compliance. Executive and the Company hereby
--------------------
acknowledge that the amounts or benefits payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) are part of the consideration for Executive's
undertakings under Article V below. Such amounts and benefits are subject to
Executive's continued compliance with the provisions of Article V. If Executive
violates the provisions of Article V, then the Company will have no obligation
to make any of the payments that remain payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) on or after the date of such violation.
ARTICLE V
OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
NON-DISCLOSURE; NON-COMPETITION
5.1 Ownership of Proceeds of Employment. The Company shall be the
-----------------------------------
sole and exclusive owner throughout the universe in perpetuity of all of the
results and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing
8
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arrangements, business strategies, pricing information, product development,
intellectual, artistic, literary, dramatic or musical rights, works, or other
materials of any kind or nature (whether or not entitled to protection under
applicable copyright laws, or reduced to or embodied in any medium or tangible
form), including without limitation, all copyrights, patents, trademarks,
service marks, trade secrets, contract rights, titles, themes, stories,
treatments, ideas, concepts, technologies, art work, logos, hardware, software,
and may be embodied in any and all computer programs, tapes, diskettes, disks,
mailing lists, lists of actual or prospective customers and/or suppliers,
notebooks, documents, memoranda, reports, files, correspondence, charts, lists
and all other written, printed or otherwise recorded material of any kind
whatsoever and any other information, whether or not reduced to writing,
including "know-how", ideas, concepts, research, processes, and plans.
"Confidential Information" does not include information that is in the public
domain, information that is generally known in the trade, or information that
Executive can prove he acquired wholly independently of his employment with the
Company. Executive shall not, at any time during the Term or thereafter,
directly or indirectly, disclose or furnish to any other person, firm or
corporation any Confidential Information, except in the course of the proper
performance of his duties hereunder or as required by law (in which event
Executive shall give prior written notice to Company and shall cooperate with
Company and Company's counsel in complying with such legal requirements).
Promptly upon the expiration or termination of Executive's employment hereunder
for any reason or whenever the Company so requests, Executive shall surrender to
the Company all documents, drawings, work papers, lists, memoranda, records and
other data (including all copies) constituting or pertaining in any way to any
of the Confidential Information.
5.3 Non-Competition. For so long as he is entitled to compensation
---------------
under or pursuant to this Agreement (whether or not he is actively employed by
the Company hereunder), Executive shall not, except with the prior written
consent of the Company, directly or indirectly: (a) compete with the Company; or
(b) be interested in, employed by, engaged in or participate in the ownership,
management, operation or control of, or act in any advisory or other capacity
for, any Competing Entity which conducts its business within the Territory (as
such terms are hereinafter defined); provided, however, that notwithstanding the
foregoing, Executive may make solely passive investments in any Competing Entity
the common stock of which is "publicly held," and of which Executive shall not
own or control, directly or indirectly, in the aggregate securities which
constitute more than one (1%) percent of the voting rights or equity ownership
of such Competing Entity; or (c) solicit or divert any business or any customer
from the Company or assist any person, firm or corporation in doing so or
attempting to do so; or (d) cause or seek to cause any person, firm or
corporation to refrain from dealing or doing business with the Company or assist
any person, firm or corporation in doing so or attempting to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity"
shall mean any entity which presently or during the period referred to above
engages in any business activity the Company is then engaged in or proposes to
be engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
9
<PAGE>
5.4 Non-Solicitation. Executive shall not, for a period of two (2)
----------------
years from the date of any termination or expiration of his employment
hereunder, directly or indirectly: (a) solicit or hire, or attempt to solicit
or hire, any employee of the Company, or assist any person, firm or corporation
in doing so or attempting to do so; or (b) plan for, acquire any financial
interest in or perform any services for himself or any other entity in
connection with a business in which Executive's interest, duties or activities
would inherently require Executive to reveal any Confidential Information; or
(c) solicit or cause to be solicited the disclosure of or disclose any
Confidential Information for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach
--------------------
any of the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.
5.6 Reasonable Restrictions. The parties acknowledge that the
-----------------------
foregoing restrictions, the duration and the territorial scope thereof as set
forth in this Article V, are under all of the circumstances reasonable and
necessary for the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company"
----------
shall be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
ARTICLE VI
MISCELLANEOUS
6.1 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and
-------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for mailing by first class registered or certified
mail, return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the
10
<PAGE>
other party set forth below or to such other address as may be specified by
notice given in accordance with this Section 6.2:
(a) If to the Company:
Four Media Company
_______________________________
_______________________________
_______________________________
Fax No.: (818) 846-5197
With a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Michael W. Sturrock
Fax No.: (213) 891-8763
(b) If to Executive:
Mr. Gavin W. Schutz
_______________________________
_______________________________
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.
6.4 Confidentiality. The parties hereto agree that they will not,
---------------
during the Term or thereafter, disclose to any other person or entity the terms
or conditions of this Agreement
11
<PAGE>
(excluding the financial terms hereof) without the prior written consent of the
other party or as required by law, regulatory authority or as necessary for
either party to obtain personal loans or financing. Approval of the Company and
of Executive shall be required with respect to any press releases regarding this
Agreement and the activities of Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or
-----------
in any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration administered by the
American Arbitration Association under its National Rules for Resolution of
Employment Disputes ("Rules") which are in effect at the time of the arbitration
or the demand therefor. The Rules are hereby incorporated by reference.
California Code of Civil Procedure (S)1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference. In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement. The arbitration shall be commenced and heard in Los Angeles
County, California. The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted. Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s). The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.
6.6 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of this
-------------------------------
Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements or understanding between the Company and Executive,
whether written or oral, fully or partially performed relating to any or all
matters covered by and contained or otherwise dealt with in this Agreement. This
Agreement does not constitute a commitment of the Company with regard to
Executive's employment, express or implied, other than to the extent expressly
provided for herein.
12
<PAGE>
6.9 Amendment. No modification, change or amendment of this
---------
Agreement or any of its provisions shall be valid unless in writing and signed
by the party against whom such claimed modification, change or amendment is
sought to be enforced.
6.10 Authority. The parties each represent and warrant that they
---------
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.
6.12 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
6.13 Effective Date. Until the Closing Date (as such term is defined
--------------
under the Stock Purchase Agreement) has occurred, Executive and the Company's
obligations (including by way of illustration and not as a limitation the
payment of compensation) shall, except as modified by Section 6.14 below, be
governed by the terms of the Original Agreement. Upon the Closing Date the
Original Agreement shall be deemed terminated and of no further force or effect
(except for obligations which are intended to survive termination) and this
Agreement shall be deemed effective as of the date of this Agreement.
Notwithstanding the foregoing, upon the Closing Date Executive shall be paid an
amount equal to the difference between base compensation due to Executive under
the Original Agreement and the base compensation due to Executive under this
Agreement for the period between the date of this Agreement and the actual
Closing Date. If the Closing Date does not occur on or before September 30,
1999 then this Agreement shall automatically, and without notice, terminate
without any obligation due to the other party (i.e., there shall be no
compensation or options due Executive as provided for in this Agreement). In
such event, the parties respective obligations shall be governed by the terms of
the Original Agreement.
6.14 Amendment. Section 1.2 of the Original Agreement is hereby
---------
amended and restated in its entirety to provide that
"subject to Section 4.1, Executives Employment
hereunder shall terminate on September 30, 1999."
[Signature Page to Follow]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ Robert T. Walston
-------------------------------------
Name: Robert T. Walston
Title: CEO
"EXECUTIVE"
/s/ Gavin W. Schutz
----------------------------------------
Gavin W. Schutz
S-1
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") shall be deemed dated as of January 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Robert Bailey ("Executive").
INTRODUCTION
A. The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry.
B. The Company has executed a stock purchase agreement dated January 18,
1999 pursuant to which the Company has agreed to issue and an investor has
agreed to purchase 6,582,607 shares of the Company's common stock (the "Stock
Purchase Agreement").
C. The Company and Executive are both parties to that certain employment
contract dated October 1, 1996 (the "Original Agreement") a copy of which is
attached hereto as Exhibit A.
D. The Executive and Employee desire to (i) enter into a new employment
agreement upon the terms set forth in this Agreement and to (ii) terminate the
Original Agreement provided that the "Closing Date" (as such term is defined in
the Stock Purchase Agreement) has occurred on or before September 30, 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth,
----------
the Company hereby employs Executive, and Executive hereby accepts employment,
as Executive Vice President of Marketing and Business Development of the
manufacturing and distribution division.
1.2 Term. Subject to Article IV below, Executive's employment
----
hereunder shall be for a term of five (5) years commencing on the date hereof
and expiring at the close of business on the day prior to the fifth anniversary
of the date hereof (the "Term").
<PAGE>
1.3 Duties. During the Term, Executive shall perform such executive
------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of Directors
of the Company (the "Board"). Executive shall devote his entire productive
business time, attention and energies to the performance of his duties
hereunder. Executive shall use his best efforts to advance the interests and
business of the Company and its Affiliates. Executive shall abide by all rules,
regulations and policies of the Company, as may be in effect from time to time.
Notwithstanding the foregoing, Executive may act for his own account in passive-
type investments as provided in Section 5.3, or, with the consent of the Board,
as a member of other boards of directors, where the time allocated for those
activities does not materially interfere with or create a conflict of interest
with the discharge of his duties for the Company.
1.4 Reporting. Executive shall report directly to the President of
---------
the Broadcast, Syndication and Manufacturing Division ("Broadcast Division")
(currently John Donlon).
1.5 Exclusive Agreement. Executive represents and warrants to the
-------------------
Company that there are no agreements or arrangements, whether written or oral,
in effect which would prevent Executive from rendering his exclusive services to
the Company during the Term.
ARTICLE II
COMPENSATION
2.1 Compensation. For all services rendered by Executive hereunder
------------
and all covenants and conditions undertaken by him pursuant to this Agreement,
the Company shall pay, and Executive shall accept, as full compensation, the
amounts set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of
-----------
$225,000 ("Base Salary"), payable by the Company in accordance with the
Company's normal payroll practices applicable to senior executives but no less
frequently than monthly.
2.3 Annual Incentive Bonus. In addition to the Base Salary,
----------------------
Executive shall be entitled to participate in an incentive bonus plan to be
established and administered by the Compensation Committee of the Board. The
criteria on which awards under such plan are based shall be set by the Board or
the Compensation Committee of the Board. In addition, to the foregoing
Executive may earn additional bonus compensation payable on a quarterly basis
provided that specific economic performance objectives ("Benchmarks")
established for such quarter have been equaled or exceeded. The Benchmarks
shall be established by the President of the Broadcast Division after
consultation with and approval by the Company's Chief Executive Officer. Bonus
payments for shall not exceed fifty percent (50%) of Executive's Base Salary for
such period.
2.4 Deductions. The Company shall deduct from the compensation
----------
described in Sections 2.2 and 2.3 any federal, state or local withholding taxes,
social security contributions
2
<PAGE>
and any other amounts which may be required to be deducted or withheld by the
Company pursuant to any federal, state or local laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.4) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
ARTICLE III
BENEFITS; EXPENSES
3.1 Benefits. During the Term, Executive shall be entitled to
--------
participate in such group life, health, accident, disability or hospitalization
insurance plans, pension plans and retirement plans as the Company may make
available to its other senior executive employees as a group, subject to the
terms and conditions of any such plans. Executive's participation in all such
plans shall be at a level, and on terms and conditions, that are commensurate
with his positions and responsibilities at the Company. During the Term, no
perquisite or special benefit made available to Executive as a senior executive
of the Company shall be materially reduced without his prior written consent.
3.2 Expenses. The Company agrees that Executive is authorized to
--------
incur reasonable expenses in the performance of his duties hereunder and in
promoting the business of the Company. The Company shall from time to time pay
or reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of
--------
four (4) work weeks of vacation per year following the date of this Agreement.
If Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by
3
<PAGE>
signing such applications and other written instruments as may be required by
the insurance companies to which application is made for such insurance.
Executive's failure to submit to such usual and customary medical and other
examinations shall be deemed a material breach of this Agreement.
3.5 Initial Stock Option Grant. Effective as of the date hereof, but
--------------------------
subject to the approval by the Company's shareholders of an amendment to the
Company's 1997 Stock Plan to increase the number of shares available for
issuance thereunder, the Company shall grant Executive an option (the "Option")
to purchase 150,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), at an exercise price of $8.00 per share. To the
extent not inconsistent with the terms of this Agreement, the Option shall be
subject to the terms of a stock option agreement in substantially the form
attached hereto as Exhibit B (the "Option Agreement").
The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):
(a) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the first anniversary of the date of grant;
(b) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the second anniversary of the date of grant;
(c) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the third anniversary of the date of grant;
(d) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fourth anniversary of the date of grant; and
(e) twenty percent (20%) of the shares covered by the Option shall
become exercisable on the fifth anniversary of the date of grant.
Notwithstanding the foregoing, all shares covered by the Option shall vest
and become exercisable upon the occurrence of any of the following events: (i) a
Termination Without Cause (as defined below), or (ii) a Termination With Good
Reason (as defined below).
In the event that Executive incurs a termination of employment for any
reason other than a Termination With Cause or a resignation without Good Reason
prior to the expiration of the Term, any portion of the Option that has become
vested on or before the date of such termination (including without limitation,
any portion that becomes exercisable due to such termination) shall remain
exercisable for 180 days following the date of such termination. In the event
that Executive incurs a Termination With Cause or in the event Executive resigns
without Good Reason prior to the expiration of the Term, any portion of the
Option that has become vested on or before the date of such termination
(including without limitation, any portion that becomes
4
<PAGE>
exercisable due to such termination) shall remain exercisable for ninety (90)
days following the date of such termination. Following the natural expiration of
the Term of this Agreement, Executive shall have 180 days following the last day
of employment with the Company to exercise the Options; provided, however, that
notwithstanding the foregoing, the Options shall terminate on December 31, 2008,
if not already expired.
3.6 Other Long-Term Incentives. Executive shall be eligible for
--------------------------
other or additional long-term incentives in the discretion of the Board,
including without limitation additional stock option grants. Such incentive
awards shall be at a level, and on terms and conditions, that are commensurate
with his positions and responsibilities at the Company and appropriate in light
of corresponding awards to other senior executives of the Company.
3.7 Perquisites. During the Term, Executive shall participate in all
-----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his positions
and responsibilities at the Company, and shall receive such additional fringe
benefits and perquisites as the Company may, in its discretion, from time-to-
time provide.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").
Notwithstanding the foregoing, no purported Termination With Cause pursuant
to (a), (b) or (c) of this Section 4.1 shall be effective unless all of the
following provisions shall have been complied with: (i) Executive shall be given
written notice by the Board of the intention to effect a Termination With Cause,
such notice (A) to state in detail the particular circumstances that constitute
the grounds on which the proposed Termination With Cause is based and (B) to be
given no later than 180 days after the Board first learns of such circumstances;
(ii) Executive shall have 15 days after receiving such notice in which to cure
such grounds, to the extent such cure is possible; and (iii) if Executive fails
to cure such grounds, he shall, upon written notice by the Board, incur a
Termination With Cause.
5
<PAGE>
4.2 Termination of Employment Without Cause. During the Term, the
---------------------------------------
Company may at any time, in its sole discretion, terminate the employment of
Executive hereunder for reasons other than those set forth in Section 4.1 (a
"Termination Without Cause") by written notice to him. In such event, the
Company shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of termination;
(b) an amount equal to Executive's monthly Base Salary in effect on
the date of termination for the lesser of (i) eighteen (18) months or (ii)
the remainder of the Term, payable as and when such amounts would have been
due and payable hereunder had such termination not occurred (the "Severance
Period"); and
(c) any reimbursement for expenses incurred in accordance with Section
3.2.
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination. If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.
Executive acknowledges that the payments and benefits referred to in this
Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.3 Termination of Employment With Good Reason. In addition to any
------------------------------------------
other remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of Executive, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the assignment to Executive of duties that are materially inconsistent
with or materially impair his ability to perform the duties set forth herein; or
(b) a material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of employment to a
location more than 50 miles from such principal place of employment; or (d) a
breach by the Company of any material provision of this Agreement (a
"Termination With Good Reason").
6
<PAGE>
In the event that a Termination With Good Reason occurs, Executive shall
have the same entitlements to the amounts and benefits as provided under Section
4.2 for a Termination Without Cause.
Executive acknowledges that the payments and benefits referred to in this
Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.3, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
4.4 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with Section
3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect on
such termination date for the lesser of (i) six (6) months or (ii) the
remainder of the Term, payable as and when such amounts would have been due
and payable hereunder had such termination not occurred. The monthly Base
Salary with respect to any period during which Executive is Disabled shall
be reduced by amounts payable to him under any insurance plan sponsored by
the Company, provided that Executive's aggregate compensation during the
period of Disability shall be equal to 100% of his monthly Base Salary then
in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties hereunder
for 180 consecutive days, and (b) he has utilized any and all benefits available
to him under state and federal laws and is either (i) unable to reasonably and
effectively carry out his duties with reasonable accommodations by the Company
or (ii) unable to reasonably and effectively carry out his duties because any
reasonable accommodation which may be required would cause the Company undue
hardship. In the event of a disagreement concerning Executive's perceived
Disability, Executive shall submit to such examinations as are deemed
appropriate by three practicing physicians specializing in the area of
Executive's Disability, one selected by Executive, one selected by the Company,
and one selected by both such physicians. The majority decision of such three
physicians shall be final and binding on the parties. Nothing in this paragraph
is intended to limit the Company's right to invoke the provisions of this
paragraph with respect to any perceived Disability of Executive.
7
<PAGE>
Executive acknowledges that the payments referred to in this Section 4.4,
together with any rights or benefits under any written plan or agreement which
have vested on or prior to the termination date of Executive's employment under
this Section 4.4, constitute the only payments to which Executive (or his legal
representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or obligation to him (or his legal representatives, as the case may
be) hereunder or otherwise in respect of his employment.
4.5 No Mitigation by Executive; No Offset by Company. Except as
------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.
4.6 Continued Compliance. Executive and the Company hereby acknowledge
--------------------
that the amounts or benefits payable by the Company under Sections 4.2(b), 4.3,
and 4.4(c) are part of the consideration for Executive's undertakings under
Article V below. Such amounts and benefits are subject to Executive's continued
compliance with the provisions of Article V. If Executive violates the
provisions of Article V, then the Company will have no obligation to make any of
the payments that remain payable by the Company under Sections 4.2(b), 4.3, and
4.4(c) on or after the date of such violation.
ARTICLE V
OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
NON-DISCLOSURE; NON-COMPETITION
5.1 Ownership of Proceeds of Employment. The Company shall be the
-----------------------------------
sole and exclusive owner throughout the universe in perpetuity of all of the
results and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to
8
<PAGE>
be works-made-for-hire for the Company within the meaning of the copyright laws
of the United States and the Company shall be deemed to be the sole author
thereof in all territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing arrangements, business
strategies, pricing information, product development, intellectual, artistic,
literary, dramatic or musical rights, works, or other materials of any kind or
nature (whether or not entitled to protection under applicable copyright laws,
or reduced to or embodied in any medium or tangible form), including without
limitation, all copyrights, patents, trademarks, service marks, trade secrets,
contract rights, titles, themes, stories, treatments, ideas, concepts,
technologies, art work, logos, hardware, software, and may be embodied in any
and all computer programs, tapes, diskettes, disks, mailing lists, lists of
actual or prospective customers and/or suppliers, notebooks, documents,
memoranda, reports, files, correspondence, charts, lists and all other written,
printed or otherwise recorded material of any kind whatsoever and any other
information, whether or not reduced to writing, including "know-how", ideas,
concepts, research, processes, and plans. "Confidential Information" does not
include information that is in the public domain, information that is generally
known in the trade, or information that Executive can prove he acquired wholly
independently of his employment with the Company. Executive shall not, at any
time during the Term or thereafter, directly or indirectly, disclose or furnish
to any other person, firm or corporation any Confidential Information, except in
the course of the proper performance of his duties hereunder or as required by
law (in which event Executive shall give prior written notice to Company and
shall cooperate with Company and Company's counsel in complying with such legal
requirements). Promptly upon the expiration or termination of Executive's
employment hereunder for any reason or whenever the Company so requests,
Executive shall surrender to the Company all documents, drawings, work papers,
lists, memoranda, records and other data (including all copies) constituting or
pertaining in any way to any of the Confidential Information.
5.3 Non-Competition. For so long as he is entitled to compensation
---------------
under or pursuant to this Agreement (whether or not he is actively employed by
the Company hereunder), Executive shall not, except with the prior written
consent of the Company, directly or indirectly: (a) compete with the Company; or
(b) be interested in, employed by, engaged in or participate in the ownership,
management, operation or control of, or act in any advisory or other capacity
for, any Competing Entity which conducts its business within the Territory (as
such terms are hereinafter defined); provided, however, that notwithstanding the
foregoing, Executive may make solely passive investments in any Competing Entity
the common stock of which is "publicly held," and of which Executive shall not
own or control, directly or indirectly, in the aggregate securities which
constitute more than one (1%) percent of the voting rights or equity ownership
of such Competing Entity; or (c) solicit or divert any business or any customer
from the Company or assist any person, firm or corporation in doing so or
attempting to do so; or (d) cause or seek to cause any person, firm or
corporation to refrain from dealing or doing business with the Company or assist
any person, firm or corporation in doing so or attempting to do so.
9
<PAGE>
For purposes of this Section 5.3, (i) the term "Competing Entity" shall
mean any entity which presently or during the period referred to above engages
in any business activity the Company is then engaged in or proposes to be
engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2)
----------------
years from the date of any termination or expiration of his employment
hereunder, directly or indirectly: (a) solicit or hire, or attempt to solicit
or hire, any employee of the Company, or assist any person, firm or corporation
in doing so or attempting to do so; or (b) plan for, acquire any financial
interest in or perform any services for himself or any other entity in
connection with a business in which Executive's interest, duties or activities
would inherently require Executive to reveal any Confidential Information; or
(c) solicit or cause to be solicited the disclosure of or disclose any
Confidential Information for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach
--------------------
any of the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.
5.6 Reasonable Restrictions. The parties acknowledge that the
-----------------------
foregoing restrictions, the duration and the territorial scope thereof as set
forth in this Article V, are under all of the circumstances reasonable and
necessary for the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company"
----------
shall be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
ARTICLE VI MISCELLANEOUS
6.1 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and
-------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for
10
<PAGE>
mailing by first class registered or certified mail, return receipt requested,
or if delivered by facsimile transmission, upon confirmation of receipt of the
transmission, to the address of the other party set forth below or to such other
address as may be specified by notice given in accordance with this Section 6.2:
(a) If to the Company:
Four Media Company
_______________________________
_______________________________
_______________________________
Fax No.: (818) 846-5197
With a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Michael W. Sturrock
Fax No.: (213) 891-8763
(b) If to Executive:
Mr. Robert Bailey
_______________________________
_______________________________
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.
11
<PAGE>
6.4 Confidentiality. The parties hereto agree that they will not,
---------------
during the Term or thereafter, disclose to any other person or entity the terms
or conditions of this Agreement (excluding the financial terms hereof) without
the prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or
-----------
in any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration administered by the
American Arbitration Association under its National Rules for Resolution of
Employment Disputes ("Rules") which are in effect at the time of the arbitration
or the demand therefor. The Rules are hereby incorporated by reference.
California Code of Civil Procedure (S)1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference. In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement. The arbitration shall be commenced and heard in Los Angeles
County, California. The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted. Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s). The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration. However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.
6.6 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of this
-------------------------------
Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements or understanding between the Company and Executive,
whether written or oral, fully or partially performed relating to any or all
matters covered by and contained or otherwise dealt with in this Agreement. This
Agreement does not constitute a commitment of the Company with regard to
12
<PAGE>
Executive's employment, express or implied, other than to the extent expressly
provided for herein.
6.9 Amendment. No modification, change or amendment of this Agreement
---------
or any of its provisions shall be valid unless in writing and signed by the
party against whom such claimed modification, change or amendment is sought to
be enforced.
6.10 Authority. The parties each represent and warrant that they have
---------
the power, authority and right to enter into this Agreement and to carry out and
perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.
6.12 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
6.13 Effective Date. Until the Closing Date (as such term is defined
--------------
under the Stock Purchase Agreement) has occurred, Executive and the Company's
obligations (including by way of illustration and not as a limitation the
payment of compensation) shall, except as modified by Section 6.14 below, be
governed by the terms of the Original Agreement. Upon the Closing Date the
Original Agreement shall be deemed terminated and of no further force or effect
(except for obligations which are intended to survive termination) and this
Agreement shall be deemed effective as of the date of this Agreement.
Notwithstanding the foregoing, upon the Closing Date Executive shall be paid an
amount equal to the difference between base compensation due to Executive under
the Original Agreement and the base compensation due to Executive under this
Agreement for the period between the date of this Agreement and the actual
Closing Date. If the Closing Date does not occur on or before September 30,
1999 then this Agreement shall automatically, and without notice, terminate
without any obligation due to the other party (i.e., there shall be no
compensation or options due Executive as provided for in this Agreement). In
such event, the parties respective obligations shall be governed by the terms of
the Original Agreement.
6.14 Amendment. Section 1.2 of the Original Agreement is hereby amended
---------
and restated in its entirety to provide that
"subject to Section 4.1, Executives Employment
hereunder shall terminate on September 30, 1999."
[Signature Page to Follow]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ Robert T. Walston
-----------------------------
Name: Robert T. Walston
Title: CEO
"EXECUTIVE"
/s/ Robert Bailey
--------------------------------
Robert Bailey
S-1
<PAGE>
EXHIBIT 10.8
DEMAND PROMISSORY NOTE
$2,000,000.00 April 8, 1999
FOR VALUE RECEIVED, the undersigned, Robert T. Walston, (the "Maker")
promises to pay to Four Media Company, a Delaware corporation ("Lender") or
order, the principal unsecured amount of Two Million Dollars ($2,000,000.00),
with interest from the date hereof on the unpaid principal balance hereunder at
the rate of four and fifty-nine one-hundredths percent (4.59%) per annum,
compounded semi-annually, (the "Interest Rate") (on the basis of a 365-day year
and the actual number of days elapsed). Except as set forth herein, the
outstanding balance of this Note, if any, and any accrued interest thereon,
shall be repaid no later than the date of 30 days following the date of the
fifth anniversary of the date hereof.
Each payment under this Note shall first be credited against costs and
expenses provided for hereunder, second to the payment of accrued and unpaid
interest, and the remainder shall be credited against principal. Lender and
each holder hereof shall have the continuing and exclusive right to apply or
reverse and reapply any and all payments hereunder. All amounts due hereunder
shall be payable without defense, set off or counterclaim, in lawful money of
the United States of America ("Cash") or in kind and delivered to Lender at 2813
West Alameda Avenue, Burbank, California 91505 or at such other place as Lender
shall designate in writing for such purpose from time to time. If payment under
this Note shall be in kind, then such payment shall consist of shares of the
Lender's common stock ("Common Shares") or, in the event such Common Shares are
changed into or exchanged for the securities of another corporation, then
payment shall
<PAGE>
consist of such successor securities. The fair market value of such Common
Shares or securities shall be the average closing sales price of such stock (or
closing bid, if no sales were reported) as quoted on any established stock
exchange or a national market system for the 20 days prior to the time of
determination. If, at maturity, the Company's securities are not listed on any
established stock exchange then the fair market value of such Common Shares
shall be determined by mutual written agreement between Lender and Maker or if
no such agreement can be reached then by appraisal through a nationally
recognized investment banking firm. The Lender shall designate such investment
bank. The cost of appraisal shall be shared equally by Lender and Maker.
Capitalized terms used herein and not defined hereunder have the meanings
specified in the Employment Agreement dated as of January 1, 1999 by and between
Lender and Maker.
Notwithstanding the foregoing, the outstanding balance of this Note, if
any, and any accrued interest thereon shall automatically be forgiven, and Maker
shall have no payment obligation with respect thereto, upon the occurrence of
any of the following events:
1. Maker incurs a Termination Without Cause or Termination With Good
Reason or termination for death or Disability during the Term; or
2. a Change in Control of Lender occurs during the Term; or
3. Lender achieves $327 million or more in Gross Operating Revenues
during the period beginning on the date of the fourth anniversary of
the date hereof and ending 365 days thereafter (the "Measurement
Period"); or
<PAGE>
4. Lender achieves $87 million or more in Consolidated EBITDA during the
Measurement Period; or
5. the Board, in its sole and absolute discretion, determines that the
payments under this Note shall be forgiven following the expiration of
the Measurement Period.
In the event of a Termination With Cause or resignation without Good Reason
during the Term, the outstanding balance of this Note, if any, and any accrued
interest thereon, shall automatically become immediately due and payable,
without presentment, demand, protest or other requirements of any kind.
This Note may be prepaid in whole or in part at any time. Any prepayment
shall be without penalty except that interest shall be paid to the date of
payment on the principal amount prepaid.
No waiver or modification of any of the terms of this Note shall be valid
or binding unless set forth in a writing specifically referring to this Note and
signed by a duly authorized officer of Lender or any holder hereof, and then
only to the extent specifically set forth herein.
Maker promises to pay all costs and expenses, including attorneys' fees, in
paying the indebtedness under this Note, whether or not any action or proceeding
is concerned.
Maker hereby waives presentment, demand, diligence, protest and notice of
every kind.
<PAGE>
This Note shall be binding to the parties hereto, shall inure to the
benefit of Lender, its successors and assigns and shall bind the heirs,
executors and administrators of Maker; provided, however, that the Lender shall
not assign this Note or any of its rights without Maker's prior written consent.
In the event that any one or more provisions of this Note shall be held
illegal, invalid or otherwise unenforceable, the same shall not affect any other
provision of this Note and the remaining provisions of this Note shall remain in
full force and effect.
This Note shall be governed by and construed in accordance with the laws of
the State of California.
IN WITNESS WHEREOF, Maker has caused this Note to be duly executed the day
and year first above written.
/s/ Robert T. Walston
_____________________________
Robert T. Walston
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> AUG-01-1999 AUG-01-1999
<PERIOD-START> FEB-01-1999 AUG-03-1998
<PERIOD-END> MAY-02-1999 MAY-02-1999
<CASH> 8,098 8,098
<SECURITIES> 0 0
<RECEIVABLES> 40,721 40,721
<ALLOWANCES> (1,666) (1,666)
<INVENTORY> 1,972 1,972
<CURRENT-ASSETS> 54,560 54,560
<PP&E> 229,003 229,003
<DEPRECIATION> (65,188) (65,188)
<TOTAL-ASSETS> 316,082 316,082
<CURRENT-LIABILITIES> 26,900 26,900
<BONDS> 0 0
0 0
0 0
<COMMON> 197 197
<OTHER-SE> 127,131 127,131
<TOTAL-LIABILITY-AND-EQUITY> 316,082 316,082
<SALES> 51,508 148,938
<TOTAL-REVENUES> 51,508 148,938
<CGS> 29,499 86,044
<TOTAL-COSTS> 29,499 86,044
<OTHER-EXPENSES> 16,126 45,457
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,198 10,454
<INCOME-PRETAX> 2,685 6,983
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,685 6,983
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,685 6,983
<EPS-BASIC> 0.21 0.63
<EPS-DILUTED> 0.19 0.54
</TABLE>
